Based in Norway, House of Control (HOC) is a small, fast growing SaaS provider of contract and business spend management software. The company has an enterprise value of 1,335 NOK ($157m) and trades at ~6x my calendar 2022 revenue estimate. The thesis is pretty straight forward. I expect the company to accelerate organic revenue growth in 2021, continue to pursue bolt on M&A, and improve margins towards its medium-term target (40% EBITDA margin by 2025). I think execution and greater investor awareness should help the stock’s multiple to narrow the gap versus global SaaS peers. I see the potential for investors to benefit from the “twin engines” of multiple re-rating and fundamental growth and think there is a reasonably good chance this doubles over the next two years with additional upside beyond that.
The company markets its platform as “The CFO’s best friend”. Its solution is designed to provide visibility and control over a company’s contracts, leases, and other recurring expenses (things like coffee machines rentals, car leases, business cell phone plans, real estate, software products, and other office equipment). This data is often stored in excel sheets or other record keeping systems without clear entitlements, transparency into renewals, and granularity of true costs. The company’s software aims fix “contractual chaos” that leads to unnecessary costs and work.
HOC’s core offering, Complete Control provides access to the most basic features to gain control over contracts. This product accounts for 63% of revenue with customers typically signing 3-year contracts with 12 months paid upfront. The platform includes (i) an overview of contracts, liabilities and assets, (ii) notifications of expirations, renewals, and due dates, (iii) budgeted cash flow statements, and (iv) automatically generated asset reports.
The company also offers Supplementary solutions which features such as digital signature, ESG reporting for emissions, advanced contract notifications, document center, and other items. These features are often developed in response to a customer ask and then standardized and offered across the entire customer base. This line makes up ~17% of revenue. Finally, the company offers Business Process Solutions which includes its most complex offerings. Examples include a supplier portal, invoice approval, and IFRS 16 leasing reporting solutions.
The software solves a global, non-industry specific problem which is good for the company total addressable market (estimated to by 60x current rev in Nordics alone). At the end of the fourth quarter, Norway made up 74% of ARR, Sweden made up 10%, Denmark 10% and ROW was 6%. The company only actively sells in the Nordics. The ROW revenue comes from multi national companies starting with a subscription in the Nordics and deploying the solution to entities around the world.
The company has a diversified customer base with over 1,300 customers and none making up more than 2% of ARR. Its largest industry exposure is in retail/hotels/ restaurants/catering at ~20% (many locations, complex lease portfolios, decentralized employees). This exposure was a bit of a drag on results in 2020 but should make for easy comps and improving performance as COVID headwinds subsist.
Thesis Key Points
·Accelerating organic growth in 2021
HOC finished 2020 with organic ARR growth of 18% (+42% including acquisitions). This was negatively impacted by COVID in March and April as the company managed through an uncertain demand environment. New sales performance bounced back sharply following the initial lock down impacts and the company posted sales records in June, October, and November. New sales in the second half of 2020 were 66% higher than the first half of the year. The below ARR bridge shows the quarterly progression with 9 NOKm added in 4Q, substantially higher than previous quarters. I expect this momentum to continue into 2021 leading to accelerating revenue performance.
The primary rationale for the company’s public listing in October was to raise capital for bolt-on M&A opportunities. In 2020, HOC completed two acquisitions, DinERP and Effectplan. DinERP provided over 30 new features that could be upsold to existing Complete Control customers and be used to win new business from customer demanding more complex feature sets. In December, the company announced that it had acquired Effectplan AB which provides budgeting and forecasting solutions. It was a small acquisition but nicely demonstrates the strategy of finding complementary solutions that can be sold to the existing customer base utilizing HOC’s sales resources. Going forward, I expect the company to continue to be active on the M&A front looking to add products with cross and upsell potential. In a recent presentation, mgmt. noted that it has screened over 40 potential targets and remains in active conversations with several.
·Attractive valuation vs global peer group
HOC trades at 9x EV/ 4Q20 ARR and 6x my calendar 2022 revenue estimate. This is a significant discount to both the Nordic and global peer group. Some discount may be appropriate given HOC’s size and illiquidity, but I think the current gap is too large and believe the discount will narrow as HOC executes its business plan.
·Long term targets provide significant upside
During its 4Q20 conf call, management reaffirmed the company’s long-term targets originally shared during the IPO. These targets are for 2025 and include:
1.ARR NOK 500m+ (excluding acquired ARR)
2.30% organic ARR growth 2020-2025
3.110% net retention rate
4.40% EBITDA margin
If we assume these targets are achievable, the current price puts us at <7x EV/ 2025 EBITDA.
CEO bought some stock in the open market in the beginning of Feb.
Disclaimer: The views and opinions expressed in this report are those of the author only and do not reflect the views and opinions of the author’s current employer. This material is being provided for informational purposes and is not to be considered an offer to sell or a solicitation of an offer to buy any investments referred to herein.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.