Description

Admicom is a Finnish company with a market cap of EUR 450 million. 

It provides specialized Cloud-based ERP software in Finland. Specifically, the company provides an integrated full-scale enterprise resource planning and accounting solution for three types of customers (1) Construction (2) Building Services Engineering, and (3) Construction. It is a highly profitable and growing business listed on NasdaqOMXNordic. 

Due to recent challenges in sales (partly due to COVID) and some internal changes in personnel, the shares have sold off significantly by approximately 40% from the post Corona peak. We believe that the main issues facing this company are temporary in nature and that long-term, it remains a high-quality compounder with structural growth. Valuation is high but lower than their Nordic peers, some of which are of lower quality. We consider this a case of a high quality business at a fair valuation considering its growth prospects.

First, what are the issues and why do we believe that they are temporary in nature?

1.     Sales Growth Slow-Down

Revenue growth was around 40% in 2017, 2018, even in 2020 combination of organic and non-organic growth at 40% (22% organic). This has recently dropped to about 10% p.a. in the last year and the tendency has been negative for the whole period. 

The simple extrapolation is that revenue growth will continue to decline, and for a business that is valued at an earnings multiple over 40x, that is simply not acceptable. 

Here are the reasons why we believe the trend is not structural in nature: (1) ERP solutions need to be sold face to face. It’s difficult to close when not in person. Especially, in industries like the markets Admicom operates in i.e. construction, decision makers only listen when a sales person sells in person. During Covid, this has not been possible. We think this is a legitimate reason in this case, and the company has already indicated that they are gradually strating to move back into in-person sales as vaccinations increase and Covid-related policies improve. (2) There are fundamental personnel changes (see below) that has resulted in a lot of new sales people being hired who require training and who have a learning curve. This has resulted in temporarily lower sales efficiency, which we do expect to improve over time. 

2.     Personnel changes

Besides its impact on sales, Admicom has had a significant amount of personnel changes in the last 9 months, which in itself is a legitimate concern. At the very top, it was announced earlier in the year that Antti Seppä, the long time CEO of the company, who had been instrumental during the company's strong growth period the last 5 years, will be departing. CFO, Petri Aho will serve as interim CEO, while a replacement will be designated. Moreover, earlier in the year, in March,  Arttu Ruotsalainen, Head of the Building Services Engineering Division, also departed in his role. The situation seemed to be that a signficant number of senior sales personnel in that division also exited the company during the preceeding 9 month period. Part of this could be attributed to the lack of continued strong incentive systems in place after many of these employees' shares/bonuses had vested with the successful IPO of the company. Operationally, this had created a lack of sales expertise, wihch showed up as lower new sales figures when compared to the other divisional numbers to be seen in the last earnings report. 

We believe, while both concerns above are real concerns, neither will structurally impair the long-term prospects of the company. Morever, we believe they have been more than priced in.

What is the core investment thesis, why is Admicom a good investment candidate?

1. Highly Profitable and Stick Business Economics  

Admicom's integrated Cloud-based product is a classic reoccuring subscription-like business model. 91% of revenues are reoccuring monthly invoices. In fact, with a yearly churn of less than 10%, it has very low turnover even for a subscription-like business. Operationally, once a business/customer commits to using the Admicom's Adminet product, integration to their own business critical processes is very signficant, and switching costs are hence very high. 

All this has in turn led to an operating profit margin of around 40%, which has been steady for many years. 

2. Strong Growth

Apart from the last 12 months (see above), organic and overall growth has been solid double-digits for many years. CAGR was 56% during 2013-2017; and CAGR was 39% during 2017-2020. Admicom's products offers its SME customers a fundamentally better alternative to a lot of their current solutions, which vary from MS Excel to individual software components from invoicing to worktime monitoring etc., but rarely an integrated solution.

When taken together, the asset light nature of Admicom's business and its very high growth, the company is a great compounder. This is not a surprise for a Cloud based-software business, but such a high level of profitablity, which has led to the company having net cash is rare for a company still in such an early stage development as Admicom. We see this as a positive reflection of the high quality nature of the underlying business. 

With the stock price decreasing to around EUR 90/share from around EUR 145, we see this as a relatively attractive investment that has the potential to growth for many years from a small base.  

Catalyst

Recovery in sales growth from circa 10% p.a. to 20% p.a.; Decrease of uncertainty once personnel changes have been completed/integrated.