After two soft quarters, CombinedX is back on track with a strong Q4 beating our sales and adjusted EBIT forecasts by 16% and 38%. The adjusted EBIT margin reached 11.2%, and the organic growth was 16.5%. The combination of strong organic growth and a solid EBIT margin is impressive. A higher number of consultants with a higher utilization rate, where many consultants worked all the way to Christmas eve, resulted in strong organic growth and solid margins. Although high license/product sales and a high share of sub-consultants contributed to the strong sales, they also drive COGS, and their EBIT margin should not be higher than the group average.

The EPS is lower than expected at this given EBT as CombinedX pays a high tax rate in the quarter. That was due to the full-year tax revision.

According to management, lower employee churn was one key factor behind the significant improvement compared to the last two quarters. Several factors helped reduce employee churn. First, the pent-up demand for switching employers following Covid-19 is likely gone. Second, post-Covid, CombinedX has been able to arrange group-wide activities, strengthening the corporate culture. Third, as the supply of consultants increases, due to layoffs at big unprofitable tech companies, for example, and as the number of available deals declines, changing employers has become riskier.

The large gap in the inbound and outbound number of employees relative to the average number of employees seen in Q2 and Q3 disappeared in Q4, indicating a clear improvement in employee churn.

Management sees a shift in the market where customer deals rather than consultants are becoming the limiting factor for growth. Although management is aware of the weak macroeconomics, its outlook is solid, and the order book is slightly higher than usual going into 2023.

Overall, a solid quarter and while one should not emphasize a single quarter too much, we argue Q4 highly indicates CombinedX is back on track. The employee churn issue seems to be addressed, the mergers of CloudPro and Nethouse, and Viewbase and Two are going well so far, and CombinedX combines high organic growth with solid margins.

We raise our sales forecasts for 2023 and 2024 by c5%, mainly as we expect slightly higher net recruitment. While the demand might weaken during 2023, we believe CombinedX will grow by c5% organically.

We leave our margin assumptions largely unchanged, resulting in a c5-6% increase in EBIT for 2023 and 2024. While the increase might seem low compared to the strong beat in Q4, our previous forecast also assumed a rebound in 2023.

While the new version of the Redeye Rating reduces CombinedX’s rating from 4,3,3 to 4,3,2 (People, Business, Financials), the WACC remains at 10.5%. The new version of the Redeye Rating is more demanding and makes it harder to receive a high rating. Thus, it should not be seen as we believe the underlying quality of CombinedX has decreased.

We raise our Base Case to SEK60 (52) due to raised forecasts and as our confidence in CombinedX profit generation has increased. Despite the recent surge in the share price, CombinedX is trading at 5x EBITDA 2023e.

CombinedX is trading at a significant discount to the peer average and median. While the company has a short track record which should motivate some discount, given our positive outlook on CombiendX operations and the strong Q4, we believe the gap will narrow.