Is SoftwareOne a good company?
Crayon vs SoftwareOne - A Christmas comment
Our target is to take an educated position on the merger between the two. In our last letter we indicated a curiosity about which decision to go for. "There’s is more than one way to Rome".
Route 1 to Rome; Stand-alone. Target price 252.
We love Crayon as a stand-alone company. Why? Because they have documented strong growth, cashflow control, margin improvements, cost control and they are well positioned (ref Gartners magic quadrant) for taking part in a fast growing future market. Further, we trust management (and founding members of the board).
Why do we trust them?
i) Facts and figures document an impressive story for 20 years. Share price is also up 769% since listed in November 2017 - anyone better?
ii) Guiding statements are reliable, it's a fact (we have backtracked 🙂)
iii) When meeting with management, it’s clear they know the business, the leadership aspects and they don’t go into denial when difficult questions are discussed.
Route 2 to Rome; Merger with SoftwareOne. Target price not decided.
Route 2 could be attractive. Why? Industrial logic is obvious. Synergies on the cost side are very big and should be easy to take out. Income synergy is a potential upside. 1+1 >3 (not "only >2" 🙂).
We have "only 4 questions to be answered":
1: Is SoftwareOne a good company?
2: Can we trust synergies to go through according to plan or....?
3: Do Crayon shareholders benefit when exchange price per SWON share is 10CHF and we receive 69NOK cash?
4: Is risk/reward attractive given closing in Q3 2025 and an implementation period of 18-24 months?
4 questions, Let's start with nr 1) Is Software One a good company?
Given a strong yes on nr 1, the answer to question nr 2 will probably be "yes" since we’ve already given our trust to Crayon management.
We have been working on the issue the last few days and have the following preliminary comments:
1: SWON share price is down 76% last 5 years, 63% last year and 8,10% today. That's an indication, is it not? Dividend is slowly growing and accumulated to CHF 1.55 last 5 years (0.21, 0.30, 0.33, 0.35, 0.36)
2: Growth is pretty slow despite a significant number of acquisitions in the last 5 years. Further it looks like organic growth is very low (but we lack figures to back it). On the other side client churn seems very low (but we lack figures to back it).
3: Margins look very strong (superior to Crayon) but "spread" between adjusted Ebitda and Ebitda is growing rapidly. Many of SWONs adjustments are not adjustments in my world. Crayon also uses adjusted Ebitda and Ebitda, but "spread” is a lot lower and adjustments are more realistic. If you look at SWONs Ebitda level last 3 years they are < 17% (simple average) and shrinking. Eps last 3 years are 0.77, -0.38 and 0.14 and 2024 looks worse.
4: Company guding 2020-2024 have failed
SWON "constantly" miss their own guiding on growth and adjusted Ebitda margin. Out of 10 guiding elements they miss on 8. To guide the present year in February is not "rocket science" in my world, and Crayons guiding is "spot on". SoftwareOne have failed and have hopefully learned their lesson.
Conclusion on question nr 1: The answer (today) is no
With recent turbulence around the company, change of board of directors, change of CEO and a new cost cut program (50m CHF) you are in a difficult situation to merge with Crayon.
Of course - the chaos in SoftwareOne might be an opportunity for Crayons shareholders. This will be discussed further in the following letters. It's 3 more questions to be answered and our conclusion today in preliminary - we need to work more and meet management.
There’s more than one way to Rome—which route do you prefer?
Stay tuned, and wishing everyone a Merry Christmas! 🎄
Disclaimer:
Hvaler Invest is a significant shareholder so you cannot trust us (or perhaps you can?)
All the best,
Sverre and David
Hvaler Invest AS
Sjusjøen, Norway
23.12.2024