Digia didn’t have a thread yet.
However, it is an interesting company that could very well even yield multiples?
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Added to the model portfolio last year with the idea that a successful earnings turnaround + normalization of valuation multiples would provide significant upside leverage. So far, the view has been accurate in the sense that the turnaround progressed well during the last year, supporting the valuation. The company basically has the potential to significantly improve profitability (especially thanks to its highly profitable product business), but it remains to be seen how much of that potential can be realized in the coming years – the direction is right. However, valuations in the IT services sector have been under some pressure lately, so there’s a slight caution in the air.
Here’s the company’s comprehensive report if you’re interested in a deep dive: Rakennuspalikat kasassa - Inderes
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That was a good report. The overview of the IT service market is excellent.
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Hi,
Looking at Inderes’s comprehensive report from a year ago, they predict the EPS for the coming years, 2019 and 2020, to be around €0.20, which is a similar level to 2015 when the stock price hovered around €3.
So my question is, what do you base your view on regarding the potential doubling/tripling of the stock price within a couple of years? This is for @polo6.
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Here’s a pre-comment on Friday’s results. Q4 should improve quite significantly due to a weak comparison period.
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So, @Emilio, my thinking is based, of course, on careful monitoring and the words of analysts, but with common sense, something like this:
- earnings should improve significantly in the future, while the company grows → this gives 1.5-2x price
- when the above happens, the undervaluation experienced by the company will also disappear → this gives the remaining growth factors towards a 3x price.
Most often, the stock price is by no means linear with respect to earnings; instead, a company is often in either a so-called negative or positive spiral, from which a self-reinforcing mechanism easily forms, either a vicious circle (-) or a bubble (+).
And then, of course, if we compare it to Gofore’s pricing, where it is a project company with hardly any permanent assets, and revenue would collapse very quickly if things change, Digia, however, has much more permanent revenue, as well as revenue generated from its own IPR in addition to maintenance revenue.
A market value of 78M for a software company with a turnover of 110-120M is quite low. → Turnover 200M → price 250M = 3x current price.
Something like that.
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And furthermore:
Tieto Oyj today has a market cap of 2 billion euros and revenue of approximately 1.6 billion euros. With the same valuation, Digia, at its current revenue, would be worth approximately 140 million euros instead of 78 million euros, almost double, to have the same valuation as Tieto. And if one considers which company has more potential to GROW, the answer is probably clear.
@Emilio
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It’s clear that when earnings improve, valuation multiples are also likely to correct to the level of peers, meaning a “double leverage” effect occurs at that point.
What I still don’t understand is where this 200M revenue forecast for the next year has been dug up from? When Inderes’ extensive report from a year ago had a 2020 revenue forecast of ~120M…? If revenue were indeed 200M and the margin was as predicted, then everything you said would align, do you have a view on revenue of ~200M or where does that come from?
Organic revenue growth of EUR 200 million would require recruiting approximately 700 professionals… a quite challenging goal in the current market.
A small sensitivity analysis illustrates this well. Assuming a static P/E ratio of 12x and varying the EBIT margin between 7-13% (from 2019e revenue), the share price would range from 2.8-5.3 euros.
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Yes, as I mentioned before, I understand your approach and don’t dispute anything other than that revenue forecast.
As for the Qt (software development framework) hype, there’s certainly plenty of it. Whether an “old-school” IT services company like Digia (Finnish IT service company) can expect to get on the same bandwagon is another matter—in my opinion, no.
Waiting for tomorrow’s earnings report. 
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I don’t see much drama in the Q4 results, but the occasional realization of project risks is a good reminder of why EV/S is justifiably below one. Higher multiples must be earned.
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Based on the Q4 report and the current share price, it could be estimated that the market is now pricing the company at an operating profit level of around 6-7%.. if you believe in a better level than that, you should stay in the ride. Considering the product business, there should be prerequisites for much better.
@Mikael_Rautanen I guess we’ll hear an analysis of this from the perspective of Digia’s valuation level? A quick mental calculation would indicate Digia’s value at around 4-5 euros per share?
Do you mean the Acando deal? The multiples paid were quite high. Based on Digia’s 2019 forecast, it would be closer to 5 euros. Digia is still a potential target in the sector’s active consolidation, of course.
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Fun bounce on the index today at open with a buy recommendation!
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Here’s the latest extensive analysis report from Digia: Edullinen tuloskäänneyhtiö - Inderes
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Any thoughts on tomorrow’s earnings report?
Good numbers from Q1, relatively significantly above our cautious forecasts:
JANUARY–MARCH 2019 (2018)
Revenue EUR 31.9 (26.9) million, up 18.7%
Operating profit EUR 2.0 (1.6) million, up 25.2%
Operating profit margin 6.2 (5.9)% of revenue
Earnings per share EUR 0.06 (0.04)
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No significant rise emerged from it
But that’s okay. I bought more at 2.95 to add to my existing shares. A 15x earnings multiple isn’t a bad price, especially when the business seems to have momentum in terms of improving sales and profitability.
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Operating profit likely fell short of analysts’ consensus forecast, but still exceeded Inderes’ cautious estimate.
That’s probably why the stock price didn’t go up.