ReadSoft RSOFB:SS
November 11, 2011 - 12:39am EST by
tony411
2011 2012
Price: 18.00 EPS $0.25 $0.28
Shares Out. (in M): 32 P/E 10.9x 9.6x
Market Cap (in $M): 89 P/FCF 6.5x 6.0x
Net Debt (in $M): -16 EBIT 11 12
TEV ($): 73 TEV/EBIT 6.8x 5.9x

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Description

ReadSoft (ReadSoft.com, RSOFB:SS) is a Swedish company that sells software and services to help companies automate document processing.  Essentially, they digitize printed, emailed and other “unstructured” documents (invoices, contracts, loan documents, etc.) and route either the digital documents themselves or the information contained in them to the proper systems, databases, and people in a company.  In the automated invoice processing segment they have over half the market, and they also compete in automated document processing overall, where Nuance is the worldwide leader.  The PE on a TTM basis is 10.4x and this doesn’t include the SEK 41.7 million in current assets (cash, A/R, and other current assets) less all liabilities, representing SEK 1.28/ per share. 

 

ReadSoft’s business is steady and boring—they have been in operation since 1991, the founders still run the company (although one of them, the current CEO, is about to step down), and founders own a quarter of the shares.  The company weathered the tech downturn of the early 2000’s and used the learnings from that experience to improve their performance in the current crisis.  Through the downturn since 2006 company sales have continued to grow each year (although not by much in 2010), ReadSoft has remained profitable every year, and the company now offers a SEK 0.25/share dividend.  The automated data capture market is growing by 11% a year, which makes sense given the trend toward digitizing information, although admittedly ReadSoft’s sales growth—a CAGR of 8% since 2006—is trailing the market overall.  However, ReadSoft is growing EBITDA at nearly a 13% CAGR over the same period, indicating that they are achieving the size necessary to reap economies of scale in the business.

 

9 out of 10 shareholders of the company are Swedish, which, given the turmoil in the Euro zone, I see as a positive.  Unlike the US, Japan, and many of the Euro-zone countries which have ballooning debt-to-GDP ratios, Sweden elected a conservative coalition government before the financial crisis that cut government spending, privatized the postal system, and paid down Sweden’s foreign debts, positioning the country relatively well, with currently a 36% debt-to-GDP ratio, when the crisis hit.  As a dollar-based investor, given the macro risks of euro, dollar, and yen debasement, I’m happier owning SEK-based investments these days than those other currencies.  

 

Admittedly, ReadSoft’s customers would be impacted by any worsening of the global economy.  However, the company has a diversified customer base, with over 6000 customers worldwide, and more importantly historically 95% of service contacts (which represent 1/3rd of sales) are renewed, making the business resilient to a further downturn.  Essentially, once a company picks a document processing provider, they are unlikely to switch or to go back to the old way of manually doing things.   ReadSoft is also using their extensive customer base (mostly invoice management clients) to cross-sell those customers on other solutions.

 

There are two notable risks:

  • A new CEO, Per Åkerberg will be joining the company.
  • As a tech business, there is always the risk they are disrupted by a new technology startup.  However, given the need to integrate with many in-company systems, it is a hard business for some guys in a garage to disrupt.  ReadSoft is also actively launching new products that embrace the current trends: they are offering a cloud-based SAAS solution for SMB; financing solutions for customers; and, a mobile phone product for capturing documents on the go.

 

 

Catalyst

Investing in ReadSoft gives you a small 1.4% dividend yield, upside optionality and downside protection.  On the one hand, if the global economy improves and we move into full recovery mode, ReadSoft’s sales will improve and it is likely we would also see both margin and multiple expansion, as the market values ReadSoft more like a growing tech company.  On the other hand, if the macroeconomic situation declines, and we see increasing currency debasement in Europe, Japan and/or the US, ReadSoft has pricing power to weather inflation and a likely stable home currency, the Kroner.    In the worst case of global economic stagnation and potentially deflation, due to the costs of switching providers, ReadSoft’s customers are relatively locked in.  So essentially this investment is protected on the downside from macroeconomic threats while providing value on the upside if or when things recover.
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