'Form is temporary, but class is permanent'. The same applies to deeply undervalued stocks like Buildtech software developer Eleco (ELCO) .
You see, as the smallcap equity markets have ebbed and flowed over the past 3 years, shares in ELCO were unfairly sold off. This is especially perplexing as the SaaS firm (74% of revenues are recurring) is already profitable and cash generative, sporting net funds of £10.9m as at Dec'23 (or 13p/share) - and so is a net beneficiary of higher interest rates.
That said, "class" eventually shines through, as investors have begun to recognise ELCO's inherent quality.
Indeed, after delivering 5% top line growth (7% LFL) in 2023 to £28m, driven by a 17% LFL jump in ARR to £22.6m, Eleco said this morning that YTD trading had been solid and on track to hit 2024 expectations.
Here house broker Cavendish is forecasting 2024 turnover, adjusted EBITDA, and EPS to come in at £32.7m, £7.0m, and 4.6p/share respectively, alongside rising to £44.1m, £9.9m, and 7.3p by 2026 - which, putting the stock on modest sector multiples of 1x PEG and 4x EV/sales, would deliver a hypothetical valuation of between 160p to 200p/share.
Similarly, Cavendish's target price is 160p - adding today: "At 119p, Eleco is trading on 12-month forward multiples of only 12x EV/EBITDA with +18% NTM growth and 3% EFCF yield, which compares to building lifecycle software peers on 17-36x EV/EBITDA with -1% to +33% growth and 2-5% EFCF yield."
Non-exec chairman Mark Castle commenting: "We are pleased to report that the business continues to perform well with a solid trading performance over the first four months of the financial year."
"The Board remains confident in the outlook and trading remains in line with market expectations for the full year. It is good to see that the hard work and delivery has started to be recognised in the share price, with a 45% increase over the past 12 months."
Elsewhere, the Buildtech software sector is consolidating, so don't be too surprised if in due course one of the larger plays comes knocking at ELCO's door.
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