Description

Investment opportunity

ELIMP is a fast growing retail chain in Norway specialising in electrical components direct to consumer and small installers. It has payback period of less than 1 year on new stores, grown revenues at >30% p.a. since 2013, but still trades at only 11x NTM EBIT. Management are doing several things to increase EBIT per store without further investments. 

Business model and economics

Electroimportøren (ELIM) is a fast growing electrical components distributor in Norway. It sells both direct to consumers and small electrical installer firms.  ELIM was founded in 1996 by Per Norman Nielsen when he opened the first store at Alnabru and launched its online store in 1998. Between 1996 and 2014 the company only had one store but still managed to reach 166m NOK in revenue.  In 2014, the PE firm Herkules acquired the company and installed a new management team that was ready for rapid expansion.

The Company has, as of 30 September 2020, 22 stores across Norway and sales and EBITDA2 on a 12 months rolling basis of NOK 1,175 million and NOK 139 million, respectively. Since 2013, the Company has experienced significant growth, illustrated by a sales CAGR of 34% since 2013, and an EBITDA CAGR of 24% since 2013, as presented below:

The business specializes in making electrical components (think downlights, lights, cables, switches, plugs, EV chargers, etc) accessible for the consumers. The picture below gives a good indication of the products it sells.

The unique value proposition is that all employees in the stores are professional electricians, which is a large benefit for the customers who have questions around these complex products that they are not allowed to install themselves.

In addition, consumers want to go to the store to see the lamps, downlights, plugs, switches, etc before they order them. Finally, under the more traditional model where the consumer hires an electrician to both purchase and install the product, the customer pays the hourly salary for the electrician to go purchase the product. The hourly rate for an electrician in Norway is somewhere around $120, so the potential savings from purchasing the products yourself is significant.

Approximately 60% of revenues are directly to consumers while the rest 40% is typically to smaller electrical installer firms that are not large enough to buy directly from manufacturers or that get significant volume discounts at the typical wholesalers.

Despite having grown with a CAGR of 34% since 2013, there is still tremendous room for further growth with only 8% market share. In addition, the company is currently evaluating strategic options in Sweden, which it will announce to the market this fall.

The unit economics of this business is fantastic, with the average payback period of each store at less than one year. It has its central distribution center around Oslo and leases stores in city centers, making the business model very capital light.

To further increase the return on capital, the company has launched its own brand Namron, which now comprise about 30% of sales. It does not have its own production, so no capital invested but higher margins on these products.

In addition, the company has recently launched a service called Spoton. This service offers customers to purchase a product in store and at the same time book an electrician to come home and install the products. This is again an example of how management is using its market position to enhance return on capital. Spoton has recently been launched in every store and will contribute to incremental EBIT going forward.

Competitors

In the professional segment, ELIMP competes with the large wholesalers (ahlsell, solar, OTRA, etc) while in the consumer segment it competes with typical big box players that supply a large number of SKUs and electrical components are typically 10-15% of the SKUs.

Valuation

ELIMP is trading at 11x NTM EBIT which we find compelling looking at the market position, potential growth, management history and return on capital.

In addition, it is worth noting that the former chairman Gaute Gillebo, who was also the partner at Herkules responsible for the ELIMP investment, left Herkules and joined Aeternum Capital and one of the first investments he did there was to acquire shares in ELIMP. Aeternum is an investment vehicle set up by John Fredriksen (the richest guy in Norway)

Risks

-          COVID has made everyone in the Nordics refurbish their house = tough comps

-          The moat is not strong enough to support the ROCE over time

-          Slowing growth as the best spots are already taken

Catalyst

-          Steady compounding, no catalyst

-          Strategic update on the potential in Sweden

-          Dividend introduction (yes I know, not value creating, but some investors like it)