Statpro Group (LON:SOG) has acquired ECPI, a small private Italian environmental, social and governance (ESG) research and index business, from its management for a total consideration of c €2.9m (c £2.6m). While the deal is small, we believe there is significant potential to add value by cross-selling the products to StatPro’s large global client base. 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.
Acquisition of ECPI
StatPro has acquired ECPI from its management for an initial payment of €0.9m with an additional deferred contingent payment in March 2022, which StatPro currently estimates at €2.0m. ECPI provides ESG indices and benchmarks and related services including constructing client-specific benchmarks. It carries out ESG research and produces ratings on an active universe of approximately 3,500 companies (total universe of 4,500+) globally and uses these ratings to qualify companies for inclusion into a series of ESG investable indices, or to provide portfolio screening services. ECPI operates a recurring revenue business model and has annualised recurring revenues (ARR) of c €0.9m. StatPro can cross-sell the service to its substantial client base and plans to incorporate it into its flagship StatPro Revolution cloud services product.
Forecasts: Edging up EBITDA and EPS
We have added £0.4m of revenues in FY19 and £0.8m in FY20 and FY21 with EBITDA little changed in FY19, and rising by c 2% in each of FY20 and FY21. With forecast interest costs increasing by £25k in FY19 and £50k in FY29, EPS edges up c 1% in each of FY20 and FY21. After adding the initial £0.8m payment in FY19, we now forecast the group to end FY19 with net debt of £23.0m (previously £22.2m), which falls to £18.3m a year later (£17.5m).
Valuation: Highly scalable cloud computing upside
StatPro’s stock trades on c 16x 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 (vs 230p before), 77% above the current share price.
Business description
StatPro Group provides cloud-based portfolio analytics solutions to the global investment community.
Acquisition of ESG research and index business
StatPro has acquired ECPI from its management for an initial €0.9m with an additional deferred contingent payment in March 2022, which StatPro currently estimates at €2.0m. The reason the vendors are selling is because the business is subscale and they are finding it harder to generate growth. However, StatPro can extend the products to its global client base. The ECPI management are staying with StatPro and have a lot of incentive to gain new business given the deferred consideration structure, which can pay out up to €10m in March 2022. We note the highly successful 2016 acquisition of InfoVest is perhaps a useful model, as it beat expectations through selling the products to StatPro’s client base.
The deal was driven by Gordon Bloor, who heads up the group’s new ‘StatPro: Source’ data division, and ECPI will become part of this division, while being integrated into the group’s Italian business.
ECPI has annualised recurring revenues (ARR) of c €0.9m and generated EBITDA of c €0.3m in FY18. StatPro says it expects the deal to enhance its EPS in the first full year following the acquisition. StatPro is paying an initial €0.9m with an additional payment in March 2022, depending on the level of ARR as at end-FY21. StatPro will pay twice the net increase in ARR, capped at €10m, with the multiple reduced if the EBITDA margin is below 20%.
ECPI’s customers are European financial institutions, which pay for the service in one- to five-year contracts. With growing demand from investors for ethical investing, asset managers are finding it important to provide data to their customers on investment suitability. We note the London Stock Exchange recently acquired Beyond Ratings, a fixed income ESG data business.
