NEUROSOFT SOFTWARE PRODUCTION SA

A tiny overlooked IT company trading at a (LTM) PE of 12x on short term depressed earnings and poised for future growth.

As always,

1. I am very grateful for any feedback.

2. Do your own due diligence. Fact-check anything I say. It’s always possible that I made minor or major mistakes, even though I rigorously try to avoid them.

3. Neurosoft is an extremely illiquid stock, so there is the possibility for major volatility and other illiquid related issues.

Disclaimer

This article is for informational and educational purposes only. Do not interpret anything below as financial advice. Always do your research & speak to a financial professional before making investment decisions. Stock prices and market value have changed since the time of writing. This is NOT a buy or sell recommendation.

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Market Cap. 14M EURO

Enterprise Value 12,8M EURO (0 Borrowings)

Free-Float: 10%

!extremely low trading volume!

EV/EBIT (LTM) 8

PE (LTM) 12

All multiples and values, which are based on the stock price of Neurosoft, are based on a stock price of 0,55 euros.

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Initially this company was pitched to me by

Financial Skeptic

1,5-2 years ago. After buying and selling the name due to some disappointing H1FY23 results (Margins were very bad in CSO & ICO), with a minor loss, I have been continuously monitoring the idea. After the H1FY24 results came out I noticed how the growth seemed to accelerate and how margins haven’t suffered as much as in H1FY23. So I delved deeper again and decided to make it a medium sized position.

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Neurosoft SA is a Greek IT services company listed in Italy, operating across three core segments: Infrastructure & Cloud Operations (ICO), Field Services Operations (FSO), and Cybersecurity Operations (CSO).

The FSO segment, a longstanding business line, primarily caters to OPAP, which operates sports betting kiosks, holds a 70% stake in Neurosoft and contributes around 40% of total revenues. With Neurosoft being seemingly responsible for the entire IT-infrastructure (including the extensive POS system) of OPAP.

In contrast, the ICO and CSO segments focus on proprietary solutions developed primarily since 2020, with a diversified customer base and a majority—or even all—of their revenues generated from non-OPAP clients. Since 2020, Neurosoft has launched 22 new products, updates, and extensions, underscoring its dedication to innovation and growth in these two high-potential areas, with no end in sight.

The focus on developing the ICO and CSO business began in 2020, following the COVID-19 pandemic, marking a pivot from international expansion to a concentrated focus on the Greek and Cypriot markets. This decision was influenced by a "full year in terms of active contracts in the home market" a trend that appears to have persisted to date. In 2021, Neurosoft further increased its focus by divesting its loss-making Fintech & Analytics business. By 2022, the strategic shift was explicitly articulated in the company’s Annual Report, with a clear focus on expanding in CSO & ICO.

"The Group’s strategic plan is to become the most innovative, value-adding Managed Infrastructure Service Provider (MISP) in Greece and Cyprus and to brand Neurosoft as synonymous with security and trust. Scale, efficiency, new technologies and automation are the key priorities in order to be able to offer a “best of breed” commercial approach to the customers. Moreover, Governmental institutions are expected to heavily invest in ICT over the next 5 years, therefore the Group’s objective is to position Neurosoft among the key market players, through partnerships in Greece, as well as in Cyprus." (Annual FY22 Page 17)

Throughout its history¹, Neurosoft had never articulated such a clear and straightforward vision for its future. Previously, the company pursued a wide array of development projects, resulting in numerous non-core, sub-scale, and loss-making segments. However, starting in FY20—and with an increased focus since FY22—the company has concentrated its efforts on its CSO and ICO segments. This strategic realignment has prioritised major product launches, updates, and enhancements, as well as growth in these areas.

Today, Neurosoft boasts a robust suite of CSO products, anchored by its 24/7 Cybersecurity Defense Centre solution, Neutrify, which consolidates previous offerings into a unified platform. Including specialised offerings like a Maritime Cybersecurity solution, alongside more conventional services such as threat monitoring, alerting, and response to cybersecurity incidents.

Additionally, Neurosoft’s ICO segment boasts a robust portfolio that includes traditional cloud migrations and security services, as well as its flagship product, EnterpriseLink - a managed SD-WAN solution developed in partnership with Telecom Italia. By combining high quality services with a lot of Cybersecurity knowhow, the ICO business is able to offer a differentiated value proposition.

Meanwhile, in the FSO segment, not much has changed. They still offer maintenance and roll-out services, mainly consisting of installing, maintaining and repairing IT related equipment. However, the company has achieved significant success by securing several large-scale contracts, in the past years.

Neurosoft offers comprehensive and well-structured information about its products on its website.

A significant driver for growth has been, and continues to be, up-selling and cross-selling of its products across its customer base, mainly from its FSO unit to the CSO and ICO units. But recently CSO and ICO have been winning more and more customers independent from cross selling. Additionally, Greece's long-standing push for digitalisation—partly financed by the European Union—has provided a substantial growth tailwind. These initiatives include new standards, laws and regulations around IT, subsidies for SMEs and expanded IT budgets for public institutions, fueling demand for IT services and solutions. One of the major new regulations in Greece is NIS2, which requires +2000 medium and large businesses in Greece to comply with certain cybersecurity standards, in the coming years.² (Neurosoft offers compliance consulting since earlier this year).

The strength of all these trends is evident in the strong overall IT-Services sector growth, since FY20 and the forecasted growth going forward:

³

One should note, that areas such as Cloud Infrastructure or Cybersecurity have been and are expected to grow a lot quicker than the general IT-Services Market.

The Recurrence of Revenue Streams:

Most of Neurosoft’s offerings include recurring or reoccurring revenue streams.

In the ICO and CSO segments, many solutions feature a SaaS model (e.g. Neutrify) or have a significant maintenance component (e.g. Managed Cloud). This shift to recurring revenues is intentional:

"The value proposition has shifted from one-off Capex to recurring SaaS revenue streams." – CEO (Annual Report 2021)

In the FSO segment, a large portion of revenues is generated from the maintenance of OPAP Sports Betting Kiosks and for other large clients, or from long-term contracts, many of which have a reoccurring nature.

The Investment Case:

To summarise, Neurosoft operates in markets benefiting from strong structural tailwinds, is characterised by largely recurring revenues, established partnerships with major players, increasing momentum in contract wins, and accelerating growth.

Margins have been very volatile, in my opinion due to the very small scale and the need for some upfront investments. The onboarding of new clients, which serves as a key growth driver in all segments, introduces a degree of lumpiness further accelerating volatility. Nonetheless the gross profit margins have been quite stable.
I do expect higher margins in the future for the ICO & CSO segments, due to the scalable nature of their software products.

Neurosoft’s enterprise value stands at €12,8M, with a market capitalisation of €14M, translating to an LTM EV/EBIT of 8 and an LTM P/E of 12. A cheap valuation for the past growth, despite the short term headwinds from negative FSO Margins which can be clearly explained by:

1. “The lower EBITDA and EBIT figures are due to the fact that, in 2024, the company secured major infrastructure projects, where the first phase of implementation involves the resale of goods, which is inherently a low-margin business line.” - H1FY24

2. “Neurosoft focused on technological optimization within the FSO business unit, investing in the modernization of the Warehousing Management System to establish a cutting-edge logistics center and improve service quality for both enterprise and telecom clients. Additionally, the Group expanded its national network to support multiple large-scale retail projects across the country simultaneously.” - H1FY24

Both factors appear to be more bullish than negative, with only short-term margin impacts expected.

If margins (EBIT) in the FSO segment return to the lower range of the historical norm of 7%, and assuming no further growth, the company could trade at a run-rate multiple of around 7x EV/EBIT.
However, given that the second half of the year is typically stronger, and considering the ongoing growth prospects in CSO and ICO, it's plausible that Neurosoft might even achieve a low single digit EV/EBIT multiple on a run-rate basis, even if the CSO & ICO margins don't scale in the short term.

Risks

While the investment thesis for Neurosoft appears compelling, there are several key risks to be aware of, primarily tied to OPAP:

1. OPAP's Control and Influence

OPAP holds 67.7% of the shares, and if we exclude the management’s stake (6%) and the shares owned by GTECH (a former partner with no current ties to the company), the free float is around 10%. As a result, Neurosoft’s future is highly influenced by OPAP. Moreover, approximately 40% of Neurosoft’s revenues come from OPAP, mainly within the Field Services segment.

• Revenue Stability with OPAP: OPAP has been consistently investing in the modernisation of its Casino-Kiosks, in addition to ongoing IT maintenance needs. As a result, the risk of revenue decline appears limited.
  Additionally, OPAP’s IT expenses have been rising over the years, with a portion of this increase attributable to Neurosoft’s services.

• Margin Pressure from OPAP: OPAP may pressure Neurosoft to reduce margins, which could be unsustainable if pushed too far, but Neurosoft’s negotiating position is very weak. However, new large contracts in the pipeline should help diversify revenues and reduce reliance on OPAP in the short to medium term.
  This diversification is already noticeable: in 2018, OPAP accounted for 64% of Neurosoft’s revenues, while in the most recent half-year report, this has decreased to 43%. Furthermore, the CSO and ICO segments, are not tied to OPAP.

2. Risk of Delisting at an Unfavorable Price

There is a possibility that OPAP may decide to take Neurosoft private at a very unfavorable price, but this seems unlikely for several reasons:

• Reputational Damage: OPAP, as a gambling-related company, already faces reputational challenges. Taking Neurosoft private at a low price would exacerbate these issues and could tarnish its image further. Even if OPAP generated a profit of €100 million from such a transaction, their market cap is approximately €6 billion, meaning the risk/reward ratio for such a move would be very low.

• Business Structure: Neurosoft has been managed as a separate company and clearly not just to cater to OPAP, as is apparent by the expansion into areas unrelated to OPAP. It would not make strategic sense for OPAP to buy a company with two highly valuable and growing units (CSO and ICO) that they don’t need internally. Therefore, I believe it to be more likely that OPAP would either sell their entire stake or the entire company to private equity. Alternatively, OPAP could divest just the ICO and CSO segments, while taking the rest of the business private. As is apparent in the annual report, the management does communicate with the public, but these efforts are very limited (accessing investor relations is difficult/not possible). But this still gives me some hope, for Investor friendly behavior in the future.

3. No Clear Path to Liquidity (Cash Flow or Exit)

This is arguably the most pressing risk for investors. Given OPAP’s lack of interest in Neurosoft (due to its smaller size), coupled with Neurosoft’s lack of communication with its investors (unresponsiveness to inquiries and no investor presentations), there is no clear indication that the company values or priorities its minority shareholders, except for the updates and detailed commentary provided in their bi-annual filings and a neat & clear IR-Page.

• The lack of communication with minority shareholders raises concerns about the company's commitment to increasing shareholder value. Initiatives such as dividends or share buybacks—particularly if the undervaluation becomes extreme—may not materialize, especially under OPAP's control.

• This dynamic might shift if the company achieves significant scale, making it far more attractive as an acquisition target or if Neurosoft starts to act as an acquirer, or if the management team actively pursues strategies to unlock shareholder value. Notably, management’s 6% stake aligns their interests with those of minority investors, which could incentivise such actions in the future.

• There’s a possibility that Neurosoft’s business could continue to grow and improve at a high rate, but the price of the shares doesn’t change. This could occur if OPAP and the management remain content with the status quo.

• The strategic shift and other operational changes reflect operational dissatisfaction with the status quo, a few years ago. This operational discontent could potentially extend to shareholder related discontent, ultimately leading to betterment with regards to the Investor communication.

Additional Information

Management

Nancy (Anastasia) Verra is the Chairman of the Board, since 2021. She is also the Chief Legal, Regulatory, and Compliance Officer of OPAP Group. With a wealth of experience and strong educational background, she likely provides consultancy and legal guidance in her role at Neurosoft.

Nodas (Epameinondas) Paschalidis has been the CEO of Neurosoft since 2017 and the General Manager since 2014, following the company’s acquisition of Kestrel Information Systems S.A., where he was a founding member and CEO from 2000 to 2014. He has also served as Vice President of Neurosoft from 2002 to 2010. Nodas has played a pivotal role in transforming Neurosoft from an unfocused business into one with a clear strategic direction.

Petros Xarchakos is the Operational Finance Director at OPAP and is likely serving as the CFO at Neurosoft. He brings a wealth of experience to the table and sits on the boards of two other companies, both of which are either partially or wholly owned by OPAP.

Nikolaos Vasilonikolidakis, a founding member of Neurosoft, served as the company’s CEO from 1998 until 2019, before transitioning to the role of Chairman of the Board of Directors until 2021. Following his departure as Chairman, there has been a clear acceleration in the company’s focus on expanding its Cybersecurity and Infrastructure & Cloud Operations. This shift suggests that Nikolaos may not have fully relinquished influence over the company’s strategic direction after stepping down as CEO in 2017, which could explain why the expansion into the CSO and ICO segments was not pursued more aggressively directly after Nodas Paschalidis became CEO.

Compensation and Incentives

The management team earns c.0,7-1,1M EUR per year, fluctuating quite strongly. This level of compensation seems quite high for a company of this size, something one should look out for in the coming years. But alignment is created by the large shareholding of the Management (6,09% of shares). And the share count has been stable since 2014. Additionally, I would assume OPAP has an eye on Neurosoft’s remuneration policy.

Partners

Vodafone: Since 2016, Vodafone and Neurosoft have maintained a framework agreement in cybersecurity. Over the years, Neurosoft’s offerings have expanded significantly, as outlined above, and the collaboration appears to be gaining momentum. Neurosoft projects revenue of €6 million from FY24-FY25 from several existing subcontractor contracts with Vodafone for public sector clients in the cybersecurity space. Beyond cybersecurity, Vodafone also relies on Neurosoft as a subcontractor for Infrastructure & Cloud projects. This partnership is likely to remain a key driver of Neurosoft’s future growth.

Navarino: Neurosoft offers a merchant marine & On-Shore Cybersecurity solution (within Neutrify) in partnership with Navarino, a large globally active IT-Services & Software company focused on the marine sector, since 2018.

Telecom Italia Sparkle⁴ collaborates with Neurosoft on the EnterpriseLink solution (since 2020). Sparkle is a multinational telecom company, offering IT & Connectivity services alongside traditional telecommunications offerings. Their portfolio includes an SD-WAN solution, which likely integrates EnterpriseLink.

Other (JV’s limited to specific contracts):

Idemia, a large multi national IT company, and Neurosoft tried to win a very large contract in 2019, but failed. Neurosoft’s task would have been partially FSO and partially CSO related, highlighting their strong capabilities in both of these fields.

Performance Technologies and Neurosoft, won a contract in 2024, to upgrade an existing data center and create a disaster recovery center. Again highlighting their expertise in CSO, as well as in ICO.

In 2023, Neurosoft and Unisystems were awarded a €25 million contract related to Greece’s “Fibre to the Home” project. This initiative primarily involves equipment installation and supply. Highlighting the strong network and capabilities Neurosoft has in the FSO segment.

Growing Market Recognition

Since 2021, Neurosoft has been increasingly securing contracts and participating in joint ventures, reflecting a growing recognition of the quality and reliability of its products and services. This rising momentum indicates that Neurosoft is solidifying its position as a trusted partner in its core areas of expertise. This is also reflected in the very strong topline growth in ICO and CSO, as well as on a lower scale in FSO.

Customers

A significant portion of Neurosoft's customers are public institutions, such as GRNET—responsible for managing IT infrastructure for schools and universities. In the private sector, Neurosoft serves a wide variety of companies from Nokia to OPAP to utility or healthcare providers.

Aside from OPAP, there appears to be minimal revenue concentration. Moreover, Neurosoft's clients generally demonstrate strong retention, reflecting the stickiness of its offerings. For instance, Neurosoft has secured the IT maintenance contract for the SNFCC (a prominent cultural center in Greece) 3 times back-to-back since 2014.

Conclusion

Overall, I believe the company is undervalued at its current price (0,55€). However, it is not without risks, particularly those tied to OPAP and the lack of a clear path to generating returns for investors. Despite these concerns, I hold a position in this stock, driven by the low valuation, underappreciated business quality and the significant potential upside and optionality driven by its growth trajectory and scale advantages.

1. (since-2014, last available Annual report)

2. I would recommend anyone further interested in the digitalisation trends in Greece to read: “Digital Economy and Society Index (DESI) Greece”, which covers all relevant topics very comprehensively.

3. Source: Statista Market Insights, https://www.statista.com/outlook/tmo/it-services/greece#revenue

4. https://www.tisparkle.com/about-us/company