Addtech
$ADDT B (+1,6%) is one of my favorite Swedish stocks and I'm a bit bored at the moment, so here's a little introduction to the company and an analysis of the business model.
What does Addtech do?
Addtech is like Constellation Software when it comes to industrial niche products. They buy small companies that dominate in various niches, scale them and use the cash flow generated to buy more and more. The group now has around 150 independent subsidiaries.
Although Addtech focuses on the Nordic region, it is active in over 20 countries worldwide.
Market position
As Addtech concentrates on a very specific niche, particularly in the Nordic region, the market continues to consolidate and the moat is constantly widening. This is supported by the fact that there is practically no competition within these niches, as the barriers to entry are too high.
Addtech's products are more or less the epitome of sticky revenue, their customers are dependent on their products and services as these are essential for their operational business. As a result, they also build close relationships with their customers. The only drawback is that the majority of Addtech's revenues and profits still come from a partly cyclical sector. More on this in a moment.
How Addtech earns its money now
Addech itself does not specify how revenues are divided into sales and recurring revenue, so I took the trouble to ''analyze'' something here.
- The average within the industry is 20-40%, but there are also exceptions such as Otis, which derive around 70% of their profits from service etc. Since Addtech focuses on niche products with high quality (also compared to similar companies), I currently assume that around 30-40% is recurring revenue and therefore 40-50& is recurring income due to the better margins. To simplify the whole thing, let's assume 1/3 round about 70:30.
Now of course the question is how much they earn on a product sold. Similar to Otis, Addtech focuses on quite durable products to service them as long as possible.
- An annual sale of about $1million would break down into $700K from sales and $300K from service. Assuming that a product lasts about 7 years, $2.1 million in service revenue is generated based on the $700K in sales.
- Since the number of products to be serviced is constantly growing, it is now necessary to determine when Addtech makes more revenue from service than from sales.
- Typically, service revenue grows faster than sales revenue. The current overall sales growth is around 7%. If we now return to the industry average of 10-15% service growth and 5-7% sales growth, Addtech should earn over 50% of its revenue from recurring revenue in about 6-8 years. This could be significantly accelerated by strategic acquisitions. This would also significantly increase the operating margin.
In the future, Addtech should therefore become increasingly less dependent on cyclicality, as new equipment is not always needed, but the existing equipment still has to work.
I'm going to give myself a few Addtech shares for Christmas, maybe the company is something for you too. I was particularly impressed by the discipline within the company.
