Sumo Group “profits well above expectations” says Zeus Capital

Sumo Group plc (LON:SUMO) H1 results were ahead of our estimates. However, excluding select factors, profits were well above our expectations. Sumo’s strong underlying results positions it to outperform current market expectations. In addition, Sumo announced the acquisition of Pipeworks, which we estimate could drive 18% earnings accretion even based on conservative forecasts. Given the relatively modest share price reaction, Sumo now trades at a lower multiple than prior to the acquisition.

H1 results were ahead of our estimates: Adjusted EBITDA was £6.0m, 6% ahead of our estimate of £5.6m. Revenue and Net cash were £26.3m and £15.2m, slightly ahead of our estimates of £25.9m and £15.0m, respectively.

Excluding select factors, profits well above expectations: Sumo’s Adjusted EBITDA outperformance would have been significantly larger if not for pre-contract work on an unsigned project, expenses for Snake Pass 2 and unusual holiday pay accruals.  Excluding these factors, we estimate EBITDA would have been £7.1m rather than £6.0m, 25% above our estimate of £5.6m (estimates overleaf). Sumo’s strong underlying profits are indicative of the company’s strong position with clients and the strength of the video game market. Sumo is not seeing any price pressure on rates and has a very strong pipeline of contracts.

Strong underlying trading indicates upside to our forecasts: £7.1m of underlying H1 2020 EBITDA represents 38% of our 2021E EBITDA estimate. In comparison, EBITDA in the first half of 2019 and 2020E represents 40% of full year on average. Therefore even in the unlikely case that EBITDA does not grow significantly in H1 2021, Sumo would still be positioned to meet 2021E expectations.

Pipeworks acquisition: We see Pipeworks as a highly complementary acquisition, with low execution risk and high earnings accretion. Sumo is acquiring Pipeworks at only 10x 2021E EBITDA compared to 22x 2021E EBITDA for the UK sector median. As a result, the acquisition leads to high potential earnings accretion (2021E: 18%) even assuming Pipework does not achieve full earnout targets.

Valuation: The Pipeworks acquisition and initial share price movement makes Sumo even more attractively priced. Share’s now trade at 15x 2021E EBITDA, down from 17x yesterday (pre-acquisition). Sumo Group’s EV/ 2020 EBITDA is at the bottom of its peer group while its 2020-2022 EBITDA CAGR, excluding acquisition, is only bettered by one of its four UK peers.

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