Origo is an Icelandic IT company listed on the Nasdaq OMX Iceland stock exchange. The company employs over 500 people, offering IT solutions ranging from hardware, software, consultancy and technical services. In addition to its Icelandic operations, Sweedish-based Applicon AB and Tempo Solutions operate as fully owned subsidiaries.
Origo 2017 Financials
In 2017, the company generated approximately 15 billion ISK ($140m) in revenues, 1 billion ISK ($9,3m) in EBIDTA and 430 million ISK ($4m) in net profits, with a debt/equity ration of 42%.
Currently, the stock is trading at a market cap of about 9,2 billion ISK ($85.5 m), which would correspond to p/e ratio of about 27. Thus, not that cheap. But there is a but.
Tempo Software Funding Round
In 2017, Origo announced that it had tapped AGC Partners to manage a formal process to raise a significant investment in Tempo ehf. According to the latest statements made by Origo, the results of the fundraising will be announced in August.
In 2017, revenues at Tempo reached $17.9 million, corresponding to a top-line growth of 42% compared with 2016. Although Origo does not disclose or break down profit margins from Tempo, the company does disclose headcount. At year-end, 84 people were working at Tempo at its offices in Iceland and Canada. I think we can safely assume that salary expenses alone are in the $10 million region annually.
The Current Valuation of Tempo
Rapidly growing software companies – especially SaaS – tend to trade at relatively high multiples. By applying recent Enterprise Value to Revenue deal multiples for software companies in SaaS, Platform and Verticals sectors (see image below), one could argue that a pre-money valuation of Tempo between 2.5 and 6 times 2017 revenues would be relatively conservative. Even looking at EV/REV multiples of publicly traded SaaS companies, post-IPO multiples seem to be quite high at a median of 8x.
Assuming a multiple within the range of 2.5 to 6 would render an enterprise value between $45 million to $108 million for Tempo alone. The company has about 3.8 billion ISK ($35m) in debt, so current enterprise value stands at about $120 million.
For the sake of mental exersise, let us assume that the pre-money valuation of Tempo is $50 million. Let us then further assume that Tempo only contributed marginally to the 2017 EBIDTA of the Origo group. This would mean that the enterprise value of Origo net of Tempo would stand at $70 million.
If this would be the case, Origo minus Tempo is trading at a 7.5 EV/EBITDA multiple, as opposed to a multiple of 13 as the current valuation would indicate. Cheaper, but not that cheap. If the pre-money valuation of Tempo is $100 (which I would deem highly unlikely), the enterprise value of the non-Tempo operations would be trading at a multiple of 2.
Is Origo Cheap?
Looking at the numbers, Origo might seem excessively priced in the market. The current multiples, however, do not tell the whole story as the value of its Tempo Software subsidiary are not fully reflected in the earnings numbers. To what extent the value of Tempo is represented in the current market cap of the Origo remains to be seen, but the catalyst is just around the corner.
Edit: On the 14 of August 2018, Origo announced that it had entered into exclusive negotiations of the sale of 33% of Tempo Software valuing the subsidiary at $62.5 million.
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