Review of Q2 2024

Sales increased by 10% y/y and was 8% above our expectations. Adjusted for the number of working days, the increase was 7% y/y. While most IT consultants have not yet released their Q2 reports, we believe 10% organic growth y/y will be among the highest in the Nordics. Avensia continues to see solid demand from new customers while the demand from current customers has stabilized, explaining why Avensia is returning to growth after six quarters with declining sales.

During H1 2024, Avensia saw a stabilization of demand and more optimistic outlooks from its wide range of e-commerce customers. Given that interest rates continue to decline, strengthening the consumer, Avensia believes the market sentiment will continue to improve.

The sales to new customers, which have been relatively strong for several quarters, are mostly driven by more mature, established, and profitable companies – with finances strong enough to finance their investments. A few years ago, new sales had a higher share of companies wanting to scale their e-commerce business fast.

The relatively strong inflow of new customers sets Avensia in an attractive position once the market rebounds, as the base of current customers Avensia can sell to has increased. Management believes that Avensia has gained market share, which we find reasonable considering the relatively strong growth in the company.

In conjunction with the Q2 report, Avensia published the development of some KPIs q/q and y/y:

An IT consultant’s sales are a function of the number of employees and their revenue per working day. In reality, the number of revenue-generating employees, i. e., excluding administrative personnel etc., would be a better measure. However, we cannot access those figures, making the total number of employees a reasonable proxy.

The number of employees at the end of the quarter increased to 303 (369), corresponding to a y/y decline of 14%. Sequentially, the number of employees increased by 3, and our forecast was 1. Avensia remains focused on very selective replacements, but the slight increase seen in the quarter, along with the more positive market outlook, suggests the company are getting more open towards recruiting. However, Avensia currently favours adding sub-consultants over adding in-house resources – highlighted by the increased cost of revenues – as the market environment is cautious. Nevertheless, we expect some net recruitment for the remainder of 2024 and a slightly higher pace in 2025 – although still way below the recruitment pace seen in 2020-2022.

The number of employees at the end of the quarter is a leading indicator for sales growth in the coming quarter. While sales is dependent on other parameters as well, the starting number of employees for the coming quarter is, together with the number of working days, the only relevant figures we know in advance.

Employee churn is typically costly for any company. However, as IT consultants’ sales generation depends on their employees in a nearly 1:1 ratio, we believe low employee churn is even more important in IT consultant firms.

According to management, the utilization rate is back at an almost normal level, but there is still room for improvements. The per-employee and working day data are now back to the healthy levels of 5,500-6,500 and +1,500, levels we expect from a premium consultant firm – although Q2 tends to be one of the seasonally stronger quarters. See the Graph below for comparison with peers - Q1 2024 R12m numbers as few companies have released their Q2 reports so far. However, for Avensia to reach its ambitious yet realistic EBIT margin target of 15%, further improvement in utilization is most likely necessary and achievable in a stronger market.

The Sales-COGS/employees/working day is a proxy for the revenue generation of one employee during one working day, indicating how advanced services the company provides and how high its utilisation rate is. While sub-consultants and reselling software and hardware can alter accuracy in this measure, we try to consider that by subtracting the cost of goods sold, which typically consists mainly of expenses related to sub-consultants and reselling. Also, as we use the total number of employees, the share of administrative personnel can alter the number. A high share of administrative personnel might not be unwanted. For example, when focusing on expansion, the investments in administration are typically front-loaded.

The Contribution/employee/working day is sales-cogs-personnel expenses and indicates the profit contribution for the average employee per working day. We believe it is a proxy of how much revenue consultants generate compared to their seniority and, thus, salary. For example, a high Sales-COGS/employees/working day might not be worth much to shareholders if most are paid as salaries to senior consultants.

OPEX was slightly higher than our forecast of SEK83m and was SEK85m (97), as Other external costs came in above our expectations. According to management, the company had some non-recurring costs in the quarter, implying a somewhat lower underlying cost base.

EBIT was SEK11.0m (-6,6), corresponding to an EBIT margin of 9.8% (-6.5), and beat our expectations of SEK7.4m and 7.1%. The significant improvement y/y (although Q2 2023 had SEK4.8m in one-offs) is due to higher utilization rates and lower costs in general. While the EBIT margin was somewhat short of the 10% short-term target, we believe the profitability in the quarter highlights that Avensia’s financial targets (10% short-term and 15% long-term) are realistic. Reaching 9.8% in what still is a rather tough market indicates solid upward potential in normalized or better market conditions.

Free cash flow was SEK13m, and the effect from NWC was close to zero. By the end of the quarter, Avensia had a net cash position of SEKc18m. While Avensia is open to acquisitions, we believe investors should expect significant dividends as this asset-light business returns to healthy profitability.

As common among IT consultants, Avensia has low CAPEX, and the cash conversion tends to be strong.

We raise our sales forecasts by 4% in 2024 and 2025 and increase EBIT by 10-18% for the same period.

Also, we raise our long-term forecasts somewhat regarding both sales and margins, estimating a long-term EBIT margin of about 11-12% and around 4-5% organic growth.

We raise our Base Case to SEK14 (12) following increased forecasts.

Avensia is trading at ~25-35% discount to the peer average and median EV/EBIT on 2024-2025e. We believe the market does not agree with our assumption of the EBIT margin reaching ~10% in 2025e – still below potential levels in a solid market. If Avensia achieves this, we expect it to trade at an EV/EBIT multiple, at least in line with the peer average.