Short-term pain implies long-term gain
Novotek AB is a Swedish company offering customers unique solutions aimed at streamlining operations, with a focus on Industrial IT and Automation. Novotek has a robust balance sheet with a net cash position of SEK 61.7M, and during the last three years, they showed returns on invested capital of an average of 28.4% (estimated to drop to 20.1% in 2020 but bounce back to 25.0% in 2021) and a cash conversion ratio of on average 86.5%. The excellent financial standing, in conjunction with increased demand for digitalisation post-COVID-19, makes Novotek more well-equipped to manage the current economic crisis and to continue to create value for shareholders than the current valuation indicates. With a 1-year forward-looking target EV/EBIT multiple of 10.3x in 2021, a target price of SEK 34.8 and an IRR of 22.1% over three quarters is motivated in a Base scenario.
- Strong Q1 despite lower willingness to invest
For the first quarter of 2020, Novotek presented revenues of SEK 81.3M (73.9M) and an EBIT of SEK 7.3M (6.9M), making Q1-2020 the best quarter yet, excl. Q4 in 2018 and 2019. While revenue growth is anticipated to be negative in 2020, the current economic climate is expected to speed up digitalisation, enabling continued growth for Novotek.
- The business concept limits competition
Novotek serves more than 3,000 customers per year, ranging from small manufacturers to global conglomerates. Novotek’s core business involves solutions architecture and the delivery of products and services that enable customers to stay ahead of the competition. There are no competitors with the same concept, however, several provide partial solutions. Within automation, Siemens, Schneider and ABB are direct competitors. Larger consultancy firms, such as Cap Gemini or Accenture, lean more toward being customers than direct competitors, as they often implement Novotek’s solutions for their customers.
- Substantial value creation implies a higher valuation
On average, Novotek traded at EV/EBIT 8.0x during 2017-2019. Considering the significant difference between the ROIC (average of 28.4%) and WACC (estimated at 7.7%), alongside the high cash conversion ratio of an average of 86.5% (FCFF/EBIT), and EBIT growth of 14.3% CAGR, during the same period, Analyst Group concludes that Novotek trades below fair value.
With conservative assumptions of no excess value creation and lower cash conversion ratio going forward, implying a large margin of safety, a fundamental EV/EBIT multiple of 10.3x and an implicit EV/Sales multiple of 1.1x are derived. Both exceed historical valuations but are in line with the 2020 pre-COVID-19 valuations. Given a 1-year forward-looking target EV/EBIT multiple of 10.3x for 2021, a potential price per share of SEK 34.8 is motivated.
