Company & Origin
Secunet AG was originally a department of TÜV. There, it was responsible for checking IT security. In 1997, the department became a limited liability company and has been listed on the stock exchange since 1999. In addition to its headquarters in Essen, it is represented at eleven other locations in Germany.
Products
An important Secunet product is SINA encryption technology. It enables the secure processing, transmission and permanent storage of information. It protects the security of a company’s own network as well as access to it via open networks (the Internet). The security enables security of (video) telephony, sending of files and storage of information. This security can replace safes and messenger services and thus offers considerable savings potential for customers.
Secunet also offers products for automated passport control. These include the EASYGATE kiosks at airports. There, the biometric data in passports is automatically matched with the user. But Secunet also offers an app for patrols and other applications that can be used to quickly check passports for authenticity. This eliminates the need for telephone comparisons. And it can also be used to quickly check the identity of third parties, for example at banks or when registering a new cell phone number. All of this makes life considerably easier for the state and private individuals. In addition to the products themselves, Secunet offers consulting services. In addition, Secunet is responsible for the entire value chain, from the development of software and hardware to their production and regular maintenance.
Customers
Secunet sells its products primarily in Germany (90.5% of revenues are generated in Germany). Secunet’s sales activities abroad have so far been concentrated on the countries of the European Union, NATO member states and the Middle East, but are of rather minor importance overall.
Revenues are mainly generated from product business (88.7%). The consulting business, on the other hand, plays a subordinate role with a share of 11.1%.
The most important customer is the public sector, which is responsible for 83% of revenues. This includes the Federal Police, the judiciary, the Federal Ministry of Defense, NATO, EU institutions and the tax office with its well-known ELSTER application.
Private individuals contribute to 16.8% of revenues. A significant role is played by healthcare. Secunet applications are used in hospitals, for example. In doctors’ surgeries, they are used for integration into digital networks and lay the foundation for electronic patient files (ePA), e-prescriptions and electronic sick notes (eAU). Secunet products also protect the networked production of some industrial companies. The products are also of interest to providers of critical infrastructure and the financial and insurance industries.
Development
The revenue growth of 39.5% in 2020 stems exclusively from business with the government (Public Sector).
By contrast, revenue from the Business Sector business decreased. However, this decline is explained by a one-time effect in 2019, the rollout of healthcare connectors in German doctors’ practices. As a result, revenue from the Private Customer (Business sector) increased by 353.8% in 2019. The 2020 retail revenue is still a threefold increase compared to 2018, so the larger trend is intact. When factoring out this effect, it even emerges that the retail business has grown noticeably; after all, the absence of the one-off effect has been largely compensated for. The medium-term developments are therefore no cause for concern.
Fundamentals
Profitability
Secunet is a very profitable company. The costs incurred are comparatively low. A significant cost item is personnel, for which EUR 54 million was spent in 2020.
However, it should be borne in mind that the development and support of the safety systems is the company’s central activity.
Considering the sales in 2020 of EUR 285.6 million, the sum is put into perspective.
This is also reflected in the EBIT margin, which has always been above 14% in recent years.
Incidentally, Secunet has managed to earn interest on its equity at over 25% in each of the last few years. All in all, Secunet is therefore extraordinarily profitable.
Financial Stability
The company’s financial situation is excellent. They have negative net debt. This means that their cash reserves are higher than their borrowings. Thus, they have cash reserves of 101 million euros and financial liabilities of 0 euros (they do not use any loans).
Thus, they are not at risk of interest rate increases. On the contrary, the balance sheet provides a stable foundation for further growth, for example by continuing to invest in the company or by making new acquisitions.
Goodwill accounts for less than 4% of equity, so there are no write-down risks here either.
Chances
Last year, the state invested considerable amounts in retooling public administration. Even if massive investments for setting up home offices on this scale are unlikely in the future, this does not diminish the business outlook: The trend toward digitizing administration (e-governance: setting up applications digitally, digital communication with citizens) will endure. Particular mention should be made of the ELSTER electronic income tax return, to the security of which Secunet is contributing.
Vulnerability has already increased in recent years – among the state and the private sector alike. The media coverage of cyber attacks (most recently, for example, in the Colonial Pipeline case) has sensitized companies to this danger. Given the high sums to be paid, this should lead to customer growth and a generally increased willingness to pay.
Secunet intends to push ahead with its activities in the Business Sector, would thereby diversify its customer structure and, above all, lead a new clientele dependent on its own products.
The approvals of Secunet products by the EU and NATO are positive. This opens up a considerable number of potential new customers. Secunet could therefore also benefit from increased spending by foreign governments and supranational organizations.
Secunet’s prospects are favored by the fact that the legislature is imposing increasingly strict regulations in the area of information security, recently in the form of the IT Security Act 2.0, the strengthening of the BSI, or the introduction of eRezept or eAU. Such stringent requirements reduce the risk of competitors entering the market.
Risiks
One risk is the great dependence on one customer – the state. However, the fact that all parties involved are familiar with the existing system means that switching to a competing provider is a significant moat. It should also be borne in mind that considerable amounts of information are already stored in Secunet systems (many files are stored in SINA), making a switch much more costly.
The same also applies to automated people screening: here, hardware (kiosks at airports) and considerable amounts of data are partly linked to Secunet’s offering, making a switch much more difficult. Ultimately, the increasing number of applications of Secunet products gives the company the opportunity to access more feedback and results from the offerings and to take this into account when making improvements.
However, Secunet also generates a large proportion of its revenue from business with private individuals. In this respect, there is an increased vulnerability to country-specific crises.
Meanwhile, it is difficult to imagine what force majeure could diminish the need for secure communications.
In the abstract, there is a risk of not being able to secure customer data due to undetected security gaps.
(Secunet’s warehousing remains problematic).
Problems could also be caused by the shortage of raw materials in 2021, which prevents the hardware from being manufactured and installed. On a positive note, however, there is no loss of market share to worry about for any manufacturer in view of the shortage of raw materials.
Peergroup
Many other IT security offerings are available on the German market besides SINA. However, many are only approved for the lower classification levels (“VS-only for official use,” “VS-confidential”). In addition, many products are not approved for NATO or EU classification levels. Ultimately, the SINA architecture was developed in cooperation with the BSI and is thus adapted to the needs of the German government. No competitor on the German market can make a comparable offer.
Valuation
For fiscal year 2021, Secunet expects revenue of EUR 260 million, a decline compared to 2020, but this is not surprising in view of the special effects (establishment of domestic workplaces). However, the long-term development of revenue is healthy and shows no sign of weakness.
The following assessment is adjusted for the special effects in 2019 (rollout of healthcare connectors in doctors’ practices) and 2020 (above-average establishment of mobile workstations). For this purpose, the average revenue growth of the years 2015-2017 is collected (it amounts to 22% p.a.) and used accordingly for the further calculations.
If the revenue from 2017 is scaled accordingly, this results in a revenue expectation for 2021 of EUR 297 million, a value that is very close to the forecast. The assumption that the growth rate can be maintained can be justified by the fact that more money is spent within existing dependencies, new customers have been acquired and new customer (groups) will be developed in the future. For example, the Management Board points out that Secunet edge, a service for industry that combines several different products, will contribute to further revenue increases in the coming years. Furthermore, the Management Board is counting on growth in business with NATO.
Therefore, it is even possible that the dynamic development of 2019 and 2020 will continue in the coming years, but new, permanent dependencies have emerged: For example, an expansion of the recently launched products for hospitals and medical practices is on the horizon.
The above assumptions are also in line with global market expectations that spending on defense against cyber-attacks will increase by 20-30% annually until 2026.
Currently, Secunet is very ambitiously valued with a P/E ratio (PER) of 45, making the valuation high by historical standards.
Earnings per share grew by 43% p.a. between 2014-2020.
The earnings per share calculated on this basis for 2021 are below management’s forecast of EBIT 7.89 per share, which means that the earnings outlook is good. The estimate shown is therefore rather conservative and suggests that earnings will continue to develop dynamically.
But what would the valuation look like with the above growth figures and the current price of EUR 373? It is obvious that a moderate valuation would already exist from 2022.
Thinking the other way around: If a P/E ratio of 30 is considered appropriate, this would result in a price of EUR 968.4 in 2025.
Up to this price target of EUR 968.4 in the observation period, there is a potential of 259% in total, which corresponds to approx. 27% p. a.
Comparison of peers: Compared to Palantir, Secunet has a significantly favorable valuation, even considering that US companies are regularly valued higher. However, Palantir has its own AI applications and is therefore only comparable to a limited extent.
Conclusion
The current valuation is very ambitious.
Due to the dependencies that have arisen, the business is secure in the long term. And in the long term, this will help the company to acquire even more customers, thereby cementing its own pioneering position. Incidentally, the business model is a winner of increasing digitization.
However, a very good development in the next few years is already priced in. Other, equally promising growth stocks are currently valued much more favorably (see our share analyses). Profits are therefore only offered by growth that follows the coming years, which are already priced in.
If you have a long-term horizon and are prepared to leave the shares untouched in your portfolio for a longer period of time, an entry is recommended.