Core investment thesis: increasing revenue share of software business from 17% in ’17 to 39% in 1H24 is driving further scale and operational leverage on the back of secular growth trends – that are partly sputtering this year. This should translate into >15% operating margins from current ~10% in 2026 – although we take a discount.

The company is a darling of the Dutch small cap space with a few large shareholders that are not very keen on delisting or selling the company. The float is quite small so this is probably more something for personal accounts. Further, the IR function is under developed in my opinion as there are no investor calls or detailed segment details. So, in this writeup I also had to deal with limited information to back-up certain assumptions. 

Nedap is a Dutch small cap and listed since 1947 in Amsterdam. The company started in 1929 as an electronics contractor and has gone through several transformations allowing it to survive and thrive. Starting early 2000, the company began to transition from a hardware company to software and decided in 2009 to outsource hardware production and focus on high margin activities instead. Key technologies that resulted in the current business is RFID that Nedap pioneered in the 1970s and first commercialized in 2003. Nedap developed several hardware and software propositions around this tech that has resulted in the four current markets, all >15% of revenue (not more detail available on breakdown unfortunately):

-       Healthcare – 100% recurring: Electronic Health Record (“EHR”) cloud business for administrative, logistic and care processes at care providers. #1 position in elderly care, disabled care and mental healthcare in the Netherlands. Acquired MediKit in 2023 and entered the general practitioners market. Market dynamics: 1) expanding market share in elderly care, 2) reinforcing the position in disabled care and mental healthcare, 3) expanding # of applications leading to larger share of wallet and 4) gaining market share with GPs which has ample room for growth both in revenue and margin improvements.

-       Livestock Management: SmartTags on individual cows generate data that through the app CowControl are translated into relevant daily tasks and reports to manage the herd. A SaaS model is introduced by the original name “SmartTag-as-a-service” and will deepen the #1 position in dairy farm sensors. Market dynamics: globally 400 million cows, 10% is held by large farms (100+ cows). Distribution in place to reach 90% with an addressable market of 36 million cows and Nedap owns 15-20%, which leaves ample room for growth.

-       Retail – recurring with monthly fixed payment per store: started out with the famous security gates in shops that will ring when you pass with a piece of clothes now transitioned into a full blown inventory management system through the !D Cloud app that increases inventory accuracy from ~70% to ~98% through RFID tags in every item (low costs of tag allows this). Notable clients are Lululemon with 600 stores and PacSun (~300 stores) in the US and Footlocker with 650 stores in Europe. Market dynamics: currently 10.000 stores are connected to the platform and aims to grow to 40.000 and over time 100.000 indicating the growth potential, although in the near term sales have dropped due to hesitance in doing new investment in the current macro environment.

-       Security Management: the AEOS system combines hardware with software for entrance control (e.g. keyless opening doors) and management for corporates – every day 50 million doors are opened with Nedap technology. The company introduced a SaaS model last year, Access AtWork targeting SMEs. Another innovation is Pace where companies get a digital twin of there building and can easily manage access rights to individuals. Market dynamics: Access AtWork and Pace are the growth drivers as further penetration for AEOS is hard.

Combined we expect at least high sd growth rate over the coming years.

Valuation

Key drivers of the valuation are 1) high sd revenue growth (~7.5%, management assumes ~9%) and 2) operational leverage as headcount growth is outpaced by (recurring) revenues growth. Management expected growth from ’23 operating margin of ~10% to 15% in 2025. However, we think it may take more time as TTM operating margin is depressed due to the slowdown in Retail and Livestock Management (12.5% operating margin in ’26 growing to 15% in ’30). CAPEX is expected around to grow to EUR 12m in 2025 and remain a bit below 5% of sales. Taking a 10% discount rate this results in a value per share of EUR ~94 vs EUR ~57 today (~65% upside). Taking management assumption results in 100% upside. Downside where margins remain in line with TTM (~8.6%) and base case growth gives the current share price (so 0% upside).

Key risks

-       Market growth comes to a halt and Nedap is not able to keep churning out innovative products. We are not so worried about the latter, but a bit more about the former in the short term. In the long-term though, these markets seem solid. For instance, in Healthcare there is a very clear trend of more long-term care for elderly as the Dutch population is getting older.

-       Management/culture: the company is a very innovative business that often forgot to commercialize innovations. Also, they failed to deliver on previous growth strategies and are delayed on this one. Hence, we are mostly worried about a combination of somewhat slower growth and a growing headcount leading to flat margins. Management has been very focal about the slowdown in hiring and that they expect this to be slower than revenue (key ingredient for operating leverage).