Mensch und Maschine Software SE — Supporting the digitisation of industry

Mensch & Maschine Software (DB: MUM)

Last close As at 28/03/2024

56.60

−1.20 (−2.08%)

Market capitalisation

971m

More on this equity

Research: TMT

Mensch und Maschine Software SE — Supporting the digitisation of industry

Mensch und Maschine Software provides CAD/CAM software to the industrial and construction sectors to support the digitisation of their design, manufacture and build processes. Group revenues have grown at a CAGR of 8.8% from 2012 to 2016, while EBITDA has grown at a CAGR of 101% over the same period. Focused on driving sales of its proprietary CAM software internationally and growing its share of Autodesk CAD software sales in Europe, the company expects continued growth in margins, EPS and dividend payouts.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Mensch und Maschine Software SE

Supporting the digitisation of industry

Software

Scale research report - Initiation

10 April 2017

Price

€14.95

Market cap

€242m

Share price graph

Share details

Code

MUM

Listing

Deutsche Börse Scale

Shares in issue*
*Net of 0.48m treasury shares

16.2m

Reported net debt as at end FY16

€22.3m

Business description

Mensch und Maschine Software (M+M) sells proprietary and Autodesk CAD/CAM software. It reports across two business lines: M+M Software (28% of FY16 revenues) and VAR (72% of FY16 revenues). The company has operations in Europe, the US and Asia-Pacific.

Bull

Largest European Autodesk value-added reseller.

High-margin, internally developed software.

Loyal workforce.

Bear

Reliant on Autodesk’s technology development.

Management owns more than 50% of the company.

Change in Autodesk’s licensing model to subscription model.

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Mensch und Maschine Software provides CAD/CAM software to the industrial and construction sectors to support the digitisation of their design, manufacture and build processes. Group revenues have grown at a CAGR of 8.8% from 2012 to 2016, while EBITDA has grown at a CAGR of 101% over the same period. Focused on driving sales of its proprietary CAM software internationally and growing its share of Autodesk CAD software sales in Europe, the company expects continued growth in margins, EPS and dividend payouts.

Strong earnings growth in FY16

Mensch und Maschine (M+M) recently reported FY16 results that confirm strong profit growth. Revenues grew 4.2% y-o-y, mainly driven by the Software business (+11.6% y-o-y) and EBITDA grew 23% to generate a group margin of 9.4%, up from 8.0% in FY15. The VAR business’s revenue growth was affected by the Autodesk transition to a subscription model, although this did not prevent the division from achieving a small improvement in EBITDA margins (4.2% vs 3.9% in FY15). EPS grew 67% y-o-y to €0.40, helped by lower amortisation and a reduction in the effective tax rate. The company announced a 40% increase in the dividend to €0.35.

Positive outlook

The company outlook is for continued growth in EBITDA and earnings and c 30% annual growth in dividends to FY20. It expects subdued performance in the VAR business in FY17 as all new licence sales will be on a subscription basis, but despite this, expects to add €1.7-2.7m to group EBITDA in FY17. From FY18, it expects growth to normalise and therefore a larger increase in EBITDA (€3-4m). Consensus forecasts reflect this outlook.

Valuation: Reflects recent strong performance

The stock has shown exceptional performance over the last two years, gaining 127% as the company has reported strong revenue and earnings growth. It now trades in line with peers on a P/E basis for FY17e, and at a discount on FY18e forecasts. After such a good run, we believe the stock may pause for breath until the impact of the Autodesk transition on profitability becomes clearer. However, evidence that the company is able to grow profitability through this transition should support further upside. The stock is supported by a dividend yield of more than 3%.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(c)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

160.4

7.5

0.24

0.25

62.3

1.7

12/16

167.1

11.1

0.40

0.35

37.4

2.3

12/17e

170.2

13.9

0.53

0.46

28.2

3.1

12/18e

187.7

17.6

0.69

0.59

21.7

3.9

Source: MBC data. Note: MBC listed in June 2016.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Company description: CAD/CAM specialist

Mensch und Maschine Software SE (M+M) is a German software company that develops and sells computer-aided manufacturing (CAM) software and resells Autodesk CAD1/CAM software. M+M is the largest Autodesk reseller in Europe, with operations in nine countries.

CAD: computer-aided design.

M+M was founded by Adi Drotleff in 1984 and the company listed on the Neuer Markt in 1997. It joined the m:access segment of the Munich Stock Exchange in 2010 and the Entry Standard of the Frankfurt Stock Exchange in 2012. In March 2017, the company moved from the Entry Standard to the new Scale segment. The company is headquartered in Wessling, Bavaria and has c 760 employees in 50 offices across Europe.

M+M operates through two divisions: M+M Software, which generates roughly a quarter of the group’s revenues, and VAR, which generates the remaining three-quarters of revenues. The M+M Software division has developed three software solutions: OPEN MIND (CAM), DATAflor (gardening and landscaping), and ecscad (electrical engineering). The VAR business resells Autodesk CAD/CAM software in Europe.

The group generates two-thirds of revenues from the industrial sector and the remaining third from AEC (architecture, engineering and construction). It has an active installed base of more than 100,000 CAD/CAM/PDM2/BIM3 seats across 25,000 end customer sites. Customers range in size from small architects’ offices to large international companies.

PDM: product data management.

BIM: building information management.

Exhibit 1: Company structure

Exhibit 2: Revenues by geography

Source: Mensch und Maschine

Source: Mensch und Maschine

Exhibit 1: Company structure

Source: Mensch und Maschine

Exhibit 2: Revenues by geography

Source: Mensch und Maschine

Strategy

M+M is benefiting from the digitisation of the industrial and construction sectors, which is driving demand for CAD/CAM/PDM/BIM software solutions. The group has a two-pronged approach to growth:

CAM software: continue to develop leading-edge software, and use the direct salesforce to sell this in Europe and more widely in Asia and the Americas.

CAD software: continue to work closely with Autodesk as its largest European value-added reseller (VAR), and continue to gain share of the European market.

The CAM business (ie M+M Software) is already generating strong EBITDA margins (23% in FY16), and continued revenue growth should enable the company to reach its 25% target relatively quickly. The CAD business (ie VAR) has a 10% EBITDA target; the 4% achieved in FY16 is some way from that, but has grown from -5% in FY12. Market share gains, combined with good sales of proprietary software and services, should enable the company to reach this target in the medium term.

M+M Software

The M+M Software division develops and sells three software solutions. It generates roughly two-thirds of revenues in Europe (42% from DACH, 25% other European countries) and the remaining third of revenues from Japan, Singapore, China, Taiwan, India, the US and Brazil. The business operates mainly through direct sales. Revenues are generated from perpetual licence fees, support and maintenance contracts and services.

OPEN MIND – CAM software

OPEN MIND is used for the process control of milling, drilling and turning in industries such as mechanical engineering; tool, mould and die making; automotive and aerospace; medical technology; toy making and watch, clock and jewellery manufacturing. M+M has 6,000 customers using this solution.

The hyperMILL and hyperCAD-S product lines are used in the highly complex 5-axis milling process. The recently launched hyperMILL MAXX machining package enables a 500% productivity gain by reducing machining time. This is being used, for example, by automotive manufacturing companies and Formula 1 teams for prototyping.

DATAflor – niche solution for gardening and landscaping

DATAflor software provides graphical planning for gardening and landscaping as well as tools to calculate project billing. It has a strong position in the German-speaking gardening and landscaping market with several thousand customers.

ecscad – specialist solution for electrical engineering

M+M originally developed the ecscad software solution and then sold it to Autodesk in 2008. It decided to relicense it back from the beginning of 2014, and since then has developed the software further. The software enables the quick and precise digital design of electrical engineering plans and has more than 1,000 customers.

VAR – Autodesk’s largest European reseller

Autodesk is a Nasdaq-listed CAD/CAM software company (ADSK, market cap $18bn), with revenues of $2bn in FY17. M+M built its Autodesk business over a number of years, and until 2009 was mainly a distributor of the software. Management decided to shift the business model to become a direct seller of Autodesk software, and between 2009 and 2011 went through the process of building out the VAR business and selling off the distribution business. It operates from roughly 40 locations in Germany, Austria and Switzerland, and since 2012 has added 10 locations in Italy, France, the UK, Poland and Romania. The business has c 450 employees spread across three competence teams: Industry, AEC and Infrastructure. M+M is a platinum partner and Autodesk’s largest VAR in Europe.

More than half of VAR gross profit from proprietary products and services

As well as reselling Autodesk software, the division customises software, develops its own related software, and provides training and support. In Exhibit 3, we show the product offering, which combines Autodesk software with proprietary software.

Exhibit 3: VAR division product suite

Autodesk products

M+M products

Autodesk Inventor

pdm pinpoint

Autodesk Revit - BIM

building suite

AutoCAD Plant 3D

plant suite

AutoCAD Map 3D

map edit

AutoCAD

CustomX

AutoCAD LT

Symbol libriaries

Autodesk products

Autodesk Inventor

Autodesk Revit - BIM

AutoCAD Plant 3D

AutoCAD Map 3D

AutoCAD

AutoCAD LT

M+M products

pdm pinpoint

building suite

plant suite

map edit

CustomX

Symbol libriaries

Source: Mensch und Maschine

The company has noted that c 23% of group gross profit was generated from reselling Autodesk software in FY16. Considering that VAR contributed 51% of group gross profit, this implies that the proprietary software and services contributed c 28% of group gross profit. Management expects this to grow, partly due to strong demand for services such as training (the BIM Ready training series is proving popular in the construction sector), and partly due to the negative effect of Autodesk licensing all moving to a subscription basis.

Volatility from Autodesk shift to subscription licensing model

Several years ago, Autodesk decided to shift its licensing model from the standard perpetual licence plus support and maintenance contract to a subscription licensing model. In February 2016, it stopped selling individual products on a perpetual licence basis, and in August 2016 stopped selling product suites on a perpetual licence basis. Now all licences are sold on a subscription basis, with the annual cost of a subscription licence roughly 40% of the list price of a perpetual licence. The subscription incorporates a licence to use the software and ongoing support and maintenance. We note that the software delivery model is not changing, with the majority of products bought for on-premise use. Autodesk’s BIM 360 and Fusion 360 are cloud products – they make up a small but growing proportion of Autodesk’s sales.

This shift resulted in very strong sales for the VAR business in 2015 and January 2016 as customers bought licences and renewed maintenance contracts in anticipation of the deadlines. There was a smaller bump in sales in Q316 as the suite deadline approached.

In June 2017, Autodesk is launching a new programme to encourage existing perpetual licence customers with maintenance contracts to shift over to a subscription contract. It is aiming to do this by putting up maintenance contract prices by 5% in FY18 (Autodesk’s year to 31 January 2018), starting on 1 May 2017, then 10% in FY19 and 20% in FY20. At the same time, it will offer a subscription contract at a 60% discount to list price (a “loyalty discount”), which will put it at the same price as the FY18 maintenance contract. The loyalty discount will reduce to 55% in FY19 and 50% in FY20. Partners (ie VARs and distributors) are being incentivised so that a customer moving to a subscription contract is worth more than retaining a maintenance contract.

M+M expects VAR revenues to be subdued in FY17 as new subscription licences will be lower in absolute value than perpetual licences were. However, over time, as more customers transition over and new customers sign up on subscription licences, the recurring revenue base will trend up and growth should resume.


CAD/CAM market

Many companies operating in the CAD/CAM market do so as part of a wider PLM4 offering, and therefore market data on the individual functionalities is difficult to find. Dassault Systèmes estimated that in 2015, the PLM market (combining CAD/CAM/product data management/ simulation/digital manufacture) was worth c $11bn, having grown at a CAGR of 3.2% from 2012. According to Jon Peddie Research, the CAD software market was worth c $8bn in 2014. The largest suppliers are Dassault Systèmes, Autodesk, Siemens PLM and PTC. Based on Autodesk’s revenues of $2.03bn in FY17 (year to 31 January 2017) and assuming approximately two-thirds of VAR revenues are from the sale of Autodesk licence and maintenance fees, we estimate that M+M generated c 3% of Autodesk’s revenues. We estimate that M+M generated c 8% of Autodesk’s European revenues of $800m. We believe that M+M has gained share of Autodesk sales over the last five years. Autodesk has had a volatile revenue performance over the last five years (Exhibit 4), and its shift to subscription licensing resulted in a revenue decline in FY17. Over the same period, M+M VAR revenues have grown from €85m in CY12 to €121m in CY16.

PLM: product lifecycle management.

Many of the CAD software suppliers also operate in the CAM market. The largest players include Dassault Systèmes, CNC Software, Autodesk (via its acquisition of Delcam in 2014), and Hexagon AB. OPEN MIND has a good position in the mid- to high-price CAM market. Accurate estimates of the size of the CAM market are not available, as many companies do not split out CAM revenues separately.

Exhibit 4: Autodesk revenues, FY13-FY17*

Source: Autodesk. Note: *Financial year ended 31 January.

Management, organisation and corporate governance

Mensch und Maschine became a Societas Europaea in 2006. At this time, the company streamlined the management structure. The Administrative Board is chaired by founder and CEO Adi Drotleff, who is joined by Thomas Becker (independent director) and Heike Lies (independent director). The Board of Managing Directors consists of Adi Drotleff, Christoph Aschenbrenner (COO) and Markus Pech (CFO).

Shareholders and free float

CEO and founder Adi Drotleff owns 43.7% of the shares. Other company management own a further 9.1% and the company holds 2.9% as treasury shares, leaving a free float of 44.3%.

Financials

Exhibit 5: Financial summary

Year end 31 December, €m

2013

2014

2015

2016

Income statement

Revenue

125.83

140.02

160.38

167.07

Profit before tax (as reported)

2.59

5.57

7.53

11.12

Net income (as reported)

2.62

3.72

3.87

6.59

EPS (as reported) (€)

0.17

0.24

0.24

0.40

Dividend per share (€)

0.20

0.20

0.25

0.35

Balance sheet

Total non-current assets

63.59

63.42

62.36

61.97

Total current assets

39.09

40.77

40.16

38.55

Total assets

102.67

104.19

102.52

100.52

Total current liabilities

(28.30)

(24.25)

(24.76)

(30.53)

Total non-current liabilities

(38.03)

(40.70)

(38.14)

(29.42)

Total liabilities

(66.33)

(64.95)

(62.90)

(59.95)

Total equity

36.34

39.24

39.62

40.57

Cash flow statement

Net cash from operating activities

3.78

6.29

14.73

14.65

Net cash from investing activities

(11.62)

(3.38)

(5.01)

(3.41)

Net cash from financing activities

8.05

(3.04)

(6.62)

(14.46)

Net cash flow

0.20

(0.16)

3.12

(3.23)

Cash & cash equivalent end of year

6.62

6.46

9.58

6.35

Source: Bloomberg

Income statement – profitable growth

M+M has shown good revenue growth and expanding profit margins over the last five years as it transitioned from the old business model.

Exhibit 6: Revenue and margin progression

Source: Mensch und Maschine. Note: EBITDA and EBIT exclude one-offs credits and earn-outs.

Both divisions have grown revenues over this period, and both have grown EBITDA margins, albeit at different levels. Exhibit 7 shows their performance over the five-year period.

M+M Software: the division has shown good revenue growth in recent years, with double-digit growth in FY16. The gross margin has steadily increased over the last five years; as it is already at a very high level, we would not expect a material increase from the current level. We note that costs associated with support and maintenance are recognised in operating expenses rather than cost of sales. The EBITDA margin has expanded significantly over the five years, from 16.3% to 23.1%. With continued good top-line growth, we see scope for this to trend marginally higher, up to around 25%. Nearly 30% of divisional revenues were spent on maintenance and development of the software in FY16.

VAR: revenue growth over the last two years has been affected by Autodesk’s decision to move to a subscription-based charging model. This accelerated sales in FY15, as customers scrambled to buy perpetual software licences while they still could. We expect growth to slow, if not decline, in FY17 now that the transition is complete. Gross margin has remained in the range 37-39% over the last five years. Gross profit from Autodesk reselling is expected to fall to nearer 20% of group gross profit in FY17, affected by the shift to subscription revenues, although management expects the remainder of the division to show good performance. The EBITDA margin has improved every year over the five-year period and we expect the company to continue to grow this margin once revenue growth is re-established.

Exhibit 7: Divisional financial performance, FY12-16

€m

FY12

FY13

FY14

FY15

FY16

Revenues

Software

33.6

35.1

38.5

41.4

46.2

VAR

85.2

90.7

101.5

118.9

120.8

Total

118.8

125.8

140.0

160.4

167.1

Revenue growth

Software

4.3%

9.8%

7.6%

11.6%

VAR

6.5%

11.9%

17.2%

1.6%

Total

5.9%

11.3%

14.5%

4.2%

Gross profit

Software

30.6

32.5

36.6

39.6

44.7

VAR

32.3

35.0

38.1

44.9

46.7

Total

63.0

67.5

74.7

84.5

91.4

Gross margin

Software

91.1%

92.7%

95.0%

95.5%

96.7%

VAR

38.0%

38.5%

37.5%

37.8%

38.6%

Total

53.0%

53.6%

53.3%

52.7%

54.7%

EBITDA

Software

5.5

6.0

7.2

8.2

10.7

VAR*

(4.5)

(2.2)

0.7

4.6

5.1

Total

1.0

3.8

7.9

12.8

15.8

EBITDA margin

Software

16.3%

17.0%

18.7%

19.8%

23.1%

VAR*

(5.3%)

(2.4%)

(0.7)%

3.9%

4.2%

Total

0.8%

3.0%

5.6%

8.0%

9.4%

Source: Mensch und Maschine. Note: *Excludes one-off credits and earn-outs received in FY12-14.

Outlook

Exhibit 8 shows the company’s projections for key financial lines from FY17 to FY20; consensus forecasts are within these ranges. Consensus revenue forecasts reflect the slowdown in VAR revenues in FY17 and profit forecasts reflect the mix shift towards higher-margin M+M Software. The company believes a group EBITDA margin of 14% is achievable (FY16: 9.4%). Based on a similar one-quarter/three-quarters revenue split for Software/VAR, and using 25% EBITDA margins for Software, this implies VAR margins growing to c 10%, from the 4.2% achieved in FY16.

Exhibit 8: Company outlook

FY17e

FY18e

FY19e

FY20e

Gross profit

€98-99m

c €110m

EBITDA

€17.5-18.5m

c €22m

Equal contribution from both divisions

Net income

€8.5-9.3m

c €11.5m

€13.5-14.5m

EPS

€0.52-0.57

c €0.70

€0.83-0.90

c €1.00

Dividend

€0.45-0.50

c €0.60

€0.70-0.75

Source: Mensch und Maschine

Balance sheet and cash flow

In FY16, M+M generated operating cash flow of €14.6m. This compares to an €11.7m inflow in FY15 (after adjusting for the €3m earn-out received). After capex and dividends, M+M generated a net cash inflow of €5.2m (FY15 €3.5m).

The business does not have high capex requirements. In FY16, the company spent €3.5m (2% of sales), split down as €1.4m for IT infrastructure, €0.5m for software and €1.6m in capitalised development costs.

At year-end, the company had a net debt position of €22.3m, down from €27.5m a year ago. This was made up of cash of €6.4m, bank debt of €20.7m, mortgage debt of €5.9m and a shareholder loan of €2.1m. The company believes that at current interest rates, it makes sense to finance the company partially through debt; this policy will be reviewed when interest rates start to rise.

After several years of flat dividend pay-out, the company increased the dividend by 20% in FY15 and a further 40% in FY16. Assuming that financial performance tracks company expectations, the dividend is likely to increase by nearly 30% per annum between FY16 and FY19.

Valuation

The share price has shown strong performance over the last two years, gaining 48% over the course of 2015 and a further 34% over 2016 as the company’s improving growth and profitability profile became evident. Year-to-date the stock is up 19%. Over that time, the P/E and EV/sales multiples have increased. The blended 12-months forward P/E has trended up from as low as 13x at the beginning of FY13 to 20x by the beginning of FY15 and 25x now.

Peer valuation

In the table below, we compare M+M’s valuation to a group of peers that includes European software companies operating in the CAD/CAM/PLM space as well as larger international companies operating in this market. With a lower EBITDA margin than the group average, M+M is trading below the peer group on EV/sales and EV/EBITDA. On a P/E basis, it is trading in line with the group for 2017 but at a discount for 2018. We note that M+M’s dividend yield is at the top end of the peer group.

Exhibit 9: Peer group multiples

Company

Quoted ccy

Share

price

Market

cap (m)

EV (rep

ccy m)

EV/sales (x)

EV/EBITDA (x)

P/E (x)

Div yield

EBITDA margin

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

MENSCH UND MASCHINE SOFTWARE

14.96

242

265

1.6

1.4

14.5

12.0

28.2

21.7

3.1%

3.9%

10.7%

11.7%

AVEVA GROUP PLC

£

1968

1,259

1,135

5.3

5.0

19.7

17.7

29.1

26.7

1.9%

2.1%

26.8%

28.5%

CENIT AG

20.6

172

140

1.1

1.0

10.1

9.5

20.5

18.8

5.1%

5.3%

10.6%

10.8%

IGE + XAO

92.0

131

98

3.4

3.3

11.8

11.1

21.8

20.3

1.6%

1.6%

28.7%

29.5%

NEMETSCHEK SE

56.1

2,159

2,156

5.4

4.8

20.4

17.6

33.1

28.2

1.2%

1.4%

26.6%

27.0%

RIB SOFTWARE AG

12.3

574

441

4.0

3.5

12.7

11.0

27.5

27.6

1.6%

1.7%

31.7%

32.0%

AUTODESK INC

US$

85.0

18,761

18,046

8.6

7.0

114.2

42.3

N/A

69.7

0.0%

0.0%

7.5%

16.6%

DASSAULT SYSTEMES

81.2

20,967

19,496

5.9

5.5

16.5

15.0

29.7

26.8

0.8%

0.9%

35.7%

36.4%

HEXAGON AB

SEK

359.8

129,579

14,987

4.3

4.1

14.3

12.4

21.0

18.9

1.4%

1.6%

30.3%

32.8%

PTC INC

US$

51.9

6,001

6,510

5.5

5.2

25.1

21.1

41.0

32.4

0.0%

0.0%

22.0%

24.8%

Average

4.8

4.4

27.2

17.5

28.0

25.0

1.5%

1.6%

24.4%

26.5%

Median

5.3

4.8

16.5

15.0

27.5

26.8

1.4%

1.6%

26.8%

28.5%

Source: Bloomberg (as at 5 April 2017)

Sensitivities

M+M’s financial performance and the share price will be sensitive to the following factors:

Reliance on Autodesk: the VAR business is dependent on the success of Autodesk in developing its technology to remain competitive. Its performance is also influenced by the policies that Autodesk follows in terms of software pricing and delivery.

Technology development: M+M must invest adequately to maintain the competitiveness of its in-house software solutions.

Exposure to Germany: with 45% of revenues generated in Germany, the health of the German economy will have a material influence on the performance of the company.

Free float: management owns more than 50% of the company.


Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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FY16 was a strong year for Keywords Studios both financially and operationally, with EPS growing by 61% and acquisitions strengthening the business across a number of service lines and geographies. It has also invested into key staff and core systems to support continued growth and we fully expect the growth trajectory to continue from here. We see scope for further upgrades through organic performance, further acquisitions and potentially larger outsourcing deals. Given the recent run, we feel the valuation prices in strong progress this year but believe that sustained execution of the strategy will continue to create shareholder value.

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