— ARP INVESTOR

25 nov 2022

1. Summary

IT engineering company, based in Poland.
Capitalizes by 440 million zlotys ($90 million) Micro cap.
Unknown company
Board aligned, the founders own 80% of the shares (free flow only 20%)
Low liquidity (trade about 300 shares a day of about $90, a volume of $27,000 a day. (extremely low for a fund)
High gross margin of 30% (Nagarro 24% and Epam 35%), EBITDA margin of 18% and EBIT margin of 14%
ROCE greater than 50%
No debt
High growth industry
It´s currently trading at 400 zlotys, which is equivalent to a 21x PER, 12x EV/EBITDA and 22x P/FCF
Growth forecast for the company between 25%~35% for the following years and EBITDA between 11%~14%
It isn´t in the company's plans to pay dividends
There is the possibility of debuting in a foreign market such as the American or other areas of Europe with greater visibility, a great catalyst.

2. Company

The company was founded in 2016 by its president Konrad Weiske
It provides IT services in software development, from integrated solutions to cloud solutions that are customized to suit the client's needs (custom software).
The projects combine the hardware level with embedded systems and high-level applications.
The company operates in the following industries

It offers its services mainly in the Polish and EU markets
More than 900 workers, and 15 offices in 9 countries.
The structure of the company is direct, eliminating middle managers and with employees who contribute operationally
It has a client portfolio of approximately 80 companies in 6 countries
It is important to note that Spyrosoft develops, but does not maintain, that is, it does not generate income from the maintenance fee (which could be a plus in the future to increase sales).
80% of its income comes from contracts with foreign clients, mainly from the UK and Germany (DACH: Germany, Austria and Switzerland)
Many companies in Western Europe and the US are outsourcing this type of service to lower costs and Poland has become one of the top 4 destinations.
One of the main problems that the industry has is the lack of engineers and the market potential that it operates is very large, for this reason:
The Polish government created the "Poland Business Harbor" in order to attract IT talent to Poland, facilitating the issuance of visas to specialists and their families.
On the other hand, companies in the sector created the Polish Software Development Association (SoDA) to attract foreign companies to provide services and talent (Konrad Weiske, the CEO of Spyrosoft, is part of the board of directors).
E2E (end to end) is a process by which companies have a global vision of a project, from the beginning to the end, with the end-to-end approach, compliance with the objectives of automating processes and continuous improvement

2.1 Business lines

Automotive: Design and implementation of processes related to Safety, software development for autonomous cars and autonomous driving
Finance: Processing and analysis of financial data, designs systems for loan processes and debt management systems in financial institutions, as well as fintech digital banking solutions
Industrial: Automation and communication of industrial devices (IIoT), as well as software that allows the exchange of data between devices and support for fleet management processes of industrial devices. The industrial sector needs a big change in the coming years, companies need to change their old models to new technological models.
Medical: Develops embedded software for advanced medical devices that support diagnostics performed by medical devices. In addition to business software, which supports the management of a medical company, patient care or monitoring the operation of devices.
Human resources and education: Design of temporary work systems, compensation management systems and educational systems. Employee behavior prediction systems, thanks to the use and implementation of Artificial Intelligence (AI) and Machine Learning (ML) technologies.
Geospatial Services: Comprehensive geospatial data processing, data storage and its intelligent analysis, as well as business software designs that enable the use of geospatial information management.
Entertainment and media

2.2 Group structure

Spyrosoft PL, Poland: The parent company offers integrated software for the automotive sector and industrial automation and health. It represents 52% of sales for the company.
Spyrosoft Ltd., UK
GOD Nearshore, Germany
Unravel, Poland: Provides technology consulting, enterprise software, embedded software, artificial intelligence and cloud solutions for the Polish, UK and US markets
Synergy, Poland: Software development and technology consulting, robotics, HMI (Human-machine) interface, technology platforms, digital products. For the automotive, industrial automation, consumer electronics and medical sectors, for the EU, UK and US markets.
Solutions, Croatia: Integrated embedded software systems (combination of software and hardware in a single package) for companies producing products from the automotive industry for the UK market
Better software group SA
Spyrosoft E-Commerce SA
Spyrosoft LLC, USA
Finin, Poland

2.3 Geographic locations

Spyrosoft has offices mainly in Poland, India, Croatia, Romania and Argentina.

Most of the sales come from the UK.
The company has a greater presence in the UK, Poland, USA and DACH (Germany, Austria and Switzerland) areas.
Weight of sales by geographical area in 2021

2.4 Growth

The company has gone from 31 MM zloty in 2018 to 174 MM zloty in 2021
A growth of 77% per year (CAGR)
EBITDA from 5 MM to 32 MM in the same period (CAGR 86%)
EPS from PLN 2.60 to PLN 15.20 in the same period
The company has gone from 18 to 900 workers in 6 years (2016~2022)
Currently, the demand for IT services is greater than the possibilities of satisfying them, which indicates that the sector will hardly decrease

3. A global outlook of IT engineering sector

It´s estimated that the IT engineering or digital transformation sector will grow between 15%~20% CAGR in the coming years.
A growth 5 times higher than global GDP.
A market of 1.140 billion is estimated for 2025.
In Europe, higher growth is estimated, of 25% CAGR due to the greater delay in European digital adaptation.
A sector with high EBITDA margins between 15%~9% and EBIT margins of 15% on average.
High ROIC, they are usually above 25%, sector with little need for reinvestment in fixed assets (tangible)
Low cyclicality sector, resistant to crises
Switching cost, customers are tied to services
They trade on average at 40x EV/EBITDA
IT engineering (also called Next Generation or digital transformation) is also fed mostly by offshore engineers, generating a reduction in costs, and consequently higher margins.

The global sales forecast for software development is estimated at 700 billion for productivity software by 2025, 600 billion for infrastructure systems, 500 billion for application development and about 300 billion for business software.

The company estimates that the market needs a greater demand for digital services that should be above 2,000 Billion by 2023

4. Competitive advantages

Switching cost: Once customers adapt the software developed by Spyrosoft to their needs, it is very difficult to migrate to another competitor.
Management team: Without a doubt, the management team is one of the strengths, a team with extensive experience in the sector
Geographical positioning: The company is in a strategic area, close to industrialized countries in Europe, with trained workers but at the same time with a lower cost of engineers.
Intellectual property: The company develops the software tailored to the client, but the rights to this software belong to Spyrosoft, so it can use all that knowledge and development acquired for future clients.

5. Comparables

There are few comparables for Spyrosoft, the following companies in the table don´t do exactly the same and are of different sizes, but they come close to do a comparable analysis.

Spyrosoft has higher growth and ROIC than its peers, with net cash and good EBIT margins.
Comparison with two good companies in the sector such as Nagarro and Endava.
Domain knowledge in global technology, organizations
Leading large and medium-sized companies that deliver custom software, offer their services to clients from various segmented businesses.
Large and mid-cap companies in the sector

6. Goals 2022-2026

The company expect to growth of 33% per year (25%-35%) for the next 5 years CAGR 33%
From 2,500 workers to more than 3,000 by 2026
An EBITDA margin between 11%-14%
Organic growth with new clients and cross-selling to existing clients
R&D Research & Development
Investment in marketing and sales
Acquisitions
Plan a listing to a more visible market like America or West Europe

7. Management

Company president Konrad Weiske has more than 20 years of international experience in the IT engineering sector (Vodafone and IBM in Düsseldorf, Microsoft in London).
He owns 30% of company shares, he is aligned with shareholders
Other investors related to the directive own 25% (Wioletta Bodnarus) and 25% (Dorota Lekawa)
All directors own 80% of the company

The salaries of the management team are ridiculous, practically symbolic, which means that all their interest is in the company doing well and not in getting high salaries and neglecting the company's results.

8.Capital Allocation

They don´t have plans to issue new shares, they are on the stock market to create credibility with new employees and clients. A publicly traded company with all its audited accounts is not the same as one that is not. In other words, it is not intended to dilute the shareholder
They don´t plan to give dividends, they will invest the profits generated for the development of the company
The development comes from the offices in Romania, Argentina, India and Croatia (costs)
The offices in the UK, USA and Germany are prepared to sales and meet with clients (clients from solvent countries)
The priority is growth
New acquisition dated 05.31.2022 still pending details

9. Risks

Difficulty in hiring personnel: Without a doubt, this is one of the biggest risks that this type of company faces by depending on specialized engineers. You have to think that these companies are chairs, tables, and computers, so the employees are the core business, and retaining them is a constant work.
Mergers and acquisitions M&A: The risk that a merger or acquisition will go wrong, that they won't be able to integrate it into their model, or that they will overpay too much for a business.
General economy and market conditions: The war in Russia and Ukraine has left the Eurozone very weak, high interest rates and inflation weaken the global economy.
Cyberattack: A cyberattack is a potential risk for these companies.

10. Valuation

For the valuation I´m going to assume three scenarios, one normal, one optimistic and one pessimistic.
Currently the company grows at 77% but I will not put this growth in any of the scenarios, considering that this high growth cann´t always be maintained over time.
Currently the company trades (market cap) for 455 million zlotys (about 100 million dollars) at a price of 400 Zlotys per share (€85), with 1 million shares outstanding.

10.1 Normal scenario