Addnode: Q1 Preview – Slight Increases

Research Update

2024-04-02

06:45

Redeye slightly increases its forecasts for Q1, 2024, and 2025 – mostly due to an expected improvement in Design Management. We raise our Base Case slightly.

FN

AH

Fredrik Nilsson

Anton Hoof

Contents

Design Management – US AEC Showing Signs of Rebound

Product Lifecycle Management – Defence Compensating Softer EV

Process Management – We Expect Stable Performance

Base Case Increased Slightly to SEK110 (108)

Q1 2024 Estimates

Estimate Revisions

Estimates

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Key financials

SEKm20232024e2025e2026e2027e
Revenues7,412.08,680.69,674.910,645.311,697.7
Revenue Growth19.1%17.1%11.5%10.0%9.9%
EBIT410.0644.9768.0861.0961.9
EBIT Margin5.5%7.4%7.9%8.1%8.2%
EV/Revenue1.61.81.71.51.4
EV/EBIT29.824.820.918.716.8
EBITDA - CAPEX5528128909911103
EBITDA - CAPEX Margin7.4%9.4%9.2%9.3%9.4%
EV/EBITDA - CAPEX22.119.718.016.314.7
Net Debt8371061112912051273
NWC/R12mSales-7.3%-5.0%-5.0%-5.0%-5.0%

Design Management – US AEC Showing Signs of Rebound

Regarding our Q1 expectations for Design Management, we note a rather optimistic view from Autodesk in its fiscal Q4 2024 (published 29 February), guiding for a ~10% revenue growth in fiscal 2025 (roughly equal to Addnode’s 2024). The US AEC market has been a drag on DM’s numbers recently but has now shown signs of recovery. For example, US home builder confidence rose to the highest level since July in March. Along with us expecting a sustained solid performance in TeamD3, we forecast a rather solid Q1 in DM. However, considering the strong market and high share of 3-year deals in Q1 2023, we forecast a negative organic growth of -8%. Regarding margins, we expect 8.8% on the EBITA level, down from 10.8% in Q1 2023 but above the 7.9% seen in Q4 2023. We expect better market conditions along with some cost adjustments to drive the q/q improvement.

Autodesk’s new transaction model is planned to be implemented gradually during 2024 for markets relevant to Addnode. That is somewhat faster than we previously thought. As discussed in our Q4 preview, we believe the new transaction model is neutral to slightly positive for Addnode. Our view is described in this text borrowed from the Q4 preview:

“From a purely financial perspective, the change has no substantial implications. It will lower Symetri’s sales and increase its gross margin, leaving gross profit, EBITA and cash flow unchanged. However, the change is more interesting from a strategic perspective. In addition to Addnode and other VARs (adding expertise and, in some cases, add-on software), there are still distributors in the digital world, mainly competing with price. With the new agent model, the strategy of selling cheap subscriptions is no longer, and distributors and VARs will have to add value in other ways. Considering Addnode’s expertise and portfolio of add-on software (customers have not chosen Addnode because of its cheap licenses), we believe the expected change in Autodesk's business model is slightly positive for Addnode. Also, it might open interesting M&A opportunities as smaller players struggle to adjust to the anticipated change in the transaction model.”

Addnode’s Q4 call included an illustrative example of the impact of the new transaction model on Addnode’s financials.

The picture below is from Autodesk’s Q4 call and describes the old and new models.

Product Lifecycle Management – Defence Compensating Softer EV

While some larger deals partly drove the strong momentum in PLM in H2 2023 – partly driven by the EV industry – we expect a stable development in Q1 2024. Although we believe investments in EV-related R&D have declined, we expect strong demand from the defence industry to compensate. Overall, we expect most end markets to remain roughly unchanged compared to Q4 – i.e. at a stable level.

We expect organic sales growth of 4% y/y, 3% M&A growth, and 1% from FX. Regarding margins, we expect 9.5% on the EBITA level, down from the strong 10.8% seen in Q4 – typically seasonally stronger due to a high share of license sales. On the other hand, Q1 will see a somewhat higher effect from the cost-saving program announced in 2023.

Since our last update, Addnode has acquired Canadian Optimec. The company has sales of about SEK40m and will join the PLM division. Although a small acquisition, it can pave the way for further expansion of PLM in North America.

Process Management – We Expect Stable Performance

While new sales constitute a small share of the market, Addnode seems to have performed rather well in a somewhat soft market regarding new sales during Q1 – with Sokigo signing deals with Falkenberg, and Sollentuna, and Ida Infront with Läkemedelsverket. We expect Addnode’s software-focused and niche operations to be largely unaffected by the pricing pressure on IT services in some public sector areas.

We leave our forecasts for Process Management unchanged and expect organic growth of 4%, a solid level but at the lower end of the 5-10% level seen over the last 2.5 years. Regarding margins, we expect 19% at the EBITA level.

Base Case Increased Slightly to SEK110 (108)

We increased our Base Case to SEK110 (108), which roughly aligns with where the share is currently trading.

Fair Value Range - Assumptions
Bear CaseBase CaseBull Case
Value per share, SEK74110141
Sales CAGR
2024 - 20319%10%11%
2031 - 20416%7%8%
Avg EBIT margin
2024 - 20317%8%9%
2031 - 20417%8%9%
Terminal EBIT Margin
Terminal growth2%2%2%
WACC9%9%9%
Source: Redeye Research

Q1 2024 Estimates

Estmates
SalesQ1E 2024Q1A 2024DiffQ1A 2023Q4A 2023
Net Sales22162078-6%19722078
Y/Y Growth (%)12%5%10%16%
Design Management14211246-12%12121246
Growth y/y (DM)17%3%21%24%
EBITA (DM)12598-22%13198
EBITA margin (DM)8.8%7.9%10.8%7.9%
Product Lifecycle Management4604998%428499
Growth y/y (PLM)8%17%-6%10%
EBITA (PLM)445423%2654
EBITA margin (PLM)9.5%10.8%6.1%10.8%
Process Management3453460%332346
Growth y/y (PM)4%4%-1%3%
EBITA (PM)66672%6467
EBITA margin (PM)19.0%19.4%19.3%19.4%
Earnings
EBITA220196-11%202196
EBITA Margin (%)9.9%9.4%10.2%9.4%
EBITDA-CAPEX*203164-19%189164
EBITDA-CAPEX Margin (%)9.2%7.9%9.6%7.9%
EBIT162135-17%149135
EBIT Margin (%)7.3%6.5%7.6%6.5%
Diluted EPS0.860.80-7%0.780.80

Estimate Revisions

Estimate Revisions
SalesFYE 2024OldChangeFYE 2025OldChange
Net Sales868185522%967595381%
Y/Y Growth (%)17%15%11%12%
Design Management512050152%542753162%
Growth y/y (DM)19%17%6%6%
EBITA (DM)4634503%5165052%
EBITA margin (DM)9%9%0%10%10%-5%
Product Lifecycle Management197219362%205020132%
Growth y/y (PLM)5%3%4%4%
EBITA (PLM)1931892%2031992%
EBITA margin (PLM)10%10%-2%10%10%-1%
Process Management132913290%138213820%
Growth y/y (PM)4%4%4%4%
EBITA (PM)2532530%2632630%
EBITA margin (PM)3%3%4%4%
Earnings
EBITA8888761%102810181%
EBITA Margin (%)10.2%10.2%10.6%10.7%
EBITDA-CAPEX8128041%8908841%
EBITDA-CAPEX Margin (%)9.4%8.4%9.2%9.3%
EBIT6456332%7687591%
EBIT Margin (%)7.4%7.4%7.9%8.0%
Diluted EPS3.413.342%4.144.091%

Estimates

Forecasts
SalesFYA 2023Q1E 2024Q2E 2024Q3E 2024Q4E 2024FYE 2024FYE 2025FYE 2026
Net Sales741222162025207523658681967510645
Y/Y Growth (%)19%12%30%15%14%17%11%10%
Design Management42911421116011971342512054275644
Growth y/y (DM)23%17%49%13%8%19%6%4%
EBITA (DM)334125104110123463516553
EBITA margin (DM)8%9%9%9%9%9%10%10%
Product Lifecycle Management1879460491497523197220502132
Growth y/y (PLM)19%8%5%3%5%5%4%4%
EBITA (PLM)14844444758193203213
EBITA margin (PLM)8%10%9%10%11%10%10%10%
Process Management1278345333291360132913821438
Growth y/y (PM)8%4%4%4%4%4%4%4%
EBITA (PM)24466635568253263273
EBITA margin (PM)19%19%19%19%19%19%19%19%
Future M&A501001503008551471
Growth y/y (FM&A) vs. group3%6%7%4%6%6%
EBITA (FM&A)6121836103177
EBITA margin (FM&A)12%12%12%12%12%12%
Earnings
EBITA64022020421125388810281160
EBITA Margin (%)8.6%9.9%10.1%10.2%10.7%10.2%10.6%10.9%
EBITDA-CAPEX*552203183199227812890991
EBITDA-CAPEX Margin (%)7.4%9.2%9.0%9.6%9.6%9.4%9.2%9.3%
EBIT410162144149190645768861
EBIT Margin (%)5.5%7.3%7.1%7.2%8.0%7.4%7.9%8.1%
Diluted EPS2.090.860.750.781.033.414.144.70

Investment thesis

Case

Consolidating VAR/SaaS niches in more markets

With a strong position in the Nordics, the UK, and Germany and a foothold in other European markets and the US, Addnode is among the largest VARs to its key partners Autodesk and Dassault Systemes. We expect Addnode to continue consolidating local Autodesk/Dassault partners in additional markets, where the recent entry to the US market opens vast opportunities. In addition, Addnode’s proprietary software, focusing on the Nordics, has similar opportunities. We believe additional high-quality acquisitions are the main catalyst going forward.

Evidence

Strong track record of acquiring, integrating, and improving

During the last ten years, Addnode has made about 40 acquisitions with the vast majority being successful. The acquisitions have allowed Addnode to expand into major markets like the UK, Germany and most recently the US. In many cases, Addnode has increased the acquisitions’ margins by, for example, adding its proprietary add-ons. The story is similar for Addnode’s proprietary software, built by a stream of bolt-on acquisitions. With historical acquisition multiples of about 4-8x EBITA, Addnode has created a lot of shareholder value through M&A.

Challenge

Dependent on Autodesk and Dassault Systemes

Addnode generates about 70% of its sales and roughly half of its EBITA from products and services related to its partnerships with Autodesk and Dassault Systemes. While the rather high dependency on two partners is a risk, Addnode has long and stable relationships with both. Also, Addnode is among their leading partners, adding a lot of customer value to the software platforms through its expertise and add-ons.

Challenge

Modest organic growth

While having an excellent M&A track record, Addnode’s markets are largely mature, resulting in modest organic growth. Although all three Divisions have seen an improvement in organic growth in recent years, we believe 3-5% is reasonable going forward, which is modest compared to most software businesses.

Valuation

Fair Value SEK 108

Our DCF model shows a fair value of SEK 108, which is also supported by a peer valuation. While that implies a multiple that is rather high compared to the organic growth and margins, the strong track record and future M&A opportunities motivate a high multiple on current earnings.

Quality Rating

People: 4

Addnode Group has a highly experienced and motivated management team. CEO Johan Andersson has been with the company since 2006 and was previously its CFO. The chairmen of the board, Staffan Hanstorp, is the founder of one of the ’group’s subsidiaries, a major shareholder, and was the group’s CEO for ten years. Mr Hanstorp is active in the company and has strategic responsibility. The group communicates with the market in an exceptional manner and has delivered on its financial and strategic targets

Business: 4

Addnode's organic growth has been relatively low, as it acts in a mature market. An increased organic growth rate would justify a higher rating. Over the past few years, the group has increased its presence outside of the Nordic region, which we see as positive. Addnode has a relatively large share of proprietary products and solutions, which increases its profitability. Another advantage is its focus on creating recurring revenue, which bolsters stability and enables improvements in profitability.

Financials: 4

Addnode is dependent on the economy and on the willingness to invest. However, the group is well diversified across many segments, which decreases the risk. Addnode has completed more than 50 acquisitions since 2003 and has, as a result, increased its debt. However, we claim its leverage is healthy and the acquisitions have been value-creating.

Financials

Rating definitions

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Contents

Design Management – US AEC Showing Signs of Rebound

Product Lifecycle Management – Defence Compensating Softer EV

Process Management – We Expect Stable Performance

Base Case Increased Slightly to SEK110 (108)

Q1 2024 Estimates

Estimate Revisions

Estimates

Investment thesis

Quality Rating

Financials

Rating definitions

The team

Download article