Canaccord Genuity initiates coverage on Eleco at 'buy'

(Sharecast News) - Analysts at Canaccord Genuity initiated coverage on Eleco with a 'buy' rating and 176.0p target price on Thursday as it wondered if the firm was poised to become "the next UK SaaS champion?". Canaccord Genuit said Eleco has "all the hallmarks of the next UK SaaS champion", in its view, noting that the group has "best-of-breed software" facing an industry that requires, and was being pushed towards, digitalisation.

"Digital transformation has historically been slow in the construction sector with industry reports estimating that circa 85% of constructors still use Excel, and that pen and paper (rather than digital tools) are used on circa 25% of job sites," said Canaccord, which noted that Eleco was exiting a more than three-year software-as-a-service transition with product-market fit across its suite of digital transformation solutions.

The Canadian bank pointed out that Eleco already counts more than 90% of the UK's top 100 construction contractors, 40 of the top 50 in Sweden, and 14 of the top 20 in Germany as customers, and said recent product development aimed at improving productivity and bridging the site/office divide could provide "a material upsell opportunity".

"Eleco's transformation has gone under the radar as the SaaS transition has resulted in group's revenue increasing 18% from FY21-24, but recurring revenue has increased 62% over the same period. Eleco reported a 19% FCF margin pre-SaaS transition and, in our view, has the potential to be at least a double-digit grower, implying strong 'Rule of 40' credentials. We view the current 2.6x FY25 EV/Sales multiple as too low for a potential 'Rule of 40' SaaS stock," concluded Canaccord.

Reporting by Iain Gilbert at Sharecast.com