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SSH - Growth remains an issue

SSH’s Q4 result missed our expectations. On a positive, the company issued an outlook for 2019 and proclaimed the end of further litigation. We see current valuation as stretched given the relatively low and uncertain sales growth, thus we downgrade to SELL with target price EUR 1.6 (prev. 1.8).

Q4 misses our expectations

SSH Q4 missed our expectations, with net sales being EUR 6.4m (7.2m Evli) and EBIT being EUR 1.3m (1.8m Evli). The miss was due to abnormally low underlying software fees (0,6m excluding 1.5m license deal in Q4). Excluding patent income (2.7m) and a few larger license deals (2.8m), growth in 2018 would have been ~10% negative.

Outlook for 2019 given

In 2019 SSH expects double digit percentage growth from its core software business exceeding the projected annual cyber security market growth of approximately 10 %. In the medium term, SSH expects similar or faster growth and will also explore avenues for accelerated growth through inorganic growth opportunities. We had previously modeled 16% growth for 2019E based on the attractive growth opportunity apparent in the PAM market.

Estimates cut, slow growth with prudent cost control ahead

We’ve cut our net sales estimates for 2019-2021. We expect net sales in 2019E to be EUR 17.5m (-4% decline y/y) due to absence of patent income. For 2021E and 2022E we model 11% and 12% net sales growth respectively. No growth this year and slight growth in the coming years coupled with less litigation costs and a prudent cost control, means SSH will slowly start reaching organic profitability. We estimate EBIT of EUR 0.8m and EUR 1.9m in 2020 and 2021.

Downgrade to SELL with TP of 1.6 (prev. 1.8)

On our revised estimates, SSH is trading at EV/Sales 2019-20 of 3.9x and 3.5x. Our DCF indicates fair value of EUR 1.6. We see valuation as stretched given the uncertainty in sales growth, thus we downgrade to SELL with target price of EUR 1.6 (prev. 1.8). Our target price represents EV/Sales of 3.4x and 3.1x for 2019 & 2020.

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