Description

These days the market seems to reward any good/entrepreneurial business model, operating within growing end markets, and with demonstrated access to capital.  Valuation has largely been of secondary (or worse!) concern. Through this lens, I pitch Mercell, a stock that I don’t doubt will grow into its valuation and then probably keep going.  Sigh.  Note this is a situation where you need to trust the jockeys, so I’m keeping it brief as I’d suggest speaking with management to get a sense of their vision and how feasible it might be to pull off.  Happy to discuss the business or strategy in more detail in the Q&A.

Note: ~8.47 NOK/USD.

Mercell operates a series of European Commission compliant standards-based two-sided meeting places for e-tenders within the Nordics; connecting: 1) RFP-issuing entities (both public and private) to 2) vendors and suppliers that seek to bid on projects (often as subcontractors).  This part of Mercell’s revenue model is referred to as “pre-award” and is not GMV driven, but rather based on recurring platform access fees charged to both sides of the platform.  Given the marketplace structure, Mercell enjoys positive networks effects and is in a winner-takes-most position across its seven core markets.  Practically speaking, this is a good business because a regional Danish plumber will see no incremental return in spending another, say, EUR 2,500 annually for access to the second-best e-tender alert platform available to it.

Management sees a significant opportunity to penetrate its existing customer base more deeply through providing very sticky software and services to customers in the areas around procurement and ordering, invoicing, payment, accounting, and spend analysis.  This part of the business is referred to as “post award”.  The company believes there exist meaningful synergies from providing post-award as a part of a full e-procurement suite through the leveraging of data, offering convenience to clients.

This is a nice business model that Mercell thinks it can roll up across other European markets.  The model is (in broad strokes), buy things at pre-award only multiples (keeping teams around and using earn-outs), roll out post-award though cross selling and apply learned best practices to keep net retention rates high and costs low.

The company IPO’d at NOK 6.75 in the summer of 2020, and while shares have performed extremely well since then (+67%), they are only just above the price of the secondary equity offerings completed in both December 2020 and February 2021 (each completed at NOK 10.50).  These follow on raises were to fund Mercell’s December acquisition of Visma, the market leader in Sweden; as well as Negometrix, an e-procurement platform in the Netherlands respectively.   The long runway of M&A growth should continue, as sellers have liked the idea of rolling into a well-run and liquid vehicle and Mercell is only currently going after the Nordics.

Putting it all together, you have a 95%+ GM network effect business with an [easily digestible] USD 600mm EV, 95% share of recurring revenues, 130% net retention rates (~20-30% organic ARR growth), and strong management, trading at ~8x ARR /20x next year’s EBITDA.  I think it’ll do just fine in this market.

Sigh.

Catalyst

More accretive M&A, ARR growth