Tech Stocks: LSI Software (WSE:LSI) – Preview Of 2Q22 Financial Results
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28/2022/GPW (84) August 30, 2022
This report is prepared for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0.
LSI Software
Sector: TMT – IT software & services
Market Cap: US$ 9 m
Fundamental rating: Buy (→)
Bloomberg code: LSI PW
Market relative: Overweight (→)
Av. daily turnover: US$ 0.01 m
Price: PLN 13.05
12M range: PLN 12.55-17.30
12M EFV: PLN 20.0 (↓)
Free float: 70%
Recommended action
We continue to be positive towards LSI Software and keep our recommendations: LT fundamental Buy and ST relative Overweight, intact. At the same time we acknowledge a dynamic cost growth at the Company related to hiring sales teams for 2 new business lines: restaurant robot distribution and software sales in the SaaS model and, as the additional costs have been incurred already, while the positive sales effect will be delayed, we lower our EBITDA forecast for FY22 and FY23 by 14% and 1%, respectively.
On the other hand, thanks to new business lines our EBITDA forecast for FY24 increased by 13%. The Company’s growth profile has improved as well; we expect the EPS to increase 29%/ 12%/ 12% yoy in 2024E/ 2025E/ 2026E and, in result, LSI Software’s development will be more similar to business models of growth companies (before we forecast the EPS dynamics at 10%/ 9%/ 10% in 2024E/ 2025E/ 2026E). This may, we believe, encourage the Company’s valuation multiples increase.
Our target 12M EFV drops by 9% to PLN 20.0 per share (from PLN 22.0 per share) because of: (i) increase of the RFR to 6.2% (from 3.4% previously), (ii) the peers’ valuation multiples decrease by 17% on average, and (iii) financial forecasts update.
Currently, LSI Software trades at the average 2022E-24E P/E and EV/EBITDA multiples of 6x and 2.0x, respectively, which implies a very high discount (43% and 66%, respectively) vs local peers; in result, we maintain our recommendations: LT fundamental Buy and ST relative Overweight.
2Q22 financial results preview
On September 30, the Company will show their 2Q22 financial results. On April 29, LSI Software released their preliminary 1H22 top line that reached PLN 25.4 million (up 11% yoy), which implies 2Q22 revenues at PLN 13.6 million (up 15% qoq and down 17% yoy). The reported preliminary revenues proved to be 16% higher than we tentatively expected. Though the preliminary 2Q22 revenues were lower yoy, we should remember that the base quarter was a specific period when the Company booked quite a few contracts shifted from pandemic 1Q21.
We expect a 21% dip of the production revenues vs last years’ high base and forecast the production segment margin to reach 38% vs 69% in 2Q21 and 32% in 1Q22. We expect the distribution revenues decline (by 11% yoy) in 2Q22 due to the same reasons (high base), with the distribution segment margin at 32% vs 31% a year ago.
The considerably lower sales (down 17% yoy) notwithstanding, 2Q22 SGA costs should be flat yoy, at c. PLN 4.1 million, according to our estimations, due to launching a sales team for a new business line (restaurant robots distribution). Besides, it is worth remembering that in the base period LSI booked a PLN 3.1 million help from the government (Anti-Crisis Shield 1.0) under other operating revenues. We do not expect a similar item to enter P&L in 2Q22. All in all, we forecast revenues/ EBITDA/ NI in 2Q22 to reach PLN 13.6 million (down 17% yoy)/ PLN 2.2 million (down 74% yoy)/ PLN 0.8 million (down 90% yoy).
A new business line – restaurant robots distribution
At the end of last year LSI became a general distributor for the Chinese company, Pudu Robotics. Pudu Robotics belongs to the biggest producers and suppliers of commercial service robots which have been gaining more and more popularity worldwide given a labor shortage and rising labor costs. According to available information, Pudu robots are installed in some Mc Donald’s restaurants in Slovenia and China. Tens of thousands of Pudu robots have been delivered to over 60 countries.
The PUDU Roboty profile on Facebook (managed by LSI Software) claims that LSI-distributed robots are already used in numerous restaurants (Pizza Hut, KFC, Da Grasso), hotels, fairs, and entertainment centers in Poland.
The brands Pizza Hut and KFC operate 478 restaurants in Poland and twice as many restaurants operate under McDonald’s brand. Overall, in Poland there are more than 70,000 restaurants which may be interested in restaurant and/or cleaning robots. In our view, automation processes (including waiting tables, cleaning, ads display, product distribution, etc.) constitute the future of the service sector. LSI is the biggest supplier of the HoReCa software with well-developed business relationships, hence, the Company seems to be the ideal partner for Pudu Robotics in Poland. With the contract for general distribution signed with Pudu Robotics, LSI Software has become the first choice provider for restaurants and hotels in Poland.
A new business line – software sales in the SaaS model
Software sales in the SaaS model are another business arm that may exert an important impact on the Company’s future financials. A SaaS model will be implemented in three areas: gastronomy, marketing, and hotel business. LSI believes that these new solutions will not cannibalize old products, as they are addressed to smaller clients looking for a cheap subscription model.
Financial forecasts
We modify our financial forecasts incorporating: (i) preliminary 2Q22 revenues slightly higher than our expectations, (ii) additional revenues generated by new business lines, (iii) additional costs incurred by new sales teams, (iii) salary pressure, and (iv) higher capex related to new business lines.
Valuation and recommendations
Our target 12M EFV drops by 9% to PLN 20.0 per share (from PLN 22.0 per share) because of: (i) increase of the RFR to 6.2% (from 3.4% previously), (ii) the peers’ valuation multiples decrease by 17% on average, and (iii) financial forecasts update.
Currently, LSI Software is trading at 6x P/E and 2.0x EV/ EBITDA for 2022E-24E, which implies a high discount (43% and 66%, respectively) vs local peers; in result, we maintain our recommendations: LT fundamental Buy and ST relative Overweight.
Risk factors
1. Very attractive current valuation
2. High dynamics of profits
3. Export expansion on the global cinema market
4. Potential success of 2 new business lines (PUDU robots distribution and software sale in the SaaS model
5. Strong balance sheet structure
6. Possible return to dividend payments in 2023
7. Potential acquisition target given an undemanding valuation
8. New products not included in forecasts
Catalysts
1. Deteriorating demand from HoReCa/ cinema sectors under potential pandemic lockdowns
2. Potential unsuccessful expansion abroad in the cinema sector
3. Strongly dependent on cooperation with Posiflex (large portion of the Group’s profits comes from distribution of Posiflex devices)
4. Salary pressures in the IT industry
Analyst: Tomasz Rodak, CFA
