SIILI SOLUTIONS IT Services 12 March H2/2012 Small cap update

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1 SIILI SOLUTIONS IT Services 12 March H2/212 Small cap update NO RATING PRICE Siili Solutions 8.5 Closing price as of High/Low 12m 8.5 / 7. COMPANY DATA Mcap 13.3 EV 1.3 No. of shares (out) 1.6 No. of shares (dil) 1.6 SHAREHOLDERS GTW Group Oy 21.9 % Erina Oy 18.7 % Santava Oy 5.2 % Ilmarinen Mutual Pens. Ins. 4.5 % Freefloat 1 % STOCK DATA Reuters Bloomberg CALENDAR SIILI.HE SIILI FH Next report date 21 August 213 AGM 4 April 213 SHARE PRICE SEMI-ANNUAL EARNINGS ANALYST Michael Schröder michael.schroder@fim.com Siili Solutions, EUR HEXP Index EPS, EUR Pohjoisesplanadi 33 A 1 HELSINKI Dealing (9) EBIT margin H1 H2 H1 H2 H1e H2e H1e H2e e 214e 18% 16% 14% 12% 1 8% 6% 4% 2% Strong growth continued in the latter half of 212 Sales grew by 25% y/y -year net sales were up by 22%, well in-line with the. FY/212 EBITDA came in at (9.6% of net sales), slightly below the projected margin level of 1. Based on signs of recovery in the operating environment and strong recruitment progress in early 213, we believe Siili is in a good position to achieve a 2 sales growth and an EBITDA margin of 1 this year. The share is currently trading at a significant peer discount on all relevant multiples a peer comparable 214e EV/EBITDA multiple of 5.6x would imply a sh 1.8 for Siili Solutions. strong despite a challenging macroeconomic environment last year. Growth accelerated to 25% in H2/212 (H1: 22%) and costs associated with outside services were down to 17.7% of sales (21.8%) as somewhat sluggish H1/212, the company added a total of 54 new employees in 212, in-line with the 1 per week target. At year-end 212, Siili held to million providing a decent buffer if the company decided to pursue smaller acquisitions in the local Finnish market. Siili has also stated that its longer term strategy includes potential expansion into international markets. Looking forward, the year 213 seems to have started with a positive tone the operating environment is showing signs of recovery and recruitment activity is progressing well, in contrast to the challenges with hiring delays experienced in early 212. Based on the above mentioned factors and a strong deal-flow, we model in a 2 sales growth and an EBITDA margin of 1 for Siili in 213, in-line with the -term financial targets. However, we acknowledge that risks are still elevated -making is still slow. Siili currently trades at a significant peer discount on all relevant multiples (-28% 214e EV/EBITDA, -7% 214e P/E). A discount can be motivated by modest -cap status, and less transparent reporting practices (semi-annual, FAS). On the other hand, Siili has clearly outperformed its peers in terms of sales and earnings growth, with the outlook statement suggesting continuing strong growth going forward. A peer comparable 214e EV/EBITDA multiple of 5.6x would translate into a Siili shar.8. Figures in EURm 215e Sales Sales growth. % 18.2 % 66.5 % 22.1 % 2. % 2. % 15. % EBIT EBIT margin 3 % 9 % 11 % 8 % 9 % 9 % 9 % EBITDA EBITDA margin 8. % 1.8 % 12.3 % 9.6 % 1. % 1. % 1. % PTP EPS DPS Yield 5 % 2 % 9 % 4 % 4 % 6 % 7 % P/E EV/EBITDA EV/Sales P/B ROE 44 % 55 % 8 % 37 % 38 % 38 % 36 % ROCE 54 % 61 % 86 % 57 % 52 % 52 % 49 % Net Gearing -54 % -24 % -62 % -75 % -85 % -92 % -96 % FCF/share FIM has made an agreement with the company this study concerns according to which it receives compensation for the research service provided. FIM does not provide any investment recommendation for the share. 1/1

2 Company description Siili Solutions Oyj is a Finnish IT company established in 25. In its early days, the company served as a resource and recruiting partner for larger local IT service providers. Over the years, the company has determinately broadened its expertise through a number of targeted acquisitions and after building up an experienced and diversified army of IT professionals, the company in 21 decided to productise its services. Today Siili challenges its former customers by providing demanding IT services to various business fields like public administration, banking, media and industry. Siili is one of the fastest growing IT services companies in Finland and has been growing profitably since the beginning. In 212, organic growth reached 22% and net sales amounted to 6 million. Siili currently employs around 15 IT professionals, with an average experience of 12 years. Business overview Siili offers software technology and information management know-how, covering the entire information system. Technical interfaces are handled through system architecture and Lean development processes and supporting decision-making. Siili is technologically independent, enabling the company to provide solutions that match the customers' existing information technology systems, in contrast to many competitors, who tend to offer their own proprietary solutions or systems serving the developers own interest. mers include the Top 5 companies in Finland and the public sector. The Top1 customers, including Pohjola, Ministry of Agriculture and Forestry, the Finnish Centre for Pensions, Elisa and Ahlström, currently make up roughly 75% of group sales. Recruiting and compensation A strong background in recruiting combined with and a unique compensation scheme are ly hires on average one new growth targets. Employees receive 5 of their own invoicing (trailing 4-month average), making it a very rewarding compensation model for skilled and hardworking IT those of its competitors, its profitability is still above the industry average, thanks to the high productivity of its motivated workforce. Profitability is also less sensitive to changes in capacity utilisation due to the low level of fixed personnel costs. Siili applies very tight criteria in its recruiting, which is reflected as a low percentage of approved applicants in 212, the company hired 54 new employees after interviewing a total of 65 applicants. For future success, Siili needs to obtain a high level of software system knowledge and information management expertise, increasing the role of successful recruiting further. The market environment for recruiting activity has remained favourable, but Finland is a small country with limited resources, which may result in challenges in finding qualified experts in the longer run. Market environment lting, application development and systems Finland. Market growth has been modest (-2%) and a similar trend is expected to continue in the foreseeable future. S doubling of its market share over the past couple of years. 2/1

3 1 2 Adressable market, 1. billion 3. % % 1.6 % 1.8 % 2.1 % 2.5 % 2. % 1.5 % 4.7 %.8 % 1. % 2.5 % E 213E 214E Application development & Integration IT Consulting Siili market share, %. % Source: Marketvision 5/211, 1/212, FIM Estimates such as Accenture, Tieto, Cap Gemini and Logica, which are typically unbeatable in large projects that require a lot of resources. However, ineffectiveness and fragmentation of knowledge across the organisation is a challenge for the big players when competing for smaller projects. In addition to the big names, Siili also competes with a number of smaller local players such as Reaktor, Sofigate, Nitor and Innofactor, whose services are typically restricted by technology or service offering. Financials Siili Solutions targets an average net sales growth of 2 p.a. and an EBITDA margin of -7 of its annual net results as dividends. Organic sales growth has been on average 3 p.a. during the last 5 years. In 212, net sales grew by, evenly distributed among customers in the Industry & Service-, Telecom & Media-, Finance- and the Public sectors. In our forecast model, we assume that in 213 net sales will increase in accordance with the company long term growth target million, and after 214, we model in a gradually slowing growth rate. Net Sales Net sales Growth-% 5 % 45 % 4 % 35 % 3 % 25 % 2 % 15 % 1 % 5 % % Source: Siili Solutions, FIM Estimates Profitability has remained good during past several years, with the EBITDA margin holding steady at between 1 and 12% of net sales. In 212, the reported EBITDA was 3/1

4 -recurring marketing costs related to the First-North listing. 2.5 EBITDA 2 % EBITDA Margin-% 15 % 1 % 5 % % Source: Siili Solutions, FIM Estimates At year- a decent buffer if the company decided to pursue smaller acquisitions in the local Finnish market. Siili has also stated that its longer term strategy include potential expansion to international markets. Valuation Siili currently trades at a significant peer discount on all relevant multiples (-28% 214e EV/EBITDA, -7 micro-cap status, and less transparent reporting practices (semi-annual, FAS). On the other hand, Siili has clearly outperformed its peers in terms of sales and earnings growth, with the outlook statement suggesting continuing strong growth going forward. A peer comparable 214e EV/EBITDA multiple of Our cash Siili share price relative to peer valuation Current price P/E 213e P/E 214e EV/S 213e EV/S 214e (EUR) Share price Peer median Peer min-max 4/1

5 Mcap EV EV/S (x) EV/EBITDA (x) P/E (x) Div. Yld EBITDA-% Net Debt/ Company 213e 214e 213e 214e 213e 214e 213e 214e 213e 214e 213e 213e EBITDA Know It Ab x.5x 6.5x 5.7x 1.2x 8.5x 7 % 8 % 8 % 9 % 4 % 21 % 1.x Hiq Intl Ab x 1.3x 9.4x 8.5x 14.4x 12.8x 6 % 6 % 13 % 15 % 8 % 12 % -.9x Avega Ab-B Shs x.6x 8.2x 6.6x 12.x 9.3x 8 % 8 % 11 % 29 %.2x Cybercom Group x.4x 5.9x 5.1x 8.9x 6.8x % 2 % 8 % 2 % 32 % 2.5x Sigma Ab-B Shs 7 8.5x.5x 6.6x 6.1x 8.5x 7.5x 4 % 5 % 6 % 8 % 4 % 13 %.8x Prevas Ab-B Shs x.3x 7.3x 5.6x 13.3x 8.6x 5 % 6 % 7 % 54 % 3.8x Evry Asa x.4x 4.2x 3.9x 5.4x 4.6x 4 % 6 % 9 % 1 % 2 % 19 % 2.6x Affecto Oyj x.6x 5.9x 5.4x 9.4x 8.3x 5 % 5 % 1 % 12 % 7 % 13 %.8x Digia x.7x 6.x 4.5x 11.x 7.2x 4 % 5 % 7 % 15 % 9 % 54 % 1.1x Tieto Oyj x.7x 5.6x 5.3x 12.1x 11.1x 5 % 5 % 12 % 14 % 1 % 9 % -.1x Innofactor x.7x 6.2x 5.7x 11.3x 1.x 2 % 4 % 5 % 1 % 22 % 216 % -.2x Average.6x.6x 6.5x 5.7x 1.6x 8.6x 4 % 5 % 8 % 1 % 7 % 43 % 1.x Median.6x.6x 6.2x 5.6x 11.x 8.5x 4 % 5 % 8 % 1 % 7 % 21 %.8x min.4x.3x 4.2x 3.9x 5.4x 4.6x max 1.4x 1.3x 9.4x 8.5x 14.4x 12.8x Siili (adj.) x.4x 5.3x 4.x 9.5x 7.9x 4 % 6 % 1 % 1 % 2 % 22 % -1.4x Dif f. vs. peer median -14 % -29 % -14 % -28 % -14 % -7 % Siili share at median multiples Source: Bloomberg, FIM Estimates Cash flow analysis Cash Flow, EURm 215e 216e e Terminal Net Sales Growth-% n.a % 66.5 % 22.1 % 2. % 2. % 15. % 1. % 2. %. % EBITDA EBITDA-% 8. % 1.8 % 12.3 % 9.6 % 1. % 1. % 1. % 1.5 % Depreciation EBIT EBIT-% 3. % 9.3 % 1.9 % 9.3 % 9.6 % 9.6 % 9.6 % 1.1 % 9. % 7. % Tax Tax rate 31 % 28 % 29 % 2 % 25 % 25 % 25 % 25 % 25 % 25 % Change in Working Capital n.a Investments n.a Investments/Sales n.a.. %. % 1. %.4 %.4 %.4 %.4 % Free Cash Flow n.a Discounted Cash Flow DCF EURm Cost of capital FCF e 4.7 Risk free rate 4.5 % FCF e 5.1 Market risk premium 5. % Terminal value 3. Micro-cap premium 3. % Enterprise Value 12.9 Equity beta 1.1 x Net debt -2.1 Cost of Equity 13.3 % Market Capitalization 15. Cost of Debt 5. % Target debt ratio % Fair value per share WACC 13.3 % 5/1

6 Forecast (reported) GROUP P&L (EURm) H1 H2 211 H1 H2 212 H1e H2e 213e H1e H2e 214e Net sales Growth, y/y n.a % n.a. n.a % 19.2 % 24.9 % 22.1 % 21. % 19. % 2. % 2. % 2. % 2. % Growth, h/h n.a. n.a. -18 % 4 % n.a. 15 % 9 % n.a. 11 % 7 % n.a. 12 % 7 % n.a. Depreciation EBIT EBIT margin 3. % 9.3 % 16.1 % 5.9 % 1.9 % 8.5 % 7.6 % 8. % 8.5 % 8.7 % 8.6 % 8.9 % 8.9 % 8.9 % Net financials Associates profit PTP Taxes M inority interest Net profit EPS BALANCE SHEET (EUR H1 H2 211 H1 H2 212 H1e H2e 213e H1e H2e 214e Intangibles Goodwill Tangibles Inventory Receivables Cash Assets Equity Capital notes Reserves obligatory Pension liabilities Long non-ib debt Long ib debt Short ib debt Short non-ib debt Advances received Equity and liabilities Equity Ratio, % 35 % 34 % 35 % 26 % 26 % 27 % 47 % 47 % 45 % 48 % 48 % 46 % 49 % 49 % Net Gearing, % -54 % -24 % -43 % -62 % -62 % -18 % -75 % -75 % -79 % -85 % -85 % -88 % -92 % -92 % Net debt ROE 44 % 55 % 8 % 37 % 38 % 38 % ROCE 54 % 61 % 86 % 57 % 52 % 52 % 6/1

7 Financials SALES GROWTH 67% 18% 22% 2 2 ROE ROCE % 44% 37% 38% 38% 12% 1 8% 6% 4% 2% EBIT MARGIN 1.9 % 9.3 % 8. % 8.6 % 8.9 % 3. % Assets/Sales Working capital/sales % 46% 38% 38% 38% 39% 3% 3% -1% GEARING -24% -54% -62% -75% -85% -92% Payout ratio Investments/Sales 341% 1% 93% 36% 68% 5 5 1% 1% 1% 1% 7/1

8 Valuation P/E P/BOOK % 6% 4% 2% DIVIDEND YIELD 8.6 % 5.6 % 4.6 % 4.3 % 4.5 % 1.7 % EV/S EV/EBIT EV/EBITDA /1

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