value and opportunity

Bouvet is a Norwegian IT consulting company which I unfortunately “discovered” last year in August before the oil price began its free fall in autumn 2014.

Not surprisingly, the stock price suffered along the other oil dependent stocks. Despite the recent small rebound, the stock is still a relative loser for me, especially compared to the huge rally taking part in German stocks:

To add insult to injury, I lost even on the currency side as the NOK became even weaker than the EUR:

Annual Report 2014:

Let’s look at the 2014 annual report first.

Diluted EPS fell in 2014 from 6,75 NOK to 5,45 NOK. If we look at quarterly earnings over the last 2 years, we can see that already Q2 2014 showed a clear decline which then continued the rest of the year. The profit is now at 2012 levels. With a current P/E of around 14 and EV/EBIT of ~10 Bouvet is not that cheap anymore,.

Also, receivables and “work in progress” increased, resulting in a Free Cash Flow before acquisitions of only ~80% of net profit which is very low for Bouvet.

The most interesting part of the annual report was the info on the CAP Gemini acquisition. They paid 12,5 mn NOK, mostly Goodwill for Cap Gemini’s Norwegian business. This is what they say is the impact:

The acquired company has an estimated contribution with NOK 6.0 million to the Group turnover and NOK 0.6 million to the Group’s profit before tax in the period between the purchase and the balance sheet date.
Included in the value of goodwill are employees and expected synergies with Bouvet Norge’s existing business.

Had the acquisition been carried out on 1 January 2014, the Group’s estimated total turnover for the entire period would have been NOK 1 159.4 million and the Group’s estimated profit before tax would have been NOK 85.5 million.

With this information,we can easily calculate the acquisition multiple:

Stated 2014 sales of Bouvet were 1.132 mn NOK and EBT 81,6. So without the “partial” contribution, Sales would have been 1.126 and EBT 81,0. So the 12,5 mn NOK bought 33,4 mn NOK Sales and 4,5 mn NOK EBT.

Overall this looks like a pretty good deal for Bouvet. Buying at a trailing EBT Multiple of 3,5 is clearly a "bargain purchase" although it's clearly relatively small.

Q1 2015

After the pretty bad last months in 2014, I was quite surprised that they showed really strong Q1 figures for 2015. At 2,32 NOK, Q1 profit is +26,5% against Q1 2014 and EBIT margin was 9,8%, pretty close to their target.

However, Q1 always looks volatile at Bouvet, from 2012 to 2013 for instance, Q1 results dropped by 23% and Q1 2014 was around +16% against 2013.

So I do think it is too early to call a “turn around” at Bouvet, although their tone is quite optimistic:

Demand for Bouvet’s services is good and stable in Norway, and growing somewhat in Sweden.
Bouvet’s turnover is highest in the oil and gas sector, where the company has tailored its range of services and increasingly delivers to the core processes of its clients. That means the decline in sales to clients in this industry has flattened out

I found this quite interesting, as in other oil related industries (drilling etc.) we only start seeing cost cuts and project delays now in 2015. In the Q1 presentation, Bouvet gives additional information.

From my side, the most interesting developments were:

– they diversified their client base

Client portfolio

The 10 largest customers represent 39.3 percent of total revenues – down from 48.8 percent in Q1’14
The 20 largest customers represent 52.5 percent of total revenues – down from 63.6 percent in Q1’14

– they used less “hired” consultants which might explain the increase in margins to a certain extent.

Other stuff

There has been some movement in the shareholder base in the recent week. According to Bloomberg, DNB sold down around -2,5% via several funds. Handelsbanken however increased in their funds the overall position by around +2% of market cap. So overall no big net movemnet.

Summary:

2014 was clearly not a good year for Bouvet and when I bought the stock, I didn’t expect the oil price to drop and their oil related business to suffer so much. On the other hand, Q1 looks very solid although one has to look if this trend really continues. Overall I do think Bouvet is a good “hold” position and if they continue to perform well I might add to the position later in the year.

Overall their strategy to be a “local Norwegian” consultant seems to work and might help them to secure more Government contracts going forward. I do expect that Norway will try to pump money into their local economy if oil stays weak and Bouvet might profit from this.