Original-Research: Verve Group SE - from GBC AG

Classification of GBC AG to Verve Group SE

Company Name: Verve Group SE
ISIN: SE0018538068

Reason for the research: Research study (Note) Recommendation: BUY
Target price: 6.00 EUR
Last rating change:
Analyst: Marcel Goldmann, Cosmin Filker

Jun acquisition ensures significant sales and earnings growth and a significant strengthening of the demand side; the integration of the acquisition opens up considerable sales synergies; significant increase in forecasts and price target; 'BUY' rating confirmed  
On 18 June 2024, Verve Group SE (Verve) announced the signing of an agreement to fully acquire Jun Group, a leading mobile advertising technology company with a focus on the demand side and strong business relationships with leading US brands and media agencies.  
The Jun Group's mobile-first demand-side business with direct access to more than 230 Fortune 500 advertisers and US agencies is a perfect complement to the market-leading US-centred mobile supply-side platform, according to the company. The acquisition will result in a more balanced sales model with 30.0% demand-side business (previous demand-side share: approximately 10.0%) and 70.0% supply-side business (previous supply-side share: approximately 90.0%). The Jun Group has a highly diversified customer base (including Amazon, McDonalds and Dell), which is growing steadily.
 
This transformative transaction will significantly increase the size and profitability of the Verve Group. The acquisition of the Group is expected to contribute approximately 23.0% in revenue and approximately 43.0% in adjusted operating profit (Adj. EBITDA), which on a pro forma basis should lead to expected Group revenue of approximately € 447.0 million and adjusted EBITDA of approximately € 151.0 million in the current FY 2024.  
The agreed total purchase price for the transaction amounts to € 170 million. According to the company, € 120 million of the purchase price will be paid from existing cash funds, whereby a cash capital increase with gross issue proceeds of around € 40.0 million (27.11 million new shares at an issue price of around € 1.48) was recently carried out for this purpose. The remaining € 50.0 million of the purchase price payment is to be made in two annual instalments in 12 and 18 months after the planned closing in September 2024. The completed capital measure is intended to achieve the targeted capital structure with a medium-term pro forma net leverage ratio of 1.50 to 2.50.
 
According to the company, the purchase price including expected synergy effects thus amounts to 3.8x EBITDA. In addition to the significant cost synergies (approximately € 2.0 million in FY 2024), the Verve Group primarily expects extensive synergies at revenue level (approximately € 9.0 million in FY 2024). Extensive sales synergies are to be realised primarily through the combination of product and customer structures and the various platforms. In the medium term, Verve anticipates sales synergy potential of between € 30.0 million and € 40.0 million. In view of the high profitability (50.0% EBITDA margin from USD 72.0 million in sales in FY 2023) and the significant growth and synergy potential of the Jun Group, we consider the purchase price for the transaction to be extremely favourable.  
With regard to future financing structure and conditions, Verve assumes that the ability to reduce debt will improve significantly in the future due to the strong (expected) cash EBITDA (approximately 80.0% in FY 2025 according to the company's forecast). Accordingly, the technology group anticipates that the expected improvement in debt ratios will reduce future financing costs as soon as the existing financial debt is refinanced. At the present time, declines in bond yields can already be observed for the existing longer-term bonds (see e.g. Verve Group bond with ISIN: SE0019892241), which indicates significantly lower financing conditions in the future.
 
Forecasts and evaluation
 
Based on the announced transformative acquisition and the strong first half of the current financial year, Verve's management has significantly revised its previous guidance upwards. For the current financial year 2024, the company now expects consolidated sales of € 380.0 million to € 400.0 million (previously: € 350.0 million to € 370.0 million) and adjusted EBITDA (Adj. EBITDA) of € 115.0 million to € 125.0 million (previously: € 100.0 million to € 110.0 million).
 
As a result of the significant increase in the Group's size and profitability, Verve has also updated its medium-term guidance. The technology company expects a sales CAGR of 25.0% to 30.0% (unchanged from previously) and an EBITDA margin of 30.0% to 35.0% (previously: 25.0% to 30.0%) and an EBIT margin of 20.0% to 25.0% (previously: 15.0% to 20.0%).  
Against the backdrop of the improved company outlook and the increased medium-term financial targets, we have adjusted our previous sales and earnings estimates upwards. Accordingly, we now expect sales of € 380.12 million (previously: € 352.18 million) and EBITDA of € 108.92 million (previously: € 100.08 million) for the current 2024 financial year. For the following years 2025 and 2026, we are forecasting sales of € 475.91 million (previously: € 389.51 million) and € 596.79 million (previously: € 437.03 million). At the same time, operating earnings (EBITDA) should increase to € 148.77 million (previously: € 113.35 million) and € 191.58 million (previously: € 130.67 million).
 
Overall, the Jun acquisition represents a good strategic step towards better balancing the Group's demand- and supply-side-specific business model and utilising the resulting advantages profitably. In addition, this transaction will take the Verve Group to the 'next level' in terms of consolidated sales and profitability. The integration of the acquisition will also result in considerable synergy effects, particularly in terms of sales, which can be gradually realised.  
As part of our DCF valuation model, we have also significantly increased our price target to € 6.00 (previously: € 4.50) per share due to our increased sales and earnings estimates. However, the dilution effect resulting from the capital increase (increase in the number of shares by 0.27 million to 186.36 million) reduced the target price. In view of the current share price level, we therefore continue to assign a 'BUY' rating and see significant upside potential in the Verve share.  

You can download the research here:
http://www.more-ir.de/d/30089.pdf

Contact for questions
GBC AG
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86150 Augsburg
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research@gbc-ag.de
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Date (time) of completion: 24/06/2024 (10:29) Date (time) of first distribution: 24/06/2024 (12:00)

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