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Thursday, June 20, 2024

EVS Broadcast SA – A Hidden Global Champion “Breaking free from the Van” with Software & AI at a Bargain Price


Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!

As always with my more detailed writeups, I will focus on the gernal section in the post and attach the full pdf for anyone interested in the details.

  1. Elevator pitch:

EVS Broadcast is a 400 mn EUR market cap Belgian technology firm that is the global leader in Live sports broadcasting/production technology that once earned margins higher than Nvidia does today.

After a relatively long phase of stagnation from 2008-2019, EVS seems to have found its path to decent growth again under new management. The main driver is a new technology cycle that will shift the product offerings from hardware focused solutions to more Software/Saas products and a move into adjacent markets (Studio production).

For a company with EBIT margins > 20%, capital return >20%, net cash and a targeted growth rate of 10% p.a. (which they have achieved since 2019), the current valuation of ~9x EV EBIT or 10-11x P/E is dirt cheap and offers considerable upside for the patient investor.

As EVS has been working on AI solutions since at least 2017 and has already functioning products to show, one gets any potential “AI upside optionality” for absolutely free. 

  1. Introduction

The first time I came across EVS in 2014 on the blog. Back then it looked like a fairly valued, extremely profitable company that had however some issue with regard to growth and potential further Technology changes. Their initial growth came from a technology change from tapes to digital hard drives for which they became the clear market leader in the niche of Sports broadcasting.

Another warning sign back then was that they just finished building their shiny new HQ.

Looking back, it was a wise decision to stay away, as the company shrank for several years until very recently.

Then just recently, I came across them once more in my “All Belgian Stocks” series and became interested.

What has changed at first sight is that since 2019 they have new management and that especially in the last 3 years the company managed to grow nicely and stabilize margins on a still very attractive level. Valuation wise, the stock is even cheaper than 2014.

So when I came across the company once again in the Al Belgian Shares series, I decided to do a new deep dive.

Full PDF:

  1. The Company & the business

EVS is a Belgian company that is relatively young, it was founded in 1994 and went public in 1998. It was founded by 2 persons which since then have left the company. They acquired a company in 1998 that brought on board Michael Couson, who today is the largest shareholder with around 6%.

Here is an overview of some KPIs:

6. Valuation/Return expectations

In a recent interview, the CEO reiterated his long term target: Doubling of sales until 2030 (target 350-400 in 2030). He explicitly mentioned that he wants to achieve this through  organic growth and acquisition. 

My short form pitch would be the following: If you can buy something for a P/E of 10 or 11 that grows by 10% p.a. for some time and is very profitable and has net cash, you will very likely come out alright with limited downside risk.

The longer version looks as follows:

The target from the CEO represents a top line growth rate of ~10% p.a. . Assuming no equity dilution, constant profitability and the current dividend yield of 3,6%, that growth rate should result in a return of around ~13-14% p.a. without any multiple expansion..

That sounds pretty OK to me for such a high quality business with no leverage etc. .

If they actually manage to deliver on that, a multiple expansion is highly likely at some point in time which could add another 3-4% p.a.

Even if profitability goes down a little bit, this still should be more than adequate. Overall I do think that I could double my money here over the next 5 years (including dividends).

12. Pro’s and Con’s

As always, before coming to the conclusion, a quick list of pro’s and con’s:

  • low valuation, cheap compared to margins and return on capitaö
  • New CEO 2019, new CFO in 2021, growth since 2019 decent after long stagnation
  • May 2020 Acquisition of AXON
  • Long term charts in Annual reports and IR presentation
  • Decent competitive advantages, still good margins
  • 2024 large event year
  • transparent reporting, no bullshit adjustments
  • low tax rate because of R&D Exemptions
  • some share buy backs in 2020 at very low prices, no further buybacks
  • Technology change / new Investment cycle from On premise to distributed and HD to UHD
  • Early mover in AI, Actual useful AI applications already realized that save customers money (cheaper cameras)
  • some tailwind from increasing popularity and significance of live sports
  • no obvious short term catalysts
  • Growth requires Working capital (inventory, receivables)
  • only limited share buy backs
  • 7 C-Level employees (but total comp OK)
  • TV Studios as customers are overall in decline in decline

13. Conclusion and game plan:

Overall, EVS Broadcast today seems to be a very interesting stock. It seems that the long stagnation period is over and that new management is able to deliver decent growth.

Based on the very modest valuation of a P/E of 10-11 for 2024 (not considering the 4 EUR et cash per share), the downside seems to be quite limited.

On the other hand, if Management could deliver on its targets (10% growth p.a. until 2030), the upside could be substantial, even without multiple expansion.

If they deliver, for an international Technology company dominating its niche, significantly higher valuation multiples could be possible.

Therefore I decided to allocate ~3,3% of the portfolio into a “starter position”, reinvesting my Proceeds from my partial DEME sale.

The game plan is simple: Sit tight and watch how the business develops over the next 18-24 months and if the Management can deliver.

Appendix A) Bonus Soundtrack:

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