Q3 EBITA was 84% above our estimate, thanks to record-high margins that offset somewhat softer sales. Digia is on track to exceed its medium-term 10% EBITA margin target already in 2020. The margin improvement came from temporary savings and postponed recruiting, but also from operational improvements in project management. We believe the margins are not sustainable going into 2021-22, because some of the cost will come back and Digia is not immune to COVID-19 with delayed projects affecting sales. Nevertheless, Q3 was a proof of Digia’s stability thanks to the high share of recurring service contracts (66% of total), which continued to grow y/y. Net debt declined by 50% y/y, enabling more M&A.
Q3 20 review.
Sales growth slowed to zero from 8% in Q2. EBITA margin jumped to 14.0% from 7.3% year-ago, driving EBITA up by 90% y/y. Margins improved notably from Q2 even though sales were flat sequentially. We understand that sales and project mix played a role.
Estimate changes.
We increase 2020E EBIT by 14% due to the strong Q3. However, we only increase 2021E by 4% and make no changes to 2022E. We estimate 11% EBITA margin for 2020E but 10% for 2021E. We have included the recent NSD acquisition in our estimates, which adds 2% to 2021E sales, but we reduce our 2021E organic growth estimate to 3% (4%) due to lower Q3 sales.
Valuation.
The share has performed well (+71% YTD). Digia trades at 26% discount to peers’ median on 2020E EV/EBITA (12.6x) but at 8-11% premiums on 2021-22E. Digia trades at a discount to local peer Gofore, which, however, reported better organic growth (double-digit in Q3 20). We increase our 12M fair value range to EUR 6-7 (from 5.5-6.5) due to estimate increases.
