Bouvet ASA (NO0010360266) – 40%+ ROE micro cap from Norway

DISCLAIMER: The stock which is discussed in this post is an illiquid micro cap stock. The author will most certainly have bought it before writing the post and will not necessarily tell you when he sells. This is not an investment advice. Please do your own research and never rely on stock tips without carefully scrutinizing th motivation and assumptions behind them.

The company

Bouvet ASA is a small Norwegian IT consulting company operating almost exclusively in Norway.

The company is the result of a merger of several smaller Norwegian IT consulting companies and, after a management buyout went public in 2007 on the Oslo stock exchange. Current market cap is around 850 mn NOKs or ~ 100 mn EUR, so it is really small.

Valuation wise, the traditional metrics are OK but not spectacular (at 83 NOks):

P/E: 11,8
P/B: 4,8
P/S: 0,7
Dividend yield 7,2%
EV/EBIT: 8,1
EV/EBITDA: 7,3

No debt, the company has net cash of ~15 NOK per share.

Clearly the dividend yield looks attractive but P/B for instance looks quite expensive, so it’s definitely not a Graham cigar butt.


The business

Consulting business itself is a relatively straight forward business. You hire bright young motivated people and “sell them” on a daily basis to companies at a higher price. In between you have to train and motivate them. This business requires very little capital, mostly it is the receivables from clients and some office supply in a small company office. You don’t need big offices anyway as the consultants are usually at the client’s site.

In my opinion, barriers to entry and therefore competitive advantages in consulting can be achieved via:

1) “Brand name”

The brand name is important for two purposes:

a) For clients: Hiring a “famous” consultant is more expensive but also lowers the “reputational risk” for a project sponsor. If “xyz consulting” is screwing up a project, then the project sponsor has a problem because he hired and unknown consultant. If McKinsey screws up, than it’s not his fault. Achieving a brand is not that easy, so entering the market on the “High end” is not that easy either. It needs time to build up the reputation, although in IT consulting the brand name is a little less relevant than in typical management consulting.

b) For employees: In order to get the best employees, you must have a good reputation with Students, MBAs etc. Without good people you cannot charge high prices, so this is a self-reinforcing cycle once you are on the list of the “High potentials”. High potentials these days have many options, consulting companies, start-ups, investment banks, Google, brand companies etc.

2) Existing client list

It is always easier to pitch “from the inside” than from the outside. Once you are inside a company as consultant, you have access to decision makers which is essential to sell new projects. If you do a good job, many managers will think twice to go through an official bidding process and give the follow-up work to the consultant who is already there. Even for projects with a competitive bidding, it is always better to have some “Inside” knowledge, especially about the client company culture etc. The bigger the client company, the better the chances to get additional projects. Large companies have a surprisingly large “thirst” for consultants.

3) Network effect of “old” consultants with important function

Consulting is not a job to get old. Most young employees will switch to a “normal” job at some point in time. If you treat your employees well, they will be proud of having worked there. Often consultants switch to relatively senior jobs or get hired straight way by clients. If they then search for consultants, they will often give the first shot to their former colleagues (and friends…). This is even more important in management consulting but also important for IT consultants. Good consulting companies “groom” their network of ex colleagues via regular “off site” meetings in nice location.

So how does Bouvet score on these 3 categories ? From my armchair perspective, it is clearly difficult to judge. With regard to attractiveness to employees; Bouvet seems to do some things right, as they are regularily among the “top places to work” both in Norway and Europe. Employee reviews are generally good, although I found one comment that the atmosphere might be a little bit “too relaxed”.

I cannot judge how good their network is, but at least the “Brand” seems to be good in Norway. The client list seems to be as good as it gets in Norway, with Statoil being a big client as well as the Norwegian Government.

Additionally to their consulting (or as a result of it), they also seem to develop some specializes software, for instance this one which measures electricity consumption of trains.

Financial track record

The easiest way to look how Bouvet is doing is of course to look at their financials

EPS ROE NI margin Div Payout ratio
2006 3,04 53,6% 7,7%    
2007 3,96 39,3% 8,3% 3,70 121,8%
2008 5,51 42,3% 9,8% 4,00 100,9%
2009 4,21 34,3% 7,2% 3,75 68,0%
2010 4,78 40,1% 6,8% 4,10 97,3%
2011 6,13 50,0% 7,0% 5,00 104,6%
2012 5,41 40,2% 5,4% 5,00 81,6%
2013 6,75 46,2% 6,2% 5,00 92,4%
2014       6,00 88,9%
           
CAGR/avg 10,5% 43,2% 7,3%   99,4%

Them most remarkable part is clearly that they managed to grow EPS by 10,5% p.a. and distribute 100% of their profit as dividend. This shows that consulting can be really good business if done right and Bouvet at least in the past seems to have done a lot of things right.

Let’s look at a quick peer group comparison:

EPS Growth NI margin ROE Payout ratio EV/EBIT
Accenture 14,3% 7,5% 64,4% 146,0% 12,0
Cap Gemini 3,0% 3,9% 8,8% 103,0% 8,8
Atos 5,6% 1,7% 5,7% 109,0% 9,3
Bechtle 10,2% 2,8% 13,6% 100,0% 12,1
Reply 16,2% 5,4% 16,4% 100,0% 8,8
Tieto -3,6% 3,90% 12,3% 89,0% 17,0
           
Bouvet 10,5% 7,3% 43,2% 99,3% 8,1

Interestingly, payout ratios are in all cases around 100%. However margins and especially return on equity are very different. Clearly US behemoth Accenture shows outstanding ratios in any category, but the stock is also priced a lot higher than the competitors. The comparison in my opinion shows that Bouvet is cheap compared to how good the business look. Bouvet has at least double the profit margins and multiple time ROE compared to those peers and still trades as the cheapest stock in this group.

Other considerations

Management / compensation

This is CEO Sverre Hurum, who owns 4,9% of the Bouvet SA:

He earned around 330k EUR total comp in 2013. This is actually slightly less than what he earned as dividend on his ~5% stake. So at first sight, comp seems to be reasonable and aligned with shareholders. One has to mention that he seems to have sold 1,4% some years ago, he used to own 6,3%.

Other than for instance the Akka CEO, he is not into motor racing but seems to enjoy cross-country skiing. The CFO Erik Stuboe owns another 2,35% in the company.

Analyst coverage /shareholders

Only 2 analysts are covering the stock according to Bloomberg and only one analysis is actually from 2014 (ABG, price target 110 NOK).

Other shareholders:

No dominating shareholders, mostly Nordic pension funds and asset managers. The biggest shareholder is Varner Kapital, the investment arm of a rich Norwegian textile family, followed by Stenshagen, another Norwegian investor with 8%, Interestingly, none of the big international investment companies is invested, this seems to be a “Local” stock.

Stock price & performance

Shareholders who bought Bouvet at the IPO and held the stock, will be very happy. They made 21,9% p.a. or 320% in total compared to only 3,9% p.a. for the Norwegian Stock index.

Despite the stock price increase, the valuation of Bouvet stayed mostly in the 11-13 P/E range as profits rose proportionally to the stock price. The stock has a very low beta to the stock market (0,38). That is not terribly important but good for my nerves especially in volatile markets….

“Flying under the radar” or why is the stock cheap ?

Bouvet is a micro cap stock. Most of the stock is held by pension funds etc, so although free float is theoretically there, trading volume is very low, around 60k EUR per day. So for many small cap funds, this is not interesting as they want to be able to move in and out of a stock relatively quickly. On the other side, this is also a potential “double upside” for investors who are able to invest “under the radar screen”. If the company continues to grow, at some point in time the market cap, free float and trading volume get so big that smaller funds become interested. In such a case, multiple expansion is often very likely. So as an investor, investing in a small, unknown grwoth stock the upside is much better than compared to an “established” stock with a relatively big free float


Negatives:

– expansion outside Norway difficult. Norway is a high cost country, exporting Norwegian consultants to other countries will most likely not work that well
– CEO is 57, how long will he continue ?
– cost structure most likely not as flexible as in an US style company
– consulting is to a certain extent personalized business. If employees are unhappy they can leave the firm but keep the client

Valuation / return expectation

Instead of coming up with a valuation, this time I make an even simpler case. I want to earn 15% on this investment p.a. With the 7,2% dividend yield, I am almost half way there. In order to earn another 8% p.a. over 3-5 years I need either:

– a multiple expansion. Based on the current cash adjusted multiple of ~10xP/E, it is not unreasonable to expect a 12-13 multiple at some point in the future
– or, based on the same multiple ~7% p.a. which is slightly below the CAGR since IPO (around 8% pa.a.)

I am willing to “bet” that it ois likely that one of those 2 scenarios will happen. If both happen, then my upside would be much higher.

Summary:

Bouvet in my opinion is the perfect “boring” small cap company I am looking for. Although it is neither terribly cheap nor having a big moat, it is a very good business at a reasonable price. It is pretty much neglected from analysts and the shareholders seem to be “strong hands”. The company is very shareholder friendly and has good growth potential in a normal environment. There is no “catalyst” event around the corner, but I still think that it is a very good complimentary position to my current portfolio, adding some Norwegian exposure along my mostly continental Europe /UK stocks.

I will therefore establish a “half position” (2,5%) at current prices of ~85 NOK per share. My target would be a 50-75% gain within 3-5 years including dividends.

18 comments

  • Hello. I’m from Sweden and live in Norway. I’ve invested in a similar company of a similar size earlier – CEO with substantial ownership, high ROE, high dividend payoff. My investment ended really bad. I underrestimated the cyclical nature of the IT consultant business, the risks of important employees leaving the company but keeping the customers like you mentioned, and the company kept growing revenue but EPS was trending down.

    I’m not saying this won’t happen to Bouvet – it looks very interesting, and I will have a further look at them. The economics of the business is extremely favorable – these companies can pay out almost 100% of their result as dividends, require almost no capital to grow, resulting in high ROE.

    My play on consultanty business (which I can recommend) is the biggest “consultant broker” in Scandinavia, eWork scandinavia. Not a very cheap stock, but they likely have substantial moat and a bright future.

    I can also recommend you to have a look at SJR – a employment agency specializing in economic and finance staff. They have been growing their market share at an impressing clip since 2007, are highly profitable, reasonably priced and pay a nice divident. The manager own a big part of the business and runs it very well.

  • I wonder why Bouvet didn’t drop more on the report: http://www.newsweb.no/newsweb/attachment.do?name=Bouvet+Q3+2014+rapport+ENG.pdf&attId=129566

    Is this a company with long-term oriented shareholders? EPS was roughly cut in half for the quarter. Oil price is lower. Statoil revenue way lower.

    • #martin,

      thanks for the link. My speculation why it didn’t drop further:

      – the company was cheap already before
      – the 3rd quarter is always the weakest anyway
      – as most of their cost is variable (with a time lag), this will be not permanent (topline was stable against a year ago)

      And yes, The shareholder base looks very stable, management owns a relevant share as well as family offices and pension funds. It is to illiquid for traders.

      mmi

  • @Markus: I think your calculation concerning the net income and ebit is roughly correct. But I do not think they get cash from the IRA. There is also no “tax refund” position on the cashflow statement.
    I think this is an accounting issue: They have a negative account (Verlustvorträge) on the capital side of their balance sheet and every year they book the taxes they have not payed because of the “Verlustvorträge” through the income statement against this account.
    But I am no tax expert, either! 🙂

    • Thats a little bit ambiguous formulated, I am sorry. They do not book taxes against the account. They book their profits against this account and have to pay no taxes because of this in their tax balance sheet. The taxes that would have been paid if their was no such accounts must be booked through the income statement against deferred taxes.

  • Laut den Key Figures des Unternehmens hat Bouvet ASA 2011 eine Dividende von 4,10 NOK (nicht 5) je Aktie ausgeschüttet, 2010 6,25 Nok je Aktie und 2009 4 NOK je Aktie.
    Vgl.: http://www.bouvet.no/PageFiles/3779/Key%20figures.pdf

    Witzigerweise hat Morningstar wieder andere Zahlen. Ich nehme an, deine Zahlen sind aus Bloomberg?
    Wie könnte es zu diesen Abweichungen kommen?

    • Hallo MArcel,

      danke für das checken der Zahlen. ich hatte für den Post aus versehen das Feld “Trailing 12 month dividend” genommen. Da wird z.B. die 2,50 NOK Special Dividend einem anderen Jahr zugeordnet. Ich vermute mal die eine Abweichung liegt daran. Die anderen Abweichungen kann ich nicht erklären, sind mir aber ehrlich gesagt ziemlich “Wurst”.

      mmi

      • Marcel Ellinghaus

        Hallo mmi,

        ah, ja das ist dann logisch. Die Abweichungen sind ja auch nicht dramatisch, ich fands nur merkwürdig. Aber Morningstar ist immer mal wieder etwas daneben mit seinen Zahlen..

        Was ganz anderes: Du benutzt ja auch WordPress, richtig? Dürfte ich fragen, mit welchem Plug-In du die E-Mail-Abo Funktionalität realisiert hast?

        Viele Grüße,

        Marcel

  • Dear,
    First I would like to congratulate on your excellant blog.
    Luckily I began to follow your blog when I had found that you owned certain french value stocks(micro caps)
    which have regularly popped during my screening.
    I read your post on the norwegian IT consulting company. In similar lines what do you think of a german IT company KPS AG.
    PE around 10, good div yield, good ROE, good revenue growth rate.
    Luckily they are trying to grow outside of germany also.
    stock is down in last 3 month due to russian problem. only problem is they have very short operating history.

    Similarly I found other german small-mid cap stocks with high ROE/ROIC down more than 5 % in last 3 months.

    BET-AT-HOME.COM : online betting small cap with low PE
    BERTRANDT AG
    Pfeiffer Vacuum Technology AG : may be price declining ex-dividend but high PE
    Fuchs Petrolub SE : contrarian play as market may be overreacting ..not very sure as it raised capital recently and stock has been revised down due to revenue drop etc.

    Thanks and Regards
    PDW

    • Hi PDW,

      KPS has a really nice earnings growth history, high ROE. They are basically debt free and right now they seem to produce a lot of cash. What I also like is that they publish their sharebuybacks. The problem I see with them is their shareholder structure. 4 Members of the managing board and board of directors own about 75 % of the outstanding shares if I remember correctly and the free float is only about 8 %.

      Regards,
      Markus

      • One additional thing about KPS:
        “Aufsichtsrat
        […] Die Bezüge der Aufsichtsräte für ihre operative Tätigkeit in der KPS Business Transformation GmbH belaufen sich auf 6867 TEur. ” (12/13 Annual Report)
        So, the owners and members of the board who work for the company earn ~23% of the total personnel costs (28.8 Mio. €) which is about 10 times the amount the executive directors earn..

        • nice job if you can get it…..

        • Hi Marcel,

          you’re right. I couldn’t really find out what that was for, how this amount is derived and why it’s so much higher than in the couple of years. Maybe the 4 guys got a new contract within the subsidiaries. Since they don’t publish a lot (see paragraph of their exceptions of corporate governance) and don’t answer emails concerning these questions it’ll be hard to find out for an outsider. Big minus for all KPS-shareholders in my opinion…

          Anyways I was still reading through their last annual reports and what really caught me is the fact that they didn’t pay taxes for the last two years. Actually they got a significant refund (1,8 Mio in 2012 and 3,9 Mio in 2013) and for me it looks like they might get one this year, too. They have deferred taxes of around 10 Mio € in their books and also about 165 Mio. € debit carryover left over (page 68 of their last annual report (2012/2013)). So with their guidance of 15,5 Mio. EBIT in 2014 (see Q3-results) their net income could be somewhere in the region of 20 Mio. or 0,58 cents/share with their increased share count of 34 Mio. That looks quite good to me especially for a company with a growth rate of around 15-20 % and a backlog of 18 months work. I’m not so much of a tax expert so please let me know if I misinterpret something here…

          Regards,
          Markus

  • Nice write-up. Am I seeing this correctly that their accounts are only available in Norwegian? did you just use google translate? Thx!

  • Thanks, good write-up and sounds very interesting.

    Two quick questions: what was the IPO price? And what is the free float?

    It seems this is mostly about a liquidity discount.. you mention 60k EUR p/d volume, but I assume that’s with taking out volumeless days, which there are a lot.. avg 3m volume is 1,102 shares, which is more like EUR 11K per day.. extremely low for a ~€ 100MM market cap stock.

    Upon reading ‘micro cap’ I was thinking more about way less than €50MM market cap.. but in terms of volume, it is indeed micro. But if free float is large, there would be looks of room for liquidity to improve strongly as you noticed, which would automatically call for a higher multiple.

    In my view, Bouvet is not a micro cap, but it is trading like one: indeed the perfect stock for a public write-up :). I’m not plunging at this point, but I definately keep this one on my radar.

    • thanks for the comment. I do not know the “offical” IPO price back in 2007, but it must have been around 33 NOKs or so.

      Free float: It depends how you define it. Do you consider a long term stake of a pension fund as free float or not ? I would guess that from the 70% shareholders you see at bloomberg, maybe 30-35% are long term stakes.

      Clearly it is quite subjective what to call a micro cap. in The US, 100 mn would be clearly a micro cap, in Norway it might be a “samll cap”.

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