1% y-o-y sales growth and 15% EBIT margin expected

We are still forecasting improved margins ahead

18x EV/EBIT and 6% FCF yield on ‘20e

Solid Q3 expected, but delivery sales are still limiting
We forecast sales of SEK 97m, up 1.4% y-o-y (0% organic and 1% FX). As we have previously argued, we anticipate that the Swedish public sector has started to increase its activities during Q3 after a quiet start in H1’19. Even so, we think that this will increase even further in Q4’19. In terms of sales split, we forecast support and maintenance sales of SEK 51m, license sales of SEK 19m, and delivery sales of SEK 28m. The latter corresponds to a 10% y-o-y decline stemming from a contract renewal with the Danish Agriculture agency in conjunction with FormPipe’s increased focus and emphasis on product (software) selling. In terms of earnings, we forecast EBITDA (excluding capitalised costs) of SEK 19m, and EBIT of SEK 15m (15.3% EBIT margin).

Trajectory of improving margins: more to come
In our view, the shift towards more product selling paves the way for expanding margins. In the last years, the company has continuously increased margins, amounting to 13% in 2018 compared with 5% in 2014. As FormPipe is a software company with a market-leading position, we estimate it can reach an EBIT margin of 16% in 2021e.

Flat sales and EBIT growth in ’19e but expect a pickup in ’20e
The Formpipe share is up 15% YTD although it has been flat since July 2018. Having three consecutive quarters with low net sales growth could help explain this, though we want to highlight that there are plausible reasons for the modest growth. On our revised estimates, FormPipe is trading at 22x EV/EBIT on ‘19e, which shrinks to 18x EV/EBIT on ‘20e. Based on FactSet estimates, the share is trading 19% above/below its NTM EV/EBIT historical average. The Q3 report is due on 24 October.

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