Translation: Original comment published in Finnish on 6/18/2024 at 8:00 am EEST.

We reiterate our Accumulate recommendation and target price of EUR 52.0 for Admicom, a specialist in construction software. Admicom's share price, and thus its valuation, has rebounded significantly from its lows in the fall of 2023, when concerns about the impact of a weak construction cycle on the company were at their highest. Since then, the company has demonstrated its ability to grow organically also in this market while delivering good earnings and cash flow. Going forward, earnings growth will be a more prominent driver of expected returns, although there may still be room for valuation multiples to rise as growth picks up. 

Comprehensive SaaS software provider for construction industry SMEs

At the core of Admicom's solution offering is the Ultima ERP system (formerly Adminet), developed especially for SMEs, and its complementary accounting services. The core idea of a solution offered as a scalable SaaS software is the advance automation and a comprehensive solution that considers the special characteristics of the construction industry. The acquisitions made by the company in recent years have expanded the offering, e.g., into cost accounting, project management and documentation. At the same time, the enlarged customer base (>3,000 customers) offers additional and cross-selling potential when the Finnish construction market picks up.

A high-quality company that has undergone significant changes in recent years in a difficult market environment

Admicom's investment profile combines strong long-term growth potential, excellent profitability and cash flow with good continuity, scalability and predictability of the business model. The company's revenue has increased by an average of 29% in 2015-2022 and the EBITA margin was 37% last year. In recent years, however, organic growth has slowed due to a major organizational change and a weakening of the construction cycle. At the same time, increased investments in the next phase of growth and internationalization have pushed the company's profitability from historically high levels. However, the major investments have been made and like the company has demonstrated in the past, future growth should be reflected more strongly in earnings. Admicom's strong market position and competitive product offering in Finland put the company in a good position to return to an accelerated growth path when the market situation improves. In addition, international expansion has the potential to multiply the market potential, and a first opening in this area is targeted for later this year. The degree of digitalization in construction is well below other industries and, in coming decades, the digitalization of the industry will offer huge growth opportunities for companies working in this area.

Attractive valuation when looking past the weak construction cycle

Based on our forecasts, Admicom's adjusted EV/EBIT multiple for 2024 (19x) is high only in light of the current year's sluggish growth and weakening profitability. However, we expect 2024 to remain the bottom year for earnings, with Admicom's growth accelerating in the medium term as the construction cycle recovers. EV/EBIT multiples for 2026-2027 (14x-11x) fall to attractive levels in our forecasts, reflecting Admicom's value-creation potential as earnings growth resumes. Thanks to Admicom's strong cash flow profile, the company's free cash flow conversion ratio from earnings is very good, which together with good long-term growth prospects justifies the relatively high valuation multiples in our view.