Eleco plc (ELCO) — Investment Research Note

Executive summary

Eleco is an AIM-listed vertical software business selling project scheduling, estimating, asset/maintenance management, PPM and BIM/visualisation tools into the built environment (Asta Powerproject, Pemac, ShireSystem, BestOutcome, Kivue). Over 2021–2025 the group has completed a SaaS/subscription transition — recurring revenue has moved from ~56% to 85% of turnover, ARR has compounded from £16m (2021) to c.£35.5m (H1 2026) — while adjusted EBITDA has stepped from £5.4m (2022) to £10.2m (2025) with FCF conversion above 150% of operating profit. The single most important point for valuation is that this is a genuinely high-quality small-cap vertical SaaS (net cash, 89% gross margin, 110% NRR, 20%+ organic ARR growth) trading around 20x FY25 adj EPS after a drawdown from 175p to 130p — a full-fat quality software business at a modest valuation.

Fair value estimate

• Fair value range: 140p – 185p per share (~£117m – £155m market cap)
• Methodology: forward earnings multiple, cross-checked against EV/ARR.
  • FY25 adj EPS 6.3p, FY26E adj EPS ~7.0–7.8p on ~10–15% adj profit growth off 15–20% organic ARR/revenue tailwind (guided in line with market expectations; H1 2026 organic revenue +15%, organic ARR +23%) 2026-07-23 trading update; 2026-04-28 finals.
  • Applying 20–24x forward adj EPS — appropriate for a debt-free vertical SaaS with 85% recurring revenue but discounted for AIM small-cap illiquidity — gives 140–187p.
  • Cross-check: EV/ARR. Enterprise value at 130p ≈ £80m (£95m mcap less £15.4m net cash). ARR £35.5m → EV/ARR ~2.3x, well below quality-SaaS comparables at 3–5x. At 3x ARR EV = £106m → ~145p; at 4x ARR → ~180p. This corroborates the earnings-multiple range.
• Comparison to £95.2m market cap: fair-value midpoint ~£135m implies ~25% upside from 130p; range implies +8% to +42% upside.
• View: undervalued (modestly).

Sector context

• Sector: Technology / Software (ICB Technology). Sub-vertical: specialist vertical SaaS for the built environment (construction planning, asset/maintenance management, PPM, BIM).
• Quality profile is above typical AIM tech peers on recurring-revenue mix (85%), gross margin (89.6%), balance sheet (net cash, no debt), and disclosure. Growth profile is in line with best-in-class vertical SaaS (~20% organic ARR).
• Listed peers: RIB Software (delisted, was a direct competitor in construction PM), Craneware (LSE-listed vertical SaaS, healthcare), GetBusy, Nexus Infrastructure/InfoTrack proxies; wider UK vertical software: Sage, Alfa Financial; US/global comparators include Trimble and Autodesk (much larger, but similar end-market).

Investment thesis (3 bullets)

1. Genuine recurring-revenue quality at a reasonable multiple. Recurring revenue is 85% of H1 2026 total, ARR £35.5m and growing organically +23%, NRR 110%, gross margin 89.6% — this is a high-quality software P&L trading around 20x FY25 adj earnings after a de-rating (share price fell from 175p in July 2025 to 130p) 2026-07-23 H1 trading update; 2026-04-28 FY25 finals.
2. Fortress balance sheet enables self-funded M&A and downside protection. Cash £15.4m (H1 2026), debt free, free cash flow £8.2m in 2025 (158% of pre-impairment operating profit). This has funded Pemac (£4.6m, immediately profitable, contributing ~£3m revenue plus €1m PBT) and Kivue (£2.3m) without leverage, with earn-outs aligning vendors 2026-04-28 finals; 2026-02-10 Kivue announcement.
3. Portfolio cleaner post-Veeuze disposal. Management has exited the loss-making German visualisation unit (Veeuze lost £1.3m PBT on £3.7m revenue in 2025) at zero effective consideration, immediately accretive to organic growth, margins and cash — evidence of disciplined capital allocation 2026-04-10 disposal announcement; 2026-04-28 finals.

Key risks (3 bullets)

1. Construction-cycle exposure limits growth in downturns. Services revenue (18% of 2025 mix) is discretionary and was called out as under pressure through 2024–2025 due to macro/geopolitics; a construction downturn could compress licence and services growth, and further disposals like Veeuze demonstrate that end-markets can turn structurally against product lines 2025-07-24 H1 trading update; 2026-04-28 finals.
2. AI angle is enabling, not receiving. The AI narrative (AstaGPT, Asta Vision Plus API layer) is genuine but positioned around augmenting professional users, not a demonstrable revenue uplift line. If competitors ship stronger AI-native construction planning or scheduling, Eleco's incumbency-based pricing power in Asta Powerproject could erode 2026-04-28 CEO Report.
3. Small size / AIM listing = liquidity and re-rating risk. £95m market cap, AIM-listed, 83.5m shares outstanding. Even a good print may not produce sustained re-rating without institutional coverage; the share price has already been volatile (105p–181p in 12 months) and is subject to small-cap discount market data 2026-07-24; inferred from listing status.

Operating leverage

This is a textbook high-operating-leverage business. Gross margin is 89.6% (2025) versus 88.4% (2022), meaning ~90p of every incremental £1 of software revenue drops to gross profit. The overhead base is largely fixed personnel (over 300 staff, 87 engineers) plus hosting; incremental subscription/SaaS revenue does not require materially more inventory, working capital or headcount. Management explicitly flag "operational gearing" and it is visible in the numbers: 2025 revenue grew 20% while adjusted EBITDA grew 32% and adjusted PBT grew 35% 2026-04-28 finals; 2025-09-16 interims. On a 10–20% revenue beat vs current expectations (an extra £4–8m on the c.£43m FY26 base), assuming 80% incremental gross-profit drop-through and modest overhead flex, ~£3–6m would fall to adjusted EBITDA — a 30–60% uplift to the current ~£10m base, and materially more to adjusted PBT given fixed D&A. Contribution margin on incremental SaaS is realistically 60–70%. Constraints: some overhead scales with international footprint and R&D reinvestment stays at 15% of revenue; but the fundamental structure delivers exactly the "revenue surprise → multiples of profit" that the strategy wants.

Value-trap signals

None material identified. Statutory 2025 EPS fell 60% due to the £2.3m Veeuze impairment, but adjusted metrics grew strongly and cash generation was record. Reasons this is not a trap: (a) organic growth accelerating (H1 2026 organic ARR +23% vs FY24 organic 9%); (b) net cash position increasing, dividend rising 20% annually; (c) NRR 110% (customers expanding, not churning); (d) recent US medical-device customer win for Pemac shows expansion into higher-value verticals; (e) auditor report unqualified. Minor watch item: related-party financing package (€1.5m at ECB+5.85%) provided to buyer of Veeuze — properly disclosed and arm's-length, but worth monitoring.

Earnings vs. expectations

Consistent pattern of beating market expectations across the covered period. FY23 finals: results ahead of consensus. FY24 finals: "ahead of market expectations" on revenue, profit and cash. FY25 finals (April 2026): explicitly "Strong Growth with Revenues, Adjusted Profitability and Cash ahead of Market Expectations." H1 2025 interims: "in line with expectations." H1 2026 trading update and AGM statements: "in line with market expectations." Filings do not routinely quote analyst consensus numerically, but the narrative language is consistently "in line with or ahead of." Pattern: consistent beats or in-line; no evidence of guidance cuts or profit warnings in the 5-year window.

Conviction

Conviction: 4 — high.

Supporting factors: (i) very clean disclosure — full APM reconciliations, segment revenue types, geographic splits and quarterly trading updates; (ii) two independent methodologies (P/E and EV/ARR) converge on a similar fair-value band; (iii) five years of consistent operating trajectory (SaaS transition executed, ARR compounding, cash growing) reduces model uncertainty.

Limiting factors: (i) forward EPS assumes continued execution of subscription mix shift and mid-teens organic growth — reasonable but not guaranteed; (ii) AIM small-cap re-rating potential is inherently harder to time than the fundamentals.

Driver scoring summary

• AI beneficiary: 40 — AI-enabled vertical SaaS, but not a picks-and-shovels AI receiver; benefits are efficiency in R&D and product features rather than a demonstrable revenue line.
• Operating leverage: 75 — textbook high-fixed-cost SaaS with 89.6% gross margin, 85% recurring revenue.
• Earnings surprise: 75 — consistent beats/in-line, no profit warnings.
• Cyclicality: 35 — some construction exposure but heavily buffered by recurring revenue.
• Moat: 60 — 12 consecutive years as Best Construction PM Software award winner, high NRR, sticky vertical.
• Leverage: 8 — net cash £15.4m, debt free.
• Earnings quality: 80 — high cash conversion, clean adjusted vs statutory bridge, minor Veeuze impairment now behind.
• Management quality: 72 — value-accretive M&A, disciplined divestment, progressive dividend, candid disclosure.
• Growth momentum: 78 — organic ARR +23%, organic revenue +15% in H1 2026.

Overall score: 620

Solid fit — high-quality vertical SaaS with genuine operating leverage, fair (not stretched) valuation, and strong downside protection. The main limitation for this specific strategy is the AI-receiver angle: Eleco benefits from AI as a feature but is not directly on the physical or infrastructure AI supply chain. That places it firmly in "strong secondary buy" territory rather than the top band.