Positive newsflow continues, with Statpro Group (LON:SOG) announcing a significant £1.5m conversion from its legacy Seven suite to its modern Revolution cloud platform. This follows the recent news of a partnership with JP Morgan’s Data and Analytics business and the acquisition of an ESG research and index business. The deal is significant since it is a large contract with a key client, has an attractive 77% conversion premium and signals that the group is moving towards the end stages of conversions of its legacy Seven contracts. In our view, the shares continue to look undervalued, given the group’s c £56m recurring revenue book and the attractive rating (c 14x FY20e), especially in light of the active M&A backdrop in the financial software sector.
Business description
StatPro Group provides cloud-based portfolio analytics solutions to the global investment community.
Conversions from Seven to Revolution progress
A large insurance company customer has agreed to convert from StatPro’s legacy StatPro Seven software to its flagship StatPro Revolution cloud service. The three-year contract has a minimum value of £1.5m and represents a 77% increase in annual subscription. The customer selected StatPro Revolution following a competitive tender, and the capabilities of Revolution’s new fixed income attribution and risk module were critical when the client reviewed its options. The contract also includes performance and equity attribution as well as composites. Following this conversion, the group has c £5m of legacy Seven annual software subscriptions to convert. StatPro is on course to complete the full conversion of most of the remaining Seven clients over the next two years. As the process of conversion comes to a close, the group will continue to realise significant operational savings in IT costs (primarily hosting costs) as well as simplify operational complexity.
Upward pressure on forecasts
We are maintaining our forecasts for now and will review them following the interim results. However, given the latest news, we acknowledge there is upward pressure to our forecasts.
Valuation: Highly scalable cloud computing upside
StatPro’s stock trades on c 17x our FY19e EPS, which falls to c 14x in FY20e and to c 12x in FY21e. Alternatively, the shares trade on c 1.9x FY19 EV/sales, around a third of the level of StatPro’s larger US financial software peers and a quarter of the level of US-based pure software-as-a-service companies. Our DCF model, when incorporating 10-year organic revenue CAGR of c 3.7%, terminal growth of 2%, a long-term operating margin target of 24.0% and a WACC of 9%, values the shares at 235p, 76% above the current share price.
