Bouvet ASA: The Scandinavian Mini-Accenture

Introduction and summary:

I have been a shareholder in Accenture (ACN) for a long time and this has turned out to be one of my best investments. It’s a pretty uncomplicated business model, at least up until now, where the main assets are the employees and the culture. We can roughly say the business model is to hire people, rent office space, invoice the client and pocket the difference. It’s a model that hardly needs any working capital whatsoever and is highly scalable. Scale is important to attract big and lasting clients.

Bouvet ASA is a Norwegian “mini-Accenture” and has a much longer runway than Accenture – if Bouvet manages to execute their business model properly. So far Bouvet has been a success story, and I believe shareholders will continue to profit handsomely over the next decade.

Any investment in the consulting business is dependent on two main factors: Its people and scalability. As such, I believe Bouvet ASA offers an interesting investing opportunity. I have a very modest position, just to dip my toe in the water, which has thus far been a very good investment. I prefer to buy a small position as I research a company.

I believe Bouvet ASA can manage above-market returns over the next decade because of these reasons:

• Owner-operated.
• Inevitable digitalization – long growth runway.
• Seems to have a good internal culture with little turnover of employees.
• “Easy” and capital-light business model. No debt.
• Highly scalable.

The Business:

Bouvet ASA is a Norwegian IT consulting business headquartered in Oslo, Norway. Bouvet saw the day of light in 2007 when its name was changed from Cell Network, which was a result of the merger between Mandator and Cell back in 2001. Bouvet ASA is renamed after the Norwegian uninhabitated island in the Antarctica region. Most business is in Norway, but management is trying to get a foothold in Sweden.

It’s a “full scale” consulting firm meaning they offer mostly the same services as bigger and global players do:

Practically all of the costs are related to salary or benefits, and a tiny part is related to office space, software fees and D&A.

Bouvet grows mainly organically and thus no risk of ill-fated M&A, which is notoriously difficult to implement, especially in a business like this where clashing cultures can have dramatic consequences.

Culture, brand, people and scalability:

The business is dependent on two factors: competent and highly motivated employees and good client relationships. The latter is obviously dependent on the first, and as such we can say the crucial factor is how to build a culture that thrives and can scale. Consulting firms need to not only sell themselves to clients, but also to potential employees. To attract the best people you need scale, good workplace and long-term client relations. With all this in place, a company will eventually be a very good consulting business. I believe all these factors are in place in Bouvet’s Norwegian operations, but they still have a long way to go in Sweden.

Consulting is a business that is scalable. Few winners take an enormous bite of the pie. Multi-disciplinary projects are in demand and only a few companies can offer this as they are very difficult to execute. Remember that the main reason why clients hire consultants in the first place is due to a lack of professionals and organizational flexibility.

A good brand is important to attract both clients and employees. Potential employees are tempted by reputation, brand and scale, and likewise, potential clients are much more likely to hire a known consultant than an unknown one. It’s kind of a snowball effect. Additionally, when you have scale you are more likely to retain clients and don’t need to pitch new clients. In 2019 97% of Bouvet’s revenue came from clients who were clients the year before.

Another feature of the consulting business is the relatively young average age among the employees. Consulting has a relatively high turnover where many use it as a springboard for better and more “laid-back” positions. Very often the client goes on to hire the consultant on a permanent basis. What often happens is that he or she returns to his former workplace if they need to hire a consultant, thus it exists some kind of network effect depending on the scale. We can say it works like a snowball effect.

From my distant viewpoint, it seems Bouvet has managed to build a certain scale, brand, reputation and some network effect. Employee satisfaction seems to be high.

The number of employees has grown at an annual rate of 10.2% over the last decade:

	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	CAGR:
# employees	650	790	881	931	1008	1036	1090	1215	1369	1557	10.2%

A good indicator of a healthy work environment is to look at the percentage of sick leave. In 4Q 2019 it was 6% for the whole of Norway, substantially more than Bouvet’s 3.8%. It’s worth mentioning that in general Norwegian employers suffer from a high number of sick leave due to the very favorable legislation compared to the other Nordic countries.

Because Bouvet is still a relatively small company they need to hire outside consultants when they lack competence or resources. For 2019 this was 13% of the revenue.

Revenue, geography and industries:

The Nordic consulting market has grown at a rate of about 6% over the last decade, handily beating the inflation rate (the Nordics are Norway, Sweden, Denmark and Finland). Bouvet has grown at a much faster pace and has clearly taken a bigger share of the market. Bouvet has mainly a Norwegian presence: 93% of the income is derived within Norway. They have 13 offices, of which 3 are in Sweden.

	2011	2012	2013	2014	2015	2016	2017	2018	2019	CAGR
Revenue Norway	866	999	1077	1091	1178	1205	1438	1695	1969	10.8%
Revenue Sweden	28	31	28	37	50	107	160	144	155	23.9%

The 10 largest clients represent 41.5 percent of total revenues and the 20 biggest represent 51%.

We can say the revenue structure resembles the overall structure of Norway: a lot depends on the oil & gas sector and this sector has made the public finances enormously wealthy. However, this has created, in my opinion, a little flexible and competitive business environment.

The table below shows the industrial client list in 2014 and 2019:

	2014	2019
Oil & gas	35.1	28.6
Public	17.9	28.5
Transport	8.5	6.2
Power supply	8.2	10.3
Retail	6.3	6
Media, IT, telecom	6.1	4
Services	5.9	3.9
Industry	4.5	4.5
Health	3.4	2
Bank/finance	2.3	4.3
Other	1.8	1.7

Since 2014 more revenue comes from public entities:

		2014	2015	2016	2017	2018	2019
Revenue from 100% of public companies		34.3	42.7	52.4	50.9	50.9	50.9
Whole or partially private		65.7	57.3	47.6	49.1	49.1	49.1

Public entities are “guaranteed” payers and additionally, most of the contracts are long-term.

Bouvet has managed to grow while keeping the margins steady:

	2011	2012	2013	2014	2015	2016	2017	2018	2019
EBIT margin	9.8	7.6	8.6	7.0	8.1	8.1	9.0	10.4	10.9
EBITA margin	9.96	7.67	8.69	7.09	8.31	8.46	9.51	10.77	11.25

Management and skin in the game:

Any investment in consulting is highly dependent on the people and their culture. So far Bouvet seems to pull the strings successfully, perhaps thanks to the long-time CEO and insider Sverre Hurum. Hurum has been CEO since 2003, and before that, he was in the management of Mandator and Cell. He is 64 years of age and to my knowledge not yet hinted about any retirement. However, in Norway it’s pretty normal for CEOs to retire when reaching 70. It’s hard to say how much of Bouvet’s success is attributable to Hurum, but I suspect it’s significant.

I like to invest in companies that are owner-operated and I believe Bouvet is such a company. Sverre Hurum owns 387 000 shares (as of writing), 3.8% of the company. Erik Stubø, CFO, owns 205 000 shares, 2% of the company. Furthermore, Anders Eriksen-Volle, responsible for investor relations, owns 99 000 shares, almost 1%. Thus, inside ownership is significant, but Hurum has been a net seller over many years. At the end of 2012, their holdings were respectively 505 000 shares, 235 000 shares and 116 000 shares.

The latest selling was reported on the 26th of May 2020 when Hurum sold 75 000 shares at 500 NOK, 16% of his holding at the end of 2019, Stubø sold 33 333 shares and Eriksen-Volle sold 16 667. All of these sales are pretty significant and I have not found any reasons for why, and neither have the sellers given any explanation for their sales. However, their actions speak more than words.

Total compensation for Hurum and Stubø was 7.5 million NOK (750 000 USD) in 2019, pretty modest compared to US standards, and also below average in Norway for a publicly listed company.

All employees have the opportunity to invest once per year for about 15 000 NOK (1 500 USD) at a 20% discount to market. If the employee is still employed three years later he or she is given an equal number of shares free of charge (!). In 2019 1 266 employees (of 1 474) participated in the program and thus it creates loyalty and incentives to stay. The program cost Bouvet 18.5 million NOK in 2019, a small fraction compared to total salaries worth about 1.4 billion NOK. Management has a separate stock incentive program that is of course much bigger than for ordinary employees.

The board owns or controls about 4% of the company, mainly via Egil Christen Dahl, which represents one of the biggest corporate shareholders.

Decentralized:

Bouvet is reasonably decentralized. The local branches/offices are responsible for attracting and building long-term relationships and the local branch might approach clients differently than they do in other branches. Each branch frequently arranges seminars where both the clients and Bouvet share experiences from cross-sections of their businesses. This serves both as a model for creating sticky relationships but also for learning from a diverse range of competence between the client and other employees of Bouvet. However, consulting requires a broad range of skills and “help” from other branches is necessary on demand. This is why size and scale are crucial.

Trends and runway:

The “megatrend” is toward digitalization, both in public and private businesses. Furthermore, there will always be demand for outsourced thinking. (This is in stark contrast to for example Warren Buffett, who would never outsource his own thinking.)

Capital allocation:

Because of its capital-light business model, it throws off a lot of cash. Most of this is handed back to shareholders via dividends (NOK per share):

2011	5
2011	4.5
2012	5
2013	6
2014	5
2015	6.5
2016	7
2017	8.5
2018	13
2019	8.25

Bouvet has bought back shares every year, but only as a means of offsetting dilution for its shareholder programs. Management doesn’t aim to do any spectacular allocations, and paying a dividend seems to be the best move. I would say it’s a shareholder-friendly company.

As of today Bouvet has practically no debt and has a slight net cash position. Excess cash is about 165 million NOK, about 16 NOK per share, not very significant, though. I always like to invest in companies that have a net cash position so they are prepared for any hiccups and rainy days along the way.

Valuation:

The most recent quarter, 1Q 2020, showed a diluted EPS of 6.31 NOK, annualized to about 25 NOK, a P/E of about 20. I would say the report was much better than anticipated and the valuation seems “fair” considering the growth vs. future uncertainties.

How Covid-19 pans out is still a big unknown. However, as investors we value intrinsic value over decades, not in quarters. The “lockdown” will ease and things will get back to normal pretty quickly and Bouvet’s clients are solid. I’m more worried about the low oil price and the cut in spending among oil companies, but this is still too early to tell. Bouvet thrived in the years after the 2014/15 oil crisis, and I see no reason why the current oil-crisis should be different. Lower revenue from the oil sector is most likely already discounted, and I suspect today’s low CAPEX in the oil sector will fuel higher oil prices some 3-5 years down the road.

Negatives:

• Can they manage to grow/expand outside Norway?
• Can we expect the same rate of growth in Norway?
• How important is Hurum to the overall success?
• How long will Hurum continue? Is his selling shares to plan for his retirement?
• Insiders are selling.
• The oil price has plummeted and this means oil companies cut a lot in CAPEX and spending. This will somewhat spill over to Bouvet and their 28% dependency of the oil sector.
• Covid-19.

Conclusion:

I like the business, management has skin in the game, the runway is still long, valuation is fair and they have developed some scale in Norway. The biggest question mark for me is how long CEO Sverre Hurum will continue. I suspect he has been instrumental in Bouvet’s growth.

All the positives aside, I still prefer Accenture over Bouvet, mainly because of the global scale of Accenture (I will do a write-up of Accenture later). Why invest in your second-best idea when you can invest in the best? Nevertheless, I’m willing to buy more of Bouvet if the price drops below 400 NOK  (because of the valuation).

 

Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.  

(This article was published on the 27th of May 2020.)