Solid Financial Performance and Massive Runway Ahead

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“We drive digitalization and innovation for the entire life cycle of the AEC industry!”

– Georg Nemetschek, Founder of Nemetschek Group

Germany-based Nemetschek (XTER:NEM) provides Building Information Modeling (referred to as “BIM”) software technologies along the complete Architecture, Engineering and Construction (referred to as “AEC”) value chain – namely Planning & Design (55.7% of fiscal 2019 sales), Build & Construct (31.6%), as well as Operate & Manage (6.9%) – through a portfolio of multiple products.

In the 1960s, the founder and current Chairman, Georg Nemetschek, foresaw the evolving landscape of the construction industry and started the business as one of the first engineering firms in the industry to use computers, even long before computers became available for personal use. The company initially developed software for its own engineers and then began to sell the program package later on.

Nemetschek went public in 1999. Fast forward to today, and the founder still owns his controlling stake (52.6% of equities) in the business. The management team is led by Axel Kaufmann, a former Chief Financial Officer from Rational AG.

The company has become truly global, with 56.8% of the revenue coming from Europe, 33.8% from the Americas and 9% from APAC. Breaking the sales down by categories, we see 54% coming from recurring transactions (i.e., software services, subscription), 41% from new licenses and 5% from consulting and hardware.

For the past few years, the company has been actively working on transitioning towards a SaaS model, which would further enhance the long-term visibility and profitability of the business, in our opinion. Notably, subscription sales, although accounting for less than 10% of the total revenue, are currently growing at an over 100% rate.

Per our calculation, Nemetschek shares approximately 6% of the total BIM market, which is expected to grow at a double-digit rate through 2022. While Autodesk (NASDAQ:ADSK) continues to lead the space, the market potential should provide enough runways for all players with quality products and innovative capability. Construction remains one of the least digitalized industries with some of the lowest spending on information technology. The management even sees the industry as being “more than 20 years behind in productivity increases, which emphasizes the need for technology adoption to achieve efficiency and quality goals.” At the same time, we have observed that many countries have raised their level of adoption and regulation in terms of BIM over recent years. Rapid urbanization and increasing spending on infrastructure worldwide may also drive long-term structural growth.

From a quantitative perspective, we notice much higher-quality business fundamentals at Nemetschek compared to Autodesk. For the last five years, Nemetschek consistently delivered a higher return on assets, earned a more stable margin, generated more robust cash flow and grew at a faster rate than its American peer. The company has also been outperforming the overall AEC market and looks to close the gap to become the top player (it is already the No. 1 in Europe).

We think that the secret sauce of Nemetschek’s success may lie in the company’s niche focus on the AEC industry and an Open BIM strategy (the open standard to enable software from the Group to communicate with any other software both within and outside of the Group via open data and communication interfaces) with a business model similar to the German Mittelstand (i.e., being specialized, innovative, customer-centric and focused on the long term).

Although the shares of Nemetschek trade at an astonishingly high valuation with a price-earnings ratio of 58, a price-sales ratio of 13, a price-to-cash-flow ratio of 44 and a dividend yield of 0.4%, we think that the robust financial performance and the promising growth prospects of the industry should earn the name a well-deserved spot on investors’ watch lists in case of future price drops.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.

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This article first appeared on GuruFocus.

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