Sygnity: Key risks, Valuation and DCF valuation – Warsaw Stock Exchange

Valuation
1. Multiples Comparison
2. DCF valuation

Liquidated Damages

Sygnity is always at risk of claims under liquidated damages and warranty clauses contained in its many contracts with customers and business partners. As of 31 December 2022, the Company reported having conditional off-balance-sheet obligations under performance and warranty clauses in the amount of PLN 14.5m.

Public Contracts

Sygnity competes in government tenders for IT services which are typically awarded to the lowest bidder. Meanwhile, the biggest contracts usually require the onboarding of subcontractors, which heightens the risk of default. Another risk are cost overruns on underestimated projects (Sygnity's 2013 e-Taxes contract is one example of an underrated budget).

Long-Term Contracts

The valuation and successful delivery a long-term contract hinges on many factors, some of which are beyond the control of the supplier. For example, the actual figures at the end of the contract might miss the initial revenue, cost, and profit targets, leading to provisions, adjustments and write-offs (cost overruns are the most common issue), and in the worst case to events of default.

Exchange Rate Risk

Sygnity's revenues and costs are affected by changes in the zloty's exchange rates relative to the euro and the US dollar. On the balance sheet, assets and liabilities denominated in foreign currencies consist exclusively of trade receivables and trade payables.

Corruption Probe

In 2019, Sygnity became involved in an investigation into allegations of corruption in the award of contracts by the Polish Post Office brought against its employees, including the CEO and the Supervisory Board Chairman. The Company fully cooperated with the authorities and turned over all requested records and items.

Since we do not have further knowledge about the current status of the case, we cannot tell whether and how it could affect future business.

Valuation

Using DCF analysis and relative valuation, we set our ninemonth per-share price target for Sygnity at PLN 20.70.

Multiples Comparison

We compared Sygnity with a peer group based on forward P/E and EV/EBITDA multiples. Each of the forecast years, calendar 2023, 2024, and 2025, is assigned an equal weight. For Sygnity, we took forecasts for the fiscal years of FY2022/23, 2023/24, and 2024/25, as if they were the corresponding calendar years.

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We opt this time not to apply the usual 15% discount that reflected Sygnity’s slower earnings growth to the final valuation outcome.

DCF valuation

DCF model assumptions:

The forecast period spans the fiscal years of FY2022/23 - 2031/32.
The perpetuity risk-free rate is 4.50%.
We assume FCF after the forecast period will grow at a rate of 2.0%.
Net debt is ex IFRS 16 as of the end of FY 2021/22.
Perpetuity D&A expenses and CAPEX are assumed equal.

DCF Model

Sensitivity Analysis

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P&L

Cash Flow

Balance sheet

Key Ratios

Analyst:

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PaweÅ‚ Szpigiel

Equity Analyst, Expert

+48 509 603 258

pawel.szpigiel@mbank.pl

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