Updater Services: Leading IFM player moving up the value chain

22 Dec 2023 , 10:58 AM

Recommendation: Buy; Target Price: Rs 418

 

Analysts of IIFL Capital Services initiate coverage on Updater Services (UDS) with BUY reco and TP of Rs418. UDS is a leading Integrated Business Services platform, offering Integrated Facilities Management services (IFM) and Business Support Solution services (BSS). The IFM segment should benefit from overall economic growth, higher outsourcing and market share gains by integrated players like UDS. BSS comprises value-added services that entail significantly higher margins and lower WC intensity vs IFM. UDS’ strength in the BSS segment should drive higher wallet share of customers. Ebitda margin expansion should be led by steady improvement in IFM, recovery in BSS margin led by revival of IT demand, and Ebitda break-even in the global flight services business. UDS’ accounting for liabilities payable to promoters of acquired subsidiaries depresses the reported PAT vs. the underlying PAT. As these liabilities are mostly paid down in the next 2-3 years, reported PAT and adjusted PAT should converge. Analysts of IIFL Capital Services hence estimate adjusted EPS Cagr of 21% over FY23-26, but reported EPS may jump 4x. The stock trades at 18x/15x 1YF reported/adjusted EPS. 

UDS is a leading IFM player: 

UDS is the #2 player in the highly fragmented IFM market —expected to grow rapidly, aided by formalisation and an increased preference of outsourcing IFM activities. Customers have started preferring integrated players like UDS that provide a one-stop shop for FM needs, rather than opting for unorganised companies. 

BSS segment to drive margin expansion: 

BSS segment entails sales enablement services, employee background checks, niche logistics/mailroom management, audit & assurance services and airport handling. UDS (mostly through M&A) has attained market-leading positions across most of these businesses and should continue market share gains. BSS contributed 31% to UDS’ revenue in H1FY24 vs 8% in FY20. The BSS segment operates at double-digit Ebitda margin vs ~5% margin for IFM. 

Analysts of IIFL Capital Services estimate 21% adjusted EPS Cagr over FY23-26: 

Analysts of IIFL Capital Services estimate 16% revenue Cagr over FY23-26, and adjusted Ebitda margin expanding 140bps led by rising contribution of the higher-margin BSS segment and operating leverage in IFM. While lower WC intensity in faster-growing BSS will also support FCF, UDS will spend ~Rs1.5bn cash on the acquisition of the remaining stake of Denave and Athena over the next three years.