We also met with Digia's competitors Gofore and Vincit last week. In general both had a similar, positive message about demand for digitalisation consulting in Finland: there is structurally growing need for services that help companies and public sector to digitalise their operations, and COVID-19 has not really changed this. However, the impacts of COVID-19 seemed quite different, with Gofore quite unaffected (up to 70% of sales to the public sector) but Vincit having seen more project postponemenets and cancellations, leading to temporary layoffs (probably due to smaller customers). Both expect M&A to continue in the industry, partly due to difficulties in recruiting.
Our view on the stock: We see Digia as a growth case that is well positioned to grow in the growing Finnish IT services market. The company has a high share (>60%) of recurring maintenance revenues - which is its main diffrerentiator among the smaller IT companies. Digia has reached a significant turnaround in performance since the QT spin-off in 2016 and we expect growth to continue in 2021-22. We have argued that Digia should be valued at high-end of its peer group and in line with HiQ, which historically traded at ca. 12.5x NTM EV/EBITA. For Digia, we estimate 11.8x 2021E and 10.3x 2022E EV/EBITA and 8-9% FCF yieds, which looks attractive.
Last week, Triton made a bid for HiQ which implies ca. 20x 2020E EBITA and 17x 2021E on FactSet consensus numbers. However, we do not see Digia as the most potential takeover target among Finnish IT services companies due to its business mix: it combines own ERP products, consulting, and maintenance/monitoring business. We think a consulting company like Gofore with no own products could be a more likely target for a larger player seeking presence in Finland.
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