Digia: First impressions - Danske Bank

Conclusion
Q2 sales were 3-4% below our and FactSet consensus estimates but grew by 8% y/y, confirming that the more stable Services (long-term maintenance contracts at >60% of group sales) support Digia even in turbulent times. EBITA beat expectations by 7-11% thanks to record-high margin, which was boosted by temporary savings and probably not fully sustainable. Digia maintains guidance for higher EBITA in 2020, which is well in the bag already as H1 grew by 36% y/y. Digia mentions higher uncertainty in the market, which is no suprise. More info to follow at analyst briefing at 11:00 EET today and webcast at 12:00.

We expect small positive consensus EBITA revisions for 2020-21 due to strong Q2 margins but neutral share price reaction following recent strenght (+16% in the past week). In our view, the report confirms Digia's relative stability thanks to high share of maintenance revenues.

Reported numbers and figures
Sales increased by 7.5% y/y, of which we estimate organic growth was 0-2% negative compared to +4-5% in Q1 20 (the consolidation of AES accquisition still impacted Q2 20). Sales growth continued in services (long-term monitoring contracts) at 13% y/y, but sales declined by 2% y/y in Projects, which includes more cyclical consulting services and Digia's own software products.

EBITA increased by 18% y/y and beat our estiamte by 7% and FactSet by 11%. EBITA margin increased to 11.7% from 9.5% year-ago, driven by temporary cost-savings from travel, meetings etc. Net financials were somewhat higher than we estimated so Q2 EPS landed close to our estimates despite an EBITA beat.

Cash flow was strong: H1 20 CF from opearations grew by to EUR 17.9m (8.4m), boosted by delayed pension payments of EUR 5.8m). Even taking that into account, cash flow was up 44% y/y. Net debt declined by 31% y/y to EUR 11.6m (16.8m) implying ND/EBITDA of 0.7x (LTM).

Outlook and guidance
Unchanged: EBITA to increase in 2020. Market uncertainty will persist in H2 20 and possibly even longer. Difficult to anticipate impacts of coronavirus. Wide offering and large share of continuous services has thus far cushioned the impacts but the outlook for 2020 is more uncertain than usual.

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