Addnode Q2 Preview: Minor Changes

Research Update

2024-06-19

08:42

Redeye expects a Q2 report from Addnode with limited organic growth yet solid margins. Thanks to acquisitions, we expect solid overall growth y/y. We assume a general market environment roughly aligned with Q1, although the public sector might be somewhat softer.

Fredrik Nilsson

Anton Hoof

Contents

DM: 3-year Licenses Likely to Remain at a High Level

PLM: Slight Boost from FX

PM: Soft New Sales Activity

Minor Adjustments

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Key financials

SEKm	2023	2024e	2025e	2026e	2027e
Revenues	7,412.0	8,773.3	9,815.5	10,797.6	11,862.1
Revenue Growth	19.1%	18.4%	11.9%	10.0%	9.9%
EBIT	410.0	655.7	746.3	877.2	977.4
EBIT Margin	5.5%	7.5%	7.6%	8.1%	8.2%
EV/Revenue	1.6	1.9	1.7	1.6	1.4
EV/EBIT	29.8	25.7	22.5	19.2	17.3
EBITDA - CAPEX	552	828	871	995	1109
EBITDA - CAPEX Margin	7.4%	9.4%	8.9%	9.2%	9.4%
EV/EBITDA - CAPEX	22.1	20.3	19.3	17.0	15.3
Net Debt	837	1160	1161	1218	1273
NWC/R12mSales	-7.3%	-7.0%	-6.9%	-7.0%	-7.0%

DM: 3-year Licenses Likely to Remain at a High Level

We expect a solid Q2 from Design Management. We believe the share of 3-year deals will stay at a rather high level due to Autodesk’s upcoming transaction model change – North America in June and Europe probably in late 2024. Combined with a decent market in most segments, we expect another solid quarter for DM. However, Q1 is a seasonally strong quarter, and we believe investors should expect declining sales and margins q/q. In its Q1 2025 report (February-April), Autodesk sticks to its ~10% revenue growth forecast for FY 2025 (ending January 2025).

We expect the new transaction model to influence numbers in Q3 and beyond – lower sales, higher margins and unchanged gross profit and cash flow (we have discussed the details in earlier Updates).

We forecast 14% organic growth, 37% from M&A and 1% related to FX. We assume an EBITA margin of 9.0%, up from 6.2% in last year’s weak Q2.

PLM: Slight Boost from FX

We forecast Q2 roughly aligned with Q1 – healthy margins and modest organic growth. Solid demand from the defence industry will likely continue to offset reduced demand from more consumer-sensitive sectors like EVs. Also, we expect the situation in Q1, with fewer larger projects to continue limiting organic growth, to remain in Q2.

We expect organic sales growth of 3% y/y, 2% M&A growth, and 1% from FX. Regarding margins, we expect 9.0% on the EBITA level.

PM: Soft New Sales Activity

While new sales constitute a small share of the overall market, the market seems to have been relatively soft in Q2 – with Sokigo signing a deal with Stenungssund and Ida Infront with Helsingborg. Although 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, the soft market seems to have slightly impacted new sales in Q2.

We have somewhat lowered our growth expectations for Q2, with 2% organic growth, down from 4%. However, we keep our margins at around the healthy 19% level. Thus, overall, we expect a solid Q2, although we expect it will have muted organic growth.

Minor Adjustments

We slightly increased our forecasts for DM, PLM, and the group due to FX, but our underlying assumptions are roughly unchanged. We leave our Base Case at SEK117.

Estmates
Sales	Q2E 2024	Q2A 2024	Diff	Q2A 2023	Q1A 2024
Net Sales	1997		-100%	1554	2409
Y/Y Growth (%)	29%	-100%		-21%	22%
Design Management	1184		-100%	778	1624
Growth y/y (DM)	52%	-100%		-36%	34%
EBITA (DM)	107		-100%	48	168
EBITA margin (DM)	9.0%	#DIV/0!		6.2%	10.3%
Product Lifecycle Management	497		-100%	468	454
Growth y/y (PLM)	6%	-100%		9%	6%
EBITA (PLM)	45		-100%	20	41
EBITA margin (PLM)	9.0%	#DIV/0!		4.3%	9.0%
Process Management	326		-100%	320	342
Growth y/y (PM)	2%	-100%		-4%	3%
EBITA (PM)	62		-100%	60	65
EBITA margin (PM)	19.0%	#DIV/0!		18.8%	19.0%
Earnings
EBITA	199		-100%	110	253
EBITA Margin (%)	10.0%	#DIV/0!		7.1%	10.5%
EBITDA-CAPEX*	178		-100%	80	237
EBITDA-CAPEX Margin (%)	8.9%	#DIV/0!		5.1%	9.8%
EBIT	138		-100%	56	187
EBIT Margin (%)	6.9%	#DIV/0!		3.6%	7.8%
Diluted EPS	0.76		-100%	0.25	0.90

Estimate Revisions
Sales	FYE 2024	Old	Change	FYE 2025	Old	Change
Net Sales	8773	8717	1%	9816	9730	1%
Y/Y Growth (%)	18%	18%		12%	12%
Design Management	5381	5349	1%	5721	5670	1%
Growth y/y (DM)	25%	25%		6%	6%
EBITA (DM)	511	508	1%	543	539	1%
EBITA margin (DM)	9.5%	9.5%	0%	9%	9%	0%
Product Lifecycle Management	1981	1951	2%	2070	2029	2%
Growth y/y (PLM)	5%	4%		4%	4%
EBITA (PLM)	192	189	2%	205	201	2%
EBITA margin (PLM)	9.7%	9.7%	0%	10%	10%	0%
Process Management	1307	1313	0%	1359	1366	0%
Growth y/y (PM)	2%	3%		4%	4%
EBITA (PM)	248	250	0%	258	260	0%
EBITA margin (PM)	2%	2%		4%	4%
Earnings
EBITA	906	901	1%	1017	1010	1%
EBITA Margin (%)	10.3%	10.3%		10.4%	10.4%
EBITDA-CAPEX	828	824	0%	871	866	1%
EBITDA-CAPEX Margin (%)	9.4%	9.5%		8.9%	8.9%
EBIT	656	651	1%	746	739	1%
EBIT Margin (%)	7.5%	7.5%		7.6%	7.6%
Diluted EPS	3.49	3.46	1%	4.17	4.13	1%

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 117

Our DCF model shows a fair value of SEK 117, 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

Income statement
SEKm	2023	2024e	2025e	2026e	2027e
Revenues	7,412.0	8,773.3	9,815.5	10,797.6	11,862.1
Cost of Revenue	3,709.0	4,487.7	4,982.8	5,398.8	5,931.0
Operating Expenses	2,943.0	3,227.6	3,661.0	4,075.9	4,461.2
EBITDA	760.0	1,058.0	1,171.8	1,322.9	1,469.9
Depreciation	30.0	34.8	30.4	29.3	33.0
Amortizations	230.0	250.4	271.0	292.3	335.4
EBIT	410.0	655.7	746.3	877.2	977.4
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	-94.0	-112.2	-85.6	-85.6	-85.6
Net Financial Items	140.0	159.2	125.6	85.6	85.6
EBT	362.0	590.5	700.7	791.5	891.8
Income Tax Expenses	-83.0	-125.5	-144.3	-163.1	-183.7
Net Income	279.0	465.0	556.3	628.5	708.1
Balance sheet
Assets
Non-current assets
SEKm	2023	2024e	2025e	2026e	2027e
Property, Plant and Equipment (Net)	51.4	39.3	36.6	41.2	45.8
Goodwill	2,977.0	3,310.0	3,646.0	4,060.0	4,519.5
Intangible Assets	972.0	1,071.8	1,218.1	1,397.5	1,582.1
Right-of-Use Assets	294.6	295.5	295.5	295.5	295.5
Other Non-Current Assets	74.0	79.0	79.0	79.0	79.0
Total Non-Current Assets	4,369.0	4,795.6	5,275.1	5,873.2	6,521.9
Current assets
SEKm	2023	2024e	2025e	2026e	2027e
Inventories	0.00	0.00	0.00	0.00	0.00
Accounts Receivable	2,161.0	2,545.7	2,803.0	3,131.3	3,440.0
Other Current Assets	0.00	0.00	0.00	0.00	0.00
Cash Equivalents	667.0	623.6	623.0	565.8	511.1
Total Current Assets	2,828.0	3,169.3	3,426.0	3,697.1	3,951.1
Total Assets	7,197.0	7,964.9	8,701.1	9,570.3	10,473.0
Equity and Liabilities
Equity
SEKm	2023	2024e	2025e	2026e	2027e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	2,116.0	2,495.7	2,912.5	3,374.1	3,893.6
Non-current liabilities
SEKm	2023	2024e	2025e	2026e	2027e
Long Term Debt	1,504.0	1,784.0	1,784.0	1,784.0	1,784.0
Long Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Other Non-Current Lease Liabilities	873.0	525.0	525.0	525.0	525.0
Total Non-Current Liabilities	2,377.0	2,309.0	2,309.0	2,309.0	2,309.0
Current liabilities
SEKm	2023	2024e	2025e	2026e	2027e
Short Term Debt	0.00	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Accounts Payable	2,704.0	3,160.2	3,479.6	3,887.1	4,270.3
Other Current Liabilities	0.00	0.00	0.00	0.00	0.00
Total Current Liabilities	2,704.0	3,160.2	3,479.6	3,887.1	4,270.3
Total Liabilities and Equity	7,197.0	7,964.9	8,701.1	9,570.3	10,473.0
Cash flow
SEKm	2023	2024e	2025e	2026e	2027e
Operating Cash Flow	485.0	684.8	1,043.9	1,153.4	1,275.0
Investing Cash Flow	-672.0	-563.8	-780.9	-919.7	-1,017.1
Financing Cash Flow	276.0	-207.4	-263.6	-291.0	-312.6

Rating definitions

The team

Disclosures and disclaimers

Premium Plan required to unlock

Contents

DM: 3-year Licenses Likely to Remain at a High Level

PLM: Slight Boost from FX

PM: Soft New Sales Activity

Minor Adjustments

Investment thesis

Quality Rating

Financials

Rating definitions

The team

Download article