Investment idea: MakoLab S.A. – Fast-growing family-owned Polish software company

Published 11/08/2020

Business description

MakoLab (Market cap PLN 56.6m/EUR 12.9m) is a Polish software company, which is owned by Vice President of the Board Dr. Miroslaw Sopek (Master’s degree in Technical Physics, Information Technology and Applied Mathematics, PhD in Theoretical Chemistry) and his wife (they both control 73.6% of the shares). The company describes itself as a Digital Project House and has been on the market since the mid-1990s. It is headquartered in Lodz, but also has offices in Warsaw, Lublin, Paris, London and Tampa (USA). MakoLab currently employs more than 180 full-time employees (thereof: 3 in UK and 2 in US) from 9 countries and has so far conducted >500 projects.

The company’s client portfolio comprises well-known names such as for example Renault, Maspex, Toyota, Pfizer, PZU, Amcor, International Paper, BASF and Europcar, who mostly have been with the company for the last 10-15 years. MakoLab’s services include Content Management Systems (incl. for example semantic search), dedicated business solutions (e.g. IT body leasing, financial simulators, lease/cost/facility management tools), Customer Relationship Management tools, e-shops, mobile apps (e.g. 3D Car/Interior Visualizer, Virtual Reality/Augmented Reality solutions), online marketing (e.g SEM/SEO, content marketing), graphic/multimedia design & user experience, Web Analytics, solutions for the Connected Car, and Data Center Services. The company is official software partner of e.g. Microsoft, IBM Sitecore, Adobe, Magento and Google.

Financials

In 2019, MakoLab generated revenues of PLN 43.4m (+36.4% y-o-y), thereof 74% abroad. International sales grew by 32% y-o-y, while domestic ones advanced by 52%. The main growth drivers were software projects for the “Connected Car” as well as outsourcing of IT services. Most sales stemmed from clients from the Automotive and Financial sectors. In 2016-2019, MakoLabs sales grew at a CAGR of 28.7%. In Jan-Dec 2019, EBIT increased by 99.1% to PLN 6.3m (14.6% margin) and net income by 93.4% to PLN 4.8m (11% margin; CAGR 16-19 = 58.6%). While Free Cash Flow equalled PLN 5.3m (2018: PLN 1.8m), net cash as of 31/12/2019 amounted to PLN 7.8m.

For H1/20, the company also reported solid results, despite COVID-19. Sales grew by 26% y-o-y to PLN 24m (thereof: +42% y-o-y abroad following robust sales of “Connected Car” solutions, -18% in Poland mainly due to weaker sales from IT outsourcing), EBIT by 30.4% (11.7% margin) to PLN 2.8m and net income by 66.9% to PLN 2.5m (10.3% margin). Between January and June 2020, operating cash flow reached PLN 4.6m compared to PLN 2m in the previous year. Free cash flow amounted to PLN 3.6m, while net cash reached PLN 11m.

While in contrast to the previous years MakoLab decided not to pay out a dividend for 2019 due to the coronavirus pandemia, no one of the company’s projects has been halted or limited since March, according to management. Given the demand for digitalisation solutions worldwide, which will likely become even stronger following the pandemia, the company’s long relationships to international clients and its cost advantage vs. foreign peers, we believe that MakoLab could even accelerate its growth in the next 2-3 years. An additional growth trigger are the company’s EU-funded R&D projects such as Blockchain-based systems for sophisticated databases.

For 2020E, we now expect that MakoLab’s net income will reach PLN 5.5m (+15.4% y-o-y), while next year it should grow at >20%.

Conclusion

Based on our estimated net income and growth rate, the stock is currently valued at a P/E 2020E of just 10.3x and PEG ratio of 0.67x vs. P/E 2020E 21.3x of another Polish software company, PGS Software S.A. We expect that in 2021E MakoLab will again pay out a dividend, which in 2016-2019 equalled PLN 0.02-PLN 0.06 per share. In our view, as for last year shareholders did not receive a profit share, there is a chance that next year the company could pay out a significantly higher DPS than historically.

Disclaimer:  The author of this article owns shares of MakoLab himself

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