Zalaris ASA ZAL
January 27, 2015 - 7:54am EST by
2015 2016
Price: 30.00 EPS 2.3 3.2
Shares Out. (in M): 19 P/E 13.7 9.7
Market Cap (in $M): 573 P/FCF 13 9.4
Net Debt (in $M): -68 EBIT 59 83
TEV ($): 521 TEV/EBIT 8.9 6.3

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  • Analyst Coverage
  • HR Service
  • customer stickiness
  • Founder Operator
  • Insider Ownership
  • Discount to NAV
  • SaaS
  • Potential Acquisition Target
  • High Barriers to Entry, Moat



Zalaris: fast growth and moats at a very reasonable price 


Key Figures  
# shares 19.1
Market cap 573
Net IBD  -68
Minority interest 16
EV 521


Multiples 2015 2016 2017
P/E 13.7 9.7 7.2
P/E ex cash 12.1 8.6 6.3
EV/EBITDA 7.5 5.5 4.1
EV/EBIT 8.8 6.3 4.7


Thesis summary

Zalaris is an attractive and asset light business with a long growth runway trading at a substantial discount to intrinsic value. ZAL holds the only license to implement SAP’s HR solutions (SaaS model) in the Nordics. They do so through their own user interface. They do implement other solutions, but SAP is what most big clients run. In addition, ZAL has a consulting unit which services clients with on-premise solutions. The consulting unit offers full implementation of system functionality and provide pre-study, design, configuration, testing, migration and og-live support services. ZAL is positioned for fast earnings growth in the years ahead since the Nordic market for SaaS HR services is immature and growing at over 20% per year. As this is a name covered by only two sell-side analysts and ZAL as a consequence has enjoyed little institutional interest, this growth is not discounted in the share price today. Other positives include long term contracts providing customer stickiness and very good earnings visibility, a balance sheet with net cash equal to 3.50 NOK per share, and long term tenured management with skin in the game (the founder and CEO is the largest shareholder with 16%).

I expect a compound annual return around 23% through 2017 based on an average of a DCF and what I consider a fair multiple of 10x EV/EBITDA on my 2017 figures. Note that my growth estimates on average until 2020 are lower than management expectations.

The most important catalyst is winning new, large clients. ZAL could be an attractive buyout target, since it is growing fast (EPS should go to 2.3 from 0.8 from 2014 to 2015), has several obvious levers to pull for increased efficiency and a fairly open shareholder structure. So it’s not hard to imagine private equity players being interested. An industrial buyer looking at the Nordic market may also find it more effective to buy the company outright rather then try to grow organically while competing with Zalaris on its home turf. I am not basing my valuation work on this eventuality, but a buyout case is roughly sketched out in the appendix.

The main risks include the loss of key clients, loss of SAP license (very unlikely) or weaker license terms, or new competitors with other platforms entering the Nordic market - fiercer competition could lead to increased client churn and/or price pressure on renewals and fewer new client signings.


The business

Zalaris is the biggest HR and payroll BPO supplier to large corporations in the Nordics, and one of the largest in Europe. The value proposition is obvious: outsourcing HR services reduces costs and time spent on administrative tasks for clients, allowing them to focus resources on their core business. Target clients are large, private sector companies with over 1000 employees. ZAL currently has about 40 large BPO clients and many smaller ones and services about 150 000 employees in the Nordic region currently. The largest clients include Nordea, Telenor, Statoil, Statoil Fuel and Retail, Proffice, Codan Insurance and Siemens. Several clients have ZAL as a service provider in multiple geographical locations. Today, about 47% of revenues are generated in Norway, followed by 22% in Sweden, 17% in Denmark, 13% in Finland and 1% elsewhere. Services offered include:

Salaries and Payments – Taking care of employee data, salaries, travel expenses and bonuses

Support & helpdesk – Questions from employees on salaries, expenses, maternity leave, insurance

System adjustments – Pension plan and incentive scheme changes and administration, union terms

Operational follow-up – Securing the proper registration of all travel expenses, hours worked etc

Controls – Registration of receipts, reimbursement, vacation planning, pension scheme follow-up

Reporting – Creating useful data collections for clients that can be used for analytical purposes

Other manual work – Manual error adjustment, job sertificate creation, updating employee data

Service level agreements (SLAs) regulate what services are offered. ZAL has four cloud based «core» product packages that include different services. Most clients have one of the two most comprehensive offerings today. For Zalaris, this is optimal as the higher level of complexity and number of services increases both revenues for ZAL and switching costs for the client. Typically, clients increase the number of services sourced from ZAL over time. Revenues are sticky, as contracts are typically long term in nature (average of 5 years).

In addition to the services described above, the company offers add-on services like digital personal archives (digital personell files), mobile solutions (acess to the Zalaris services via mobile devices), HR analytics (statistics on headcount, sick leave, employee satisfaction etc) and talent management (performance reviews etc). The company has described the upselling potential from add-on services to existing clients as equivalent to 50% of current revenues, which is obviously significant.

Growth potential

The remaining Nordic market for services like Zalaris’ is about 1000-1500 companies comprising 4-4.5m employees according to management. In theory, that leaves plenty of room to grow revenues several times over for Zalaris. Everest Group estimates the SaaS HR outsourcing market in the region will grow by 23% until 2017. This rhymes reasonably well with medium term guidance from management, who think ZAL’s top line will grow by 20% per year in the medium term (defined more specifically when pushed as 3-5 years). After that they expect 10% growth in revenues longer term. This growth will come as a combination of new client wins and upselling of add-on services. I am not giving as much thought or credit to any ambitions regarding growing in the rest of Europe as the competitive situation is less favorable there, but it is a possibility in the longer term.

Moats and competitive position

Zalaris’ primary economic moat is a high switching cost for clients, reflected in a 99% customer retention rate historically. Once a client is using a ZAL solution, switching to a competitor is costly and time consuming. This means sticky revenues. Very few clients bother to switch to a new system after only one contract cycle. The average outstanding contract length for the 20 biggest clients is 3 years, typically an initial contract is for 5 years.  Note that this also means poaching clients from other vendors is tough. Luckily, ZAL’s target market is immature and the number of new outsourcing prospects is high.

Another advantage ZAL has is that it is the only player in the Nordic market to offer a fully integrated SAP solution. Moreover, ZAL has decided to keep their local service centers in locations with a lower cost base. For example, they have a service center in Karlskrona instead of Stockholm, and in Rovaniemi instead of Helsinki. This allows them to pay lower salaries, have less employee turnover and still keep in touch with local conditions and regulations.

Local competitors include Bluegarden, Aditro and KMD. ZAL has an advantage versus these players because it has a lower cost base and because they offer a fully integrated solution from SAP. Global competitors include ADP, Paychex and Northgate. These big players have no service centres in the region which makes it more difficult to serve clients optimally because they don’t have the same detailed understanding of local regulations like sick leave and benefits, tax laws etc. This is more complex than say accounting which is more easily offshored. Local clients therefore tend to prefer a vendor that speaks the same language and deep knowledge of local conditions. Despite having service centres locally, ZAL does near- (Latvia) and offshore (India) several routine tasks and realize cost savings because of it. According to the company, there is some low hanging fruit here in terms of further cost reductions going forward, which will help ZAL realize its margin targets over time.


Management, ownership and incentives

The management and board all appear to have the proper qualifications. They all have extensive experience in HR services, and several have experience from large IT services companies as well. My personal impression of senior management is positive, they seem conservative and non-promotional.

CEO: Hans Petter Mellerud

The CEO founded the company in 2000. Before Zalaris, Mellerud was partner at Accenture, where he led business development for the outsourcing department. He has an MBA from IMD in Lausanne and a BSc and a MSc in Computer Science from the University where he graduated with honors. Mellerud owns 16% of Zalaris today and is the largest shareholder.

CFO: Nina Stemshaug

Stemshaug joined Zalaris in 2007 after having held g several finance and controlling positions in German industrial companies. She has an MBA from BI in Norway. Ms Stemshaug is also responsible for investor relations at Zalaris (perhaps an indication of a frugal company culture).

Chairman of the board: Lars Henriksen

Has been on the board since the beginning and has been chairman since 2010. Before 2010, Mr Henriksen was managing partner for Accenture in the Nordic Region.

Board member 1: Narve Reiten

Founder of private equity firm Reiten & Co, which owns 10.2% of Zalaris. MBA from BI and a certified financial analyst (CFA). Also experience from various business operations in the Nordic region.

Board member 2: Liselotte Engstam

Engstam runs her own corporate business advisory Innovisa AB. Partner at venture capital firm Business Angels in Stockholm. Nordic CEO of HCL, a global BPO services provider until last year. 20 years experience from IBM where she led the BPO division in the Nordic region as well as Strategy and Change Consulting division for Europe and the Middle East. Independent board director.

Board member 3: Jan Koivurinta

Broad experience in international aquisitions and business integrations in Europe, the US and Asia. Senior advisor to the Nammo Group and business and industrial advisor to the Kongsberg Defence and Aerospace division (at Kongsberg Gruppen). MBA from IMD in Lausanne.

Board member 4: Tina Steinsvik Sund

Ms Sund is strategic advisor to the CEO at PayU, and formerly EVP and COO at Sparebank 1 SMN. She has 10 years of experience from Intel from her time as senior investment manager and related positions. Prior to Intel she worked at Accenture specializing in change management. MBA from INSEAD and MSc in engineering from the Norwegian Institute of Technology (NTNU).

Pre-mortem: a summary of the most important risks and negatives to consider

  1. SAP could worsen terms of license or not renew license agreement, or offer products directly to customers, eliminating the need for Zalaris.

Mitigant: The current license agreement rund until 2018. ZAL expects terms to be comparable to what they are currently. SAP is in the midst of a big effort to increase cloud based income as software installed locally is losing share and cloud solutions grow. This means SAP is incentivized to grow rather than to maximize margins, and that they depend on players like ZAL to get their product out to as many clients as possible. As such, I think this is a limited risk. As for SAP offering an integrated solution directly, this would run counter to the stated strategy of the company, which is to focus on developing the best products and software solutions, and require them to build a much larger organization. I doubt they want that.


  1. Bigger global BPO competitors with competing solutions could increase their efforts in the Nordic region and put pressure on margins and client growth rates. There is also a risk that big IT consulting companies like IBM and Tata could enter the HR BPO space in the Nordics.

Mitigant: The Nordic market is not really big enough to warrant a big push from say ADP. It would be much easier for them to buy Zalaris outright. The more time passes without such a push, the more Zalaris will be considered tried and true and a reliable local vendor, and the more difficult it will be for the competition to present any real advantages for the client.


  1. The company could lose key employees, specifically the CEO.

Mitigant: The CEO owns 16% of the company and is still quite young. Seems unlikely to leave.


  1. High client concentration: 40ish clients only. Losing large clients will be diffcult to compensate for as relationships with large clients tend to take a long time to cultivate.

Mitigant: client relationships are sticky because of the significant switching costs involved. This can be seen quite clearly in the low historical churn rate / high retention rate. Also, the client base is well diversified across industries.


  1. New client growth can fail to materialize. If it does not, ZAL’s cheapness is an illusion.

Mitigant: ZAL’s core market still looks immature and fast growing. The market for SaaS HR outsourcing is estimated to grow by 23% from 2012-2017 according to the Everest Group, and management’s guidance is around 20% top line growth medium term (3-5 years).



Valuation assumptions

For 2015, much of the assumed revenue growth is given since estimates are based on actual signed contracts that will start contributing from 2015 onwards. I have assumed 15% revenue growth in my model from 2016- 2018, tapering the top line for the rest of my forecast period to 10%, 7.5% and 5% through 2020. I further assume COGS and operating expenses will grow by 10% in 2015, 2016, 2017 and then taper off in line with rev. growth by 2020. My perpetuity growth assumption in FCF is 2.5%, and my discount rate is 10%. At a recent meeting, management said they expected total capex to be about 10m in 2015. Maintenance capex is about 6m per year according to the CFO. I have assumed total capex grows by 1-2m every year after 2015 in the model. My EBIT margin assumption is consistent with management’s stated goal a couple of years out, and in line with ADP’s today.

Base case P&L 2013 2014 2015 2016 2017 2018 2019 2020
Sales 262 320 388 446 513 564 607 637
growth   22 % 21 % 15 % 15 % 10 % 8 % 5 %
COGS -13 -14 -16 -18 -21 -23 -25 -26
Gross profit  249 306 372 428 492 542 582 611
Opex -217 -275 -303 -333 -366 -403 -433 -454
Total COGS & Opex -230 -289 -318 -351 -387 -426 -457 -480
Growth   26 % 10 % 10 % 10 % 10 % 8 % 5 %
EBITDA 32 31 70 95 126 139 149 157
EBITDA margin 12.2 % 9.6 % 18.0 % 21.4 % 24.6 % 24.6 % 24.6 % 24.6 %
Depreciation tangibles -1 -1 -1 -1 -1 -1 -1 -1
Depreciation intangibles -7.1 -8.3 -9.2 -11 -13 -14 -15 -16
EBIT 23.9 21 59 83 112 124 133 140
EBIT margin 9 % 7 % 15 % 19 % 22 % 22 % 22 % 22 %
Net financial items -1 1 1 1 1 1 1 1
Share of earnings in associates 0 0 0 0 0 0 0 0
Other items 0 0 0 0 0 0 0 0
Pre tax profit 22.9 22 60 84 113 124 134 140
Taxes -6.4 -6 -16 -23 -30 -34 -36 -38
Net profit 16.5 15 44 61 82 91 97 102
Minority interest -1.3 -2 -2 -2 -2 -1 0 1
Net margin 6.3 % 4.8 % 11.2 % 13.7 % 16.0 % 16.1 % 16.1 % 16.0 %
Net profit to shareholders 15 14 42 59 80 90 97 103
Shares outstanding 19.1 19.1 19.1 19.1 19.1 19.1 19.1 19.1
EPS 0.9 0.8 2.3 3.2 4.3 4.7 5.1 5.4

Free cash flow calculation 2015 2016 2017 2018 2019 2020
EBIT 59 83 112 124 133 140
- taxes  -16 -23 -30 -33 -36 -38
+ D&A 11 12 14 15 16 17
- capex -10 -12 -14 -15 -16 -17
- increase in WC 0 0 0 0 0 0
= Free cash flow 44 61 82 91 97 102
FCF growth rate   39.3 % 34.7 % 10.5 % 7.6 % 4.8 %
Free cash flow yield 7.6 % 10.6 % 14.3 % 15.8 % 17.0 % 17.8 %


DCF calculation  
Discount rate 10 %
Terminal FCF growth rate 2.5 %
Forecast period value 331
PV of terminal value 867
Net cash/debt 68
Minority interest -16
Equity value 1,250
Shares outstanding 19.1
Per share 65


Expected returns and investment recommendation


Valuation base case    
EV/EBITDA = 10 (2017E) 55  
DCF value w/ 10% WACC 65  
Median 60  
Scenario Value P(scenario)
Bear case (12x 2015 EPS - no growth through 2017) 23 20 %
Base case - median est from above 60 40 %
Bull case (DCF med 20% topplinjevekst - mngmnt est) 67 40 %
Probability weighted fair value estimate 55 100 %
Last price 30.00  
Discount to fair value today 46 %  
Total upside: 85 %  
Buy below 38.8  
Exp 3yr CAGR 23 %  

  • My base case is the average of my DCF estimate and EV/EBITDA 10 on 2017 numbers. Listed global peers like ADP and Paychex currently trade at an average of EV/EBITDA 15 (2015 estimates). While their operating margins are higher, they also grow much slower, so this multiple assumption doesn’t seem overly optimistic.

  • Because the underlying market looks so strong and management is so confident in the growth prospects of the company, I assign a 40% probability of the bull case ocurring, a 40% chance of my base case scenario occurring and a 20% chance of no growth through 2017.

  • If that seems aggressive, remember that this is also a business with very high earnings visibility and sticky customers and that upsales of add-on services to existing clients could be sizable in the coming years.

The bottom line:

My probability weighted fair value estimate is 55 NOK on a three year horizon. Consequently, the expected 3 year CAGR from an investment in ZAL is 23%. Given the large discount to fair value, favorable growth prospects and solid balance sheet, Zalaris looks like a very attractive investment. The company could be a takeover target, but the most important catalyst is time. As the positive attributes of the company become more visible to the broader market, I expect a repricing of ZAL.





1. Shareholders

Major shareholders


2. LBO scenario – attractive returns, if an unusual capital structure is used.

I have not included this in my valuation work because it assumes a capital structure that may or may not be unrealistic depending on the mood of the bond market and a sales price of 12x EBITDA. (Then again it may not be: I imagine an 8% bond loan like I assume below might be interesting to many, and peers trade above 15x EBITDA). I’m assuming this bond constitutes 70% of the debt used in the deal. I assume 70% of the debt is bond financing with a bullet principal payment and 8% interest payed annually. The rest of the debt is a bank loan at 6% interest. Total debt used in the deal constitutes only 25%, which is fairly conservative.


Deal Inputs       Payback schedule 2014 2015 2016 2017 2018 2019 2020
Acquisition price 45     EBITDA 31 70 95 126 139 149 157
x shares outstanding 19 .1    EBITDA growth -93 % 127 % 37 % 32 % 10 % 8 % 5 %
Transaction price USDm 860     Less interest expense -14 -14 -13 -13 -12 -11 -11
Deal structure       Less taxes -14 -25 -33 -42 -45 -48 -50
Debt used in deal m215  25 %   Less increase in WC 0 0 0 0 0 0 0
Equity m645  75 %   Less capex -10 -12 -14 -15 -16 -17 0
Net cash 68                    
Debt / (EBITDA) 3.1     FCF available for debt repayment -7 19 36 57 66 73 96
EBITDA/ int exp 2.1     minus debt installments -9 -9 -9 -9 -9 -9 -160
(EBITDA-Capex) / int exp 2.8     FCF after debt rp -16 10 26 48 57 64 -64
Blended interest rate % 6.7 %     Ending cash 52 61 88 136 192 256 192
Exit scenario       LBO debt remaining 206 196 187 178 169 160 0
Exit Multiple EBITDA* 12                    
EBITDA on exit 156.8     30% bank loan at 6%, even amort              
Minority interest -16     70% bond at 7%, bullet payment of principal            
Value at 12 x EBITDA plus net cash/debt & MI 2058                    
# shares 19     Bank loan 64.5            
Per share 107.7     Bond loan 150.4            
Equity invested 645                    
Equity proceeds on exit 2058                    
Net profit in NOK 1,413                    
% profit 319 %                    
CAGR 21 %                    
* Average transaction multiple recent past                      

Given these assumptions, 45 NOK would be a small price to pay for an LBO player.






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.


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