Considering that we believe the revealing of the company's largest owner and its possibly big implications, we discuss this first and then finish with the Q4 follow-up.

In short, the owner is a private equity firm that has previously taken several public firms private. Also, the proposed M&A-driven growth strategy is typical for a PE firm - and a strategy we believe is best suited for a private environment. Nepa's third largest owner, Elementa Management, agrees with Hanover's strategy to create value. However, Elementa also believes financing eventual acquisitions would be easier in a private environment. Last, the typical investment size of Hanover Investors is much greater than what it has currently invested, whereas a buyout would align better with its previous investments.

At the Extraordinary General Meeting (EGM), three new members for the board were suggested, out of which two from Hanover Investors: Fredrik Lundqvist and Ashkan Senobari. This proposal, suggested by shareholder Ulrich Boyer, includes the removal of Adam Lytle, Carl-Fredrik Meijer, and Fredrik Beltzér from the board. Eric Gustavsson was also added - specializing in M&A and strategy.

Hanover Investors is a private equity firm headquartered in London and was established in 2002. The firm has an additional office in Sliema, Malta, and seeks investments in the UK and Nordic-based companies. It has made over thirty investments, made nine exits, and currently holds nine investments.

The firm has built a reputation for its strategic investments and value-creation initiatives and acts within three strategies: Private and Public Equity and Credit. It focuses mainly on European and Nordic markets and invests in various sectors, including manufacturing, technology, and financial services.

Private Equity - Hanover Active Equity Funds (HAEF)

The Hanover Active Equity strategy invests in high-potential public and private businesses where operational, strategic, or capital structure changes can unlock significant value. Their target companies are headquartered in the UK and Northern Europe, and the firm can invest over £25 million of equity in these opportunities.

Public Equity - Hanover Catalyst Fund (HCF)

The Hanover Catalyst Fund is characterized by its high conviction, unconstrained approach to investing in small-cap listed companies. It capitalizes on inefficiencies in the smaller end of public markets, where companies often receive less analysis and are prone to price dislocations.

The fund primarily targets UK and Nordic listed businesses but also has the flexibility to hold unlisted instruments, particularly when companies are transitioning in or out of a listed environment.

Credit - Hanover Capital Solutions (Hcaps)

Hanover Capital Solutions specializes in delivering investment opportunities across the capital structure of European SMEs. Leveraging a network of entrepreneurs, intermediaries, sponsors, and consultants across Europe, they tailor transactions to unlock growth potential and balance sheets.

Their focus areas include direct lending, opportunistic credit, and special situations. Hanover Capital Solutions aims to bridge the gap between traditional lenders and for-control private equity, emphasizing capital preservation.

Currently, it holds nine investments. Six of the nine current investments are public to private, i.e., companies bought out from a listed environment. Two of their holding are private, and one is listed. So, the investment strategy is clear: Hanover Investors is an active private equity/buyout firm taking listed companies private.

Fredrik Lundqvist works in the 'Private Equity' part, whereas Ashkan Senobari works in the 'Public Equity' part. These two have, except for the engagement in Nepa, two joint engagements - the buyout of ZetaDisplay and an investment of 50.1% of Lumi Gruppen - after first having made a bid on the whole company.

In June 2021, Hanover took the Swedish company ZetaDisplay private after a bid worth SEK710m. In April 2023, Hanover made a bid on Lumi Gruppen worth NOK600m. In this case, Hanover first 'only' obtained 49.8% of the shares but later bought enough to get a majority. We assess that a typical investment for Hanover is sized around GBP50m (SEK660m) of equity plus debt.

Hanover’s current SEK30m investment in Nepa appears to be way too small for being a full-sized investment. However, if it acquired Nepa for, say, SEK45 per share, the total investment would be around SEK300m, and it would align better with the typical strategy.

We argue, from Hanover's point of view, a plausible strategy forward could be:

The question is whether a listed environment is the most suitable option for this strategy. A closer look at Hanover’s investment approach in the past strongly implies a preference for taking listed companies private. This decision would streamline the process of raising new capital and facilitate the implementation of more extensive strategic changes within a private setting.

Hanover owns 19.32% of the votes and capital, Ulrich Boyer owns 18.39% and Elementa Management 16.99%. As we understand, all three major shareholders are in talks and working together. We believe Hanover’s ownership of 19% of the capital is far too low for Hanover to accept long-term.

However, with the current ownership structure, the situation is somewhat locked. We believe Ulrich Boyer is open to Hanover’s M&A agenda (considering he called for the EGM), while Elementa is positive in general but believes it to be easier in a private environment.

We argue there are two possible ways forward:

With two sitting Board members from Hanover and Eric Gustavsson, who is an M&A specialist, we believe option number two is not likely, especially over the long run.

Later in the day, there was news that Anders Dahl would be the new CEO of Nepa. Mr. Dahl previously served as Chief Operating Officer (COO) and was Elementa’s preferred choice as new CEO. Mr. Dahl has been an important engine behind the turnaround to profitability. Ferry Wolswinkel, the former Chief Revenue Officer (CRO) and interim CEO, will leave the company. We believe the CEO change makes it obvious that tight cost control and execution excellence will be highly prioritized going forward.

The press release revealed that Nepa aims to grow profitably both organically and through M&A - a typical private-equity setup. While we believe this endeavor to be value accretive, we argue that a listed environment is typically not the ideal place to be - strengthening our view that a buyout is highly likely.

After the EGM, we contacted Nepa's third-largest owner, Elementa Management, to get its view on the new owner. Here are our key takeaways from our discussion with Marcus Wahlberg (CIO):

The indicated growth strategy and the indicated view of Nepa's opportunities are well aligned between Hanover and Elementa. From this point of view, Elementa would gladly continue to own its share in Nepa in its current public environment.

The big question, according to Elementa, is how to finance the acquisitions. Elementa argues that the best way would be to take Nepa private. This would enable Hanover to make 100% of additional investments and then get 100% of the returns. The rationale behind this is that share issues are costly and thus risks being value-destructive in the short term. Also, such a strategy depends on the stock market - whose mood swings are way too big to create the necessary stability and predictability.

As such, Elementa is generally very happy that Hanover Investors has invested in Nepa. While Elementa agrees with Hanover's strategy to create value, it believes a private environment to be more suitable. However, a fairly priced bid would be needed for this to happen.

Total revenue was SEK74.6m, -2% y/y, and -3% below our estimates of SEK81m. However, net sales was affected negatively by SEK3.3 from a previous one-off accounting error from the now-closed APAC unit. The underlying development was thus in line with our estimates.

Subscription revenues rose by a solid 6.7% y/y. Ad-hoc from clients and non-subscription clients amounted to SEK16,6m (estimated SEK21m) and SEK16,6m (estimated SEK15m). As such, the more qualitative part of ad-hoc revenues (to existing subscription clients) was weak in the quarter.

EBIT adjusted for items affecting comparability was SEK5.2m, with an EBIT margin of 7%. The gross margin of 79% came in better than our estimate of 75% due to data cost reversals stemming from historical accounting errors within the Nepa APAC subsidiary.

Subscription revenues grew +6.7% y/y, to SEK44.8 compared to our estimate of SEK45.6m, and accounted for 57% (60%) of sales in the quarter.

During Q3, Nepa experienced an uplift in churn. The trend continued in this quarter, and the churn was 6.1%. This led to the ARR declining sequentially in the quarter, reaching SEK164m compared to SEK172.4m in Q3. Management highlights ongoing budget constraints among its clients, which makes it increasingly challenging to offset lost customers with new ones.

Ad-hoc revenues amounted to SEK33.2m (-3% y/y) and accounted for 43% (37%) of sales in the quarter. Ad-hoc from clients amounted to SEK16.6m, -14% y/y and 21% below our estimates. Ad-hoc sales to non-subscription clients amounted to SEK16.6m, 10% y/y and 11% above our estimates. As such, it was the less qualitative part of ad-hoc revenues (to non-existing subscription clients).

Nepa continues to highlight the UK as an important market in which to proceed with sales and marketing activity. Historically, very large ad-hoc projects have been conducted by UK clients, and they typically come back to redo the project every two to three years. However, according to the management, converting non-ad-hoc clients is harder and longer time in this market enviroment.

During the quarter, it closed down its subsidiary Nepa APAC in India. This was due to a weak financial situation (more or less breakeven) and its suboptimal alignment with the group’s overarching strategy direction. Moreover, historical accounting errors and provisions for bad debt adjusting sales and costs were corrected. Nepa APAC accounted for less than 3% of total net sales.

OPEX amounted to SEK57.6m and CAPEX to SEK5.3m, implying a total cost base of SEK62.9m.

The average number of employees decreased sequentially from 281 to 273, a 16% year-on-year decrease. Despite these reductions, management emphasized its commitment to maintaining the quality of product delivery going forward. As highlighted by management, resource allocation will be agnostic and dynamic depending on the projects, tailored to fit each project accordingly. Nepa is now finding more effective ways of working and improving its ability to move internal resources between markets to enhance the utilization rate of its consultants. While there may be some additional costs following the closure of Nepa APAC, they are not expected to impact the PnL significantly.

The board proposed a dividend of SEK1.23 for 2023 - the same as last year if adjusting for the extra dividend paid during Q3 (SEK5.2m, or SEK0.67 per share). By the end of Q4, net cash amounted to SEK38.3m or SEK4.85 per share.

Nepa enters 2024 with a slim organization focusing on organic profitable growth with the possibilities of smaller acquisitions. The underlying market is still under pressure, and we believe it will be the case in the coming quarters. If the rate cuts start in H2, advertising demand should pick up at the end of the year. However, we believe Nepa is in a very good position at the moment, so it should, even in a slower market, generate a decent operating profit margin of 8-12%.