It is apt that the information technology sector is itself shortened to an acronym given the industry is home to a number of other such abbreviations such as ‘IoT’ (internet of things) or turns of phrase like ‘cloud computing’. The former is simply machines ‘talking’ to each other and the latter refers to IT data stored in a big central depot (a ‘data centre’) which is owned by someone else rather than being housed in a company’s own basement. Both are sectors within the wider industry that are subject to strong structural growth trends with several companies benefitting from the boom.
Many of the stocks held by CRUX in this sector share important characteristics. Not only are they mostly capital-lite, they have the crucial ability to be able to up-sell their products to either new or existing customers. This is an extremely likeable quality in any company we assess, given the need to be able to continue to innovate and retain the interest of customers, as is the ability to weather a potential market downturn.
The structural growth across the IoT and cloud computing sectors is something that we believe will continue in the coming years. The advantages of the technology and the ease of use it offers consumers is clear, and the companies that continue to innovate today will surely reap the rewards of tomorrow.
Below is a selection of some those companies owned by CRUX:
Cancom
Cancom is based in Munich, Germany, where it owns a large data centre to offer cloud computing to its customers. It started out as a reseller of IT equipment to medium-sized businesses with 500 to 10,000 employees, and then introduced related IT services and integration of the equipment into the client’s IT systems. As a result, it developed close relationships with these clients and could upsell its cloud offering and go on to host the entire IT system of the client – often without a competitive bidding process. As time goes by the clients become more and more dependent on Cancom and as its offering is strong Cancom rarely loses any clients. We acquired shares in 2017 soon after a former CEO acquired a 10 per cent stake. It meets many of the characteristics that we favour: fairly capital-lite, no working capital, high return on capital and structural growth. One might expect sales to decline in a recession but in fact sales growth was positive in 2009.
Atea
Atea is very similar to Cancom, but with less exposure to the cloud offering. It is listed in Norway and the founder chairman still has 25 per cent of the shares. Atea is focused on the Nordics as an IT hardware reseller with fairly high market shares resulting from an active acquisition spree which ended in 2015. It shares the same capital-lite characteristics as Cancom and trades on about 18x price-to-earnings (P/E) for 2019 with nearly a 6 per cent dividend yield and no debt. It is growing as its customers need to upgrade their IT hardware and require advice on integrating the devices into their IT systems. We first acquired shares in early 2016. Interestingly in 2012 private equity tried to acquire the business, suggesting that its characteristics may appeal to financial buyers.
S&T
S&T is run by a very dynamic chief executive based in Austria overlooking the Danube who has a large equity stake. When he took the reins in 2011 the company was an IT hardware distributor and SAP installer in central and eastern Europe. To boost margins, he started upselling firewalls to small industrial customers to stop hackers compromising industrial robots and other equipment connected to the internet. Then in 2017 he acquired Kontron which adapts Intel computer processors to be the ‘brain’ of certain industrial equipment, in particular industrial robots. Now S&T can make machinery ‘connected’ and ‘secure’ and hence its services are in high demand, driving ~10 per cent organic growth in recent quarters. We initiated a position earlier this year soon after the CEO had also bought some shares for himself to take advantage of an attractive valuation following a sell-off in the fourth quarter of 2018. Since then the company has acquired a business which makes the control and automation systems for trains – nicely fitting into the IoT theme.
Dustin
Dustin is another Nordic-based IT distributor of hardware. It sells small baskets of IT equipment mainly to SME customers but also to the public sector and some large companies. Around 70 per cent of items are delivered the next day. Increasingly it is upselling software and services to clients, as it already has the customer relationships in place from the reselling business. These sales are higher margin and also more recurring in nature. Like the other businesses mentioned it is capital-lite with no working capital needs and very low capital expenditure. Dustin trades on about 17x P/E for 2019 with a 4 per cent dividend yield and with modest debt following its recent acquisition of a smaller peer in the Netherlands. Dustin listed in 2015, however, we usually avoid buying shares at IPOs (initial public offerings) and so waited for the dust to settle and then first acquired shares in 2017. The former private equity owners sold a 25 per cent stake to long-term supportive shareholder Axel Johnson in blocks after the listing.
Evry
Evry is a Nordic IT services company, which offers IT consulting, IT infrastructure support and outsourcing and proprietary software. On 18 June 2019, it was bid for by competitor Tieto, listed in Finland for cash and shares.
James Milne is co-manager of the CRUX European Special Situations fund. The views expressed above are his own and should not be taken as investment advice.