1Spatial: Encouraging Early Signs From GI
Edison | Oct 14, 2019 06:35AM ET
H120 saw a solid performance from 1Spatial (LON:SPA)’s core business augmented by a good start from its recent Geomap-Imagis (GI) acquisition. GI generated revenue of £2m and EBITDA of £0.5m in its first three months and additional synergies have been identified. It is early days but in the context of a £5.3m price tag (EV) we see this performance as encouraging. 1Spatial also highlighted significant contract wins post period end. It now looks well set to execute on its next phase: establishing a market leading position in Location Master Data Management (LMDM).
Solid performance in the core
Reported revenue of £10.9m included £8.9m from the core business, up 1% y-o-y. The Spatial Solutions segment (£6.4m) grew 8% y-o-y, despite the shift to term licensing, with growth in all territories. Adjusted EBITDA in the core business rose by c 25% in line with management expectations to £0.8m (9% margin). This was boosted by a £0.4m adjustment for IFRS 16 and the £0.5m contribution from GI (see below).
Plus a good start from GI
GI reported revenue of £2m for its first three months. Given we had included £4.9m for FY20 (ie nine months), it looks to be tracking ahead of expectations. It also reported adjusted EBITDA of £0.5m (a 25% margin) and further (unspecified) revenue and cost synergies are expected to benefit the P&L in FY21.
Positive outlook but estimates unchanged for now
1Spatial highlights a record order book, increased revenue visibility and a number of significant contract wins post period end (see London geospatial pilot project win ). We raise our FY20 adjusted EBITDA estimate to £3.1m to reflect the impact of IFRS 16 (see over) but leave our underlying forecasts unchanged for now.
Valuation: Execution, margins and LMDM priced in?
The acquisition and integration of GI marks the successful completion of 1Spatial’s turnaround strategy. The company is now focused on establishing a leadership position in LMDM. We will review 1Spatial’s longer-term prospects in due course, but continue to believe that the current valuation (FY21 EV/sales of 1.3x) does not reflect the increasing evidence of execution, the potential for margin expansion or the chances of longer-term success in LMDM.
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Business description
1Spatial’s core technology validates, rectifies and enhances customers’ geospatial data. The combination of its software and advisory services reduces the need for costly manual checking and correcting of data.
Changes to forecasts
Adding adjusted EBITDA in the core business to the contribution from GI, 1Spatial generated adjusted EBITDA in H1 of £1.2m, a margin of 10.9% (before IFRS 16 adoption – see below). Our FY20 estimate (on the same basis) of £2.1m implies the company needs to deliver just £0.9m in H2. We leave our forecasts unchanged for now but as H2 will include an extra three months from GI (potentially an additional £0.5m) they should be very achievable. The company prefers a cautious stance on numbers given the substantial near-term political risks in the UK and its experience in the US earlier this year, where the government shutdown unexpectedly affected performance.
While we leave our underlying forecasts largely unchanged, the adoption of IFRS 16 from the beginning of the year does have a significant impact on the presentation of the P&L and, to a lesser extent, cash flow. IFRS 16 eliminates the distinction of leases as either operating leases or finance leases and has the effect of moving c £1m of annual costs previously reported above the EBITDA line into depreciation (a small element is moved into finance costs).
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