What is too cheap?

Many have asked us during the weekend, and here are some facts and our comment on price;

  • we hold 1.9 mill shares in Crayon for the long term and could trade 100' extra (buy and sell) to trade a margin since we are waiting for higher prices in future

  • Crayon is >40% of our equity which is too high, so we will probably reduce somewhat during the next 6 months (Q3 results will be good and Q4 will be very very good).  

  • we have conducted our own full analyses of Crayon (as we always do), we have spent hundreds of hours, and we certainly look at intrinsic value and peer pricing when trying to predict future. The problem is however - how do you value a long term 20% growing company....?   

Many analysts have discussed the current situation during the weekend, and they have price ranges varying from 150-200 when they comment the situation. 

 

The problem is that the analysts are too conservative in what they write🙂 They focus mostly on peer pricing as opposed to intrinsic value, and as a result are too short sighted. We have s target price 242 NOK and are pretty confident that Crayon will reach this level during the next 12-18 months. The situation is similar to Hvaler Invest predicting Protector in 200 (or more) when analysts was just above 100. We know today we were right, and Protector continued above 200 NOK (and dividend was paid). Remember, this is only a snapshot in time. We bought the first Protector shares at 1,87 NOK in late 2003, we bought a lot in 2008 at 5.25 NOK (down from 16 NOK during financial crises) and we bought more at 70 NOK in 2017. How do you price a 20% growing company (Protector growth pace last 10-15 years or more)? 

 

Why will Crayon move towards 200 and higher;

  1. The very high growth will continue. We are in a mega trend and Crayon steals market share (it's a fact)

  2. Margins will increase due to a) consultancy margin recovery, b) business of scale development and c) a maturing international market (fact, fact and fact) 

  3. NWC issues are history and company credibility restored (fact again)

  4. Interest levels will go down which probably will reprice the sector (almost a fact)

  5. Short interest in the company is going down as we speak (It's a fact)

  6. Investor eyes are moving into 2025 and onwards

  7. Some shit will happen but the size of it will not at all be comparable to 1-5 (probably a fact)

As mentioned, we use intrinsic value analysis to set our target price of 242. But there are other ways to (easily) justify 200-242 as a “correct” price for Crayon (with inspiration from the Pareto analysis sent out Sunday (see below):

  • Multiple expansion: Crayon is delivering stronger growth (CAGR 23-25e) + EBIT (‘24e) than SoftwareOne, by some 5% (29,1% Crayon, 24,1% SoftwareOne) Still, they are trading at a discount to SoftwareOne, with Crayon is at 6,1x  EV/EBITDA ‘25e as of Friday, with SWON at 7,5x. The median is at 9,1x ‘25e EV/EBITDA, an even though we would argue Crayon should be above, lets say that the median is OK (conservative 1). Let’s also use the consensus ‘25e EBITDA of 1530 MNOK, even though we are some 130 MNOK above this in our own estimates  (conservative 2)

    • This would result in a price of 164

  • Cost synergies: If Crayon were to merge with SoftwareOne there would be some obvious cost synergies due to having similar products and geographies in the large scale of things. Let’s for simplicities sake say that the synergies are 30% of admin cost, and no other synergies is apparent (there will surely be other cost/income synergies. Conservative 3). 30% opex savings in Crayon admin is some 390 MNOK/year based on LTM figures.

    • This would result in a price of 204

 

Our point here is that you can either use intrinsic value analysis, or multiples and potential synergies, and both roads leads to Rome, or in this case a price between 200-242🔥. This is despite being conservative in our estimates, as you see above😊

 

Conclusion; 

we are on our way to 200 or 242 per share - you better get on board before Q3 and Q4 and before analysts starts to upgrade their target prices 🙂

 

Does a merger with SoftwareOne make sense and will it happen? 

Of course it makes sense, and multiples are paid on M&As, so we should "be happy today".

Our opinion is that it will probably not happen, and we should not hope for it. Why? Because timing (for Crayon) is wrong. It's too early and the willingness to pay a high enough premium is probably not present. 

 

Here is a statement from the nr 1 rated IT analyst in Norway, Petter Kongslie, who shares this view: “[…] That being said, we believe the biggest hurdle for a deal would be the exchange ratio of Crayon ownership and SoftwareOne ownership in a NewCo (i.e. relative multiple discussion) and is most likely where a potential deal would strand”. Simply said: The premium vs current share price Crayon owners should expect is so high that price negotiations will likely fail.

 

Crayon management and board, keep up the good work and consider bigger transactions 2-3 years from now. While waiting the share price will go up and down but mostly up (it's a fact 🙂)

 

Best regard

Sverre and David

 

Snip from Paretos analysis: