Description

Long recommendation: UnifiedPost Group (Euronext Brussels: UPG)

I recommend investing in UnifiedPost Group (ticker UPG, trading on the Euronext Brussels), a provider of electronic invoicing services. The company is executing an ambitious growth plan with clear levers, namely a TAM ~3x its SME client base just in France (~20x across Europe) over which it has exclusive distribution rights through accountants in the country, and a no-brainer opportunity to cross and up-selling of its customer base of c. 1m SMEs – in the process becoming the pan-European equivalent of US success story Bill.com. Management is well-aligned (CEO owns 18%) and we believe the risk/return is asymmetric as the market's disbelief of UPG's growth guidance contrasts with the multiple levers available for management to achieve it. Shares have been depressed since the expiry of IPO lockups at the start of the Summer, and we believe we are still at an attractive entry point right now.

A. BUSINESS OVERVIEW

UPG was founded in 2000 and operates several enterprise software platforms centered on e-invoicing for SMEs that it has developed and acquired since then. The basic purpose of these platforms is to allow businesses to exchange and pay invoices in a tax compliant digital manner, manage its working capital through an integrated view of payables and receivables, and cut invoice storage and handling costs through digitalization.

In practice, the use case for e-invoicing is divided into accounts receivable (AR) and accounts payable (AP) automation. In AR automation, a company that wishes to charge its customers would use the platform's workflow to create a tax compliant digital invoice, send it to the client, track days payable, issue payment links, and receive payments. In AP automation, a company would receive an invoice from its customer, upload it to the platform through OCR if the original is in paper, and be able to automate and manage payments considering its working capital needs. The core document creation, management, and OCR functions are complemented by the ability to then pay invoices through UPG directly, and access/identity management functionality allowing companies to determine who can approve and pay specific types of invoices. Finally, UPG is working on layering several ancillary services on top of this core product, namely built-in factoring and credit insurance intermediation solutions (the first currently live through a partnership with ABN AMRO).

The company is led by founder and CEO Hans Leybaert who owns 15% plus 3% through in-the-money options with a €18 strike (plus some additional options at ~€30).

B. MAIN FINANCIALS

UPG’s financials are clouded by its M&A activity throughout 2020 and 2021. Pro forma for all acquisitions, it would have had €147m in revenue in 2020 with EBITDA of €4m excluding IPO and M&A expenses. In the recently reported 2Q21 results, revenue growth accelerated slightly to 13% YoY vs 12% in 2020.

~60% of 1H21 and 2020 pro forma revenue comes from the e-invoicing software solutions, while the remaining comes from the recently acquired postal optimization business (a lower quality BU that came as part of the acquisition of Nordic e-invoicing provider 21 Grams). Within software, ~95% of revenue is recurring (a mix of subscription and transaction volume-based). The company is present across Europe, with home country Belgium representing 35% of 2020 revenue.

The company is trading at an EV of ~€640m considering €80m net cash on balance sheet as of 2020 year end (after IFRS 16 leases and pension liability) and an estimated ~€100m net cash burn from acquisitions announced since then and operations during 2021. Valuing the postal business at 5x EBITDA, the e-invoicing software portion would thus be trading at ~6x LTM revenue or 10x our estimate of digital EBITDA for 2025 (7x total EBITDA). E-billing peers Esker (Europe) and Bill.com (US) trade at 15x and 56x LTM revenue, respectively. Esker is growing LTM revenue at 13% in line with UPG, but with ~20% EBITDA margins, while Bill.com is growing at ~50% YoY – however, we believe UPG is set to accelerate revenue growth and improve profitability meaningfully over the next three years.

C. INVESTMENT THESIS

1) Attractive market with significant moat being built and clear catalysts for growth.

Although the core e-invoicing functionality sounds simple, we believe creating a new platform of this kind would require significant upfront time and financial investment: the software must (1) comply with all national laws regarding VAT, invoice format, and communication with tax authorities (mandatory in some countries), (2) create integrations with all other e-invoicing software providers and ERPs to allow a seamless experience when companies using different software wish to exchange documents, and (3) if is to have direct payment functionality in the EU, a PSD2 payments license is also required.

The feedback from large ERP providers that we have spoken with has been that the market is too niche for them to invest the significant effort needed in obtaining these elements. This is underscored by the fact that Intuit has a partnership with Bill.com to distribute the latter’s e-invoicing solution through Quickbooks. In addition, feedback about Bill.com is that they have reportedly also looked into entering the European market, but decided against due to the operational complexity created by an hodgepodge of regulation across countries and strict payment rules at the European level.

At the same time, there are clear catalysts for growth in the market. In addition to an overall digitalization of European SMEs supported by EU Covid recovery funds, e-invoicing is becoming mandatory in the region, driven by a government push to improve VAT compliance and shore up state finances. France is set to implement mandatory e-billing during 2023/2024, and UPG has exclusive distribution rights for its e-invoicing platform (branded “JeFacture” in the country) through a partnership with the official French accountants’ association. The case of Italy, where according to Billentis data e-invoicing volumes jumped ~30% 18-19 after the introduction of a similar law in 2019, underscores the potential impact. With 20k accountants registered in the association and 2.75m SMEs in France, the country represents a TAM 2.75x UPG’s current client base. We have looked at a private company that also distributes a similar product (SME accounting software) through a similar partnership in an European country, and in that case it reached a penetration of 17% of the association’s accountants after a couple of years. Assuming a similar rate for UPG in France, this alone would represent c. €50-60m in annual recurring revenue (at an average ticket of €120 / year) – alone enough to reach a 17% CAGR in revenue if realized over the next 3 years.

UPG is the largest provider of SME-targeted e-invoicing in Europe, and the single pan-European player. All other competitors that we have identified are fragmented local players or focus on much larger companies (e.g. Esker). We therefore believe UPG is well positioned to take advantage of the growth in the market in the coming years.

2) Strong up and cross sell potential create clear path to accelerate revenue growth

UPG in 2020 had an average ARPU of €170 / year, compared to €1.5k for Bill.com. Although BILL’s customers are on average larger SMEs, we believe this underscores the upsell opportunity – management believes ARPU could rise to ~€50 / month, corresponding to the current price of their premium solution (which includes the payments functionality). In addition to the payments functionality, we also believe factoring intermediation has potential - our conversations with a local European bank implementing similar local solutions indicate that this works very well and allows banks to much more confidently underwrite shor term credit, given the wealth of information that a company such as UPG has at its disposal.

In addition, most companies acquired in 2020 and 2021 had ARPUs below €5 / month, representing an opportunity to ~3x the acquired revenue base of €30m (as of 2020) just by bringing it to the ARPU level of the core UPG product (~€15 / month).

3) Potential for significant gross margin expansion from digitalization of legacy paper business

UPG’s invoicing gross margin has decreased significantly since 2017, from 58% to 39% in 2020 Pro Forma (30% including the postal business), as some of the companies it has acquired had parts of their revenue tied to offline paper invoice processing (namely Fitek in Eastern Europe and Prime Document in the UK). UPG’s goal is to transition these invoices to a digital format, much like it has done with its own business pre-2017. This is the driver behind management’s guidance of 60% gross margins by 2023. If one looks at the individual financials of Fitek and Prime Document, digital invoices represented 25% of total document revenue in 2020, vs 3% in 2019, with overall document revenue flat, indicating the transition seems to be going well and without significant churn from the client migration to digital.

4) Well-aligned and capable team that is improving communication with the market

CEO Hans Leybaert has been a pioneer of the e-invoicing space, having founded the company (originally within the postal space) in the early days of the industry. The CFO also has ~10 years experience at UPG. Marcus Laube, CEO of UPG’s last acquisition, Crossinx, recently joined as Head of Sales and brings significant expertise running a leaner, SaaS-first company (Crossinx was growing its €8m revenue base at ~30% prior to the acquisition) in addition to lending the company his reputation as Co-Chairman of the European e-invoicing association (EESPA). Finally, former Crossinx CFO Marcus Sander is reportedly also potentially also joining the company in an IR advisory role. As a former equity research analyst himself, there is plenty he can do to improve the quality of UPG’s reporting, allowing the ongoing value creation to become more perceptible (e.g. reporting performance by client cohort and presenting cross and up-sell KPIs).

D. VALUATION AND RETURNS

As stated, UPG currently trades at ~6x its e-invoicing revenue. Management guidance is for e-invoicing revenue growth to progressively accelerate to 15% by 2021 end, 20% in 2022, and 30% in 2023. Considering these growth levers and the large, growing TAM available (particularly JeFacture in France, as mentioned above), this seems achievable.

Assuming this occurs and the company accelerates to 20% by the end of 2022 with growing EBITDA and gross margins, the market will likely assign the company a growth SaaS multiple. At 10x 2023 year-end digital revenues of €190m (consistent with growth guidance), the upside would be ~3x (60% IRR from today).

If instead we look to 2025, assuming the company decelerates slightly after reaching the target 2023 growth rate of 30% going forward (growing at ~20% p.a. 23-25) and reaches a ~30% EBITDA margin typical of SaaS businesses (and the long term target of BILL), UPG could generate ~€80m digital EBITDA, representing an IRR of 18-25% if exiting at 15-20x. These calculations value the non-digital business at 3x 2023 and 2025 EBITDA and assume progressive transition of the company to being cash flow positive by 2023.

In case of failure and barring bankruptcy, I believe there is inherent value in UPG’s sticky client base and technology/operations supporting its platform (namely the PSD2 license and integrations with local e-billing providers across Europe). UPG has historically acquired local e-billing providers at ~2x revenue, and using this as a lower bound on valuation, downside would be ~65% considering 2021E revenue. Although this shows how UPG is a high risk / high reward opportunity, I believe it compares favorably with the potential upside given the clear levers management has at disposal to achieve its growth plan.

Catalyst

• Management achieves growth projections, with revenue acceleration in 2022 to ~20% YoY driving a re-rating
• Mandatory e-invoicing is introduced in France and in the rest of Europe over time
• Potential acquisition by player looking to enter the SME e-invoicing market (e.g. Bill.com or Esker)