Business description
MakoLab (Market cap PLN 56.2m/EUR 12.5m) 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 188 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 equaled PLN 5.3m (2018: PLN 1.8m), net cash as of 31/12/2019 amounted to PLN 7.8m.
In 2020, growth slowed down due to COVID-19. Sales grew by 11.9% y-o-y to PLN 48.6m (thereof: +19% y-o-y abroad following robust sales of “Connected Car”, “Data Center” and on-demand digital services, -9% in Poland mainly due to weaker sales from IT outsourcing), EBIT declined by 10.6% (11.6% margin) to PLN 5.7m and net income advanced by 0.5% to PLN 4.8m (9.9% margin). While profitability was negatively affected by higher personnel costs and expenses relating to the new German subsidiary MakoLab Deutschland GmbH, there was a positive impact from FX changes and lower tax y-o-y. Between January and December 2020, operating cash flow reached PLN 9.8m compared to PLN 5.7m in the previous year. Free cash flow amounted to PLN 9m, while net cash reached PLN 15.8m.
Currently, management see price pressure by MakoLab’s clients, which could negatively affect results in 2021E. However, given the demand for digitalisation solutions worldwide, which will likely become even stronger following the pandemic, 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 2021E, we expect that MakoLab’s net income will reach PLN 5.7m (+19% y-o-y), while in the following years it should grow at >20%.
Conclusion
Based on our estimated net income and growth rate, the stock is currently valued at a P/E 2021E of just 9.9x and PEG ratio of 0.51x vs. P/E 2021E 14.6x 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 equaled PLN 0.02-PLN 0.06 per share. In our view, there is a chance that the payout ratio, which in 2019 equaled just 8.8%, will significantly increase in the coming years.
Disclaimer: The author of this article owns shares of MakoLab himself
