Carasent: Rising Margins And Accelerating Growth Make This An Attractive Investment

Investment thesis

Carasent (OTCPK:APXZF) is a leading SaaS provider for the Nordic healthcare industry. It has historically demonstrated attractive growth and profitability, though profitability in particular has suffered in the last two years due to elevated growth related investments. However, strategic steps undertaken by its new CEO last year have resulted in a re-acceleration of growth and a return to profitability in the last two quarters. I find the company's valuation to be highly attractive based on management's latest financial targets. Furthermore, I believe the recent buyout offer, which did not go through, presents a floor for its valuation going forward. Despite certain risks that I highlight in my article, I consider the overall investment thesis to be favorable and therefore rate shares a Buy.

Company overview

Carasent is a Norwegian vertical market software (VMS) provider for the healthcare market in Sweden and Norway. It operates a SaaS model providing software solutions such as Electronic Health Records (EHR) and other IT solutions along with consultancy services. It operates under different brands based on the type of product and the market. Its largest product is Evimeria Webdoc followed by Medrave for the Swedish market, while Metodika EPM operates primarily in Norway. Its offerings benefit from a growing healthcare market and typically experience low levels of churn (<2%).

The company's current CEO Daniel Öhman joined the company in January last year and immediately shifted the strategic focus of the company. This included discontinuing the Webdoc Norway project and as well as initiating a NOK 40 million cost reduction program. Management also returned a significant portion of the cash on its balance sheet in the form of both dividends and share repurchases totalling NOK 250 million. The company has shown a return to strong organic growth and improving profitability in recent quarters, which attracted a take-over offer from EG AS at NOK 20 per share. The buyer has, however, withdrawn its offer due to a lack of an agreement with a majority of Carasent's holders and management in the meanwhile is focusing on listing the shares on the Swedish stock market where it expects to garner more interest from investors.

Q2 earnings review

Revenue was NOK 66.3 million in Q2, which represented year-over-year growth of 5%. Adjusted for the company's divestment of its Confrere brand in Q1, revenue growth was closer to 10% while recurring revenue growth was 15%, as shown above. The company's Net Retention Rate (NRR) remains a strong positive factor for the bullish case, as it rose to 111% compared to 110% in Q1 and 108% in Q2 2023. EBITDA margin was at 16% when adjusted for capex and growth related costs and FCF was NOK 1.8 million.

My thoughts on management's mid-term financial targets

Management provided its latest financial targets together with its Q1 earnings report. These targets call for revenue growth of 15% this year followed by 20% next year. This is a significant improvement compared to management's guidance at its Investor day in November last year that called for a revenue CAGR of 15% between 2024 and 2026. This was likely due to the positive momentum seen in the business following recent contract wins from Västra Götalands Regionen (VGR) in Sweden and Frelsesarmeen in Norway. The company's ARR backlog had risen sharply to NOK 17 million last quarter compared to NOK 2 million in Q2 2023. This metric gives investors an early sign that future revenue growth is expected to accelerate and investors to should to track this metric going forward.

Also included in its latest targets is the expectation for EBITDA margins to reach close to 15% for this year followed by 25% next year. Initially, management had expected to reach an EBITDA margin of 25% only in 2026. Its CEO spoke about his confidence with respect to these targets and the rationale for it on the Q2 earnings call stating:

We feel that our targets are solid, and we're delivering on those. So we're pleased with where we are and moving forward in a good fashion. This type of business is quite compared this as we have a small churn, we know the rate of our growth and we can keep a good cost control.

I tend to share management's confidence in achieving these targets, having observed their execution over the past few quarters. Additionally, I anticipate that revenue contributions from the company's entry into the German market, which are not currently included in the guidance, could positively impact results, particularly in the latter half of 2025. I will discuss this further in a later section.

My expectations going forward

Continued margin expansion

The cost cutting measures that were undertaken by its CEO last year have resulted in a significant improvement in the company's margins, as shown above. Investors should expect to see significant sequential improvements in margins each quarter as the business demonstrates its operating leverage thanks to high gross margins (>80%) and largely fixed cost base. Investors should realize that the company is currently facing certain one-time costs this year related to its listing on the Swedish stock exchange and the entry into the German market.

Inorganic growth opportunity in Germany

The introduction of the company's Webdoc X product for the German market presents an opportunity for a significant expansion of the company's TAM. Germany is Europe's largest healthcare market and is early on its journey towards adopting cloud-based solutions. It presents a substantially larger TAM than the NOK 1.3 billion and NOK 0.2 billion TAM that the company currently targets in Sweden and Norway respectively, as described during last year's Investor day. Its CEO described the ongoing efforts related to the launch and his expectations stating:

And it's been a very intense quarter when it comes to our operations in Germany. We have had many discussions with possible pilots and acquisition targets and also collaboration partners, we've spent a lot of time in Germany this quarter. And that time we spent talking to customers talking to potential partners, which is strong on that this makes us to be. So I really look forward to start rolling out during next year.

Thoughts on valuation

Management's guidance which is also in line with Analyst estimates calls for revenue of NOK 270 million and NOK 320 million for FY24 and FY25 respectively. At today's share price of 17 NOK and considering the company's net cash position of NOK 376 million, it has an enterprise value of NOK 0.85 billion, based on 72.3 million shares outstanding. Thus shares currently trade at EV to Sales multiples of 3.1 and 2.6 for FY24 and FY25 respectively. Given the elevated levels of ongoing growth related expenses this year, I consider next year's EBITDA to be more relevant for consideration. Based on management's guidance of NOK 80 million for next year, shares trade at an EV to EBITDA of 10.6.

Shares of relevant public Nordic healthcare B2B SaaS peers such as Nordhealth (NORDH) and Physitrack (STO:PTRK) trade at EV to Sales multiples 4.5 and 1.5 respectively. The former exhibits an organic growth rate close to 20% while the latter is growing at less than half that value. In comparison, I consider Carasent's valuation to be highly attractive given its promising outlook for growth rates above 20% in the medium term as well as the room it has for margin expansion.

Risks to consider

A major risk to investing in the company stems from the current political environment in Stockholm, which could significantly impact the revenue generated by its Evimeria product as the current government favors that clinics move from private to public care. Carasent's CEO addressed this concern during the Q2 earnings call and expressed his views that the current events would be temporary, while also highlighting that the share of private healthcare as a part of total healthcare in the region is still increasing.

Another potential risk is that management might overpay for an acquisition as they attempt to enter the German market. The current CEO has no history related to M&A but his track record of prudent expense management since joining the company alleviates some of this concern. Owing to its strong exposure to healthcare spending, the business is less susceptible to macroeconomic downturns.

An additional risk for US investors is the lack of liquidity in the company's shares listed on the OTC Pink exchange. Its main listing is currently on the Oslo Stock Exchange with a listing on the Stockholm Stock Exchange expected in Q4 this year.

Carasent is a Buy

I find the company's financial metrics to be highly appealing with growth expected to accelerate to 20% next year with higher margins, supported by an improving NRR that currently stands at 111%. Despite certain risks which I have highlighted, I believe the current valuation is attractive and presents a solid risk-reward for investors to initiate a Long position in the company.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.