Little over a year ago, I laid out the investment case for a gem of a Nordic software company - Simcorp (OTC:SICRF). Since there have been significant developments in the company's business as well as its market price. The purpose of this article is to provide the appropriate updates.
The basic method to value Simcorp (or most businesses in general) is on (pre-tax) economic earnings power - i.e., the profits a private business owner would be able to pocket after any expenditures necessary to maintain the earnings power of the business and its position as a going concern. For Simcorp a reasonable approximation to this is:
- economic earnings = EBITDA - capital expenditures
(all amounts in millions of EUR)
|Pre-tax economic earnings||19.5||72||59||55||49.5|
Note that on a run rate basis Simcorp is on track to have lower year over year revenue and earnings for 2016. However, underlying business has actually improved - the company's order book is at an all time high - the discrepancy lies in unfavorable currency movements.
The state of the business
Since I wrote the original article, in addition to Simcorp's general grind upwards, there have been two significant developments.
The first, whose effect will probably not be visible for a few years, is that apart from its standard license/maintenance revenue model, Simcorp has started offering its products on a subscription (SaaS/cloud) basis.
The second development is much more recent (occurred in the past week). On September 24, the company announced that Franklin Templeton had chosen Simcorp's flagship product to support the firm's back office and investment accounting operations.
This development is significant for multiple reasons. As I outlined in the original article, the company's products are quite well penetrated in Europe. Further growth in Europe will be a slow slog. The company's greatest opportunity lies in penetrating North America. Franklin Templeton is one of the largest asset managers globally (by AUM). The Franklin Templeton win should have a positive short term effect on the company's growth. More importantly, it bodes well for the company's initiatives in penetrating the North American market.
Of course, much of this has been realized by the market. Which brings us to the all important question of valuation.
When I wrote the first article on Simcorp in August of last year, the company traded at about 315 DKK (Danish Krone) per share. Currently, the quoted market price is about 380 DKK. In other words, about a 20% gain. Not shabby (especially when combined with the dividend collected in that period), but this is not meant to be a backdoor brag, but rather an exhortation to compare with the financials and check that the market price hasn't got too far ahead of the intrinsic value of the business.
Let's be a bit optimistic. Ignore the lower earnings for 2016 due to currency. From 2014 to 2015 the company grew pre-tax economic earnings by about 20%. Let's look five years out and assume that 2020, the company is able to about double these earnings to about EUR 150 million (so about a 15% annual growth rate). In my opinion, an investor should at least demand a 10% pre-tax earnings yield on their cost after holding an investment for about 4-5 years.
Simcorp's current market capitalization stands at about EUR 2 billion. This is a tad bit rich. Remember, that our outlook has 15% growth annually till 2020 already penciled in.
Although, I wouldn't call the pricing of Simcorp's stock irrational, there isn't much of a margin of safety built in.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SICRF over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.