Before Q3’23E we keep our estimates largely unchanged with growth in-line with
Microsoft guidance (+5% FX gain). More important, is cash flow, where we expect
NWC to continue to stabilize as it has for the last three quarters (avg. 12m NWC
LTM to GP). As such, a ~45% discount to the broader VAR space while outgrowing
the lot, presents a rare opportunity. We also find comfort in recent insider buying
ahead of Q3’23E results and think odds are in favor of going long with Crayon
currently ~8/5x EV/EBITDA – BUY/TP NOK 120 p.sh reiterated.
For Q3’23E we expect GP +24% y/y & another quarter of NWC improvements
For Q3 we expect GP of NOK 1,275m (+24% y/y) in line with consensus. Our growth
assumption is based on MSFT’s guidance of +15/26% Intelligent Cloud/Azure growth and an
fx. gain of ~5% on reported figures. While sequentially up from the +14% (CC) growth posted
in Q2, ‘SCC’ in ‘APAC & MEA’ should be back following the portfolio optimization one-off in
India. We estimate adj. EBITDA at NOK 173m vs. cons at NOK 168m, implying a quarterly
margin of 14%, up 2.4pp y/y. Cash flow will yet again come into focus, where we model NOK
-49m in FCF vs cons. at 83m. Although the Philippines payment did not come in Q3’23e, we
still expect NWC improvements due to operational measures, with 12m avg. NWC at -2.0%
of LTM GP, improving from -1.1% in Q2.
Resilient demand, cash flow improving & Philippines the kicker
Cloud continues to be a resilient pocket of IT enterprise spend and we make limited changes
to our growth assumptions for ’23-25E, where we are at 25/17/16%, implying a ’22-25e CAGR
of ~19%. If anything, this appears conservative relative to key vendor MSFT’s consensus at
16/17/16% cloud growth over the same period (Azure at 27%). One caveat is the softer ITconsultancy market (consulting 29% of LTM GP), causing some short-term headwinds. Still,
we think Crayon’s intertwined offering with its cloud business shields it from the more
discretionary tail of IT-consultancy spend. We remain bullish on Crayon’s growth prospects
& EBITDA profile, but this currently means little for the equity story until cash conversion
improves. While the Philippines remains a black box, we have become more comfortable in
our FCF estimates ahead. This based on I) the historical cash-conversion prior to 2021, II)
NWC having stabilized the past quarters & III) that H1’23 NWC release has been stronger
than both ’21 & ’22. The latter indicating that Improvements are being made despite a tough
macro backdrop, & we expect H2 improvements regardless of the Philippines outcome.
~40-50% discount to peers despite CF improving – BUY/TP NOK 120
At ~8/5x ‘23/24E EV/EBITDA, the market is clearly not pricing in our nor consensus’ cash
flow estimates, with our DCF indicating a fair p.sh value of NOK ~150. Multiples appear to
have become irrelevant, with Crayon now at a ~45% discount to the broader VAR space
despite being the fastest growing name. Although cash flow has been weak, we think Q3 will
showcase another quarter of NWC stabilization and thus find the odds widely in favor of
betting against the market’s current assessment of this being a permanent issue. Coupled
with both insider purchases, and a very high short interest ahead of the figures, we think
odds are in favor of going long. We reiterate our BUY rec & TP NOK 120 p.sh., implying 12/9x
‘23/24E EV/EBITDA.