Description

Entersoft is a Greek software producer. Company was initially focused on ERP solutions, but after emerging from GFC started to invest into developing more niche applications, specific for various industry verticals such as Warehouse Management & Supply Chain, Retail, EDI, distribution and invoicing, field sales and various other software solutions. Reason for diversification is that ERP market is the most fierce in terms of competition. 50% of the market is occupied by SAP and MSFT, while the other 50% is up for locals to distribute. Entersoft positions themselves as the priciest in local market, focusing on value and not quantity of its clients. They are slightly cheaper compared to SAP, but can be up to 40-50% more expensive compared to Greek competition (SingularLogic or Softone). Market for domestic ERP undertook a significant change, where 2 legacy companies got acquired – SingularLogic by Epsilon and Orosimo by SoftOne. Previously these companies were operating at a razor thin margin, cutting prices to keep clients, but with new owners the focus will be on quality + profitability, hence improving market conditions. I expect in a year or two competition to intensify as reorganization and re-tooling completes.

Taking ERP market share is quite difficult due to high switching costs for companies. Entersoft can sell its portfolio of products to the companies who aren’t willing to change ERP system. Despite not having the ERP by Entersoft, some of the largest Greek companies use some sort of software provided by Entersoft. Important to note that many international companies with presence in Greece still use Entersoft products.

Entersoft has ~4-4.5k clients in Greece (3.5k) and Romania/Bulgaria. Focus is on medium+ sized clients and they cite and target ~66k companies market size in Greece, of which only ~3.5k are their clients. There is no client concentration, and biggest client constitutes ~1.5% of revenues. Greece business software market is around €350m, of which Entersoft has ~4.5% share.  

Entersoft brings out how underpenetrated market is in regards to various digital programs, citing adoption rates ranging from 10-40% for CRM, enterprise mobility, EDI and Warehouse Management. 10 year crisis in Greece disincentivized companies to invest into non-critical components, which hindered their competitiveness. Weak international competitiveness is quite active theme in various papers in EU on Greece and government is actively promoting digitalization with first stop being implementing eInvoicing by Greek IRS. There is also an initiative, which will likely go through that if a company receives funds from Restructuring Fund, it must do all communications with government via online programs, such as EDI I presume, where Entersoft is active.

Geographically, Greece is 90%+ of revenues, Romania ~5% with Bulgaria and UAE is the rest. Renewal rate is high, 98-99% p.a making churn minimal. 50-65% of revenues are recurring and predictable.

Entersoft pays dividend, ~2.4-3.3% yield on a rough 30% expected payout in the coming years but I expect it to be a little more volatile given no formal policy and potential acquisition funnel. Company has negative net debt.

Growth and margin graphs are like Epsilon (recently written up by Va1ueJunkie, another excellent opportunity). Companies are quite similar in their timing of listing on main market, making acquisitions and margin expansion. Even their strategy is quite similar, despite different end-market focus.

Entersoft spends around ~18% on R&D, 14% of which is expensed and 3-4% capitalized. Capitalized part is a bit larger compared to Epsilon, but still low.

Recent acquisitions

In late December 2020, bought Optimum for €5.1m, with 50% payable immediately, 25% in 12 months and 25% in 18 months. Company had revenues of €2.36m and net income of €0.44m, negative net debt €0.7m. Optimum was Entersoft’s big competitor in the Supply Chain, Logistics and Warehouse Management Systems. After the acquisition, Entersoft became undisputed leader in the space in Greece.

 In March 2021 acquired Wedia for €500k. Wedia had revenues of €1.4m and net cash on BS. Wedia specializes in Web and eCommerce applications and digital marketing services. Clients of Wedia include Piraeus Bank, AXA Insurance, Eurobank, Philip Morris and other companies. Logic for the acquisition was to extend its product line offering to a full integration, starting from customer experience up to final delivery of the product. Currently Entersoft is working diligently to release new B2B and B2C eCommerce platform in 2022 and get a foothold in that market as well.

 Entersoft has €13-15m in gunpowder to make acquisition. Targeting smaller, complimentary acquisitions in both Greek and Romanian market.

 Below is the product range offered now by Entersoft.

Thesis is similar to what Va1ueJunkie presented in his write-up on Epsilon

1.       Greece companies were in a crisis like situation for the past decade limiting non-critical spending which in the LT puts considerable strain on competitiveness.

2.       Greece has one of the lowest business software adoption rates in EU and overall digital literacy is lagging.

3.       State acknowledging the problem and taking material steps to bring Greece up to date with respect to technology. One of the concrete examples is introducing mandatory eInvoicing.

4.       EU funding as part of the recovery fund.

 Valuation

I expect company to exit 2021 with €26m in revenues and compound revenue organically at 15-20% in the coming years. Since they are close to reaching critical mass, margins are set to level-off and settle in the 30-32% EBT and 25-27% net margins. Using DCF with 8% disc. rate and 3% terminal growth Entersoft can be worth ~€7/sh. I expect company to have ~30% ROE in 2021 and above that after.

Revenue increased by 54% during 1H and 2H should be as strong. It is also important to note that company hasn’t benefited yet by eInvoicing introduction. The increase is due to acquisitions and organic growth.

Things to like

i.                     Wide set of product offering which allows them to get foot in the door. ERP has high switching cost and gaining new clients via upselling through other products is easier.

ii.                   Geographic presence in Romania and Bulgaria. Both markets are similar to Greece, but 5-10 years behind which puts Entersoft in a good spot. Have to take into account that Entersoft is “foreign” for Romania/Bulgaria hence I don’t believe replicating Greece success is a sure thing.

iii.                 High insider ownership across key management and Chairman. Over 60% is owned by the management and Chairman.

iv.                 Shrewd and straight shooting CEO.

v.                   Strong existing relationship which limits churn. Entersoft is very careful in selecting/approaching clients.

Things to dislike

i.                     Low liquidity.

ii.                   Share price has moved quite a bit during the summer and some margin of safety has been eroded.

There is also risk 2020-2021 were one-off years and spending on IT will go back to slumber similar to previous decade.

While the adoption rates of some cited software remain very low, and apart from clear regulatory push, it’s considerable risk that they remain anemic to change. Adoption rate of CRM in Developed Markets for example is 70%+, while remains below 40% in Greece.

In case of Entersoft there’s also risk that they are slowly reaching market peak in ERP sales in Greece and will be unable to onboard further clients. It is alleviated by inorganic growth, growth coming from niche software and Romania.

Catalyst

Markets catching up to growth.