Eleco (ELCO)

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

W: https://www.elecosoft.com/


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).

Company Operations

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)


13.4% H.A.Allen

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.


Hi Ben,

Many thanks for the write-up. Not a company I have looked at before.

I will look at the company in the next few days. In the meantime I will leave you with this bearish document published last year from Ciphersense Research:

CS_ELCO_25-06-2020_Final part1.pdf (2.8 MB)
CS_ELCO_25-06-2020_Final part2.pdf (3.7 MB)

Can’t say I have read that document fully, and things may have moved on, but some bullet points:

  • ELCO’s core software is ex-growth and experiencing structural decline
  • ELCO’s accounts contain significant red flags and conflicts with subsidiary filings
  • ELCO’s limited non-IFRS disclosures are highly deceptive and misleading
  • ELCO’s R&D claim suggests lack of software enhancing activity
  • ELCO’s original German operations generate next to no profit
  • ELCO’s acquisition of Active Online has potentially been misrepresented
  • ELCO sales are heavily geared to licence sales under a legacy perpetual model
  • ELCO has failed to file accounts in multiple jurisdictions
  • ELCO has 6 Finance chiefs over the course of the last 10 years
  • ELCO lacks credible software experience at board level
  • ELCO’s ex-Finance Chief of 16 years has returned as chair of the audit committee
  • ELCO commissions glorifying research reports targeted at retail investors
  • ELCO’s outdated perpetual licencing model poses a risk to its market position
  • ELCO’s Executive Chairman possesses an uncomfortable degree of control
  • ELCO’s cross-selling potential is dramatically overplayed and misunderstood

Ciphersense can be found here:


There is also this blog report:

I think the blogger has misinterpreted what is ‘boilerplate’ language from the auditor.


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Thank you for almost giving me a heart attack :scream_cat: but then I read some of the report and decided it wasn’t so bad!

It’s good to be aware of the bear case (but if Ciphersense/Dexter Burt had a short on ELCO at publication, I hope they have covered it by now or it could be quite painful!)

Re the blogging article and boilerplates, yes, I agree all professional advisors seem to want to abdicate all liability for the work they are paid for through boilerplate clauses! It’s really weird they can do this.

On the re-election of directors, I had thought the point of AIM for the companies involved was light touch regulation?! I agree they should have got back to my fellow misanthrope.

The relationship with Mr Ketterley is interesting, creates a potential share overhang and also deserves further investigation.

Management claim the market for building lifecycle software is £8bn, with an 8-15% cagr. I need to validate this.

Still investing in alot into R&D, and capitalising only 50% of it. Currently around 6% of revenue or 30% of operating profit excluding R&D expensed. If true, this seems like a sensible level of investment to me.

Admittedly R&D spend was much greater in the years preceeding this chart, but it is heading in the right direction now.

This is being addressed, but it’s an opportunity cost rather than any kind of malfeasance.

This is being addressed.

If true, actually a very good point by Mr Burt!

This has been addressed.

Good point!

Most companies do this, I believe? Edison Research etc. PR? Not immoral, to me in any case, as this relationship will be disclosed within the report. AJ Bell do the same I think and numerous other companies.

This is being addressed and actually a repetition of the ‘legacy perpetual licence’ point above?!

Not sure Mr Ketterley would want to risk being a ‘shadow director’. I know I certainly wouldn’t!

I need to dig through the CS report in more depth. Thanks for bringing it to my attention.



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I looked into this company recently and decided to give it a miss for the time being given that management expects a worsening of financials in the short term as they transition to SaaS.

I’d really like to see some progress in developing new markets (eg. US) to evidence the competitiveness of their products. I’m concerned their switch to SaaS may simply replace their existing revenue with hopes of a re-rating rather than drive increased profitability.



Thanks for your post!

Yes, management say they are trying to progress in new markets which I think is the right strategy - it’s just, as you say, whether they can execute it given the quality of their product.

I have no reason to doubt the quality of their software, yet! Revenue tends to increase with ROCE and ROE remaining fairly constant at acceptable levels (for me!). Other than these metrics I have no special insight in this regard.

On the switch to SaaS, the other way to look at it is if ELCO didn’t switch away from perpetual licences (given the way the market is) they would definitely have received an enormous de-rating, so the company had no choice but to grasp the nettle at some point resulting in flatter eps.

You may well be able to purchase this company at a lower price in the future because of the switch to SaaS, however I’m personally not very good at market timing, so I tend to sit and wait.

(Whether SaaS leads to enhanced life-time spend per client is yet to be proved by any software company, imo, just because SaaS hasn’t been around for long - we will see!).

Is the switch to SaaS (which started, as far as I can tell for ELCO in mid 2019) hiding some growth which would have been reflected the accounts had they continued with perpetual licences, something also to ponder?




Hi Ben,

Just going through Part 1: Financial engineering and accounting trickery of the Ciphersense report. A few points could be reiterated 2020:

Underlying products are in structural decline in core markets

Possibly. 2018 report says purchases of Shire and ActiveOnline would have added an extra £1,161k and £1,849k respectively to revenue had they been owned for the full year.

2018 revenue was £22,220k, which is £25,230k with the full-year Shire and ActiveOnline contributions. Revenue for 2019 was £25,398k and for 2020 was £25,232k, so no underlying revenue growth between 2018 and 2020.

Recurring revenue growth is dependent on acquisitions/Recurring revenue is inflated by ‘Repeatable’ revenues

Not sure about these claims, but I notice recurring revenue for 2019 within the 2020 report was £13,557k…

…but was declared as £14,435k the year before:

So what would have been a 2% decline for 2020 was restated to a 5% increase.

Plus the 2018 recurring figure was restated in the 2019 report and the 2017 recurring figure was restated in the 2018 report. So a fair amount of re-jigging has occurred with what is an important number, which is not ideal.

Restatements concealed decline in 2018 licence revenue

The snapshots above show 2019 licence revenue was originally £6,046k but restated as £5,877k for the 2020 report. Still a 7.5% decline for 2020, but not a 10% decline if the original figure was used. So ongoing restatements here are not ideal either.

Revenue was not restated for H1 2021, so hopefully the re-jigs have stopped.


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Thanks Maynard!

On the restatement of recurring revenue and services revenue, their annual report states;

Revenues for the year ended 31 December 2019, have been restated as we identified elements within Recurring which related to Services. The reclassification of revenue types has been made with a net effect that £878,000 has been reclassified from Recurring to Services, while £169,000 has been reclassified from Licence to Services

So whilst recurring revenues may have been flattered in prior years, services income has been de-flattered, so a net nothing overall?! (apologies for butchering the English language!). Maybe there is a slight issue being recurring maintenance being more valuable than services income, however for recurring income there would still have been an increase in 2019 over 2018, so why mis-state this intentionally?

Notes to the accounts are audited so I have to assume they proved this mis-statement to the auditors (or vice-versa), otherwise I would be seeing problems everywhere in the accounts (but I do know for a fact everyone is out to get me!!! :upside_down_face:). Personally I don’t believe they restated in 2020 to show an upward curve in recurring maintenance, even if that were possible.

I get your point, but personally I believe the company has coped admirally with both Brexit and the pandemic. The accounts have been straight forward about the flat revenue and I would say that despite the flat revenue, EPS increased by +18%/+17% after dilution.

I have to say I don’t like the tenor of the Ciphersense report - it isn’t balanced and invites the reader to doubt auditors and management, trying to join up dots in a particular pattern. Ciphersense said the pandemic would be cataclysmic for Eleco. To me the pandemic seems to have galvanised management’s ambition, resulting in a more effective long-term strategy and a much improved mix of Boardroom skills.

By the way, isn’t the £3.9m 2020 profit before tax the highest it has been in over a decade? :wink:

We will see what happens!


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Hi Ben,

There’s no evidence of an intentional mis-statement. But ongoing restatements of the same entry are not ideal, and add to the overall picture of a company if other ‘not ideal’ features arise as well. On their own, a single issue such as this may not be a problem. But several issues all added together may give pause for thought – even if none of them individually is a full ‘red flag’.

The Ciphersense report is not perfect. For example:

  • Absence of relevant software metrics” compares ELCO with Autodesk, a $63 billion business. ELCO not reporting ARRs and customer numbers is not ideal, but not out of keeping with many other small AIM shares.

  • Companies do have some leeway when defining direct and indirect costs, which could explain the claim “Gross margins appear to be overstated”.

  • Aggressive capitalisation of development expenditure” is claimed by a comparison against only two other companies and is arguably not statistically significant.

But the report reveals a lot of oddities that are worth noting. Ciphersense was alarmed at the trend of “Receivables past due, not provided”, the firgures for which were then omitted from the 2020 report. The auditor providing a full-scope audit for subsidiaries representing only two-thirds of group revenue (“Audit concerns”) does seem low as well.

While the Ciphersense report did not contain a knockout blow to ELCO, I suspect the report contained enough to start conversations among shareholders. Perhaps the long-term executive chairman departing three months after the report was published was not a coincidence.

A general meeting requisition was thrown out earlier this year on a technicality, but the subsequent board changes suggest management has listened to dissident shareholders. The board’s bios refer too much to ‘M&A’ and not enough to ‘software’ for my liking, but the appointment of a building-sector executive (i.e. a customer) as a non-exec feels a good move. I note some of management’s options kick in if EPS surpasses 7p, which compares to 4.8p for 2020 and may give some indication of ELCO’s ambitions.


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Thanks Maynard,

I personally suspect the Ciphersense report was a cynical attempt to short the company, issued at an opportunistic time when investors were feeling jittery.

Who are Ciphersense/Dexter Burt, anyway? I have certainly never heard of them until now - are they some sort of US Muddy Waters wannabe?

I notice as well as auditors, Ciphersense issue their own disclaimer! Perhaps they should concentrate on facts rather than innuendo, hiding from the courts under journalistic exemption.

Personally, I don’t have a list of amber flags adding up to a red flag;

  • For reasons already mentioned, I don’t care about the restatement of the mix of revenue.

  • Revenue is flat due to pandemic and Brexit issues (but eps did increase). How many companies would figuratively give their left arm for flat revenue over this period?

  • The hugely influential Chairman has gone (and this needed to happen for the company to grow up). At this point I don’t give a fig about his pay-out on leaving.

  • The re-election of all directors isn’t a requirement of AIM, so it is a non-event for me. I’m sure they got back to the major shareholders on the refusal of the general meeting, but I am not surprised they didn’t reply to a very minor blogger (although it would have been polite to do so). I can’t see any institutions selling shares since 2006 so they must have reached an understanding on this issue.

  • You mention they have directors with M&E experience but why can’t Eleco have directors with business combination experience? There is nothing wrong with having a buy and build strategy along with an organic growth strategy. This seems to work well with a number of companies. Eleco are debt free 2 years after the last major acquisition. How is this different from Judges Scientific, for example? (There are Directors with software experience so I don’t really understand what you are saying).

  • On receivables, the company carries out an audited impairment exercise. I don’t understand why this is deemed fraudulent due to a change in the reporting format. I don’t see the evidence that this is the symptom of some dastardly scheme?

I may be wrong about all of the above, though, so this is my disclaimer (everyone else seems to issue one!) :grinning: I tend to hold around 70+ US and UK company positions, so for me the consequence of a 40%+ drop in any one of my companies (as indicated by the Ciphersense report) is very limited.

As you say, maybe the Ciphersense report has provided the impetus for the company to improve further and go on to greater heights? If Dexter Burt is an American, it’s a shame he may not get the irony in this!



Hi Ben,

Mr Burt appears in this StockSlam event at c42mins:

I suppose the research doc was a giveaway to attract attention for potential future subscribers etc. Website activity has since gone quite, so he might be up to something else now.

Fair point. I am generally not keen on acquisitive companies, although I recognise Judges and others have worked out well. I like directors with hands-on experience of the product, as that (rightly or wrongly) gives me some assurance that management know what it is doing. I may be mistaken, but I did not get the impression any director had written software. All this is personal preference, though.

I can’t argue otherwise with that. Receivables were just one of the oddities I said that may (or may not!) be worth noting. I did say the report did not contain a knockout-blow (i.e no definitive proof of fraud!)


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Yes, I get you in that buy and build is definitely more risky than organic growth.

Thanks for the PI World link. Mr Burt advocates a ‘risky risk’ company (a really new float in the vaping sector). Maybe hubris, maybe genius :thinking:

And thanks for your time on this. It’s certainly given me food for thought and flags to look out for in future ELCO rns.

Have a good week.


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my notes below if of interest to anyone;

20th September 2020 – Investor Meet Company

CEO (Jonathan Hunter) and CFO (Robert Tearle)

  • Collaboration cloud product solution launched (JH).
  • Concentrate more on organic growth (JH)
  • Strategic review completed (JH)
  • Combining the 3 uk entities under one brand (rather than 3 separate brands) (JH).
  • Combining the 2 nordic entities under another brand (JH).
  • Went through the half year metrics (RT) which were as expected.
  • They say customer retention is excellent.
  • Q&A – time to 100% SAAS revenue? – not really answered (JH)– They have processes in place for SAAS, for new clients. To move to 100% SaaS they would effectively have to repurchase perpetual licences back from existing clients. I got the impression this would be a focus for the next period going forward but it would have to be on a voluntary basis for the moment. 2/5 products are already 100% SaaS (RT).
  • Q&A – M&A in future? Yes, if in the correct area.
  • Q&A – US expansion details? Yes, in Texas initially because it is growing rapidly, and the opportunity there is greater than the whole of the UK put together. Their impression is most construction companies currently used MS Excel spreadsheets so it could be an opportunity (but it may take time!! :grinning:)
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