Sales beat our forecasts by 20% following strong growth in acquired companies. Organic growth was 5.5%, and while Healthcare had 18% organic growth, Lab had -12% as it reduced its low-margin sales. Thus, the underlying organic growth was solid in the quarter. The adjusted EBITA margin was 26.8% (12.3), significantly beating our forecast of 16.2%. Acquisitions and strong development in the Healthcare segment was the main drivers behind the improvement.

Sales in Healthcare came in 37% higher than expected, and ADDvise’s US-based pharma companies contributed to the strong growth. The Healthcare segment had a strong Q4 also margin-wise, hitting 29.3% (13.7%) on the EBITDA level. While acquisitions contributed to the great margin improvement, the organic development was also solid. Although the robust organic order intake growth of 23% in Q4 suggests that the Healthcare segment’s momentum will continue in 2023, we expect the margin to normalize to somewhat lower levels.

Sales in Lab was 24% below our forecast following a 12% decline in sales y/y. However, the EBITDA margin and EBITDA increased to 17.1% (10.9) and SEK9.5m (6.9) as the Lab segment focused on improving its product mix, which seems to have worked well so far.

In conjunction with the report, ADDvise announced pro forma targets for the end of 2023.

That is roughly in line with our 2024 forecast of SEK1.5bn in sales and an EBITDA of SEK349m, which includes SEK125m in sales and SEK22m in EBITDA from future acquisitions. Thus, we believe that is a reasonable target that partly depends on how much sales and EBITDA ADDvise acquires during 2023. However, considering that M&A likely will play a role in reaching the target, we would prefer a target focusing on sales and EBITDA per share.

The long-term financial targets for ADDvise Group remain unchanged.

Since our last Update (Nov 7), ADDvise has had a strong inflow of large orders. Although smaller orders constitute the bulk of ADDvise’s business, the company has added SEK171m in large orders since November compared to SEKc50m in the same period last year. While Poly Pharmaceuticals joined the group on 2022-01-01, the underlying intake of large orders has most likely improved.

Also, the total order intake increased organically by 7.7% in Q4 and 9.6% for the full-year 2022. Thus, the momentum for larger and smaller orders has been strong, implying a high likelihood for solid organic growth in H1 2023.

ADDvise has announced two new letters of intent to acquirer since our last Update, Diabetic Supplies, Reina Imaging, which we discuss below. On an R12m basis, ADDvise has added about SEK 460m in sales from acquisitions, corresponding to about 64% in sales growth contribution. We consider that a very high number, but as ADDvise was, and to some extent still is, small, we believe a high pace is reasonable. However, we also consider a very fast acquisition pace riskier; the strong sales contribution from M&A in the quarter suggests ADDvise has handled its M&A process well despite the fast pace.

After the end of the quarter, ADDvise announced the intent to acquire US-based X-Ray Cassette Repair Company Inc ("Reina Imaging").

Brief company description from the PM:

“Reina Imaging is an international medtech equipment manufacturer based in Crystal Lake, Illinois, USA. The company produces digital x-ray panel holders and related imaging products primarily for the healthcare industry. Reina Imaging is a supplier and product development partner to some of the world's largest x-ray imaging companies. The company has a strong market position for customized x-ray panel protection devices and is the largest x-ray grid distributor in North America. The company's customized and application-specific designs are well known throughout the imaging industry.

The company's revenue for the full year 2022 amounted to USD 9.12 million, with an adjusted EBITDA of USD 1.92 million, corresponding to an adjusted EBITDA margin of 21.1 percent.”

Management sees potential cross-selling synergies from related companies in the group, some of them already being customers to Reina. Apart from cross-selling opportunities, having companies being customers to an acquisition typically reduces the risk, as the group should understand the product well. ADDvise pays a multiple of 5.6x EBITDA, excluding earn-out, largely in line with its ~5x historical average.

After the end of the quarter, ADDvise announced the intent to acquire Diabetic Supplies Inc.

Brief company description from the PM:

“Diabetic Supplies is based in Columbus, Ohio, USA and is a distributor of medical devices for diabetic patients. The Company distributes, among other things, continuous glucose monitors and insulin pumps. Over Diabetic Supplies twenty years of operations, the Company has established a strong customer portfolio of American insurance companies. The Company provides diabetes patients with the necessary equipment for monitoring and treatment.

-Through the acquisition of Diabetic Supplies, we complement our existing range of diabetes products and strengthen our market position. Diabetic Supplies' strong brand and good relationship with insurance companies open up new growth opportunities, says Rikard Akhtarzand, CEO ADDvise Group.

Diabetic Supplies' revenue for the full year 2022 amounted to USD 7.0 million, with an EBITDA of USD 2.7 million, corresponding to an EBITDA margin of 39 percent.”

The company complements ADDvise's current B2C-like offering with exposure to insurance companies. Considering it has a high share of recurring revenues and impressive margins, we believe the 3.8x EBITDA multiple, excluding earn-outs is attractive.

We make substantial forecast increases for both 2023 and 2024 EBITDA. In addition to the recent letters of intent to acquire Diabetic Supplies and Reina Imaging, both having margins above our previous forecasts, we also raise our organic margin assumptions in both Healthcare and Lab. We assume that Healthcare's strong momentum will persist, supported by the solid order intake. Lab has focused its operations on high-margin segments, which seems successful so far.

The change in our sales forecasts is minor for several reasons. First, we remove our assumed future M&A for Q1-Q3 2023 and expect Diabetic Supplies and Reina Imaging to be consolidated from Q3 2023. Second, following Lab’s focus on high-margin revenue, we have reduced our sales forecasts somewhat.

We raise our Base Case to SEK12.50 on the back of increased forecasts. While the acquisition pace remains high, which increases the risks and potential reward, the performance in acquired businesses has been strong, suggesting ADDvise can handle the fast pace.

Net debt to EBITDA 2023e is 2.9x, which only includes the two most recent letters of intent to acquire for two quarters (Diabetic Supplies and Reina Imaging). Thus, looking at the 2024e net debt to EBITDA of 2.2x is fairer. Nevertheless, both are within ADDvise’s net debt target of <3x EBITDA.

ADDvise is still trading at a substantial discount to its larger peers. As mentioned before, we believe ADDvise will be rewarded with a higher multiple if it can continue to grow and keep its solid operational momentum. The recently made acquisition is a significant part of ADDvise going forward. Thus, if successful, it will provide ADDvise with a strong track record, essential for a serial acquirers’ valuation. We believe Q4 is another clear step forward, as the contribution from M&A and the organic development exceeded our expectations.

We believe the high net debt to EBITDA combined with the fast acquisition pace might turn off some investors, as other companies with similar strategies have been in trouble. However, we do not believe such a comparison is fair considering ADDvise’s solid track record, especially in this Q4 report.