Administer - Digital financial and payroll administration

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Administer announced today for First North

Administer is a group providing financial and payroll management services, consulting services, and software services. The company aims to reform the financial management services market by developing new technology and new solutions. According to its management’s assessment, Administer is one of Finland’s largest providers of financial management services measured by revenue, and Finland’s largest provider of HR and payroll management services measured by the number of payslips.

Revenue 2020 44 MEUR, the offering aims to raise 11 MEUR for the company, and in addition, current owners are selling their shares. Subscription commitments totaling 12.6 MEUR if the pre-money valuation remains at 55 MEUR.
Considering the acquisition of Emce (2021-08), the pro forma 2020 revenue would have been approx. 51 MEUR.
Earnings are on a downward trend, although usually before an IPO there’s talk about earnings being somewhat “pumped,” but who knows in this case.

Administer’s financial targets for the strategy period are as follows:
Administer achieves a revenue of 84 million euros in 2024; and Administer achieves an EBITDA of 24 percent in 2024. According to the dividend policy confirmed by the Company’s Board of Directors, the Company aims to distribute at least 30 percent of its profit adjusted for goodwill amortization as annual dividends.

During 2022, Administer aims to continue growth investments as well as organic and inorganic growth. The company aims to make 5–10 acquisitions during 2022. The company’s financial targets for 2022 are:

Achieve a revenue of at least 51 million euros; and achieve an EBITDA margin of at least 8 percent.
Administer estimates that the revenue and result for the financial year ending December 31, 2021, will be weaker than for the financial year ended December 31, 2020.

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Administer aims to raise gross proceeds of approximately 11 million euros through the Initial Public Offering, which are intended to be used primarily to implement and support Administer’s growth strategy.

Ilmarinen Mutual Pension Insurance Company, Elo Mutual Pension Insurance Company, Aurator Asset Management Ltd, and certain other professional investors have each separately committed, under certain conditions, to participate in the Offering and subscribe for shares for a total of 12.6 million euros, provided that the valuation of the Company’s entire share capital before the proceeds from the Offering is at most 55 million euros.

https://www.administer.fi/

https://www.administer.fi/tietoa-meista/administer-yrityksena/

https://www.kauppalehti.fi/lehdistotiedotteet/administer-oyj-administer-oyj-suunnittelee-listautumisantia-ja-listautumista-nasdaq-first-north-growth-market-finland-markkinapaikalle/b81c09bf-b260-3fd0-9446-deb5f00bc6df

https://administergroup.com/tietoa-meista/ajankohtaista/administer-oyj-suunnittelee-listautumisantia-ja-listautumista-nasdaq-first-north-growth-market-finland-markkinapaikalle/

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Inderes has published an interview

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It’s hard to come up with many rational reasons to consider switching horses from Talenom to Administer right off the bat. Administer, for example, is targeting a 24% EBITDA margin in 2024 according to the CEO, while Talenom has achieved a 37.4% level this year. Today, Administer apparently manages a 5.4% EBITDA. The profitability of operational business for these two players is like fathers vs. sons, which is a pretty big red flag for me, at least. In addition, a quick check of revenue seemed to indicate that Administer is targeting the same revenue level in 2024 as Talenom can achieve in 2021. In other words, what would indicate that Administer would be a more likely/bigger winner in the accounting services market in the future than Talenom?

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I can’t comment on that profitability difference yet, as there’s no material available, but from a valuation perspective, you’re talking about two completely different things. Administer has a lot of growth potential relative to Talenom. In Inderes’ forecasts, Talenom trades at over 30x 2022e operating profit (IFRS), while Administer’s 2022e guidance is about 15-18x 2022e EBITA (derived from EBITDA guidance; net debt estimated at max 10 MEUR, because as stated, there’s no material yet, but there can’t be much debt given the ownership structure). These are indeed my own quick calculations and include some “rough” estimates.

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Yes, naturally, valuation is on the other side of the coin. But isn’t an investor playing their case with this valuation card then taking the view that Administer will be able to grow faster and more profitably than, for example, Talenom in the future? Otherwise, there’s no benefit to those lower multiples unless the company’s operational performance gives the market a reason to start giving higher multiples in the future.

I commented on this in my previous message, saying that based on the recent figures of both companies mentioned, Talenom seems to be a much stronger contender and a more likely big winner in the future. The market is quite large, of course, so there will probably be enough time for all the biggest players to grow for several more years. I was already thinking 5-10 years ahead.

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Yes, operational performance does affect acceptable odds, but right here and now, Administer has significantly more modest growth expectations and/or a better safety margin in its valuation, relative to Talenom. So, I see it as an opportunity, whereas investing in Talenom doesn’t interest me because it’s already “fully” priced, and the valuation might not withstand a slowdown in growth. Edit: but I hope we get Inderes’ IPO analysis so we can compare the forecasts a bit.

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Administer’s company presentation is now available on InderesTV, waiting for the live stream to begin :slight_smile: Administerin yhtiöesittely 7.12.2021 - Inderes

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Administer publishes the subscription price of its planned First North IPO and further information on the listing of its shares on the First North marketplace.

https://administergroup.com/tietoa-meista/ajankohtaista/administer-julkistaa-suunnitellun-first-north-listautumisantinsa-merkintahinnan-ja-lisatietoja-sen-osakkeiden-listaamisesta-first-north-markkinapaikalle/

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Evli has published an IPO analysis of Administer.

https://pankki.evli.com/hubfs/Evli.com/Documents/CF/Administer/Administer%20IPO%20Research%20Report.pdf

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Economics & Valuation:

  • EVLI values the company pre-money at EUR 62-68m
  • The company’s margins have been low, in the “single digits.”
  • EV/Sales-21e = 68 / 42 = 1.61 … not cheap, considering the company’s revenue is decreasing for the third consecutive year, and profit is approaching zero.

Positives:

  • A mature company with experience in growth and acquisitions.
  • Inorganic and organic growth will be supported by the IPO.
  • Assumed stable business: Financial, HR, and payroll services. Consulting and software services might be more volatile.
  • Personnel are committed through the offering.
  • Assumed - Aims for better profitability through economies of scale and synergies from acquisitions.

Competitive Advantages: ???

  • Experienced and mature company?
  • Comprehensive financial management services - are they truly comprehensive and functional? The company’s website even lists tax optimization as a service.
  • eFina software solutions. Is the IPR owned and protected?
  • A set of ready-made integrations with existing IT solutions from other vendors - is there a benefit here from work already done or some kind of experience advantage?
  • Broad customer base: SMEs, municipalities, large corporations, and even light entrepreneurs and new entrepreneurs.

Challenges:

  • Is the company’s industry a “strong value creation” growth platform? Or would it rather be stable, boring, and slow growth?
  • Is the business focused enough, given that HR services and CFO services already include various “ramifications”?
  • Is the 11 million euro gross capital raise sufficient to boost growth?
  • International growth mainly in Sweden and Estonia, small-scale operations?
  • Domestic market-oriented - Are there enough growth prospects to attract investor interest?
  • Risk that larger disruptors and consolidators in the domestic market will capture the market.
  • 2021 profit and EPS are around zero. EBITDA and EBIT margins will be low in the coming years (EVLI’s analysis).

Other & Gut Feeling:

  • It’s somewhat amusing that the company’s international operations seem small-scale, yet its website features a “guide,” a checklist for internationalization.
  • The company seems to be investing in sales and marketing, and business is what pays…
  • Administer hardly presents its own financial data on its website, even though it specializes in financial management, which is puzzling. Revenue is decreasing in 2021 and has been decreasing since 2019, which could be the reason for the poor visibility of financial figures.
  • The company may be a market consolidator that will win in the future, but somehow there is no clear story here; the economy is declining, and the ownership story is also somewhat hidden.
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Let’s see if Administer’s company presentation will answer my question (I doubt it…). So I sent the question well in advance so they could process it (around 5:25 PM) through the Q&A session of the ongoing company presentation.

Why would accounting firms exist in the future? A large part of accounting and financial management processes can be automated so that they can be implemented agilely with software without separate personnel - i.e., produced by large ICT companies or agile startups. In Finland, this development has been weak, but why wouldn’t the situation change in the future?

EDIT: Surprise, surprise, they didn’t dare to bring up that question as a public question; instead, they found it necessary to bring up trivial questions, the silliest of which was a question I put in as a joke and my own test (i.e., I wanted to see if they would bring up so-called difficult questions or easy questions from an investment case perspective): Why is the company’s name “mainosministeri” (ad minister)?

The founder’s answer was completely incomprehensible; he said, among other things, that they have gained international customers because of the aforementioned name. So, by what logic? An English-speaking customer is looking for an advertising agency and ends up acquiring accounting services? At what point does he realize that Administer’s advertising expertise isn’t very good? Perhaps turnover has decreased in recent years precisely for that reason… :smile:

I certainly won’t invest in this.

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Financial management. HR and payroll administration (EmCe acquisition). ERP service. They boast a lot of their own software and AI development.
The market value with additional shares would be €62–68 million. They aim to raise €11–14 million in gross funds for growth (acquisitions).
Strategic goal for 2022. Revenue at least €51 million, operating margin at least 8%. 5–10 acquisitions!
Strategic goal for 2024. Revenue €84 million, operating margin 24%, dividends at least 30% of profit.
Comparison: Aallon Group revenue in 2021 was €25 million?? and market value €45 million. Talenom revenue in 2021 was €80 million and market value €550 million. So, Talenom has a significant growth and efficiency premium priced in!
So, this Minister doesn’t look too bad after all.

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What bothers me here is the contradiction between the 2022 and 2024 targets. For 2022, they are guiding for practically 0 growth compared to the 2020 pro forma, but then they should grow 30% per year for the next two years to reach the €84M target. At the same time, the EBITDA margin should more than double.

So, they are forecasting very cautiously for one year ahead, but very optimistically for three years ahead. Is the intention to grow solely through acquisitions? Revenue can certainly be inflated this way, but significantly improving profitability with these methods can be considerably more difficult.

The performance in 2020 and 2021 or the 2022 forecast do not, in my opinion, justify the asking price. The 2024 target is more in line with the price, but acquisitions do not come for free; they consume cash and dilute ownership.

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“Incomprehensible, he said, among other things, that they have gained international customers because of the aforementioned name. So, by what logic?”

I don’t know your birth year, but it likely refers to this:
Back in the day, you’d pick up a physical brick, or rather, the Yellow Pages of a phone directory, flip to the Accounting Services section, and there the firms in that industry were listed alphabetically. Customers would then go through the list and often call a firm at the beginning of the alphabetical order to inquire about services. Apple, at least, once advertised that it got a lot of business by being listed before IBM or whatever competitors there were at the time.

In the video, Administer’s CEO stated that accounting entries are already partly automated by AI. Money will be made in the future especially through expert services, which require a human. Many of the 4,000 small accounting firms in Finland will probably wither away in the future, but a few large players will remain.

However, there is a vast amount of accounting, tax, and labor legislation, and no AI can yet apply them to more difficult individual cases, which constantly arise. This requires an expert. One would think that the client would buy a comprehensive service from a provider that also has this expertise. Then, if ever, for example, district court judges are replaced by AI, then perhaps the financial administration sector can be declared dead for human employees. I’m not entirely sure if I’ll still be alive then. So, I certainly don’t see it as a threat in the coming years.

I doubt this company is any worse than Talenom, as long as it gets into the fast lane in sales, as promised in the video.

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Phone books and Yellow Pages are, of course, familiar things, but international customers probably wouldn’t know how to order them to Stockholm, let alone London. It’s a different matter, of course, if Mr. Minister of Advertising was mistaken and those customers are domestic.

AI is not the problem in replacing accountants; it comes more from societal constraints, which are sometimes quite incomprehensible in Finland. A Finnish startup entrepreneur developed an application in the USA that automated the entire process from payment transactions to accounting and financial statements. That information is already in digital form, so technically it’s easy to transfer it to the correct accounts. So, an accountant is unnecessary in between.
Why, by the way, does the Ministry of Advertising consider its own software development a big deal? It’s not an ICT company, is it? The situation is a bit like an ICT company starting to do its own accounting and praising its own expertise in it. Makes no sense.

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At Talenom, this proprietary software has worked quite well, and it has become a tenbagger in less than ten years. :slightly_smiling_face:

Talenom’s CEO also used to enthusiastically praise this proprietary software. In Aallon’s listing, the lack of proprietary software was seen as a minus.

A lot of buzzwords are used in this listing. The numbers are fairly poor, and it doesn’t even convince me as an accountant, as the financial statements are a bit haphazard, and investment activities don’t really succeed.

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Interesting to hear experiences. I interpreted that you have been an Administer client.
I watched the Company Presentation video, and although I found some good additional information and belief in profitable growth, a few quite questionable things were revealed:

  • Patents are missing, even though they have their own technology solutions!
  • The understanding of market size could have been better.
  • The understanding of competitors’ operations was quite weak.
  • International expansion is discussed, but concrete plans seem to be missing, and it was mainly some small-scale international growth planned through a partner network.
  • The business has not been fully defensive, and this is still negatively reflected in the numbers.
  • The acquisition of the loss-making Adner has been a considerable risk, and it still seems uncertain whether the turnaround will succeed. What is the company’s skill level in acquisitions?
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Administer’s IPO was one of the most anticipated for me, as my portfolio’s largest holding is currently Talenom and the third largest is Aallon Group! So far, accounting firms have at least in my own portfolio guaranteed relatively good and low-risk returns, even though Talenom is more seen as a growth company. So, in my usual manner, I wrote an IPO analysis of Administer.

Administer is an interesting hybrid in that it’s a bit like Talenom (its own software), but a bit like Aallon Group (it feels like it’s ready to serve almost anyone as a client). And the plot twist is its own software, which Administer can sell to clients who want to manage their financial administration themselves.

The presentation’s points were familiar to anyone who has followed the accounting industry, regarding market size, acquisition potential, etc., but what perhaps bothered me most about Administer’s operations was the clear lack of focus. Talenom has a clear focus on profitability. Aallon Group focuses on small accounting firms and inorganic growth.

Administer does a little bit of this and that and aims to grow a little bit through acquisitions and a little bit through software sales. Otherwise, it’s a fairly traditional accounting firm that is listing, in my opinion, at a reasonable valuation, and where the offering has already been almost entirely subscribed by institutional investors, meaning a relatively small risk, but I don’t believe the reward will be anything incredible either.

By far, what bothers me most about this offering is perhaps the lack of direction. Some numbers have been provided, but no clear roadmap on how to achieve them. At the same time, in the Q&A section, I was very confused as to how the company’s founder and CEO, a seasoned professional in the field, could not explain why a client should choose Administer over, for example, Accountor or Talenom.

It seems that Administer doesn’t even have its value proposition under control, but rather just does whatever comes its way. This is perhaps the biggest red flag for me in the entire offering, because it indicates that the company itself may not even believe it is in any way special in the market (which may be true, but it shouldn’t be communicated externally :D).

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Thanks again for the good analysis!

I, too, considered participating in the IPO for a quick profit.
The company presentation did not create an impression of a company that would be a long-term winner, so it’s not for a long-term portfolio.
Additionally, in my mind, the risk is increased by the fact that the CEO, Peter Aho, is a very significant majority owner (now 60.9% before listing, diluting to around 50%), so power is too concentrated.

In the longer term, if the profitability turnaround fails and the stock price falls, I see a fair chance that Talenom will acquire a significant amount of market share from this.
In practice, the decision to sell depends on the stance of one major owner, and retirement might already be enticing after a 27-year career at Administer.

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Several points struck me as vague, and a few red flags definitely stood out:

a) The much-hyped AI, about which details were initially scarce, and based on answers to questions at the end, turned out to be solely for processing purchase invoices, and even then, with only a 50% success rate. I don’t claim to be an expert, but based on my experiences with accounting firm partners, I believe this success rate puts them quite a bit behind competitors. Of course, it’s possible I misunderstood this.

b) The listing prospectus mentions this “resource planning system,” which was also referred to in the company presentation. However, I couldn’t find any information about it on Administer’s website. Either the product is rudimentary, it’s not actually for sale, or its marketing has completely failed. None of these three options really gives a good impression of the company’s practical capabilities.

c) Throughout this year, they have been looking for experts of various kinds. Among these, the search for a Cobol software developer caught my eye. The application states that the job includes, among other things, “change and renovation work for our electronic financial management system, including daily modifications and broader system development work with our skilled team.” Can it truly be that the company’s advanced software solution is based on a practically dead programming language, for which there are no longer even experts, let alone new ones being trained? (Source: Landing page - also available elsewhere)

d) The market share table seemed odd to me, even if software sales were excluded from the figures. I looked at the recent revenues of the mentioned competitor companies, and either the competitors are selling an incredible amount of software, or Administer has significantly exaggerated its market share. The “Source: Management’s estimate” in the presentation didn’t exactly boost confidence in the numbers.

e) The owner/CEO’s limited knowledge of the market in the final questions was quite concerning. How can a company claim to produce more advanced solutions if the CEO knows nothing about the competitive landscape?

Financial management stocks have generally offered small-scale, low-risk, steady growth. In Administer’s case, there are risks in the air, and their own growth expectations for the near future are quite modest. I consider it too risky even for a short-term portfolio at this point.

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