The annual investment research of Wood & Co has assessed Sirma’s market position amidst a slowdown in IT in its investment report
On November 3, 2022, Wood and Co. published its regular equity research on Sirma Group Holding JSC. The report is carried out by the Research Coverage Program, supported by the EBRD and the Bulgarian Stock Exchange – Sofia.
The investment bank Wood & Co researches a limited number of public companies in Eastern Europe under the “Research Coverage Program.” The companies included in the Program meet the criteria for growing small and medium-sized public companies, as defined in MiFID II. Sirma Group Holding JSC is one of the four Bulgarian companies participating in the Program. The report from the investment study of Sirma Group Holding JSC includes an assessment of the Group, financial indicators, market analysis, financial forecasts, and a description of the risks. The main takeaways for the investor’s community are:
Significant cash inflow from recent disposal
A consortium of investors bought Sirma’s Ontotext, a highly regarded and top player in semantic technology and the IT knowledge domains. Due to intense competition in the US, the Group decided to partner with VCs by selling a majority stake (76.2%). The analysts estimate that the company’s equity was valued at BGN 80m after a share capital increase in the target. Sirma should receive cash proceeds of BGN 39m this year due to the sale, or c.90% of its market cap.
A large cash pile should make dividends part of the equity story
With a net cash position of BGN 21m by the end of end-2022E and net cash/EBITDA above 2.0x, investors could expect an improved dividend policy, in our view: 50% payout from the annual consolidated net profit. In addition, a special BGN 0.04 DPS (a 5.4% yield) in 2023E due to the sale of Ontotext in line with the proposed articles during the AGM on June 24. Cumulatively, Sirma should pay out BGN 9.7m in dividends over 2022-24E, on our estimates (3-11% yields).
According to Gartner, recession threats have not affected Sirma materially, but IT spending is expected to slow down in 2023E
Surveys indicate that CEOs intend to manage any recessionary budget cutbacks in IT. Gartner and IDC forecast mid-high single-digit growth in IT spending over 2023E, in line with our outlook. The fast-developing segments, like IaaS and cloud-based enterprise IT products/services, continue to be essential for its international clients, fuelling solid growth in the foreseeable future.
There is still a positive trend of M&A activity, but this may decelerate
According to the company, there has been no indication yet that transactions have slowed down, and prices remain elevated. However, management believes that 4Q could see some loss in appetite and, with the market cooling, Sirma could take advantage of favorable M&A opportunities, benefiting from lower valuations.
Access to the full text of the report in English is free and available to all interested parties from the specialized Hub for investment research under the Program.
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