Crayon pre Q4 2023

Our top pick for 2024 – Ready for takeoff? 🚀– Buy target price 196

Before Q4 ’23 figures are released, all analysts point to cash flow as the “only” focus in the short term. We agree that this will be the main focus of the market, but that’s not the only reason for owning Crayon ahead of Q4. We believe that 1) you should want to own a company that is growing faster than its peers in a very strong market, 2) when a competent and motivated management team focus on cash collection (and margins) results will come, 3) when Hvaler Invest and other analysts “all” agree that price is stupidly low vs peers, it’s time to listen.

1 We believe in the underlying business in a fast growing, very attractive market.

A worldwide top 5 reseller of Microsoft (and other top players) products means you simply team up with a worldwide mega trend. Yes, market maturity is very different in different regions, but that is good! It means volume growth can continue “forever” without stealing market share. Think it through – how many markets are growing with high double digit next 10 years? You have heard about AI and Microsoft Copilot November release, have you? Will AI boost volume and margins late in 2024 and onwards – we are convinced – what’s your take?

2 We believe in Crayons prudent cash collection and very strong margins

First of all, remember that Crayon has revenue of around 45 billion NOK (mostly related to intermediary license sales). So, when cash flow and working capital is fluctuating +/- 1BNOK, it should not be compared to their “gross profit” of around 5,6 BNOK. Our point is that despite cash flow being poor the last twelve months, it’s not the end-all, be-all for Crayon as a company, as you might think by reading some analysts opinions, media articles, etc. the last 6 months.

But what is the problem, and how will Crayon fix it? Clients are paying their bills. The “problem” the last year is paying suppliers to fast (moving from 68 days to 58 in the LTM. Crayon is Microsoft “ahead of agreed schedule”. That’s not a big problem – is it? In fact – you are stupid as a CFO if you can’t fix it 😊 Margin improvement and cost savings are probably also “easy picks” for Brede (CFO) with background from a low-cost airline carrier. When focus shifts from M&A and fast growth in all markets to; consolidation, efficiency, profitability, and scalability margins will improve. Remember – it’s not that difficult to reduce overhead costs (in % of volume) when you grow 20% a year – is it? Melissa (CEO) and her team are competent and reliable – it will happen. Company guiding on cash collection and margin development has historically been prudent (it’s a fact) and we believe in cash collection and EBITDA margin improvement going forward. In fact - we’ll be surprised if they don’t beat expectations since expectations are lower than guiding.

3 We believe in analysts all saying price vs peers is stupidly low

Ok, let’s be honest – we are normally not very impressed by what analyst is doing, it’s too many agendas out there. But when our own value estimates are “in line or only slightly higher” we think they are pretty close. Petter Kongslie (SpB1) is good when he “takes the long view” and educate the market, Kristian Spetalen (Artic) is very good when he confronts the facts on cash collection and Oliver Pisani (Carnegie) is very well into the case and truly understand what’s going on. Only Christian Bjørnsen (DNB) is lost in conspiracy theories and probably vote for Trump (he-he). Why should a faster growing, higher margin company (read Crayon) be priced a lot lower than peers. Short players you say? We know, and we don’t give a shit – they will finally move out and go elsewhere. When? Well, we don’t know but when they do, they will probably move fast.

Triggers are many, now (Q4) it’s cash collection but there are many more to come. We said 9months ago Protector would grow 40% in 2023 and we had a target price sized 200 (given a year ago). Well, Protector ended at 47% growth and are now trading at 220 (up 50 LTM). Very rarely we see similar situations occur in the market (but will let you know when we do) but now …

Crayon is ready for take-off. Fasten your seatbelts🚀🚀

Lillestrøm, February 6th 2024

Disclaimer: Hvaler is a significant shareholder so you cannot trust us (or perhaps you can?)