Eleco Plc (LON:ELCO): Why Conservative Accounting and Recurring Revenue Make This Stock a Hidden Gem

The market often misinterprets Eleco Plc’s valuation metrics, undervaluing its recurring revenue model and conservative accounting practices. Beneath the surface lies a company primed to outperform discounted cash flow (DCF) models, offering investors a compelling buy at current levels. Let’s dissect why Eleco’s intrinsic value is far greater than its discounted earnings suggest.

The Recurring Revenue Engine: Growth That Defies DCF Assumptions

Eleco’s shift to a SaaS-driven business model has transformed its financial profile. With 77% of revenue now recurring (up from 74% in 2023), the company has built a cash-generating machine that DCF models often fail to fully capture. Unlike one-time license sales, recurring revenue streams provide predictable, compounding cash flows that grow organically over time.

Consider these key metrics:
- Annualised Recurring Revenue (ARR) grew 18% to £26.6m in 2024, driven by a 109% Net Revenue Retention Rate. This means existing customers are not only staying but spending more—a hallmark of durable competitive advantage.
- Total Recurring Revenue (TRR) surged 20% to £24.9m, accounting for 77% of total revenue. This diversification reduces reliance on volatile, non-recurring sales, which have shrunk to just £1.0m in 2024 (from £1.5m in 2023).

Why DCF Models Underestimate Eleco’s Value

DCF models typically assume declining growth rates and high risk in later years. But Eleco’s recurring revenue model defies these assumptions:
1. Operational Gearing: With recurring revenue covering 100% of overheads (£24.8m), each incremental pound of revenue drops straight to the bottom line. This creates a non-linear profit trajectory that DCF’s linear assumptions miss.
2. Conservative ARR Calculation: Eleco’s ARR is based on the final month’s revenue multiplied by 12, ensuring no overstatement of future cash flows. This method is intentionally conservative, meaning actual performance could exceed projections.
3. Acquisition Synergy: Recent deals like Vertical Digital (April 2024) and PEMAC (Jan 2025) add recurring revenue streams without inflating current valuations. Their full potential will compound over years, not quarters.

A Fortress Balance Sheet, Built for Long-Term Growth

Eleco’s financial discipline is evident in its cash generation and zero-debt structure:
- Free Cash Flow rose 66% to £6.3m in 2024, up from £3.8m in 2023.
- Adjusted EBITDA grew 26% to £7.7m, with margins expanding to 31%—a testament to the scalability of its SaaS model.

These metrics are cash-rich and low-risk, enabling Eleco to reinvest in growth without dilution or debt.

The Hidden Catalyst: Market Share in Regulated Sectors

Eleco’s software solutions dominate high-margin, regulated industries like facilities management and energy. Its ISO 27001-certified platforms (e.g., Elecosoft UK, PEMAC’s CMMS) are critical for compliance in sectors where downtime costs are astronomical. This creates sticky customer relationships, further insulating revenue from competition.

Valuation: A Mispriced Opportunity

While DCF models may suggest Eleco is overvalued at current levels, they fail to account for:
- The optionality of its recurring revenue base (e.g., 10%+ net retention growth annually).
- The compound impact of acquisitions (e.g., PEMAC’s blue-chip customer base in regulated industries).
- The de-risked cash flow profile, with 77% of revenue now recurring.

Final Analysis: Buy Now Before the Market Catches Up

Eleco Plc is a recurring revenue juggernaut with conservative accounting that understates its true potential. Its SaaS model, strong retention, and fortress balance sheet position it to outperform DCF projections, making its current valuation a rare bargain. Investors who act now gain exposure to a company poised to compound value for years, regardless of short-term market skepticism.

Action Item: Buy Eleco Plc (LON:ELCO) now. This is a stock where accounting conservatism is an investor’s best friend—and its intrinsic value is just beginning to be recognized.

Disclosure: This article is for informational purposes only and not financial advice. Always conduct your own research before investing.