Description

IVU is a German Software company providing ERP software to public transport companies i.e. to Bus and rail operators. IVU is specialised in resource planning which for rail operators involves personnel planning and dispatching as well as vehicle deployment. For Bus operators they cover a broader need around planning, dispatching, fleet management as well as ticketing and passenger information systems.

IVU has two principal competitors that are listed: For public transport ERP systems the German INIT is the most relevant comp. And for Rail operators Software UK listed Tracsis is the main listed peer. As can be seen below both peers trade on very different valuations than IVU which is one part of the thesis:

One reason for the lower valuation is that in 2016 IVU disappointed investors because they were writing off a project in Israel where they basically started to implement the software for a Bus operator w/o having been paid in advance. As the operator didn’t pay they had to write down 2m EUR corresponding to 50% of net profit.

Going forward I explain why I would expect a relatively smooth performance going forward:

1. Economic Characteristics

IVU sells software that needs to be customized & implemented with their customers systems. While that makes the implementation sometimes painful and relatively low margin, the systems once in place are very sticky.

Currently most operators actually still run their self developed software solutions - thus IVU has many more clients to win over in the coming decade.

Segmentation by type of revenue: 15-20% Licence, 25-30% Maintenance, 30-40% Project (implementation), and 20% Hardware (reseller business of Displays etc.)

IVU generates roughly 50% of sales in GER and the rest mostly in surrounding countries.

Rail Operators

Whereas for Bus operators IVU is behind Init when it comes to the scope of the software and the market penetration it is very strong with rail operators. Interestingly its peer Tracsis achieves >20% EBIT margins in the UK providing planning for rail operators.

This shows the inherent potential of this vertical and is also visible in the EBIT margin progression of IVU:

Whereas Tracsis has invested relatively little in its software in recent years, IVU (all R&D is expensed) has spend ca. 3% of revenues on R&D in recent years and therefore developed a very modern suite (e.g. they also have a Cloud enabled suite) that has won the major tenders in German speaking countries and partly also abroad (e.g. Trenitalia in Italy).

B. Shareholder Return

Over the last 5Y the company grew gross profit by ca. 10% CAGR. On top as you can depict from the chart above the company had operating leverage allowing for EBIT to grow ca. 12% CAGR.

Going forward I would expect this track record to continue as the company has a very strong sales pipeline for the coming years and e.g. already >75% of revenues in 2019 are secured (biggest contract is a DB Regio project which will deliver 80-100m revenues of 5Y).

Thus even w/o a rerating to the level of peers I think a 12% EPS CAGR is achievable. On top the company currently holds 20% of the MCAP in cash - which it wants to use to acquire a company that would help IVU to internationalize (e.g. to penetrate the UK market).

C. Principal Risks

Clearly the biggest risk is that IVU messes up an implementation project as done in Israel in 2016. From my discussions I would argue that they learned their lesson and only work against prepayments as soon as the counterparty isn’t known to them to well (e.g. they did a project in Nigeria where payment was secured by the World Bank).

Currently their biggest client is the DB Regio - where I would assess the risk of a failure as relatively low given the long term relationship with the customer

D. Opportunities

Beside a rerating the company could also be taken out: e.g. a peer of them PTV was acquired by Porsche SE for 3x Sales in 2017.

Catalyst

A. Successful Execution on the DB Regio Project and ongoing wins of new Rail operators where they have a strong competitive position

B. Bolt on M&A or vice versa an offer for IVU itself given the market leadership it has in its niche