I thought as I had done the work, I would post my notes on this company and today’s interims. Any comments welcome (within reason!), especially in relation to risks. I own shares in this company.
The Engineering and Electrical Lighting Company (ELECO/tidm ELCO)
Listed on AIM within the LSE, Market cap 120.9m, 237 employees, 137.5 pence per share, down 8.5% on interims released today (15th Sept 21). pe 30.3
1895 - founded as ‘The Gilbert Arc Lighting Company’ in Chingford, Essex!
1939 - incorporated and listed on the LSE, 82 years ago, operating in civil engineering.
1994 – started software division
2013 – divests physical businesses to concentrate solely on software
(pls look on their website for an excellent presentation of this).
Turnover: 37.5% UK, 24.1% Scandanavia, 19.3% Germany, 3.5% USA, ROW 15.6%
Products: 38% project management software, 18% visualisation software, 11.2% estimating software.
ROE 16%, ROCE 14.4% (possibly suppressed by transition to SaaS, but both higher than both 5 yrs ago and 5 yr averages).
Gross margin 90% (up 1.1% from 5 yrs ago)
Debt to market cap 5.7%
Reported eps increase over 5 yrs ago +254.5%
FCF increase over 5 yrs ago +805.4%
F-score 7/9 (new shares issued+asset t/o hasn’t increased - New shares dilution @ 2% p.a., but book value per share (5 year cagr) is still +19.9%).
Revenue 5 yr cagr +10.6% p.a. and eps cagr 5 yr +29.2% p.a. (reported eps)
Drivers for Growth
Construction industry has been a late adopter of software (or so the company says!)
Expansion into the US (new direct sales approach) and Germany.
Improvement in fundamentals over time as SaaS becomes a greater proportion of revenues, increasing the client life cycle.
Predicted increased infrastructure spend post-pandemic so maybe there will be demand tailwinds.
Share price history
Appears to be in a good way now after a sticky patch from 2008, probably due to the great financial crash and ELCO’s involvement with the construction sector which suffered greatly during that period.
Chairman – Serena Lang (BP/Ernst & Young/Invensys-Chairman Sept 20, non-exec dep chairman May 17, Non-exec Dir Dec 14)
CEO – Jonathan Hunter (CEO Sept 20, June 16 Board member, 2010 employee)
CFO – Robert Tearle (March 21)
15% John Ketteley (including other Ketteley holdings). Former Chairman.
6.5% John Lee (I think this is Lord Lee of Stafford?)
Interims reported today (15th Sept 21), 6 months to 30 June 21
Revenue up 13%,
Operating profit up 14%,
Profit before tax up 15%,
Basic eps up 16%,
FCF down 23% (re FCF, repayment of £135k for government furlough also divi paid of £329k (no divi in comparative period), totalling £464k against prior year operating cash=+4.5m),
Cashflow conversion 105%, with net cash @ 30 June of £8m (py £4.4m).
Recurring revenues = 55% of revenue (down from 57%?- company explanation due to a different product mix)
Mentions of note- cloud solution launched, so perhaps looking to the future. Confident of meeting full year market expectations for yr to Dec 21. Doesn’t say what the Board considers market expectations to be, however!
Software development capitalised = £790k and expensed = £838k, similar amounts to the prior year.
Group Transformation Manager employed – possibly leading to greater efficiencies?
Chair of Quartix Technologies admitted to the Board? (Paul Boughton/Quartix=vehicle tracking systems). Experience of US, Scandinavian and German markets offered, as well as experience transitioning from perpetual licences to a SaaS model.
Also Annette Nabavi to help with shift to SaaS.
Temporary reduction in profit expected over the next 18 months during transition to SaaS.
Verdict (15th Sept 21)
Now cash positive. ROCE growing slightly but ROE decreasing (I think only because borrowings have been eliminated).
Watch out for bumps in the road due to SaaS transition and reduced profitability (intention - to ignore this when it happens, as it possibly did today).
The company has proactively taken skills into the boardroom and, I think, replaced underperforming members.
Chairman and CEO seem very credible.