Sales beat our forecast by 14% due to slightly higher organic growth and a higher contribution from M&A. Organic growth was 13%, and our forecast was 10%. The main reason for the deviation was Design Management growing organically by an impressive 22%. The market was especially strong regarding the Autodesk-related offering in the UK and US, likely partly due to a catch-up in demand following the pandemic. The share of three-year licenses remained largely in line with last year for the full year 2022, suggesting there is no significant growth boost from three-year deals. Also, the proprietary offerings in SWG and Tribia continue to do well. PLM and Process had slightly higher growth than we expected.

EBITA and EPS largely matched our forecasts, following a slightly lower EBITA margin than anticipated. While Design Management combined its strong growth with a strong margin, resulting in an EBITA beating our forecast by 24%, Process and especially PLM had lower margins than forecasted.

PLM grew by 6% organically, and the German market’s development has been stronger than anticipated. In Q3, management saw some early signs of weakness which did not materialize. While 9.7% is a healthy margin level for PLM, we expected a higher level considering its recently strong margin momentum. Management mentions a few factors behind the declining margin y/y: first, with more recurring revenue and fewer licenses, the traditional seasonality with a strong Q4 is gradually fading. Second, acquisitions with somewhat lower margins joined the numbers. There is ongoing integration work to improve the margin. Third, the internal efficiency was not as solid as in recent quarters.

Process grew by 8% organically and continued its solid organic growth streak. However, the margin came in somewhat below our expectations. Like regarding PLM, 17.9% is a solid level, but considering its recent track record, we expected a higher level. According to management, recruiting new personnel to fuel the strong organic growth has negatively impacted margins.

In early 2023 Addnode acquired FAST2, a supplier of EPR software for real estate companies. The software has nine out of 13 of Sweden's largest public housing companies and will add cSEK80m in sales. By acquiring FAST2, the proprietary offerings in Design Management (SWG, Tribia and now FAST2) generates cSEK500m in yearly sales. While SWG and Tribia have margins above the Design Management average, management states that FAST2 currently operates at lower levels with the potential for increases going forward.

Assuming a purchasing multiple in line with what Addnode typically pays for a proprietary software company (c7-9x EBITA), we are positive towards the acquisition. This is as Addnode strengthens its proprietary offering towards real estate owners.

Addnode’s R12m acquisition activity remains high, mostly due to the large acquisition of Microdesk in March last year. As usual, we expect additional acquisitions and assume that Addnode will add SEK600m in sales from M&A during 2023 on a full-year basis.

We raise our sales growth assumptions slightly for all three Divisions, particularly for Design Management. However, the rise is partly offset by slightly lowered margin assumptions in PLM and Process Management for both 2023 and 2024, as recent quarters’ levels probably have been somewhat above a reasonable long-term average. Also, both sales and EBITA in Design Management get a slight boost from the acquisition of FAST2, consolidated from January 2023.

All in all, we forecast somewhat higher sales growth, partly due to a strong economic outlook, although we still expect organic growth below 2022’s impressive 13%. For 2023, we expect c3%. But due to lowered margin assumptions, we raise our EBITA and EPS estimates by c1-2%.

We raise our Base Case slightly to SEK105 (100) following somewhat raised forecasts.

Addnode’s valuation of 22x EBIT for 2024e is in line the average SaaS business in our peer list. Addnode has a relatively low share of SaaS revenues versus these peers. On the other hand, the group does have a very successful acquisitions record, and when looking at EV/EBITA excluding capitalization, which we believe is the most accurate multiple for Addnode, it is trading at 20x for 2024e. Also, we believe the estimate uncertainty is lower in Addnode compared to many other of the companies in the list, where analysts expect significant margin improvement. Addnode is trading at a discount to Vitec, another successful software-focused M&A compounder. However, Vitec has solely proprietary software, indicating the potential in Addnode as its proprietary solutions grow. Note the forecasts for Addnode are Redeye’s and include future M&A.

From an EV/Sales versus sales growth and margins perspective, Addnode stands out as attractive versus the other larger companies. However, Addnode’s high share of third-party software and services, which limits its margin potential, likely holds its valuation back. Also, the forecasts include future M&A. On the other hand, the smaller, often unprofitable, and more “pure” software companies trading at an EV/Sales in line with Addnode are often followed by only a single or a few analysts. Thus, considering companies with a long track record of profitable growth, Addnode’s valuation stands out, at least partly justified by its business model with a high share of third-party software and services.

Compared with the successful traditional M&A-compounders, at 20x EBITA excluding capitalization for 2024e, Addnode is trading in line with the serial acquirers.