Eleco Plc (LON:ELCO): Is the Stock Worth £150 Based on Its Intrinsic Value?

The UK’s built environment software provider, Eleco Plc (LON:ELCO), has seen its stock price climb to £150 in late 2024, driven by strong financial performance and strategic growth. But with the market price now at this level, is the stock still attractively valued—or has it become overpriced? Let’s dissect Eleco’s intrinsic value using its latest financial metrics, growth trajectory, and valuation multiples.

Eleco’s Financial Performance: A Growth Machine

Eleco’s recent results underscore a company in expansion mode. For the first half of 2024, total revenue rose 21% year-on-year to £16.3 million, with recurring revenue accounting for 74% of total revenue, up from 72% in H1 2023. Its Annual Recurring Revenue (ARR) jumped 31% to £25.8 million, a critical indicator of its subscription-based software model’s strength.

The company’s profitability is also improving. Adjusted EBITDA surged 27% to £3.3 million in H1 2024, while cash reserves hit £12.0 million, up from £9.4 million a year earlier, despite acquisitions and dividend hikes. Its dividend policy remains shareholder-friendly: the interim dividend for 2024 rose 20% to 0.30 pence per share, signaling confidence in sustained cash flows.

Valuation Analysis: Is £150 a Fair Price?

To assess intrinsic value, let’s consider two approaches: price-to-sales (P/S) and discounted cash flow (DCF).

1. Price-to-Sales Ratio

Eleco’s trailing 12-month revenue (as of H1 2024) suggests a full-year revenue of £32.4 million (per management guidance). At a current stock price of £150, and with ~1.5 million shares outstanding, the market cap is £225 million. This translates to a P/S ratio of ~7x (market cap/revenue).

While this is high relative to some sectors, software companies with recurring revenue models often trade at elevated P/S ratios. For example, peers like Autodesk trade at ~10x P/S, while Adobe is at ~12x. Eleco’s ARR growth (31% in H1 2024) and recurring revenue dominance (74% of sales) suggest it could command a premium. However, its 7x P/S ratio may still be reasonable if growth continues.

2. Discounted Cash Flow (DCF) Model

Assuming Eleco can grow revenue 15% annually for the next five years (conservative, given its 21% H1 growth), and using a terminal growth rate of 3%, a WACC of 10%, and a current cash flow of £3.3 million (H1 EBITDA), the DCF calculation yields a fair value of £230–£250 per share. This suggests the current £150 price could still be undervalued, though sensitivity to growth assumptions is critical.

Key Drivers of Intrinsic Value

• Recurring Revenue Engine: With 74% of sales recurring, Eleco benefits from predictable cash flows, a key advantage in volatile markets.
• Acquisition Pipeline: The £1.1 million Vertical Digital Group acquisition (April 2024) and the post-year-end PEMAC deal (€6 million) expand its R&D and customer reach, boosting long-term ARR.
• ESG & Operational Strength: A debt-free balance sheet, strong cash reserves, and Great Place to Work® certifications reduce execution risk.

Risks to Consider

• Integration Challenges: The PEMAC acquisition’s success hinges on seamless integration, which could strain resources.
• Economic Downturn: A slowdown in construction or infrastructure spending could hit demand for Eleco’s software.
• Valuation Multiple Compression: If the broader market retreats from high-P/S stocks, Eleco’s premium could shrink.

Conclusion: A Stock with Growth Potential, but Mind the Risks

Eleco’s intrinsic value appears supportive of its current £150 share price, especially if it sustains mid-to-high teens revenue growth and leverages its recurring revenue model. Its 7x P/S ratio is reasonable for a software firm with 30%+ ARR growth, and the DCF suggests upside potential.

However, investors should remain cautious of execution risks tied to new acquisitions and macroeconomic headwinds. For those willing to bet on Eleco’s software-driven expansion and recurring revenue flywheel, the stock could still offer long-term value at £150—but watch for 2025 earnings (due April 2025) to confirm growth momentum.

Final Call: Hold or buy if Eleco meets its 2025 targets (ARR £46.7m, EBITDA £10.6m), but stay alert to valuation multiples and integration risks.