Eleco plc (ELCO) — Research Note

Executive summary

Eleco is a specialist vertical-software provider for the built environment (project management, CMMS, visualisation) whose business has been successfully re-engineered into a high-recurring-revenue SaaS model, with ARR up ~16% to £35.5m at H1 2026 and adjusted operating profit +89% on 8% headline revenue growth — a clear operating-leverage inflection. The single most important valuation input today is not fundamentals: on 10 September 2026 the board recommended a cash offer from Avocet Bidco at 235p per share 2026-09-15 interim results, and the shares now trade at 230.5p — i.e. 2% below the offer with a tight timeline to completion by Q1 2027. For investment purposes this is now a merger-arb situation, not a growth-compounder entry point.

Fair value estimate

• Fair value range: 225 – 237p per share (implied market cap £188m – £198m)
• Methodology: anchored to the recommended cash offer of 235p, with a modest arb spread to reflect probability of deal completion. On a pre-bid fundamental basis — FY2026E adj EBITDA ~£11-12m, adj EPS ~10-11p, ~ £15m net cash — a mid-teens P/E and 15-17x EV/EBITDA for a sub-scale UK SaaS roll-up supports a fundamental standalone fair value in the 160-200p range. The bid price is accordingly a full-ish exit valuation (~18-19x EV/EBITDA), consistent with strategic buyer appetite for sticky construction software.
• vs. current market cap £192.0m: essentially at fair value. Absolute upside ~2% if the deal completes (235p vs 230.5p), with downside of roughly -35% to -40% to the ~130-150p pre-bid trading range if the deal breaks (although fundamentals have continued to improve since).

Sector context

Classification confirmed: Technology — vertical SaaS for the built environment. The quality profile is above the average AIM small-cap: 85% recurring revenue, 89-90% gross margin, debt-free, consistent organic ARR growth. Listed peers include The Access Group (private, but comparable UK vertical SaaS), Craneware (healthcare vertical SaaS, LSE), Bytes Technology Group, and in construction-tech more broadly Autodesk (US) and Procore (US). Within AIM, closest comp is probably Cerillion. Eleco's quality is in line with best-in-class AIM SaaS; its scale is smaller than Craneware/Cerillion.

Investment thesis (3 bullets)

• Clean, cash-generative SaaS franchise at a locked-in exit price. The bid price of 235p provides a hard valuation anchor with recommended board support and no visible competing bidder 2026-09-15 interims; 2025 year-end acquisition announcement. Investors buying at 230.5p are effectively running a ~2% arb into Q1 2027.
• Operating-leverage inflection has materialised. H1 2026 adjusted operating profit +89% on reported revenue +8% (organic +15%), with 85% of revenue now recurring and NRR at 113% 2026-09-15 interims. The business clearly earns disproportionate incremental margin on new ARR, which is why Avocet is paying up.
• Fortress balance sheet with disciplined M&A record. Debt-free, £15.4m cash at H1 2026 after funding Kivue (£1.9m) and ongoing Pemac earn-out; demonstrated willingness to exit sub-scale/non-core assets (ARCON 2023, Veeuze 2026) rather than defend them 2026-04-28 final results; 2026-04-10 disposal RNS.

Key risks (3 bullets)

• Deal-break risk is the dominant single-name risk. Completion is subject to shareholder, court and regulatory approvals 2026-09-15 interim, note 16. If the scheme fails, the shares would reset materially lower given the ~70% re-rating from pre-bid levels (c.135p in August 2026) to the current 230.5p.
• Limited AI-receiver exposure despite management rhetoric. Products are described as "AI-enhanced" (Asta Vision Plus, Asta GPT) but AI is used to protect the installed base and improve productivity, not as a dominant revenue driver 2026-09-15 interims. For an AI-receiver thesis, Eleco is a modest-at-best beneficiary.
• Cyclical construction end-market and Veeuze write-down precedent. The disposed German Veeuze visualisation business required a £2.3m impairment in FY2025 after sustained end-market weakness 2026-04-28 final results, a reminder that parts of the portfolio are exposed to construction/property cycles even if headline recurring revenue is sticky.

Operating leverage

Eleco is a textbook operating-leverage SaaS story at this scale. H1 2026 cost of sales was just £2.2m vs £17.7m gross profit, i.e. a 89% gross margin; selling & admin ex-D&A/one-offs was ~£11.0m vs £10.8m prior year, so revenue grew 8% while cash opex barely moved 2026-09-15 interim condensed income statement. The result: adjusted EBITDA margin expanded from ~23% to ~28% and adjusted operating profit from £2.7m to £5.1m. Software product development expense was £1.3m (6.5% of revenue), with a further £1.9m capitalised — a predominantly fixed R&D base. A 10-20% revenue beat on the current ~£40m run-rate would plausibly add roughly 60-80p of each incremental £1 to EBIT given gross margin headroom and a largely fixed cost base, i.e. a 15-20% revenue beat could roughly ~1.5x the adjusted operating profit versus plan. The 23% organic ARR growth 2026-07-23 trading update confirms that this operating leverage is actually being realised, which is why Avocet has bid.

Value-trap signals

None identified. Revenue is growing, recurring revenue mix is rising, debt is zero, dividends were paused only because of the recommended offer, management has acted decisively on underperforming units (Arcon, Veeuze), and there is a committed cash buyer at 235p.

Earnings vs. expectations

Across the 5-year filing window, Eleco has repeatedly delivered above or in line with market expectations and has not issued a profit warning: FY2024 revenue "ahead of market expectations" 2025-01-28 trading update; FY2025 revenue, adjusted profit and cash "ahead of market expectations" 2026-01-27 trading update, 2026-04-28 final results; H1 2026 adj EBITDA +30%, adj PBT +93%, exceeding internal expectations 2026-07-23 trading update, 2026-09-15 interims. AGM statements in 2024, 2025 and 2026 all reiterated "in line with market expectations." Guidance has been credible and consistently met or beaten — a positive earnings-surprise pattern.

Conviction

Conviction: 5 — very high. Factors anchoring it: (i) a recommended cash offer at a disclosed, binding price of 235p provides an unambiguous valuation anchor; (ii) the current share price trades within 2% of that anchor, so there is minimal room for valuation debate; (iii) H1 2026 audited-trajectory financials are clean and consistent with the bid rationale. The limiting factor is deal-completion risk itself: if the scheme does not go effective in Q1 2027, the "fair value" collapses back toward a fundamental 160-200p range and the conviction in 235p disappears.

Driver scoring and overall score

For this investor profile (AI-receiver + valuation discipline + operating leverage), Eleco is not a fit at today's price. The AI angle is thin ("AI-enabled" vertical SaaS, not an AI picks-and-shovels receiver); operating leverage is genuinely attractive but is now capped by the takeover; and the valuation offers ~2% to the offer vs ~35-40% downside if the deal breaks — the opposite of the "fair-to-cheap with asymmetric upside" the strategy wants. Downside protection is excellent (net cash, recurring revenue) but is already reflected in the share price. The portfolio could own this as a merger-arb line but it is not a strategic long for the AI/operating-leverage thesis.