Business Description

Founded in 1990, Comp is currently the No. 1 provider of fiscal devices and IT security solutions in Poland. The company, which generates c. 7% of its total revenues abroad, operates two business units:

1. Retail Segment

-> Production and distribution of proprietary cash registers (including online and virtual versions), payment terminals, and add-on services such as M/Platform (an online big data platform for smaller shops for managing promotions, e-payments and e-invoices in cooperation with Eurocash, a leading wholesaler/retailer in Poland). Approximately 900,000 (thereof: c. 550k online ones that can be equipped with add-on services) of the total 1.8m (c. 1.1m) cash registers in Poland were produced by Comp.

-> Contributed 35% of total revenues in 2023

-> EBITDA margin of 12.9% in 2023

2. IT Segment

-> Provides IT security software and equipment for large enterprises and public administration. Comp holds all necessary certifications to conduct business with the Polish Ministry of Defence and the Armed Forces, which are difficult to obtain. Over the last 30 years, the company has built strong relationships with both public and private clients, as well as with international IT security solution providers such as Cisco Systems, Check Point Software, HP, IBM, Juniper, McAfee, and Symantec.

-> Contributed 65.1% of total revenues in 2023

-> EBITDA margin of 13.9% in 2023

Historically, Comp has been heavily dependent on third-party providers of IT security software and equipment, as well as on investment cycles related to cash registers and budgets for IT security projects. However, in our view the company now already generates over PLN 40m in monthly recurring revenues from proprietary add-on services for cash registers and from its own products (e.g. encryptors, identification tools). We believe that these high-margin categories are growing at >25% year-over-year and are expected to help Comp 1) reduce the seasonality of its business, which has historically been skewed towards H2, and 2) increase its EBITDA margin to 15-20% in the near future.

Comp’s shareholder structure is stable and long-term oriented. Polish pension funds own over 43% of the shares, the US-based fund Perea Capital Partners owns 6.7%, and CEO Robert Tomaszewski holds 6.3%. Since 2021, Comp has distributed PLN >70m to shareholders through dividends and share buybacks.

Latest Results

Over the past five years, Comp has increased its revenues and EBITDA at a CAGR of 8% and 9%, respectively. ROCE has historically ranged between 3% and 7%, but improved significantly to 9.9% in 2023, with further growth expected due to a focus on service revenues. For Q1/24, the company reported revenues of PLN 153.1 million (-28.8% y-o-y), including PLN 83.7m (-2.2%) from the Retail segment and PLN 69.6m (-46.4%) from the IT segment. In Q1/23, sales were positively impacted by several large but low-margin IT projects such as E-Health in the Pomorskie province and the Electronic Surveillance System. At the Group level, the EBITDA margin in Q1/24 increased to 18.4%, up from 11.6% in the previous year. In the Retail segment, the margin was 18.9% (Q1/23: 13.3%), and in IT, it equalled 24.9% (Q1/23: 14.3%). Between January and March 2024, Comp’s net income amounted to PLN 9.6m (+53.4%). The only negative was the decline in operating and free cash flow, which fell from PLN 38.2m in Q1/23 to PLN -86.1m, and from PLN 30.4m to PLN -94m, respectively. As of March 31, 2024, the company’s net debt stood at PLN 163m (net gearing of 36.6%), a reasonable level. 

Summary & Conclusion

We appreciate that Comp is the market leader in its segments in Poland and that it has successfully introduced proprietary products and services with recurring revenues in recent years, which should positively impact operating profitability, cash flow generation, and ROCE going forward. It is also a positive sign that the company’s management team, holding over 6% of its shares, has been stable over time. Given its track record, Comp is well-positioned to benefit from the upcoming replacement cycle of older fiscal registers, potential extensions of the fiscalisation in Poland, increasing investments in IT security by large private enterprises (funded, for example, by the EU Reconstruction and Resilience Funds, which foresees EUR 4.6bn for digital transformation & cybersecurity until 2026E), and defense and security investments (with Poland’s defence budget at >4% of GDP).

Current sell-side forecasts for Comp project EBITDA of PLN 135m (+22.2% y-o-y) in 2024E and PLN 148m (+9.6% y-o-y) in 2025E, translating to an attractive EV/EBITDA multiple of 4.8x and 4.4x, respectively. Additionally, Comp plans to continue its distribution policy, with expected dividends and share buybacks for both 2024E and 2025E valued at PLN 8/share (yield of 7.9%).

Business description

The LSI Software Group, which has c. 300 employees (full-time and freelancers), was founded in 1998 and is based in Lodz. It is a provider of Enterprise Resource Planning (ERP) software for hotels, restaurants (products: Gastro, tAPP Gastro, POSitive Restaurant), cinemas (POSitive Cinema) – in these three areas, it is Polish market leader with a share of between 43% and 75% – sports facilities and retailers. In addition, it is the exclusive distributor of POS management systems and peripheral devices of the company Posiflex and, since year-end 2021, the robots of the Chinese company PUDU, which operates in 60 countries worldwide. Due to the structure of the company’s sales – the sector HoReCa accounts for c. 70% of its annual sales – LSI Software was hit hard by the COVID-19 pandemic, with a revenue and EBITDA decline of 17% and 43% respectively y-o-y. 

LSI Software, where in 2021 international revenues made up 24% of the total, generates sales from software integration, consulting, services, and hardware delivery. Last year, revenues from own software and maintenance/servicing accounted for 53.7% of the total, however the distribution activities (mainly sales of Posiflex products and PUDU robots) were most profitable with a gross margin of 30%. Recently, the company started offering its software products in the SaaS model, which is particularly attractive for smaller clients due to the low monthly fee of c. PLN 250. In our view, this should increase the share of recurring revenues from currently c. 50% and improve profitability in the coming years. 

According to management, LSI’s clients include >5,000 restaurants, c. 1,500 cinemas and several dozen cinema chains. The 3-4 largest customers account for only 15-20% of the company’s yearly sales and the customer churn only equals <5%. Examples of clients include the cinema chains Helios S.A. (Poland), Muvi Cinemas (Saudi-Arabia), KITAG Cinemas (Switzerland) and the leading Polish retail and restaurant chains CCC and Amrest.

Currently, LSI Software has c. 300 employees, of which 75% work as software developers and testers and 25% in other functions such as sales & marketing, HR and administration. Although there is no employee incentive scheme, the employee fluctuation is below peers, according to management.

LSI Software’s largest shareholder is its CEO Grzegorz Siewiera, who owns 30.8% of its shares, but 53.6% of the votes. The Spanish family office Inmuebles Polo SL owns a stake of 13.2%.

Recent results

Between 2013 and 2019, LSI Software grew at a CAGR of 14.8% on top line. After the pandemic year 2020, in which the company was hit hard due to its dependance on the HoReCa sector, in 2021 LSI Software’s revenues went up by 25.5% to PLN 54m. While the gross margin jumped to 30.7% (2020: 21.3%), EBIT and net income improved by 256% to PLN 5.9m (11% margin) and by 169.1% to PLN 6.5m respectively. However, due to higher investments in working capital and CAPEX operating and free cash flow deteriorated to PLN 4.5m (2020: PLN 9.9m) and PLN -3m (PLN 6.1m) respectively. In 2021, LSI generated a ROCE of 10% compared to an estimated WACC of 18% at present. 

Due to the recovery in most of its markets after COVID-19-related lockdowns for 9M/22 LSI Software reported revenues of PLN 40m, which corresponds to a y-o-y increase of 19.9%. 18% (9M/21: 11%) of total sales were generated abroad, of which 6% (4%) in the US. The share of revenues from own products and services declined to 52.8% (54.7%), which mainly stemmed from 24.9% higher sales of hardware such as PUDU robots. In 9M/22, the Group’s gross margin improved from 22% last year to 23.4%. However, following 85.7% lower other operating income due to a one-off effect – in 9M/21, LSI reported PLN 3.4m of COVID 19-related government grants vs. PLN 245k in 9M/22 – as well as 21.6% higher sales costs y-o-y (e.g. trade fairs, sales staff), which should have already positively impacted results in Q4/22, EBIT declined from PLN 1.6m to PLN -1m and net income from PLN 1.4m to PLN -1.3m. Between January and September 2022, free cash flow equalled PLN -10.9m (9M/21: PLN -698k), which was related to significant investments in inventories of PLN 5.7m due to longer delivery times of suppliers, among others. At the end of September 2022, the company had net debt of PLN 2.9m, which corresponds to 6.5% of its equity. Its interest-bearing debt mainly reflects the valuation of its office leasing contract in Warsaw according to IFRS 16.

Summary & Conclusion

In our view, LSI Software is a solid, owner-managed software company with a leading position in its domestic market and strong growth potential related to the roll-out of SaaS-based products and further international expansion. Based on most recent broker estimates, it is currently trading at an EV/EBITDA 2022E of 4.5x, EV/EBITDA 2023E of 3.7x, P/E 2023E of 7.5x and PEG of 0.23. For the coming years, we expect an acceleration of growth and regular dividend payouts. We also believe that due to its strong product portfolio and attractive valuation LSI Software could be taken over by a larger player soon.