Sales grew by 10% y/y and was slightly lower than we expected, largely due to lower Deliveries. Public DK, which had a strong Q3 2021, was negatively impacted by a larger TAS release and work related to the won tender from The Danish Board of Agriculture (more about the deal later in the Update), which lowered the number of hours available for consulting. On the other hand, the Deliveries in Public SE continue to increase y/y, like in Q2 2022, indicating that the reorganization is paying off. Thus, we believe there will be a normalization in Q4 2022 driven by a rebound in Denmark and a continuation of the solid trend in Sweden.

Following somewhat higher OPEX relative to our forecasts and the lower Deliveries, EBIT came in at SEK6.2m compared to our forecast of SEK9.7m. However, considering Formpipe’s current growth-focused phase, we believe whether EBIT is SEK6m or SEK10m is largely irrelevant. Instead, we argue that the lower ACV makes the quarter somewhat soft. Also, as recent investments gradually pay off, management expects gradually increasing margins over the coming quarters. However, considering that we expect low licenses in Q4 and as margins in Q3 are seasonally strong due to vacations, we expect a sequential decline in the EBIT margin, followed by gradual improvements in 2023 and beyond.

The total ACV of SEK6.2m (9.8) came short of our estimate of SEK9.5m. While Private and SaaS were decent, S&M and Public SE had a softer quarter. As the two recent Q3s (2020, 2021) have had rather solid S&M ACV (mainly concerning the public segments), we likely underestimated the seasonality effect, as Q3 typically is a softer quarter. Regarding Private, the MSFT Dynamics-related offering sees strong demand in every market. In contrast, postponed investment decisions negatively affected the Temenos-related offering to banks, likely due to fears of a weaker economic environment.

The deal in short: “The agreement runs over four years with options to extend with additional three years, and the order value amounts to a minimum of DKK 7 million in the form of a yearly recurring fee to Formpipe for system management and maintenance. Including additional fees for development and adaptations of existing solutions, the order value is estimated to amount to a total of DKK 200-250 million, of which an estimated 40 percent pertains to Formpipe's services”.

While the deal likely has rather low margins, we expect the order to contribute positively to earnings. Also, the deal provides an opportunity for upselling to The Danish Board of Agriculture. As this is a current Formpipe customer, we do not increase our forecasts based on this deal. The deal is won together with a large international consulting firm, which will gain knowledge about TAP through the deal. While not included in any of our Cases, the collaboration could result in further TAP deals going forward.

As always with public tenders: “The agreement is subject to the usual standstill period within the framework of the rules that apply in a public procurement, which means that it may be appealed. The standstill period runs until October 31 2022. Formpipe will notify the market if anything material in the agreement changes or if the agreement is appealed.”

We leave our forecasts for 2022e largely unchanged. The changes are mainly due to the lower outcome in Q3 than we expected. Regarding 2023E, we make modest downward revisions of sales and OPEX, where positive FX effects compensate for the somewhat lowered organic ACV assumptions. The net effect on EBIT and EPS is close to zero.

We leave our long-term forecasts largely unchanged and expect Formpipe’s growth investments to pay off in terms of sales and margins gradually. We assume Formpipe will hit almost 20% in EBIT in 2025.

We lower our Base Case to SEK33 from 38, due to lowered short-term forecasts and an increased risk-free rate from 2% to 2.5%.

While Formpipe does not look very attractive on EV/EBIT multiples 2022-2023, as Formpipe focuses on growth, investors should focus on EV/Sales. We believe the combination of a rather low EV/sales, decent sales growth potential, and solid margin expansion potential make Formpipe interesting. The 2024 EV/EBIT of 13x gives a hint where the expected margin improvement and decent sales growth make with the EV/EBIT valuation. Also, considering that we believe Formpipe can reach an EBIT margin of almost 20% in 2025, the current EV/S of 2.6x, is arguable attractive given the company reaches our forecasts or its 20% EBIT margin target.