Admicom - A Finnish Software Gem
Admicom (HSE: ADMCM) is a Finnish software company that provides pure cloud- and SaaS-based ERP solutions to its clients within the construction industry. I believe that the stock currently offers an attractive risk-reward with market outperforming returns over the next five years. My thesis is mainly based on the following points:
The stock is down signficantly from its ATH as the Covid-19 pandemic appears to have longer lasting impacts on Admicom’s customer base than expected, tempering growth expectations. However, I expect this issue to resolve itself when economies recover and the industry returns to normalized levels from H2 2021/H1 2022.
Admicom still has plenty of growth opportunities left including product extensions, business line expansion, entrance to international markets and M&A options.
Admicom is a small cap stock with low analyst coverage (only 1 currently), which I expect to increase now that the company has started to also report in English.
The Business
Admicom provides a comprehensive Enterprise Resource Planning (ERP) system called Adminet to SME’s within the Finnish construction industry. The ERP system integrates operational and financial management solutions with a strong focus on automation. Admicom offers its customers functionalities such as invoicing, project management, product control, supplier price listings, information management (CRM), accounting and payroll services. Admicom’s value proposition is that customers no longer need to spend time behind the computer fixing administrative tasks in Excel or a legacy software service, but instead focus on their work in the field. Customers save a lot of money by avoiding routine office tasks and cutting administrative costs.
Admicom’s system is provided as a Software as a Service (SaaS) that charges its customer on a monthly basis. On top of that, the ERP system is 100% cloud-based, meaning that customers can easily access the system from anywhere and on any device, as long as they have an internet connection. It furthermore offers customers real-time insights into their business, which aids strategic decision making and operational control. Another benefit of the SaaS and cloud model is that it is easily deployable and scalable for customers. In contrast to legacy ERP systems with long deployment periods, Admicom’s offering only takes a few months to get implemented.
Admicom’s revenue streams can be divided into three segments. The SaaS solution constitutes approximately 72% of revenues, accounting services 21%, and consulting, education and other services make up the remaining 7%. In total, 91% of Admicom’s revenues are recurring. The pricing of the system is flexible, adjusted each month depending on the customer’s usage volume and annually based on the customer’s revenues. For its main SaaS offering Adminet, I estimate income per customer (note: not user) to be in the area of €1500 per month, based on 90% of the 91% recurring revenues being derived from this service and >1000 deployed Adminet ERP systems.
Target Markets
Admicom’s target market consists of Finnish SMEs with the majority employing >10 people and having annual revenues in the range of €1M-€5M. However, over the last years Admicom has increased its attention for both smaller and larger clients through new product offerings and acquisitions (i.e. Tocoman). For example, in 2018 Admicom introduced Adminet Lite, a limited version of Adminet for their smaller customer segment (<€1M in annual revenues). The most basic version of Adminet lite can already be implemented for €45 p/m + €10 per additional user. For a more comprehensive lite version also including payroll, accounting and mobile services, a customer pays €85 p/m + €20 per additional user.
Besides targeting SMEs, Admicom currently focuses on customers in three main industries. The first industry is that of building services (engineering and installations), which is Admicom’s main market with approximately 24% market share and the market where the company started its operations in 2010. Companies within this industry are focused on services such as heating, ventilation and air conditioning (HVAC), electricity and plumbing.
The second industry Admicom focuses on is that of pure construction, including building projects, painting, roofing, renovating, infrastructure plans and civil engineering projects. Admicom currently has a lower penetration in this industry (10%), while the opportunity is twice the size of that of building services. Through the recent acquisition of Tocoman, Admicom aims to strengthen its position within the construction industry with the aid of Tocoman’s cost accounting and production management solutions (e.g. Building Information Modelling (BIM)). This development will further enhance future growth opportunities from the networks and partnerships obtained through the acquisition, as well as the launch of new cloud-based products. For example, the cost accounting software has recently also been launched as a cloud solution. In addition to that, the acquisition enables Admicom to obtain a stronger footprint with larger customer bases (>€5M in annual revenues).
The third and final industry is that of industrial manufacturing, which is the most recent market Admicom has entered. The market opportunity is slightly below that of construction, but the current penetration rate is also much lower (2%). Hence, Admicom still has plenty of growth opportunities here by establishing a more dominant market position. It will be interesting to see which other markets Admicom will enter in the future and whether they will remain within the scope of the construction industry.
A commonality among all Admicom’s core markets is that the level of digitization remains very low. The construction industry is one of the largest in the world ($10T -> $14T in 2025), however the rate of technological adoption is one of the lowest. Following the McKinsey report, the construction industry lags behind all other major sectors with regards to digitization, except for agriculture and hunting. Intense competition and the need for increased labor productivity are strong drivers for implementing new technologies such as Admicom’s services. Especially the transition of companies from legacy software to SaaS solutions represents an obvious tailwind for Admicom. Other tailwinds include growing population, urbanization and the need for ongoing maintenance and repairs. The Covid-19 pandemic has provided a major headwind in the form of less office constructions due to the Work From Home (WFH) trend, but also tailwinds with people investing more into home renovation projects and infrastructure stimulus plans. Nevertheless, the construction industry is highly cyclical, which has a considerable impact on the growth outlooks for both the industry and Admicom. In conclusion, I believe Admicom is well-positioned and has substantial growth opportunities in their current markets, but I would like to see the company expand both internationally and to other business lines in the future to support long-term growth rates.
Competition
Admicom themselves have stated to be the market leading solution within the building services industry, while also having a dominant position within the construction market (partly due to the Tocoman acquisition). Admicom’s edge is commonly described as it being the only company to provide a comprehensive ERP system for SMEs that is both SaaS- and cloud-based. Furthermore, Admicom has an extensive focus on automation and offers in-house financial management services. Switching costs for ERP systems are also relatively high, which provides Admicom a strong position within their own customer base. In my opinion, Admicom faces three types of competition:
Direct
Indirect
Legacy
Direct competition forms the main threat to Admicom’s operations and consists of several software companies also providing ERP systems, including those focused on the construction industry niches. With regards to building services, Admicom faces mainly competition from Pajadata, Visma L7 and Ecom. For construction the main competitors are Jydacom (owned by TietoEVRY) and Lemonsoft, while for manufacturing competition consists mostly of Oscar Software, Visma Nova and CGI (C9000). Comparing these competitors to Admicom, it becomes apparent that the competitors often do not offer the same comprehensive package that Admicom provides. The majority either lacks specific features (e.g. accounting and payroll services) or are not available through the cloud. Nevertheless, some competitors state working towards this or already offering almost identical services (e.g. Visma L7 or Oscar Software). Besides these competitors that are also more focused on SMEs, Admicom faces tougher competition with larger customers. In this segment it is not uncommon to compete with services such as Microsoft Dynamics and SAP. While these tech giants are obviously hard to beat, I do not expect them to go after Admicom’s SMEs markets, mostly because the opportunity is probably not lucrative enough to them. Additionally, as mentioned before, SMEs often do not require extensive ERP systems, but require something that can be more easily deployed, such as Admicom’s Adminet. Looking at direct competitors in neighboring countries, Admicom might face future competition from companies like Jeeves, Monitor and Rambase, whom are all based and operational in Scandinavia.
Indirect competition mostly consists of companies offering partial solutions of the ERP systems, such as Talenom for accounting and payroll services. I believe Admicom holds a strong advantage over these competitors by being able to offer similar services plus more. Admicom’s niche focus should also be beneficial here to acquire customers. While companies such as Talenom, Heeros and Visma’s Netvisor pose for indirect competition in Finland, Admicom should also be aware of international indirect competitors, such as Fortnox (accounting).
Lastly, Admicom also competes with legacy solutions, such as Excel. It is not uncommon for especially small entrepreneurs to still be working with spreadsheets. This is why Adminet Lite proposes such a strong value proposition, as it enables the conversion of the smallest target markets.
Management & Ownership
Admicom was founded in 2004 by Matti Häll, who together with his team performed six years of R&D before launching the product to the market. Prior to starting Admicom, Matti Häll founded a software company called Liinos, which he sold to Visma in 2004. Häll has been the CEO of Admicom until his resignation in 2016, after which he continued to function as the chairman of the board. However, he also resigned from this position February 2021, where he got replaced by Timo Häll, the previous vice chairman.
Antti Seppä has been the CEO and president of Admicom since 2016, but he will also be resigning at the end of 2021 after serving a tenure of 5 years. The reasoning behind his departure has been communicated as the company requiring a new management team that can implement the company’s new organizational model (matrix à line) and strategies for the upcoming years. Obviously, the true reasoning might be something else, but it will nevertheless be interesting to see who the company hires.
Last August Admicom already hired former sell-side analyst Petri Aho as the new CFO, who has significant experience as an equity analyst on the construction and software sector. Anna-Maija Ijäs has been appointed as the managing director (CEO) of Admicom Finland in January 2021. She has several years of sales experience within Admicom, which I see as a positive as she has been in close contact with clients. Simon Villa is the current director of product development and has been so since its foundation, while previously having worked at Visma. It is a good indication that the person highly involved with the origin of the product still being involved with the product development today.
Admicom has a high insider share ownership, but this is mostly derived from the founder Matti Häll owning 30.7% of the company. CEO Antti Seppä owns approximately 3.7%, while the rest of the management team do not own any noteworthy stakes except for Matti Häll’s granddaughter and Adminet Lite director Mia Häll, who owns around 1.6%. Apart from insiders, the company is mostly owned by Nordic institutions, especially those focused on small caps. An interesting fund owning Admicom is TIN fonder (~4,5%), a Swedish fund focused on technology companies that has shown signs of activism in the past. Last January they for example publicized a statement regarding Admicom where they actively promote internalization and growth ambitions.
All in all, in the near future I expect some insider selling from both Matti Häll and Antti Seppä since they are losing their connection with the company. Furthermore, I suspect Matti Häll being the reasoning as to why Admicom currently provides a juicy dividend to its shareholder (>50% of earnings). According to my calculations, his stake provided over one million euros in dividends in 2020 alone. Hard to blame the guy in retirement enjoying the benefits of his success. Note that this is heavy speculation from my side and does therefore not equate to the truth, but the distributions of dividends for a strong growing SaaS company is highly unusual. Preferably I would like to see the company removing the dividends and focus on reinvestments instead, which I will further touch upon later on. Admicom currently only has one sell-side coverage, namely Inderes Oy (the CFO’s former workplace), but I also expect this to increase as Admicom started to report in English, possibly also attracting more international institutions.
Opportunities
Before diving into the quantitative aspect, I want to discuss the opportunities and risks Admicom currently faces. I believe Admicom has plenty of growth opportunities left that can help maintaining long-term top line growth:
Increasing Market Share (%): Admicom clearly still has plenty of room left to grow organically in their core markets in Finland. Especially appealing to larger customers can be beneficial for future endeavors, while both the construction and manufacturing markets have the most room left for growth.
Up- and cross-selling: Admicom still has opportunities left to enhance their current product offering by introducing new features and modules. This allows for growth from within the current customer base. Adminet lite has been a good example of locking in customers with a simplified solution from which one can upgrade. New modules enable cross-selling, consequently enhancing the monthly revenues derived from one customer (increases ARPU).
Business Line Expansion: While I believe Admicom should continue to focus on the construction industry, it is not illogical to think that the company can expand to other industries in the future. Following an Inderes report, industry segments of interest could be security, locks or real estate. Specifically the latter could in my opinion be a great expansion that should be relatively easier to adopt to.
International Growth: This might be both the hardest, but potentially also the most lucrative opportunity that Admicom faces. International expansion is hard and requires especially for SMEs a lot of localization. However, the total addressable market (TAM) is significantly larger beyond the Finnish borders. The number of enterprises in the broad construction sector in Finland totaled 82.470 in 2016, whereas neighboring country Sweden totaled 213.434, which is more than double that of Finland. Hence, expanding operations abroad could significantly enlarge Admicom’s TAM. Admicom has remained rather conservative in the past on international expansion, but the company did include international markets as an inorganic growth opportunity for their 2021-2023 strategy.
M&A: In 2020 Admicom acquired Tocoman to enhance their services for the construction market, while also appealing to customers with larger turnovers. I expect Admicom to continue seizing inorganic growth opportunities through acquisitions, utilizing this strategy to either establish more dominant positions in already entered markets (e.g. manufacturing), enhance their current product offerings, expand to new business lines (e.g. real estate) or expand abroad (e.g. Scandinavia). Admicom has positive cashflows, plenty of cash, no debt and can easily raise additional capital to engage in more M&A activities.
Risks
Apart from opportunities, Admicom obviously also faces considerable risks. The following three main risks were identified:
Cyclical customer base: The construction industry is highly cyclical, which includes a lot of instability during downcycles with many customers struggling financially or going bankrupt. Even though Admicom functions as a relatively stable SaaS business, churn rates and new customer acquisitions deteriorate in poor economic environments. The recent Covid-19 pandemic has provided a great illustration of this, with organic growth declining significantly, adjustment fees rising less and higher churn rates. Churn rates have historically been relatively low (~2%), but have increased in 2020 (<5%). It should be noted that the majority of the churn stems from customers going bankrupt or being acquired by larger companies, rather than switching to competitors. 2021 projections for the industry do not seem rosy, so Admicom faces tough comps for the current fiscal year.
Emerging competition: With SaaS and cloud solutions rising in popularity, it is not unreasonable to expect emerging competition from new technological companies in Admicom’s industry. Nevertheless, Admicom serves a special niche with already established players, consequently making it harder for new companies to enter. Furthermore, Admicom spent 6 years on developing their initial product, so it requires substantial effort and resources to produce a superior offering.
Management Execution: With all the recent changes in management and the new growth strategy, the major risk I believe Admicom faces is management execution. Whether the new management team can pull off the previously mentioned growth opportunities remains to be seen. M&A integration, business line expansions and entering international markets are no easy tasks to fulfill. The appointment of a new competent CEO might ease down some of these risks.
Financials
It’s difficult to not fall in love with Admicom’s financials. The company operates at 95%+ gross margins and has seen its top line grow organically 30%+ annually over the last couple of years. 2020 has been an exception, partially due to the Covid-19 pandemic. While revenue grew with 40%, organic growth only accounted for approximately half of this. However, Admicom has at the same time proven the scalability of the business model. EBITDA margins have improved significantly over the recent years, increasing from approximately 22.7% in 2015 to 45.4% in 2020 (55,1% incremental on average).
The majority of Admicom’s expenses can be derived from personnel costs, which have decreased substantially as part of revenues (46.5% in 2016 to 37.4% in 2020). Of the total number of staff, 31% works with accounting services, 19% in product development, 18% in implementation services, 16% in sales and marketing, and 8% in customer support and administration each. Other operating expenses, such as rent and auditing fees, are the second biggest cost item and have ranged between 12%-14% of revenues. Depreciation and amortization (D&A) commonly range between 3%-6% and the company pays around a 20% tax rate (= Finnish corporate tax rate).
Going into 2021, management expects revenue growth to be between 10%-20% because of higher forecast uncertainties (Covid-19), more bankruptcies and lower adjustment fees (remember Admicom adjusts prices annually based on turnover etc.). EBITDA margins are guided to be between 40%-50%. Admicom reported 2021 Q1 numbers of 21% revenue growth and 45% EBITDA margins. The stock took a short nose dive as the company indicated that it expects to end up in the lower range of the guided revenue growth for 2021. It is furthermore expected that Q2 will be the worst quarter in terms of growth. Admicom’s strategic forecast for 2021-2023 targets a 20%+ revenue CAGR, including a stronger emphasis on inorganic growth opportunities, with similar EBITDA margins as guided for 2021.
Admicom has a robust balance sheet with no long-term interest-bearing liabilities and over €13.8M in cash. The company furthermore operates with a negative net working capital, demonstrating its ability to generate cash quickly through its asset-light business model. Return on equity (ROE) and assets (ROA) have consistently been above ~30%+ over the recent years, they have however been trending downwards.
Valuation
At a price of €92, Admicom is trading at around 19x EV/Sales and 41x EV/EBITDA, which is not necessarily cheap but slightly below the 2-year historic median (46x EV/EBITDA). Nevertheless, looking forward five years, I believe this is not a bad area to start considering the accumulation of shares. For my assumptions I remain relatively conservative by following the company’s guidance on growth and margins. Furthermore, I expect Admicom’s TAM to remain stable for 2021, after which I estimate a 5% CAGR until 2025 based on factors such as population growth, urbanization, and digitization trends. For the whole 5-year period I expect a 17.3% revenue CAGR, leading to 21% market share on 2025 numbers. The majority of this growth should be derived from increasing market shares in especially the construction and manufacturing industries plus strong Adminet Lite development. Moreover, I expect EBITDA margins to improve following the 5-year average incremental EBITDA margin of 55.1%, hence reaching 50.4% in 2025. Further scalability of the business model should come from decreasing SG&A expenses as part of revenues. Lastly, I expect the FCF conversion rate to remain stable at 75% as the upwards changes in net working capital compensate the convergence of D&A and capex expenses.
Discounting the cash flows and utilizing a 25x EV/EBITDA exit multiple, I estimate the stock to provide a 10% IRR for the next 5 years at €90.34. Obviously, a higher exit multiple leads to a higher IRR and vice versa. My estimations do not include any of the potential growth opportunities, such as M&A, international expansion or new business lines. Therefore, I see a strong optionality in the stock of accelerated top line growth by engaging in the aforementioned growth opportunities. Preferably I would like to see Admicom to stop distributing dividends and potentially even sacrifice margins temporarily to support growth rates and establish a more dominant market position.
For a bear case scenario, I assume a 10% revenue CAGR for the 2021-2025 period and a 15x EV/EBITDA exit multiple. The new exit multiple alone would already imply the stock to be flat for the next 5 years, whereas it in combination with the lower growth rate would provide severe negative returns. As a consequence, management execution regarding Admicom’s growth strategy forms a substantial risk to the whole investment case.
Conclusion
I believe Admicom to be a great business with high insider ownership and a market leading position within their niche. The company provides a valuable and comprehensive ERP system with several competitive advantages. Admicom experiences favorable industry tailwinds with the construction industry being both huge and ripe for more digitization. Like most SaaS- and cloud-based companies, Admicom’s business model is extremely profitable and highly scalable. The company has no long-term debt obligations and plenty of cash on the balance sheet. On top of that, I identify several growth opportunities that can enhance long-term growth rates and function as a strong optionality to push the stock much higher in the upcoming years. Furthermore, I expect the stock to attract more attention from investors as the company has started to provide information in English. Nevertheless, Admicom faces some temporary industry headwinds and contains several risk factors that should be taken into careful consideration. In my opinion, management execution to realize strong continuous growth rates forms the biggest risk to the investment thesis. Based on some simplified calculations, I consider the low €90’s an attractive area to buy shares.
Disclaimer: I’m long Admicom. The information contained in this report shall not be understood or construed as financial advice. I am not a financial advisor, nor am I holding myself out to be, and the information contained in this report is not a substitute for financial advice from a professional. I shall not be held liable or responsible for any errors or omissions from this report or for any damage you may suffer as a result of failing to seek competent financial advice from a professional.