Elecosoft: transformed and underrated

Elecosoft provides software for all stages of a construction project, including project management, estimation, site management and timber engineering among other areas. The continued integration of these offerings should generate future cross-selling opportunities. The group also pays a small but fast-growing dividend yield, supported by strong cash generation. And yet, Elecosoft’s shares are valued at a low price/earnings growth (PEG) ratio of just 1.2 despite the potential for further upgrades. We think the shares offer value.

Trading was positive in 2017. Elecosoft enjoyed 12 per cent sales growth, or 8 per cent on a constant-currency basis, to £20m – nearly half of which was recurring revenue. Underlying growth in its mature UK and Swedish markets, representing 69 per cent of sales, was decent at 3 per cent, and the group continued to diversify internationally. The rest of Europe grew 25 per cent to £2.2m, and the ‘rest of world’ climbed 23 per cent to £0.4m at constant currencies.

US sales grew by a relatively modest 8 per cent to £0.7m. Prospects in the US look promising, though. In December, the group announced a partnership with Texas-based Innovative Management Solutions, which does project management work for companies across oil and gas, utilities, financial services and the public sector, among other areas. This followed a major sale of Elecosoft’s Powerproject offering in New England, which finnCap described as a “notable success in the backyard of much larger US rivals”.

The group's performance last year also benefited from Icon, a property information management business acquired in October 2016, which contributed 4 per cent to sales. Now fully integrated and rebranded ‘IconSystem’, the business is expanding its customer base beyond the retail sector to serve the likes of retirement housebuilder McCarthy & Stone. Encouragingly, McCarthy has also adopted the group’s Bidcon estimation product.

The story is even more compelling further down Elecosoft’s P&L: together with top-line growth, cost management helped to increase pre-tax profits by 50 per cent to £2.3m last year, or 28 per cent on an underlying basis.

Meanwhile, free cash flow up was 117 per cent to £2.6m and helped the group move from a £1.3m net debt position to £1m net cash. This supports the decision for a 33 per cent dividend hike. Bosses say the balance sheet strength could be used for further acquisitions; something to look forward to, given Icon’s contribution so far.