Zeus Capital expect Big Technologies plc (LON:BIG) to outperform in the current macro environment. In general, Western sanctions on Russia are reducing corporate sector revenues and rising inflation is squeezing corporate margins, consumer spending and business capex. However, we believe BIG is sheltered from these negative macro pressures due to resilient markets, low exposure to rising input costs and forward-looking inventory management.
Non-cyclical market: The company’s revenues and earnings are unaffected by potential declines in consumer and corporate spending. BIG sells to criminal justice authorities, whose budgets should not be affected by rising oil and commodity prices, unlike consumer and corporate budgets that may be squeezed. BIG is exposed to non-cyclical government department budgets rather than volatile consumer spending or business capital expenditure. We compared UK MoJ expenditure limits to UK household consumption and UK business capex from 2005 to 2021. The coefficient of variation of UK MoJ expenditure limits was only 0.07, well below 0.14 for UK household consumption and 0.12 for UK business capex. In addition to stable end markets, the majority of BIG’s sales is committed under multi-year long-term contracts, which currently provides 90% visibility into 2022 sales.
Resilient to inflation and supply constraints: Big Technologies should be less impacted by rising input costs and supply chain bottlenecks. BIG has accumulated at least 12 months of critical component inventory and the company estimates that even in the case of doubling semiconductor costs EBITDA would fall only 2%. Semiconductor costs are a small share of revenues and BIG has high margins. The company provides a low cost, high margin technology solution. As a result, rising input prices should have a lower impact on BIG’s margins.
Continue to expect outperformance: As a result, we remain highly confident in our forecasts. Indeed, we continue to believe BIG should be able to exceed our conservative revenue forecast of £45.5m. Run rate revenue at the end of 2021 was £38m and potential revenue from recently awarded contracts should total at least £7.5m. Therefore, BIG can hit our 2022 forecast based on its existing contract base alone and any additional new customer signings in 2022 would only drive outperformance, assuming retention of current customers. In terms of EBITDA expectations, our 2022 estimate conservatively assumes only a marginal increase in margins (+0.5%) despite the inherent operating leverage in BIG’s model and high anticipated sales growth in 2022 (24%). In conclusion, we continue to see significant upside to estimates, even in the current macroeconomic environment.
Attractive valuation: While the company remains well-positioned to exceed earnings estimates, its EV/EBITDA multiple has fallen to only 22x 2022 estimates. Assuming material outperformance against our 2022 EBITDA estimate, then Big Technologies is effectively trading below 20x 2022 EV/EBITDA. We believe this represents good value given the company’s strong management team, market leading technology and acquisition potential.
