Ahead of second phase of Software Mind expansion We initiate coverage for Ailleron with a target price of PLN 26 and a BUY recommendation. Following the capital hike at the Software Mind segment, the group rapidly increased the scale of operations thanks to a series of acquisitions in 2021-22 and as a result of organic growth. Ailleron's revenues grew 162% between 2020 and 2022, and we expect them to triple in the current year relative to 2020. The integration process of the acquired entities is nearing completion. The current phase of the market downturn creates good conditions for the second phase of expansion of Software Mind, which remains an undersubscribed entity. Despite the strong growth rate, the company was able to maintain margins at a higher level than its industry competitors.
The segment's operating margin is clearly higher than its WSE-listed competitors. In 2021-22, Software Mind's EBIT margin was 16% compared to 13-14% at Spyrosoft and 11-13% at Fabrity. Despite the normalisation of demand resulting in a lengthening of the 'bench' and a decline in margins in the sector in early 2023, Software Mind extended its lead in terms of profitability and generated almost 14% EBIT margin in Q1'23, against less than 10% at Spyrosoft and Fabrity. Ailleron's margin was also higher than the global leaders in the software house sector.
We expect a marked improvement in performance in 2024
We assume that Software Mind will suffer from the slowdown seen in the industry, with the strengthening of the PLN weakening margins in H2 '23. We expect sales growth to fall to +3% in H2 '23 and margins to fall to 12.5%. In 2024-25, we forecast a return to double-digit revenue growth at Software Mind of 12% and 18% respectively. We also expect the margin to fall from 16% in 2022 to 13% this year and gradually rebound to 14.5% in 2025. In the FinTech segment, this year's operating result will still be affected by the loss on the Pekao contract (we forecast PLN -1m EBIT burdened by one-offs), but in 2024 we already expect PLN 7m operating profit.
The FinTech segment will focus on further growth in the services area, leveraging the product solutions developed in the group. We do not expect large capital expenditure in the coming years, as significant investments have already been made in products, including the SaaS version of the LiveBank platform. We assume an increase in FCF yield from 2% in 2022 to 7% in 2024, with long-term capex to revenue in the Ailleron Group below 3%.
Upside in acquisitions. Although our forecasts do not include specific acquisitions, we do not rule out completing at least one major transaction in the coming quarters. A series of acquisitions in 2021-22 gives credence to the strategy of building shareholder value through acquisitions. Companies with exposure to the US and Western Europe, particularly the DACH and Nordic countries, remain targets.
Valuation. We base our target price of PLN 26 on the DCF model. A comparative valuation to the foreign group returns a value per share of PLN 32.4, while a comparison to Spyrosoft based on the adj. net result for the last four quarters implies a share value of PLN 29.5. On our 2024-25 forecasts, the company is valued at P/E of 10.0x and 7.9x, and at a target price of PLN 26, the P/E is 14.1x and 11.2x, respectively. Assuming a return to double-digit earnings growth, these values are not excessive in our view. Global industry leaders have been valued at forward P/Es in the range of 20-30x in recent quarters .
