RIB SOFTWARE AG RSTAY
December 15, 2016 - 12:59pm EST by
cobia72
2016 2017
Price: 12.65 EPS .20 .28
Shares Out. (in M): 46 P/E 44 32
Market Cap (in $M): 577 P/FCF 13 10
Net Debt (in $M): 0 EBIT 32 39
TEV ($): 410 TEV/EBIT 13 10

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Description

RIB Software – Transforming the Construction Industry – 50% Upside Potential

RIB Software AG (RIB.GY) provides software that is used in the construction industry to link the computer aided design (CAD) software that is used to design buildings to the enterprise resource planning (ERP) software that is used to purchase building materials, account for these purchases, etc.  RIB’s flagship iTWO software builds a virtual construction site and portrays each step of the construction process.  It lets the general contractor know when and how much material to buy and when to be ready for each subsequent step in the construction process.

RIB’s customers are a who’s who of the world’s architecture, engineering, and construction (AEC) firms, including some of the biggest international contractors, developers, architecture, and engineering firms.  The company also sells to the public sector, as well as infrastructure and transportation providers.  Across the installed base, customers using iTWO have been able to optimize materials and time planning, resulting in up to 30% time and cost savings on construction projects ranging from luxury residential and commercial properties to billion dollar state of the art hospitals.

When we first looked at RIB in 2013, the company had two main challenges.  The first was that the company’s software represented a sea change from how construction projects had been managed previously, and the industry has historically been very conservative in its adoption of new technology.  To address this challenge, the company began opening high tech laboratories in locations around the world where potential customers can stage a three day simulation of the virtual construction site produced by RIB’s software.  One of the first lab visits for a customer in the company’s Hong Kong lab led to an immediate sale versus the 6 to 9 month sales cycle that RIB had seen previously.  As sales began to accelerate, the company quickly built a roster of top-tier reference customers whose adoption of iTWO strongly validated the software in the construction industry.  Large customers have also in some instances forcibly driven adoption of iTWO – RIB signed the largest deal in its history in 2014 with Deutsche Bahn, the German national railway, which now requires all architects and contractors that it does business with to use iTWO as well.  Finally, RIB has validated iTWO’s strength in academic settings, developing partnerships with leading engineering programs at universities like Stanford, Georgia Tech, National University of Singapore, and the University of Hong Kong.

The second hurdle RIB had to overcome was expanding its geographic reach, as the vast majority of its historical sales had been in Germany and the rest of Western Europe, and its distribution capabilities were very limited outside these markets.  Since then the company has expanded its sales reach into North and South America, the Middle East, and Asia, especially in China.  Even so, RIB’s growth has still been constrained by the size of its sales force.  The distribution challenges historically faced by RIB have all been addressed by three transformative partnerships all announced over the last few months, each of which we feel could massively expand the company’s reach and bolster its financial performance.

The most recent of the three new partnerships is with Autodesk (ADSK), the leading provider of computer aided design (CAD) software.  RIB will closely integrate Autodesk’s Revit architecture software into RIB’s iTWO product, and Autodesk will recommend iTWO to its vast account base, which essentially includes every major player in the construction industry.  We believe that Autodesk is a very likely acquiror of RIB at some point, but RIB’s CEO owns a very large stake in the company and will not sell at these levels.

Prior to signing the deal with Autodesk, RIB inked a joint venture arrangement with Flex Limited (FLEX), a large supply chain management player.  The JV will supply construction projects worldwide with required materials and RIB will record a transaction fee equal to a small percentage of the total volume.  If this platform works as envisioned, it will become a very large and completely incremental revenue stream for RIB down the road, in addition to providing an expanded sales pipeline for iTWO.

The third new partnership was signed with Wipro Limited (WPRO.IN), a large Indian outsourcer who will distribute RIB’s software worldwide.  Wipro will be the consultant for these deals while RIB will receive the software license revenue.  This partnership should significantly boost RIB’s worldwide distribution capabilities and make its software finally available to a broad worldwide customer base.

Shares of RIB are currently trading near €12.50, down from a recent high around €14.50.  At current levels the company has a market cap of €570 million and an enterprise value of €405 million after accounting for over €165 million of net cash on the balance sheet.

In 2016, we forecast sales of €95 million, up 16% and at the midpoint of management guidance.  RIB is highly profitable, and we expect the company’s EBITDA margin to be just over 33% for the year, also within management’s stated guidance range.

We forecast 18% and 16% sales growth in 2017 and 2018, with EBITDA margins expanding slightly to 35%.  On these estimates, RIB will generate €46 million in 2018 EBITDA, valuing the company at less than 9x.

Given the company’s growth and profitability profile we believe that shares would be fully valued at 15x 2018 EBITDA, yielding a target price of €18.60 and representing approximately 50% upside from current levels.

As previously mentioned, RIB is ultimately a very likely candidate for consolidation by a strategic player.  Autodesk would be an obvious fit as iTWO and Revit are so closely integrated and should have a growing attach rate going forward.  SAP (SAP.GY) would be another logical acquiror as iTWO represents a natural extension of SAP’s ERP dominance in the construction sector.  SAP has actually been a long-term investor in RIB, currently holding 4% of the company’s shares.  Dassault Systemes (DSY.FP), a provider of 3D design software, could also be interested in RIB.  Any potential acquisition would likely have to be supported by RIB’s CEO Thomas Wolf who currently owns just under 20% of shares, and who we believe aims to significantly grow the share price organically before exploring a sale of the company.

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

RIB just signed three important partnerships; Autodesk, Flex, and Wipro.  These partnerships will gain traction in 2017 and accelerate the company's revenue growth, thus leading to a higher stock price.

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