2014 2015 2016E 2017E 2018E COMPANY ANALYSIS 11 February 2016 Summary Addnode Group (ANODb.ST) Steady as she goes Addnode reported a net sale of 614 MSEK (2% below our estimate) and an EBITA of 70 MSEK (expected 76 MSEK). TechniaTranscat continues to beat our expectations and the company already sees some synergy effects. The high revenue growth, of 33%, during the quarter was primarily driven by the Transcat acquisition. The upcoming change in the sales model for Autodesk-licenses, within Design Management, will start to affect the revenue and margin levels from H2 2016 and onwards. We welcome the change as the recurring revenue and financial stability will increase, however the reported numbers will temporarily look depressed, despite an actual increase in business volume. We have made only minor adjustments to our estimates and reiterate our Fair value, in a Base-case, at 60 SEK per share. We estimate a Fair value range of 24-75 SEK per share. In our view, the current share price indicates a relatively neutral riskreward situation for investors. List: Small Cap Market Cap: 1,734 MSEK Industry: Information Technology CEO: Staffan Hanstorp Chairman: Sigrun Hjelmquist OMXS 30 Addnode Group 70 65 60 55 50 45 40 35 30 09-Feb 10-May 08-Aug 06-Nov 04-Feb Redeye Rating (0 10 points) Management Ownership Profit outlook Profitability Financial strength 9.0 points 9.0 points 5.0 points 7.0 points 7.0 points Key Financials 2014 2015 2016E 2017E 2018E Revenue, MSEK 1,599 1,599 2,129 2,184 2,336 Growth 11% 0% 33% 3% 7% EBITDA 171 184 184 220 271 EBITDA margin 11% 12% 9% 10% 12% EBIT 129 129 120 143 182 EBIT margin 8% 8% 6% 7% 8% Pre-tax earnings 130 127 120 143 182 Net earnings 100 98 94 111 142 Net margin 6% 6% 4% 5% 6% Dividend/Share 2.25 2.40 2.65 3.00 3.20 EPS adj. 1.32 3.22 3.08 3.66 4.67 P/E adj. 18.6 17.9 18.5 15.6 12.2 EV/S 0.8 1.0 0.8 0.8 0.7 EV/EBITDA 7.5 8.9 9.1 7.7 6.3 Share information Share price (SEK) 57.0 Number of shares (m) 30.4 Market Cap (MSEK) 1,734 Net debt (MSEK) 23 Free float (%) 64 % Daily turnover ( 000) 12 Analysts: Kristoffer Lindström kristoffer.lindstrom@redeye.se Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report. Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: info@redeye.se
Redeye Rating: Background and definitions The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation. Company Qualities The aim of Company Qualities is to provide a well-structured and clear profile of a company s qualities (or operating risk) its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company s qualities on a ten-point scale based on five valuation keys; 1 Management, 2 Ownership, 3 Profit Outlook, 4 Profitability and 5 Financial Strength. Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points. The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys. Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company s management are: 1 Execution, 2 Capital allocation, 3 Communication, 4 Experience, 5 Leadership and 6 Integrity. Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company s stability and the board s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 Ownership structure, 2 Owner commitment, 3 Institutional ownership, 4 Abuse of power, 5 Reputation, and 6 Financial sustainability. Profit Outlook Our Profit Outlook rating represents an assessment of a company s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 Business model, 2 Sale potential, 3 Market growth, 4 Market position, and 5 Competitiveness. Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 Return on total assets (ROA), 2 Return on equity (ROE), 3 Net profit margin, 4 Free cash flow, and 5 Operating profit margin or EBIT. Financial Strength Our Financial Strength rating represents an assessment of a company s ability to pay in the short and long term. The core of a company s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company s financial strength is based on a number of key ratios and criteria: 1 Times-interest-coverage ratio, 2 Debt-to-equity ratio, 3 Quick ratio, 4 Current ratio, 5 Sales turnover, 6 Capital needs, 7 Cyclicality, and 8 Forthcoming binary events. 2
PLM above our expectations Addnode Group Net sale of 641 during the quarter Addnode reported net sales of SEK 614 million (629 expected) and EBITA of SEK 70 million (against our forecast of SEK 76 million) for the quarter. Because of the large acquisition of Transcat, the sales mix now looks different to the previous year, leading to a lower EBITA margin at the group level. Q4 2015 Addnode - Actual vs Estimates Q4 2014 Q4 2015 Actual Redeye % diff Revenue 461 614 629-2% growth % 6% 33% 36% EBITA 63 70 76-9% EBITA margin 13.7% 11.3% 12.1% EBIT 54 58 65-11% EBIT margin 11.7% 9.4% 10.4% Q4 2014 Q4 2015 Segment Actual Redeye % diff Revenue Design Management 230 254 242 5% Product Lifecycle Mngmt. 75 205 222-8% Process Management 125 128 131-3% Content Management 36 36 37-3% Centralt -5-7 -4 n.m. Largest deviation in Process Management EBITA 0 0 0 Design Management 27 25 27-6% EBITA margin 11.7% 9.9% 11.0% Product Lifecycle Mngmt. 18 28 27 4% EBITA margin 23.7% 13.5% 12.0% Process Management 24 21 28-23% EBITA margin 19.4% 16.7% 21.0% Content Management 0 2 2 3% EBITA margin 0.8% 6.4% 6.0% Centralt -6-7 -7 n.m. Source: Redeye Research, Addnode Regarding earnings, the greatest deviation from our forecast was in Process Management, as we understand it this deviation is mainly due to quarterly fluctuations. We also find it likely that the slightly weaker margin may partially be due to the segment s strong Q3. Design Management surprised positive when it came to sales, driven primarily by strong growth in the Swedish construction and real estate market. In Norway the segment delivered a stable result despite a harsh business climate, following the decline in oil prices. During the next year, the transition to selling Autodesk licenses on a subscription basis will influence the result (but not the underlying business volume) negative. We will get into more detail about this change in the Design Management segment section of this analysis. TechniaTranscat continues to deliver strong results, and PLM reported an EBITA margin that exceeded our forecast. Addnode state that they can already see synergies between the companies, which is slightly earlier than 3
Net sale (MSEK) % of Net sale Addnode Group Early visible synergies at TechniaTranscat we had anticipated. The company sees an increased number of spontaneous requests with reason of the Technia Transcat merger, which we find positive. Within Content Management, the segment continues to deliver an EBITAmargin just north of 6%. During the period, the number of employees decreased to 122 (down from 128 in Q4 2014). The fact that the segment shows profit and maintains sales despite fewer employees indicates a definite improvement in efficiency. We find it likely that the company will continue to focus on costs structure before focusing on growth. Revenue stability on the rise! The rising revenue stability in Addnode is important as the financial risk decreases in the company. It also creates a greater possibility for opportunistic acquisitions with a healthy leverage. Recurring revenues from support and maintenance accounted for 48% of the total revenues in the quarter (46% in Q4 last year). The change in business model for Autodesk license sales means that the percentage of recurring revenues will continue to increase in coming years. We present in the diagram below the recurring revenue as a percentage of the trailing 12 month revenue (T12M). Revenue stability continues to rise Recurring revenue T12M 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 50% 48% 46% 44% 42% 40% 38% 36% T12M Net sale % recurring rev (T12M) Source: Redeye Research 4
Norway weakness or opportunity? A repeated discussion in Addnodes latest quarterly reports is the effect from the oil price drop on the Norwegian economy. About 22% of Norway s GDP constitutes from the oil and gas sector and the significant decline in the oil price effect the Norwegian economy as a whole. During 2014 about 35% of Design Management s revenue was generated in Norway. For 2015, we estimate that the number is closer to 30%. In total, we estimate that about 13% of the Groups revenue is exposed to the Norwegian economy. Symetri (UK also effected by the oil price drop) stands for about 5% of the group s revenue. Revenue in Norway Year 2011 2012 2013 2014 2015 Design Management total 515 573 650 781 828 Norway % 23% 26% 33% 35% 31% Revenue Norway 118 149 214 273 257 Part of Group total 9% 11% 15% 17% 13% Source: Addnode Group & Redeye Research The oil price, of course, has an effect on the GDP growth in Norway. But despite seeing a price drop of almost astonishing -49% during 2015 the real GDP grew by approximately 1.2%. According to consensus forecasts compiled by Bloomberg, the price of oil is expected to increase gradually and reach about 55 dollars per barrel in 2017. OECD on the same time expects that the GDP growth to recover in 2016 and 2017 as non-oil investment picks up in response to higher exports and some new oil investment projects start up. OECD expect that accommodative macroeconomic policies will also sustain the aggregate demand. Brent Oil price & GDP growth Norway Year 2011 2012 2013 2014 2015 Current 2016E 2017E Oil price 107 111 111 105 57 31 42 55 Change 13% 4% 0% -5% -46% -46% -27% 31% GDP growth 1.0% 2.7% 0.7% 2.2% 1.2% 1.1% 1.9% Source: OECD, Bloomberg & Redeye Research Despite a low oil price (in relation to the price levels we have seen the last few years) the Norwegian economy is still expected to grow, but at a slower pace. We expect the business environment to continue being harsh, but that Addnode will endure and have the opportunity to advance their positions in the market as smaller players cannot adapt to the somewhat tougher business climate. Here lies a clear opportunity for a larger player such as Addnode. We find that the economic risk for Addnode due to the Norwegian exposure as relatively limited on a group level. 5
Design Management As discussed in earlier published analysis reports (included as an appendix in this analysis) the sales of Autodesk licenses will gradually shift to a new subscription-based model, and as of 1 August 2016 Autodesk licenses will be sold only on subscription. In the long term, this change will lead to a greater proportion of recurring revenues for Addnode, which also increases the revenue stability of the company, and in our opinion also the revenues for the same volume of business (higher margins). The underlying volume of business does not decrease (the need still exists), but the transition will entail a negative impact on net sales, earnings and cash flow for CAD-Q. Addnode believes that earnings in 2016 will be negatively affected by approximately SEK -15 million (compared with previous internal forecasts). By 2019, Addnode expects earnings from Autodesk products to be on the same level as before the change. Design management 2015 2016e SEKm Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e 2015 2016e 2017e 2018e Revenue 229 184 162 254 224 193 133 198 828 747 723 795 grwth 11.6% 11.4% -10.4% 10.1% -2.0% 5.0% -18.0% -22.0% 6.0% -9.7% -3.3% 10.0% EBITA 17 11 13 25 15 14 7 10 66 46 53 80 Margin 7.4% 5.8% 8.1% 9.9% 6.5% 7.5% 5.0% 5.0% 7.9% 6.1% 7.3% 10.1% Source: Redeye We expect to see the largest drop in sales levels from H2 2016 and onwards. During 2016 we see likely revenue in the region of 747 MSEK. We also expect to see a margin decline as it takes time to adjust the cost structure to the new sales model. We expect that the tough business climate in Norway will continue to be harsh but the effects for Addnode as limited. Finland and Denmark will most likely continue to be challenging and the Swedish market is expected to be strong during 2016. In total, the result will mostly be affected by the change in the sales model of Autodesk licenses. So a reader can understand how the different regions affect the sales levels we present a chart ring below consisting of the country mix during 2014 within Design Management. The numbers for 2015 haven t been published yet, but we expect to see a significant increase in other markets (Transcat) and in Sweden as the market have been strong. Design Mang. - Country mix during 2014 Others 8% Denmark 6% Finland 17% Norway 35% Sweden 34% Source: Addnode Group 6
PLM TechniaTranscat continues to deliver As discussed earlier TechniaTranscat continues to deliver strong results. The reported sales levels was a little below our estimates but the EBITAmargin beat our forecast. Addnode state that they can already see synergies between the companies, which is slightly earlier than we had anticipated. Product Lifecycle 2015 2016e SEKm Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e 2015 2016e 2017e 2018e Revenue 59 62 187 205 184 190 201 221 513 795 850 906 grwth -5% -9% 227% 171% 210% 205% 8% 8% 94% 55% 7% 7% EBITA 6 4 16 28 16 18 20 29 53 82 94 109 Margin 9,5% 5,6% 8,5% 13,5% 8,5% 9,5% 10,0% 13,0% 10,3% 10,4% 11,0% 12,0% Source: Redeye We have adjusted our margin estimates slightly upwards because of the outperformance to our estimates (during 2 quarters) and early indications of synergies between Technia and Transcat. In the long-term (3-5 years) we expect that the margin will slowly rise to the region of 12-14% (for the fullyear) as the company increasingly sells proprietary products to old (and new) Transcat customers. Process Management and Content Management For Process Management the reported EBITA-margin was below our estimates. Q4 is usually the strongest quarter both regarding revenue and margin levels. We find the most reasonable explanation for the relatively low margin as quarterly fluctuations and possible that the exceptionally strong Q3 affected the Q4 negatively. We are not concerned about the quarterly margin fluctuations and expect margin levels in the region of historical levels going onwards. Process management 2015 2016e SEKm Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e 2015 2016e 2017e 2018e Revenue 111 109 93 128 117 114 97 134 440 461 482 504 grwth 0,6% 1,8% 2,8% 2,1% 5% 5% 5% 4,8% 1,8% 4,8% 4,5% 4,5% EBITA 16 15 18 21 16 16 16 25 70 74 77 81 Margin 13,9% 13,8% 19,7% 16,7% 14,0% 14,0% 17,0% 19,0% 15,9% 16,1% 16,0% 16,0% Source: Redeye Content Management continues to improve, both sales and earnings were in line with our forecasts. Cost efficiency continues to improve, and going onwards we find it likely that the company continue to focus on costs rather than growth. We see a gradual improvement to around 7% EBITA-margin by 2018 with an average growth of around 2%. Content management 2015 2016e SEKm Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e 2015 2016e 2017e 2018e Revenue 37 37 29 36 38 38 30 37 140 143 146 148 grwth -1,3% 0,0% -5,5% 0,3% 2,0% 2,0% 2,0% 2,0% -1,5% 2,0% 2,0% 2,0% EBITA 2,5 2,3 1,5 2,3 1,9 2 2 3 8,6 9,1 10,2 10,4 Margin 6,7% 6,2% 5,1% 6,4% 5,0% 6,2% 6,5% 8,0% 6,1% 6,4% 7,0% 7,0% Source: Redeye 7
Forecasts for the group and estimate changes Two factors will have the largest impact on the sales growth levels in the coming years; 1. The Transcat acquisition increases the growth rate during 2016 as the company will be consolidated during the full year and not only two quarters as in 2015. 2. The transition to a subscriber based sales model in CAD-Q (Design Management) will decrease the sales levels during H2 2016 and 2017 but also increase the growth rate during 2018 as the recurring revenue starts to kick-in. We expect sales growth of 12% in 2016, 2.6% during 2017 and 7% for 2017. The margin levels will also be affected by the aforementioned change. We expect an EBITA-margin for 2016 of 6.6%, 5.6% during 2017 and 5.4% in 2018. Our forecasts are based primarily on organic growth, even though Addnode has completed some 40 acquisitions over the past 10 years. Addnode Group 2015 2016e SEKm Q1 Q2 Q3 Q4 Q1e Q2e Q3e Q4e 2015 2016e 2017e 2018e Revenue 432 387 467 614 558 530 456 585 1901 2129 2184 2336 grwth 5,0% 4,3% 31,8% 33,2% 29,2% 36,9% -2,4% -4,8% 18,9% 12,0% 2,6% 7,0% EBITA 34 23 42 70 36 41 35 56 168 168 191 232 Margin 7,8% 5,8% 9,0% 11,3% 6,5% 7,7% 7,7% 9,6% 8,8% 6,6% 5,6% 5,4% Source: Redeye Below is a summary of our estimate changes. The primary factor behind our estimate revision is, as mentioned before, the change in the sales model of Autodesk licenses effecting Design Management. Estimate revisions MSEK 2016E 2017E Revenues Old 2 140 2 259 New 2 129 2 184 % change -0.5% -3.3% EBITA Old 186 220 New 168 191 % change -9% -13% EBITA margin Old 8.7% 9.7% New 7.9% 8.7% EPS Old 3.27 3.63 New 3.22 3.08 % change -2% -15% Source Redeye Research 8
Valuation DCF valuation We value Addnode using a DCF-model. Our required rate of return is 9.2%, and is based on Redeye's rating model. We expect long-term average growth of 8.2 % during the period 2016-2025, and an average EBITA-margin of 10.2%. We assume a terminal growth rate of 3% and an EBIT-margin of 7.5% in the maturity phase, which is equivalent to an exit EV/EBITA multiple of around 8x. We reiterate our Fair value, in a Base-case, at 60 SEK per share. Our fair value estimate indicates a potential of around 11% given the current share price. Our Fair value estimate of 60 SEK per share Addnode Group valuation assumptions, Base-case Assumptions: 2016-25 (09-14) DCF value CAGR Sales 8.2% 8.5% WACC 9.2% EBITA margin (avg.) 10.2% 9.6% PV av FCF 599 ROIC (avg.) 15.2% 12.6% PV av Terminal Value 1 245 ROE (avg.) 14.0% 11.4% EV 1 844 Terminal Net debt -7 Terminal growth of FCF 3.0% Dividend 0 EBIT margin (terminal) 7.5% DCF-value 1 837 EV/SALES exit multiple 0.8x Fair value per share 60 EV/EBITA exit multiple 8.0x Todays stock price 54.5 Potential/Risk 11% Source: Redeye Research Catalysts for value creation For the share and the valuation to gain further, the company will have to demonstrate that it can make more acquisitions, preferably of a slightly larger nature, like the Transcat acquisition. We believe that acquisitions that can help generate further growth, either in new markets, new segments or strengthening their already strong competitive position, which could lead to an upward revaluation of the share and possibly will result in us raising our estimates. We regard continued consolidation of the market in the UK and Germany as highly likely, and we are optimistic about further acquisitions in a new European country. 9
Relative valuation We believe that a premium valuation of Addnode is justified since the company has a greater proportion of recurring revenues than other comparable companies, which means we assess the risk in its revenues as lower. In a comparative perspective, we see some upside from current valuation levels. A premium valuation is justified according to us Addnode is increasingly beginning to resemble a software company, which in itself would justify further multiple expansion towards the level at which a company like Vitec Software is traded. That said, Vitec's high margins probably justify a higher valuation. Peer valuation Price MCAP EV EV/Sales EV/EBITDA P/E EBITDA % Sales CAGR (SEK) MSEK Company 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2015-2017 HIQ INTERNATIONAL AB 45.9 2475 2292 1.5x 1.5x 11.4x 10.8x 15.5x 14.6x 13% 6% VITEC SOFTWARE 58.5 1720 2109 2.6x 2.6x 9.5x 9.0x 20.5x 19.1x 28% 4% ACANDO AB 15.3 1597 1667 0.7x 0.7x 7.7x 7.0x 10.6x 9.3x 9% 4% KNOW IT AB 54.25 998 1282 0.4x 0.4x 5.2x 5.0x 8.3x 7.7x 8% 4% SEMCON AB 37 670 816 0.3x 0.2x 4.8x 4.2x 7.4x 6.4x 5% 3% AVEGA GROUP 21.2 240 235 0.5x 0.5x 5.7x 5.9x 7.4x 8.0x 10% 3% PREVAS AB 12.45 127 186 0.2x 0.2x 6.0x 4.2x 21.1x 9.7x 3% 2% Aggregerad Peer grupp 7 827 8 588 0.7x 0.7x 7.8x 7.3x 12.1x 11.1x 9% 4% Median 998 1 282 0.5x 0.5x 6.0x 5.9x 10.6x 9.3x 9% 4% ADDNODE 54.50 1 658 1 611 0.8x 0.7x 7.9x 7.0x 15.1x 13.5x 10% 9% Källa: Redeye Research, * Bloomberg 10
Fair value estimate of 75 SEK per share in our Bullcase Scenario valuation & Fair value range Bull Case valuation In our Bull Case, we assume that we have underestimated the market potential of several of Addnode's business areas. Addnode succeeds in getting its own solutions distributed outside the Nordic region while taking an even greater hold on the Nordic markets. In the Bull Case, we anticipate higher sales growth, averaging 9% going forward, and a long-term EBITA margin of 11%. Our fair value estimate in a Bull Case amounts to SEK 75 per share, indicating a potential of 38% above the current share price. Fair value estimate of 24 SEK per share in our Bear-case Bear Case valuation In our Bear Case, we assume further softening of the economy, which would primarily affect two of Addnode Group's business areas negatively since these are relatively dependent on the industrial and construction sectors. In the Bear Case, we anticipate falling growth over a protracted period and a long-term EBITA margin of around 7%. Our fair value estimate in a Bear Case amounts to SEK 24 per share, which is around 59% below the current share price. Addnode Group: Fair value range 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 Last price 54.5 Bear-case: 24 0 10 20 30 40 50 Base-case: 60 60 70 Bull-case: 80 75 90 We estimate a Fair value range from 24-75 SEK per share with a Base-case at 60 SEK per share. Our Fair value range and the current share price indicate a relatively neutral risk reward situation. 11
CAGR 2015-24 WACC WACC Addnode Group Sensitivity analysis It is always good to perform a sensitivity analysis on the assumptions that form the basis of a DCF-model. A sensitivity analysis can also show which approximate fundamental assumptions are factored into the current share price. Fair value estimate CAGR-Sales 2016-25 7.0% 7.6% 8.2% 8.8% 9.4% 60-4% -2% 0% +2% +4% 7% 84 89 94 100 106 8% 66 70 74 78 83 9% 54 57 60 64 67 10% 46 48 51 53 56 11% 39 41 43 45 48 Källa: Redeye Research The valuation is obviously sensitive to assumptions of the WACC and sales growth. These assumptions are varied in this sensitivity analysis. We can see that an increase in sales growth during the years 2016-25 has a relatively small impact on the valuation, and an increase in the CAGR to 10% during this period would indicate a fair value of approximately SEK 67 per share. WACC impacts the valuation very sharply, and assuming a WACC of 7-8% would indicate a fair value estimate of SEK 74-94 per share. Fair value estimate EBITA margin avg. (2016-2025) 60 9.3% -1% 9.7% -1% 10.2% 0% 10.6% +1% 11.1% +1% 7% 90 92 94 97 99 8% 70 72 74 76 78 9% 56 58 60 63 65 10% 47 49 51 53 55 11% 39 41 43 45 47 Källa: Redeye Research The valuation is more sensitive to changes in sustained profitability. Increasing our margin assumptions by 1 percentage point would indicate a fair value estimate of nearly SEK 65. Fair value estimate EBITA margin avg. (2016-2025) 9.3% 9.7% 10.2% 10.6% 11.1% 60-1% -1% 0% +1% +1% 7.0% -4% 50 52 54 56 58 7.6% -2% 53 55 57 59 61 8.2% 0% 56 58 60 63 65 8.8% 2% 59 61 64 66 68 9.4% 4% 63 65 67 69 72 Källa: Redeye Research 12
We find that a sustained margin of around 9.4% and a CAGR of around 8% are factored into the current levels. There is presently little potential for mishap at the company, in our assessment. Investment case Addnode Group differs fairly substantially from the traditional IT consulting companies in that it often builds its business around both proprietary software and third-party software. This means that the company has a higher proportion of recurring revenues than other consulting firms on the stock exchange. It is precisely these qualities that make us believe the company should be valued at a higher premium compared to its industry peers, and that it should be valued more in line with software companies. A repositioning of Addnode Group from a consultancy to being more comparable with a software company should be able to drive the valuation of the company going forward. Addnode Group has long been one of our favorites in the IT consulting sector. The company is one of the few IT consultants that has successfully managed to grow through acquisitions, which is an important feature since most IT consulting firms have found it difficult to grow organically in recent years. With its four different business areas, the company has managed to identify interesting niches. It has taken a leading Nordic position in most of these niche markets, and this is the company's ambition for all of its business areas. This strategy has now been expanded to other north European markets. The group have already expanded to the UK and now, also, Germany. The four different business areas also contribute to a good spread of risk at Addnode. We believe the company will have good opportunities for growth in the coming years. Addnode Group has also been on a growth track in both the UK and Germany for some time, which means there is very exciting potential for the long-term growth of the company. 13
Appendix: Changed sales model New business model for CAD-Q Addnode Group After the end of Q3, Addnode announced that its subsidiary in Design Management, CAD-Q, will be affected by a change in the business model for Autodesk. Sales of Autodesk licenses will gradually shift to a new subscription-based model, and as of 1 August 2016 Autodesk licenses will be sold only on subscription. In the long term, this change will lead to a greater proportion of recurring revenues for Addnode, which also increases the revenue stability of the company, and in our opinion also the revenues for the same volume of business (higher margins). The underlying volume of business does not decrease (the need still exists), but the transition will entail a negative impact on net sales, earnings and cash flow for CAD-Q. Addnode believes that earnings in 2016 will be negatively affected by approximately SEK -15 million (compared with previous internal forecasts). By 2019, Addnode expects earnings from Autodesk products to be on the same level as before the change. The result is expected to be on the same levels as before the changed business model, by the year 2019 To assess the effect of this change, we must first get an idea of what proportion of Design Management's revenues come from Autodesk licenses, and their profitability. According to the company's annual report, software accounted for 22 percent of revenues (for Design Management) in 2014. Total revenues for the business area amounted to SEK 780 million, so 22 percent of this would equal approximately SEK 172 million. Revenue mix, Design Management 2014 2% 18% 22% 58% Support & Maintenance Software Services Other Source: Addnode Group Revenues are distributed between CAD-Q, Joint Collaboration and a small proportion in Symetri. According to the official company accounts, Joint Collaboration has sales amounting to NOK 108 million and EBITA of almost NOK 14.8 million in 2014. We estimate that CAD-Q had net sales of approximately SEK 630 million with EBITA of SEK 51 million in 2014. If the revenue mix for the entire business area (Design Management) is also 14
Net sale & EBITA (MSEK) Margin (%) Addnode Group representative of CAD-Q's mix, we estimate that it sold software for approximately SEK 140 million in 2014. We estimate that about SEK 110 million of this was generated from the sale of Autodesk licenses. We find it likely that the subscription based model will generate higher margins Addnode says that, by 2019, revenues will be back at about the same level as before the change. We interpret this to mean that the price of a one-year subscription represents about 30 percent of the current license cost. Addnode also predicts that the change will lead to an earnings drop of approximately SEK 15 million next year. We estimate that sales of Autodesk licenses will be approximately SEK 33 million in 2016, which is a decline of close to 70 percent (about SEK 77 million) from 2015. Management expects the total decline in earnings, including cost reductions, to approximately SEK 16 million. In the long term, we believe that CAD-Q will have a higher margin on subscription-based license sales since the sales force is likely to be smaller and more autonomous. In the graph below we illustrate how the sales and margin levels will be affected by the new sales model. Illustrative example of Autodesk sales and EBITA at CAD-Q 140 120 100 80 20% 15% 10% 60 40 20 0-20 2015 2016E 2017E 2018E 2019E 5% 0% -5% -10% Net sale CAD-Q (Autodesk prod.) EBITA (Autodesk prod.) EBITA margin Source: Estimates of Redeye Research 15
Summary Redeye Rating The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points. Management 9.0p Rating changes in the report No changes in the rating. Addnode Group has a highly experienced and motivated management. CEO Staffan Hanstorp is the founder of one of the company's subsidiaries and major shareholder in Addnode Group. Management has, one of the few consulting firms, have been successful in growing through careful acquisitions. Ownership 9.0p The company has a very strong shareholder structure with a combination of successful entrepreneurs who are also active major shareholders and institutional investors. All board members own shares in excess of directors' fees, which we also see as positive. Profit outlook 5.0p Profitability 7.0p Addnode Group has a relatively weak organic growth prospects and mainly grown by making smart add-on acquisitions that complement the existing business areas. A higher organic growth would justify a higher rating, but as the IT consulting market looks like, it does not seem likely as the market is relatively mature and saturated. We believe that Addnode in the future will continue to make acquisitions to grow. At the same time, the company must be commended because they are good at adapting the operations to the market conditions prevailing which results in a relatively strong operating margin. Addnode Group is unlike many of the other IT consulting companies, with a relatively large share of 50% own products and solutions, thus increasing the profitability of the company. Another advantage is that they can also create recurring revenue, which provides stability to the company and strengthen profitability as they increases. Cash flow in the company has been strong in recent years. Financial strength 7.0p Addnode Group is a company that is dependent on the economy, not least industrial. Company has a strong balance sheet and has good opportunities to continue to grow through acquisitions. Historically, the company had a net cash position but it is about to change as the company continues to grow through acquisitions. We believe that the company's balance sheet can handle a certain leverage thanks to its strong cash flows and recurring revenues. 16
Income statement 2014 2015 2016E 2017E 2018E Net sales 1,599 1,599 2,129 2,184 2,336 Total operating costs -1,427-1,414-1,945-1,963-2,064 EBITDA 171 184 184 220 271 Depreciation -12-14 -16-16 -21 Amortization -65-42 -48-62 -68 Impairment charges 34 0 0 0 0 EBIT 129 129 120 143 182 Share in profits 0 0 0 0 0 Net financial items 1-1 0 0 0 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 130 127 120 143 182 Tax -30-29 -26-31 -40 Net earnings 100 98 94 111 142 Balance 2014 2015 2016E 2017E 2018E Assets Current assets Cash in banks 72 103 151 113 117 Receivables 547 662 745 721 794 Inventories 1 1 0 0 0 Other current assets 0 0 0 0 0 Current assets 620 766 896 833 911 Fixed assets Tangible assets 27 35 46 47 51 Associated comp. 0 0 0 0 0 Investments 35 30 30 30 30 Goodwill 739 889 889 889 889 Cap. exp. for dev. 0 0 0 0 0 O intangible rights 136 172 229 262 280 O non-current assets 0 0 0 0 0 Total fixed assets 937 1,125 1,194 1,228 1,250 Deferred tax assets 0 0 0 0 0 Total (assets) 1,557 1,891 2,090 2,062 2,161 Liabilities Current liabilities Short-term debt 0 0 0 0 49 Accounts payable 0 0 0 0 0 O current liabilities 631 872 958 917 934 Current liabilities 631 872 958 917 983 Long-term debt 0 0 90 70 50 O long-term liabilities 54 102 104 106 108 Convertibles 0 0 0 0 0 Total Liabilities 684 975 1,152 1,093 1,142 Deferred tax liab 0 0 0 0 0 Provisions 0 0 0 0 0 Shareholders' equity 873 917 937 968 1,019 Minority interest (BS) 0 0 0 0 0 Minority & equity 873 917 937 968 1,019 Total liab & SE 1,557 1,891 2,090 2,062 2,161 Free cash flow 2014 2015 2016E 2017E 2018E Net sales 1,599 1,599 2,129 2,184 2,336 Total operating costs -1,427-1,414-1,945-1,963-2,064 Depreciations total -43-56 -64-78 -89 EBIT 129 129 120 143 182 Taxes on EBIT -40-29 -26-31 -40 NOPLAT 99 99 94 111 142 Depreciation 43 56 64 78 89 Gross cash flow 142 155 158 189 231 Change in WC -19 126 3-16 -56 Gross CAPEX -42-244 -133-112 -111 Free cash flow 81 37 29 61 64 DCF valuation Cash flow, MSEK WACC (%) 9.2 % NPV FCF (2015-2017) 89 NPV FCF (2018-2024) 490 NPV FCF (2025-) 1266 Non-operating assets 103 Net debt -7 Fair value estimate MSEK 1838 Assumptions 2015-2021 (%) Average sales growth 6.0 % Fair value e. per share, SEK 60 EBIT margin 7.3 % Share price, SEK 56.0 Profitability 2014 2015 2016E 2017E 2018E ROE 12% 11% 10% 12% 14% ROCE 14% 14% 12% 14% 17% ROIC 13% 12% 12% 13% 15% EBITDA margin 11% 12% 9% 10% 12% EBIT margin 8% 8% 6% 7% 8% Net margin 6% 6% 4% 5% 6% Data per share 2014 2015 2016E 2017E 2018E EPS 3.39 3.22 3.08 3.66 4.67 EPS adj 1.32 3.22 3.08 3.66 4.67 Dividend 2.25 2.40 2.65 3.00 3.20 Net debt -2.45-3.38-1.99-1.41-0.59 Total shares 29.60 30.43 30.43 30.43 30.43 Valuation 2014 2015 2016E 2017E 2018E EV 1,292.2 1,646.7 1,673.8 1,691.6 1,716.5 P/E 18.6 17.9 18.5 15.6 12.2 P/E diluted 18.6 17.9 18.5 15.6 12.2 P/Sales 0.9 1.1 0.8 0.8 0.7 EV/Sales 0.8 1.0 0.8 0.8 0.7 EV/EBITDA 7.5 8.9 9.1 7.7 6.3 EV/EBIT 10.1 12.8 13.9 11.9 9.4 P/BV 1.6 1.9 1.9 1.8 1.7 Share performance Growth/year 13/15e 1 month -5.4 % Net sales 15.4 % 3 month -3.0 % Operating profit adj -3.3 % 12 month 14.7 % EPS, just 52.7 % Since start of the year -6.9 % Equity 3.6 % Shareholder structure % Capital Votes Vidinova AB 27.2 % 25.0 % Aretro Capital 24.0 % 12.9 % Lannebo Fonder 5.8 % 7.6 % Swedbank Robur Fonder 5.4 % 7.0 % SHB Fonder 3.5 % 4.7 % Avanza Pension F rs kring 3.0 % 3.9 % Diener & Gerge fonder 2.5 % 3.3 % Fj rde AP-fonden 2.1 % 2.7 % E. hman J:or Fonder 1.7 % 2.2 % Multiple Choice F retagsservice 1.7 % 0.3 % Share information Reuters code ANODb.ST List Small Cap Share price 57.0 Total shares, million 30.4 Market Cap, MSEK 1734.4 Management & board CEO CFO IR Chairman Financial information Staffan Hanstorp Johan Andersson Sofie Abrahamsson Sigrun Hjelmquist Capital structure 2014 2015 2016E 2017E 2018E Equity ratio 56% 48% 45% 47% 47% Debt/equity ratio 0% 0% 10% 7% 10% Net debt -72-103 -61-43 -18 Capital employed 800 814 877 925 1,001 Capital turnover rate 1.0 0.8 1.0 1.1 1.1 Analysts Kristoffer Lindstr kristoffer.lindstrom@redeye.se Redeye AB Mäster Samuelsgatan 42, 10tr 111 57 Stockholm Growth 2014 2015 2016E 2017E 2018E Sales growth 11% 0% 33% 3% 7% EPS growth (adj) 1% 30% -4% 19% 28% 17
Revenue & Growth (%) EBIT (adjusted) & Margin (%) 2500 2000 1500 1000 500 0 2013 2014 2015 2016E 2017E 2018E 35,0% 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% 200 180 160 140 120 100 80 60 40 20 0 2013 2014 2015 2016E 2017E 2018E 9,0% 8,0% 7,0% 6,0% 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% Net sales Net sales growth EBIT adj EBIT margin Earnings per share Equity & debt-equity ratio (%) 5 5 0,6 12,0% 4 3 2 1 4 3 2 1 0,5 0,4 0,3 0,2 0,1 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% 0 2013 2014 2015 2016E 2017E 2018E 0 0 2013 2014 2015 2016E 2017E 2018E -2,0% EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio Sales division Geographical areas Conflict of interests Kristoffer. Lindström. owns shares in the company Addnode: No Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this. Company description AddNode r en nordisk IT-koncern som erbjuder bransch- och teknologispecifika IT-l sningar som effektiviserar och utvecklar kundernas aff rsverksamheter. Bolaget r organiserat i fyra aff rsomr den uppdelade p Design Management, Product Lifecycle Management, Process Management och Content Management. Aff rsmodellen r kortfattat en kombination av tj nster, programvara och support- och underh llavtal. It-l sningarna baseras ofta p ink pta och delvis modifierade programvaror men ven p egenutvecklade programvaror. 18
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