It seems there wasn’t a dedicated thread for Innofactor yet, and I believe that as the turnaround has progressed, the company is now on a more stable footing and attractively priced.
Below is this morning’s results comment to start the exchange of ideas:
We are upgrading Innofactor’s stock recommendation to Buy (prev. Accumulate) due to a very attractive risk/reward ratio and raising the target price to 1.8 euros (prev. 1.4 euros), reflecting forecast changes. Innofactor’s Q4 figures were better than our expectations. The order backlog, streamlined cost structure, strong Finnish operations, and improving international operations support continued earnings growth also in 2021. Considering our increased forecasts and strengthened balance sheet, the stock’s valuation (2021e EV/EBIT 10x) is very moderate and offers a very attractive expected return relative to the risks. The CEO’s video interview from Q4 can be seen here.
Q4 report exceeded expectations
Q4 revenue grew by 5% to 18.3 MEUR and slightly exceeded our forecast. Revenue grew very strongly in Finland, and according to company comments, clearly at a rate of >10%. The company’s order backlog grew by 21% to 60.4 MEUR and, according to company comments, is better diversified geographically and by competence areas. The order backlog did not yet include the large 15–25 MEUR order from the Tax Administration (Verohallinto). The reported Q4 EBITDA of 1.6 MEUR was weighed down by a 1.0 MEUR write-down related to a Swedish customer project. Without the write-down, EBITDA was 2.6 MEUR or 14% of revenue, clearly above our 1.9 MEUR forecast. There were no surprises on other line items. A surprise was the larger-than-expected dividend proposal, as the board proposed a regular dividend of 0.02 euros plus a 0.02 capital repayment and a possible 0.04 extra dividend. Before the report, we forecasted a dividend of 0.03 euros per share.
The business risk profile has decreased
Innofactor’s years 2017–2018 were challenging, but over the last two years, the company’s turnaround has progressed steadily, and earnings growth has continued for 8 quarters. The balance sheet has strengthened and continues to strengthen through cash flow. Additionally, the good order backlog and strong performance of Finnish operations provide support. The company’s comments on the improved development and outlook of countries outside Finland also give confidence in the continuation of earnings growth. Thus, the company’s risk profile has decreased from several perspectives.
We cautiously expect just under 10% earnings growth
Following the better-than-expected Q4 report, we raised earnings forecasts for 2021–22 by a good 10%. We forecast Innofactor’s revenue to grow 4% to 69 MEUR and EBITDA to grow to 8.5 MEUR (2020: 7.2 MEUR and 8.2 MEUR without the write-down) in 2021. The forecasts are in line with the guidance expecting growth in revenue and EBITDA. We forecast revenue to grow 3% and EBITDA to remain at the 13% level of 2021 during 2021–2023. With the balance sheet and financing arrangements, the company now also has better opportunities for inorganic growth.
Valuation is very attractive and already offers a margin of safety for disappointments
Innofactor’s share price rise over the last 2 years has been strongly based on earnings growth, and as sector valuation levels have risen, the gap to the sector has grown. With our moderate forecasts, the stock’s valuation at adjusted EV/EBIT and P/E multiples is 10x and 11x for 2021, and 8x and 11x for 2022, respectively. The valuation is nearly 40% below Finnish peers. The valuation, combined with forecasted earnings growth of just under 10% in the coming years, a 3–4% dividend yield, and upside potential in valuation multiples, offers an attractive expected return relative to the risks, especially considering the decreased risk profile and strengthened demand fundamentals in the sector. Our target price corresponds to 12x and 10x EV/EBIT multiples for 2021–22.
/Joni
