Description

Crayon is a growth company trading at 13.6x 2024 EPS and <10x 2025 EPS. The company has been written up twice on VIC before; in 2021 when the stock was at NOK 142 and 2022 when the stock was at NOK 115. The stock is now at NOK 85 and the risk-return feels significantly better.

Description:

The 2021 writeup from JohnKimble provides a good overview of the business so I will keep this brief. The company a) resells software from e.g. Microsoft to end clients and smaller integrators, and b) helps clients manage their software. The company is headquartered and listed in Norway.

Software resellers provide companies and other end clients with a single point of contact for all software from multiple vendors, and help clients optimize and reduce software expenses. They also allow e.g. Microsoft to focus on developing software instead of customer support. Cloud computing is a significant and growing part of the business.

Microsoft is Crayon’s biggest vendor, but the proportion of other vendors is increasing.

This is a split of the segments from a presentation at a Berenberg conference in March 2023:

Crayon makes money by getting a cut of license payments (typically 6-7%) and getting paid for consulting services.

Thesis:

- Growth. Crayon has grown gross profit 20%+ p.a. organically over last five years. Going forward the company should be able to grow at least 15%, in line with market; the company has been able to gain market share in the past and expects to achieve 20% organic growth, but we don’t need to assume continued market share gains for the thesis to work. Market growth is driven by digitalization of the economy and especially growth in cloud computing. 

--> Competitive advantages not obvious for a software reseller. However, Crayon should benefit from scale, strong relationship with Microsoft (#5 Microsoft reseller worldwide) and a proven track record of helping and saving money for clients.

- Margin increase. Crayon’s most mature and profitable region is the Nordics where it makes 30%+ EBITDA/Gross Profit margin. The company is still investing in other countries where sufficient scale has not yet been achieved. YTD2023 margin in Europe and APAC&MEA is mid teens and negative in the US. This has led to a group margin of mid to high teens. As new markets mature, group margin should increase and profit growth should be significantly higher than revenue growth

- Clarity on working capital situation. Crayon has had a lot of incoming questions on very weak working capital. The weak working capital in Q3 is mainly due to a) outstanding receivable of $45m to Philippine Government and b) timing mismatch of receivable and payable around quarter end in Q3. The company believes this should reverse and guides to return to negative working capital 

- Valuation. Crayon trades cheaply both on standalone and relative valuation basis. Peers such as SoftwareOne with lower growth prospects trade at same or higher EBITDA multiple than Crayon

Risks:

- Weak cash flow not just due to temporarily working capital issues. See Crayon's call in Sep 2023 for questions/allegations against the company

- Microsoft relationship important - any changes to relationship, incentives etc. could be a risk 

Catalyst

Revenue and earnings growth over coming 2-3 years

Cash conversion improving and clarity on working capital deterioration