Redeye takes a positive view of CombinedX’s most recent acquisition Why. CombinedX strengthens Nethouse’s position by acquiring a highly profitable company with a solid track record at ~4x EBIT. We raise our forecasts and Base Case somewhat.

Earlier this week, CombinedX announced that its subsidiary Nethouse acquired the Sundsvall-based IT infrastructure consulting company Why IT Solutions. Why has about 30 employees, sales of about SEK70m and an EBIT margin of around 10%. Why has a strong position among public customers in the area, such as Region Västernorrland and Försäkringskassan, as well as in the timber industry –an important sector in this region. Like Nethouse, Why focuses on cloud and IT infrastructure.

With 30 employees and SEK70m in sales, the sales per employee is high. However, as we lack the full annual report for 2023, we cannot calculate the Sales-COGS/employees/working day. According to management, Why has a rather high share of hardware and sub-consultants in its sales mix – which we find reasonable considering the high sales per employee.

Addnode Group

Proact IT Group

CombinedX

* Lack of major recurring revenue streams, potentially impacting business stability and predictability.
* Limited geographic diversification, with a high concentration of sales in Sweden.
* Absence of easily identifiable sustainable competitive advantages typical in the IT consulting industry.
* Not expected to achieve five-fold growth within a decade, indicating potential limitations in long-term expansion.
* Operates in a fragmented market with numerous competitors, which could impact pricing power and market share.

* Strong positioning in specialized IT consulting niches, leading to above-average profitability and solid returns on invested capital.
* Benefits from secular tailwinds in digitalization, cloud computing, and AI, with a business model unlikely to be disrupted in the near future.
* Demonstrates operational stability with minimal regulatory interference, independence from key individuals, and limited cyclical dependencies.
* Proactively promotes environmental sustainability and maintains high employee satisfaction, as evidenced by a strong eNPS score.
* Products contribute to the greater good by helping businesses digitize and become more efficient, while avoiding any environmental or ethical issues.

* Inconsistent earnings growth, failing to maintain 10%+ growth over five years or show stable growth over a decade.
* Operating margin below 20% and not increasing for three consecutive years, suggesting potential efficiency or pricing power issues.
* Stock price has not compounded by at least 10% since IPO, indicating underperformance in long-term shareholder value creation.

* Strong financial health with current assets 1.5 times greater than current liabilities, low debt levels, and good interest coverage ratio.
* Efficient cash flow management, demonstrated by high Operating Cash Flow and Free Cash Flow conversion rates above 80% over the past five years.
* Attractive dividend yield between 1-2.5 times market median, well-covered by cash flows, with recent growth exceeding 7% annually.
* Return on Assets outperforming industry average over the past five years, indicating superior asset utilization.

* Management team's average tenure is slightly less than five years, potentially limiting institutional knowledge.
* Inconsistent achievement of the 10% EBIT margin target, despite overall growth and transparency about challenges.
* Lack of opportunistic action on attractively priced stock, opting for dividends over share buybacks.
* Absence of a controlling owner with more than 20% voting rights, which could provide additional long-term stability.
* Limited experience of CEO in IT consulting industry prior to joining CombinedX, though mitigated by five years at the company.

* Strong visionary leadership from CEO Jörgen Qwist, with a clear long-term outlook and commitment to creating leading specialized IT consulting brands.
* Decentralized organization promoting accountability, with a management team experienced in M&A and listed companies.
* Consistent communication strategy focusing on long-term value creation, with transparent reporting and upfront discussions about challenges.
* Significant insider ownership, including founders, board members, and management, aligning interests with shareholders.
* Diverse and experienced board of directors with relevant expertise in IT consulting, digitalization, and entrepreneurship.

SEKm	2023	2024e	2025e	2026e	2027e
Revenues	766.3	1,003.2	1,084.1	1,125.7	1,168.7
Revenue Growth	17.6%	30.9%	8.1%	3.8%	3.8%
EBITDA	117.1	137.5	156.2	166.9	172.5
EBIT	80.0	95.4	117.8	129.3	138.4
EBIT Margin	10.4%	9.5%	10.9%	11.5%	11.9%
Net Income	71.0	75.4	93.2	102.3	109.5
EV/Revenue	0.7	0.9	0.7	0.7	0.6
EV/EBIT	6.5	9.1	6.9	5.7	4.9

Key financials