Nemetschek: Initiating Coverage With Narrow Moat and EUR 54 Fair Value Estimate

We’re initiating coverage of Nemetschek NEM with a narrow moat rating and EUR 54 fair value estimate. Our fair value estimate implies a 2023 enterprise value/EBITDA multiple of 25 times and a P/E ratio of 45 times. Our estimates are broadly in line with FactSet consensus. Consequently, the shares look fairly valued at current levels.

Nemetschek is a leader in the software market for the architecture, engineering, construction, and building operations industry. Additionally, the company makes software for the media and entertainment market, primarily 3D animators.

The company’s narrow moat is based on switching costs, which generate a midteen return on invested capital, including goodwill. We think switching costs vary within the company’s segments; the strongest is in the design segment. Software in the design segment is primarily used by architects and engineers to create 3D models of buildings and infrastructure. This software is mission-critical for users as it is their core tool during most of their working hours. The learning curve is steep and requires a significant time investment for users, typically several months to become proficient. Once users have become comfortable with the software, they have little motivation to switch as it would completely disrupt their workflow and likely prevent them from taking on any new projects for several months.

We expect 10%-15% growth per year for Nemetschek over the medium term, except for 2023 where the transition of its largest brand, Bluebeam, to a subscription model will depress growth temporarily to mid-single-digit levels. We think Nemetschek’s growth will largely reflect market growth plus acquisitions. We expect a modest improvement in the company’s EBITDA margin over our forecast period, rising from around 28% in 2023 to the low 30% range over the medium term.