Sales beat our forecast by 17% due to higher organic growth and a higher contribution from M&A. Organic growth was 19% and our forecast was 8%. The main reason for the deviation was, once again, Design Management growing organically by an impressive 25%. PLM and Process also had higher growth than 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 25%, PLM had lower margins relative to our forecasts, while Process was in line.

As seen in most recent quarters, Design Management had a strong Q1 regarding organic and acquired growth and margins. The market continues to be strong regarding the Autodesk-related offering in the UK and US, while the company saw a slight slowdown in the Nordic AEC market. While customers focusing on residential buildings in Sweden experiences low demand, which was expected, construction within the public sector remains solid. Combined with the strong markets in the UK and US, Addnode believes it has increased its market share, which we find likely. Also, the proprietary offerings, SWG and Tribia, had solid demand. Although the margin only beat our forecast slightly, considering the strong demand, particularly in the third-party related businesses Symerti and Microdesk, we believe it is a strong level.

PLM grew by 13% organically, and the German markets remained stable while the Nordics were somewhat weaker. As for Design Management, the UK was strong and rather than an assumed rebound from Covid, Addnode now believes the underlying market is growing steadily. The EBITA margin came in at 6%, which was lower than expected. The margin was negatively affected by low-capacity utilization in the Nordic consulting operation. According to management, the market is healthy, and the problems are internal. The Division has launched efficiency measures, and we expect gradual margin improvements.

Process Management grew by 10% organically and continued its solid organic growth streak, likely increasing its market share further. The margin came in at 19%, in line with our estimates. Management sees some signs that some municipalities and regions are becoming more cautious in investing. However, we do not believe it is major enough to impact growth, at least not near-term.

Addnode has made one minor acquisition since our last Update, Key Performance, strengthening PLMs offering in the US and Sweden. The company provides digital twins for both the private and public sectors and is a typical small and offering-strengthening acquisition, where Addnode can leverage its know-how through its larger organization.

Addnode’s R12m acquisition activity is currently low, as the large acquisition of Microdesk in March last year was consolidated just before the current R12m period. 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. As the larger acquisitions in Addnode tend to occur lumpily, we do not see any reason to be worried about the acquisition pace.

We raise our sales growth assumptions by c5% on the group level for both 2023 and 2024. While raising all Divisions somewhat, partly due to the better-than-expected outcome in Q1, the main contribution is Design Management. While some smaller areas like Swedish residentials have a tough market, the large UK and US markets are performing better than we expected, and we believe that momentum will continue.

We leave our EBIT forecast for 2023 unchanged while increasing 2024 by c4%. The rise in Design Management is offset by lower margins in PLM during 2023 following the low utilization rate in the Nordics. While management has initiated initiatives to improve margins, we expected a gradual increase from the level seen in this quarter, meaning a lower overall level than we previously expected. For 2024, we expect PLM to regain solid margin levels.

We raise our Base Case slightly to SEK110 (105) following somewhat raised forecasts.

Addnode’s valuation of 24x EBIT for 2024e is in line with 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 22x for 2024e. Also, we believe the estimate-uncertainty is lower in Addnode compared to many other 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 22x EBITA excluding capitalization for 2024e, Addnode is trading in line with the serial acquirers.