Stock research analysis of Fortnox AB - Free excerpt from the watchlist publications

fortnox ab watchlist Jun 08, 2022


It is a wise idea to invest only within your circle of competence. I have been working with accounting systems for a good while, since about 2014, and I know a lot about the digital cloud solutions that are on the market in Norway. If only Visma and its subsidiaries had been listed on the Oslo stock exchange, I'd be pretty interested in owning them, because I have been following their numbers and admired their dominance in the Norwegian market. Solutions for accounting systems and alike has been a super business to own over the last decade. Another example is the smaller company Fiken, which is also super profitable, growing and efficient on capital.

With hands on experience on the cloud accounting business, and seeing how good these kind of businesses are in Norway, I should have looked more across the border for opportunities as well.

In Sweden a company within the same business as Visma has been growing rapidly the last years. It's called Fortnox AB, and it seems to have established a firm and substantial position within its niche there.

The CEO of Visma, Øystein Moan, has been buying so-called ERP-companies that provide accounting systems in the cloud with both hands over many years. Back in 2016 he offered to buy Fortnox AB for 1,1 billion (Danish Krones I assume). Today the market cap of Fortnox is roughly SEK 35 billion. However, the board of Fortnox supported the offer, and they recommended the shareholders to take it. From my estimates, Visma offered a P/E of roughly 33 for Fortnox back then, if you assume around SEK 1,000 million purchase price for ca SEK 32 million of net profit after tax in 2016. Read the story here:

The numbers are great, and the company looks wonderful. Only the stock seems very expensive. And since it has looked expensive on P/E-multiples for many years, I guess I can forgive myself for not discovering this company earlier. I would probably have thought the stock was overpriced 5-6 years ago, and I'd miss out on a big upswing in it.

But at least I'm keeping an eye on it. And you can as well now, as it is added to our Watchlist. If an event occurs, perhaps a hiccup in growth, or some temporary negative news, we might get a chance to enter as a shareholder at a fair or low price in the future.


About the company

Fortnox is a leading fin tech company within accounting, payments and digital business solutions in Sweden. The company was founded in 2001, and it is based in Växjö, where it has its headquarters.

The company reached 425,000 customers in 2021, and their revenue model is mostly subscription based. Their customers are companies that use their systems to do their own bookkeeping, as well as accountant companies who use the systems for their clients.

With about 600 employeee, and a staggering growth they are still quick to provide new solutions to their customers, such as for example the automatic process of applying for government support for the recent pandemic situation.

The last couple of years they have been investing a lot in growth by acquisitions in companies that they believe will fit into their Fortnox eco system, according to their management letters.

Their vision is to be an important integrated partner with companies and entrepreneurs in Sweden when it comes to business solutions software and accounting. And helping their clients have smart systems that do most of the work automatically, while giving them a low price.

One example of the low price they use is a service that they offer through their new subsidiary, Bolagspartner. This subsidiary offers shelf companies. If you as a customer wants to start a company and get hold of a new corporation quickly, you can order a shelf company from Fortnox now. And the price is as low as SEK 1995. 

To see how they present this and their other solutions, check out their website in Swedish here:

Indeed the price is low. For comparison, the market leader that provides shelf companies in an efficient way in Norway charges NOK 20,000 for the same service - 10x the price of Fortnox.

This is just an example of a service that they add to their ecosystem of products and services.

Their main revenue stream comes from their business and accounting platform. For as little as SEK 159 per month you can get automatic accounting services and fully digital handling of invoices and receipts, which are integrated with over 400 different systems that help the customers avoid time loss due to work being done twice, as they say.

The price looks pretty low in my view. Their Norwegian competitor, Visma and its solutions, typically charges more with all their additional fees for invoice handling, amount of employees on payroll etc.



Key figures for 2021

At the end of 2021, the number of customers was 425,000 (367,000), up 16 (17) percent.

Annual Recurring Revenue (ARR) amounted to SEK 693 million (553).

Average Revenue Per Customer (ARPC) amounted to SEK 194 (169). These numbers are per month.


Key figures last five years

In the numbers we can see

- Very high growth in sales

- Sustained high and improving net margin

- Very high return on equity every year

- 10x in equity over 4 years, while keeping a rather conservative capital structure (not too much debt)

Taking extra contributed equity capital aside, the retained earnings have roughly tripled in only the last two years.


Fortnox is in a very good business

From what we can see in the key figures, Fortnox clearly seems to be in a good business. They're a market leader in a niche within acounting-fintech solutions where they help their customers save time and money with automatic and quick processes. And they seem to strengthen their competitive position by continuously adding more features to the ecosystem of products that the customer uses. Not to mention the sexy ARR revenue model which it mainly operates in.

As we see in the table from the notes above, ca 73% of the revenues are subscription based.

It seems to be a very profitable place to be the last decade in Sweden, and we have also seen it in Norway, where Visma has been the market leader. If you look at the numbers of Visma over time, they have also benefited greatly from similar solutions.

From my experience, being professionally involved as a customer of Visma products, it seems to me that the solutions that Fortnox offers make sense. They seem to have a platform of products that are very future oriented and modern. And they look very competitive to Visma when it comes to their average price per customer.


High return on capital

With a net profit after tax of about SEK 241 million for 2021, and an average equity over the year of ca SEK 725 million, the company has had a return on equity of ca 33% for the year.

As you see in the table of key figures on the top, RoE has declined the last year. However, they've added SEK 605 million of goodwill on to its balance sheet after the recent purchases of subsidiaries. If you look at the consolidated earnings of ca SEK 241 million, and subtract the goodwill from the equity to get the company's tangible equity capital, you get a return figure as high as 61% on the average tangible equity, which is fantastic.


Little debt

Fortnox total interest bearing debt is ca SEK 314 million at the end of the year. A new loan of SEK 200 million originated in 2021. They did not have interest bearing debt the previous two years.

With an operating profit of SEK 315 million, its financial position seems rather safe, and one year of profit without growth could pay back the entire loan.


Management's financial activities taking advantage of the high stock price

Fortnox has been using the high stock price to issue new shares. In 2021 alone it issued SEK 312 million in equity, while only diluting the existing shareholders by 0.01 in EPS. Assuming shares before dilution 60,794 million, and 60,848 after.

If you ask me, that seems like a sound capital market decision. They get more than the value of 2021-profits extra into their capital base for a very minor dilution. That said, the cash proceeds from the share issue is only about SEK 14 million in 2021. This is because Fortnox has paid their acquisition of Offerta with shares.

See example from 2021:

Furthermore, management shares with the investors in the note of the 2021 annual report how the purchase of the subsidiary affected its cash flow:

Their purchase of Capcito Finance AB on the other hand was done with SEK 322 million in cash, for 79% ownership.

Dividend policy - ca 20% payout ratio - the rest for growth

With the dividend being a decent SEK 46 million compared to the profits of SEK 241 million (less than 20%), the company has used most of its cash flows on new acquisitions - together with a new loan of SEK 200 million.


How big is the market?

What is their market share and growth prospects? This is still to be researched, and I'll let you know if I update what I know about the company.

It'd be interesting to know how large the competition in Sweden is.

If Fortnox' solutions and value/price is better than the competition, perhaps they will keep increasing market share and grow.

Will they expand beyond the Swedish border? If not, how much can revenues grow if they take most of the market?


Hard to compete?

With such a low price of less than 200 SEK per month (ARPC), and with such a huge group of Swedish companies as customers, 425.000 in 2021, I'd guess it'd be pretty hard to go in as a new company and try and do better with a lower price. In Norway, the average price that Visma takes is quite a lot more. And Visma is Norway's largest similar company. It wouldn't be impossible to compete, but my impression is that it would require a lot of investment capital to build the service platform needed, and most likely sustain operational losses for a long start-up period before the competitive low price would and eventual market share would cover the costs of running a new business. Not to mention needed marketing investments.

If I would dig deeper, it'd be interesting to try their platform out, and see if they offer a better solution than what the market leader in Norway does. I don't see why they wouldn't be able to offer their services to Norwegian companies as well, with some adjustments to their integrations.


On price

Even if you discovered and recognized the potential for growth in Fortnox, you might have sat on the sideline in wait of a lower price. The price to earnings ratio since the adoption on the Stockholm stock exchange has never been lower than ca 65 the last eight years, and it has been about 114 on its highest. 

That said, the growth has been there, and if you invested back in 2018, not that long ago, you'd have more than a 10-bagger today.

Despite the high price many years ago in terms of P/E, investors have gotten richer over the years with a soaring stock price, where the multiple has been kept high.


What growth is needed to justify the current high valuation?

At the time of writing you'd have to pay a market cap of ca SEK 35 billion to acquire the company.

The earnings were ca SEK 241 last year (2021), which means you'd get an entry yield of only 0,7% on today's price. 

If you'd wanted at least a future return of 7% on your shares (earnings yield on cost), the future earnings would have to increase by 10x.

I have still too little insight into the market share potential to say something intelligent about the future for Fortnox. But my opinion is that a 10x in a rather short time is not outside the realm of possibilities.

It has proved that it can grow quickly. As you see in the figures above, earnings have increased 7.5x in the last five years.

It's only a question of how large the market they can take is, and if they will keep pleasing the customers as they have done until now.


Regarding its position on the Watchlist

It's a fantastic business - a wonderful company I'd say - but it looks expensive now. At least let's say it's hard to call the price and investment opportunity a no-brainer.

I would gladly put this company on our Watchlist however. It seems to tick all the boxes when it comes to a so-called Wonderful Company. The key figures are great, along with high historical growth. Their competition situation seems to be very good, as it can sustain a very high return on capital.

And they seem to make the customers really happy, given the high growth, and from the low monthly average prices per customer. They seem to be strengthening their competitive position by adding relevant services into their ecosystem that the customers are using. With the high level of automation and low price for the service, and a dominant position in Sweden, it seems to me that they are very hard to compete with now.

I believe shareholders that get an ownership of this stock for a low enough price that makes sense will reap huge rewards and earnings in the years to come.


I'll sit on the side line until the stock price looks more sensible

But I'll try and be ready for a price decline. 

But all that said, I think the price looks too high for me, and I would rather keep the stock on the Watchlist and wait for an "event" to make the shares more affordable, even if the growth stagnates.

If I change my mind and buy it after all you can get notified of the price I bought shares at, in the end-of-the-month-journal that I provide.


Note on the stock price

When you study figures online on Google and in stock terminals, you might see several sources where they say the amount of outstanding shares of Fortnox is ca 610 million with a share price of ca SEK 55. In their annual report they state that the amount of outstanding shares is ca 61 million, while the share price at the end of 2021 was SEK 585. Correspondingly the stated EPS for 2021 is then SEK 0.40 or SEK 4.00 depending on which source you use.

Nevertheless, the both measures give the market cap of the company of ca SEK 35 billion, and 2021-earnings of SEK 241 million.


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