"Briding the physical and digital worlds in Healthcare, Retail, Security and Livestock."
At Nedap, the focus is simple, solve real problems with smart solutions. From helping farmers monitor millions of cows effortlessly to ensuring healthcare workers spend more time caring and less time on paperwork, this Dutch company knows its niche and excels at it.
This analysis breaks down the key strengths, opportunities, and challenges that make Nedap a company worth watching. Whether you’re here out of curiosity or die-hard investor, you’ll walk away with some new insights.
Nedap is a company owned by several of us for several reasons. In this fundamental analysis of Nedap, our analysts Mathijs and Siem give you all the ins-and-outs of this beautiful Dutch hardware and software company.
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Summary
Business Model Nedap is transitioning from a hardware to a software-driven company, focusing on superior software solutions tailored to customer needs. While hardware production is outsourced, Nedap retains control over key components, selling integrated hardware-software packages.
The company prioritizes recurring revenue, with a 17% CAGR in this segment (2019–2023), and aims to dominate four key markets: livestock, healthcare, security, and retail.
In livestock, Nedap is a global leader, offering smart monitoring solutions for cattle, increasing productivity and health management of cows. In healthcare, its "Ons" platform streamlines administrative tasks for caregivers and health organizations, boasting a 99% customer retention rate and a strong market position in elderly and disability care. In security, Nedap specializes in access management solutions, serving major corporations, but faces competition in this fragmented market. Lastly, in retail, it leads in RFID (Radio Frequency Identification)-based inventory solutions, significantly enhancing inventory accuracy for clients like Adidas and Decathlon, while also offering secure self-checkout technologies.
Nedap's growth strategy is in line with market trends, such as the rise of large-scale farming, aging populations, security needs, and RFID adoption, ensuring its relevance and profitability in evolving industries.
Moat
Nedap’s competitive advantage lies in its focus on niche markets, cross-synergies across propositions, and high switching costs in healthcare, livestock, security, and retail. Transitioning systems is costly and time intensive, while continuous product improvement strengthens its recurring revenue model. Network effects in healthcare enhance demand as adoption grows, and its reputation in security, supported by major clients such as The European Parliament, Airbus and Schiphol, provides a strong but fragile advantage. By leveraging shared technologies and market focus, Nedap ensures sustained growth and resilience.
Management
Nedap’s is led by CEO Ruben Wegman since 2009. He emphasizes employee added value and fairness. CFO Daniëlle van der Sluijs and CCO Rob Schuurman round out the management board, driving strategy and alignment with stakeholders. Employees benefit from a profit-sharing plan, with 75% participation in 2023, fostering a culture of entrepreneurship. While CEO Wegman has significant share ownership (5x his base salary), broader board-level stakes could be higher. Financial targets include ROIC, revenue growth and operating margin, aligned with the company’s ‘Step Up!’ strategic plan.
Financial Analysis Over the past decade, Nedap’s revenue has grown by 4.5% annually, while EPS doubled that pace at 8.5%. Recent years show stronger momentum, with 8% annual revenue growth in the past five years, driven by recurring revenue, which now accounts for 40% of total revenue. Gross margins rose to 69% in 2023, with operating margins steady at 10%, aiming for mid-teens by 2028.
Capital Allocation
Nedap’s R&D spending, focused on improving existing products, aligns with its asset-light strategy. It contributed to a strong 23.6% ROIC in 2023. Despite high ROIC, reinvestment rates are modest, with most profits returned to shareholders as dividends (yielding ~6%). Financial KPIs target high single-digit revenue growth, mid-teens operating margins, and 30%+ ROIC, signaling disciplined capital allocation and a focus on recurring revenue growth.
Risks
Attracting the right amount of talent to grow is challenging for Nedap
Security breaches could lead to a loss of trust and reputation
Nedap might be unable to deliver its growth targets
Opportunities
RFID technology is getting cheaper, which could lead to new opportunities for Nedap.
Nedap can increase its offerings within propositions.
Valuation Nedap’s current P/E ratio of 20 is lower than in some periods over the past decade, reflecting rising earnings without corresponding share price growth. While not particularly cheap, the valuation appears reasonable given historical trends. Using a five-year projection (2025–2029), Nedap is expected to grow revenue at 8% annually, achieve a 12% net profit margin, and stabilize at a P/E of 15 as it matures. This results in an expected CAGR of 13.2% (19.2% including dividends), highlighting strong potential returns. Even in a more cautious scenario of 6% growth and a 10% margin, the dividend boosts total returns to 11.6%, making downside risk relatively low.
Conclusion After researching Nedap, I’ve decided to increase my position. The company has leading positions in markets like livestock and healthcare, with strong products and impressive growth in recurring revenue. While retail and security are more competitive, Nedap’s solid management and healthy balance sheet provide confidence.
Chapter 1 - Introduction
1.1 Preface
As a premium member of The Dutch Investors, you have insights into our personal portfolios. As you might have noticed, one of my positions is Nedap. It is actually my smallest position, with only 3% portfolio weight. The main reason is that Nedap was one of my first investments and I never sold nor bought more of the stock. I want to use this analysis to decide: sell my position or make it a decent position (in the future).
If you are not Dutch, chances are small that you know Nedap. It is one of the reasons why this company might be even more exciting to you. Nedap is a Dutch microcap, worth around €360 million and listed on the Amsterdam Stock Exchange. What attracts me to this company is its low capital intensity, their focus on niche markets, their market leadership and management with skin in the game. I don’t want to give away too much information in this preface, but I hope you are triggered by some of Nedap’s characteristics that I just mentioned.
You probably know Amsterdam and The Hague, perhaps Rotterdam and Utrecht. Nedap is not located in any of these cities. The company has its headquarters located in Groenlo; a small village in the East of The Netherlands with around 10.000 inhabitants. The remarkable thing is that Nedap started in Amsterdam in 1929. What directed the company eastwards? Let’s start briefly with the history.
1.2 History
Nedap was founded in 1929 in Amsterdam, actually in a former cocaine factory. There, Nedap produced a broad range of devices based on the needs of customers. From 1940, Nedap decided to start making their own devices, under their own brand name. At the same time, they also produced products for third parties, like washing machines and electric blankets.
In 1947, the company moved from Amsterdam to Groenlo. This eastern-Dutch village offered Nedap a place to expand its manufacturing capabilities, now operating in a less-urbanized environment. In that same year, Nedap went public through an IPO. After decades of producing electrical and electromechanics, Nedap was one of the first businesses to develop RFID (Radio Frequency IDentification) in 1973. Even today, almost all of Nedap’s propositions are using RFID technology.
Where Nedap operated mainly top-down, with higher management making the decisions, this changed around 1993 when the company reorganized itself. From that moment, it started appreciating the engineers more, while giving them more responsibility. In the 2000s, Nedap realized that they could add more value by creating the software, combining it with its devices. “What kind of devices?” you may ask. To give you an example, Nedap created a client card where healthcare professionals could track the medical history of a client. The technology behind it was RFID. At that time, it was a pretty groundbreaking technology.
It was the start of Nedap ONS; an electronic client file for health professionals where it became easier to administrate, schedule and have an overview of a patient’s needs and medications. Today, Nedap is the Dutch market leader within this segment, implemented by over 1500 health institutions in The Netherlands.
Fast-forward to 2024, Nedap is focused on four key markets: healthcare, livestock, retail and security.
Chapter 2 - The business
2.1 The business model
Nedap aims to maximize its added value per employee and decided that this can be achieved by focusing on developing superior software, based on their customers’ needs. It’s important to note that Nedap does sell their hardware- and software in one package to its clients most of the time. However, the mass-production of hardware is being outsourced to third parties. Nedap is only involved in the development of some hardware components.
As mentioned, Nedap is focused on four key markets. It used to be active in seven markets before 2021, but the company wanted to increase their focus on markets where they are market leader or where they have a significant chance to gain market leadership. The below breakdown shows the achieved revenue per segment in 2023.
The different companies need to be able to achieve high ROIC and the businesses need to have a competitive edge in favorable market circumstances. Nedap mentioned that this wasn’t the case anymore, when they sold their ‘pig livestock’ activities.
Nedap is still in transition from being a hardware company to becoming a software company. The company is consistently increasing its recurring revenue, moving to subscription-based services. This is relatable to every proposition. The CAGR of recurring revenue is 17% from 2019 till 2023. In the first half of 2024, recurring revenue accounted for 40% of Nedap’s total revenue. The transition has a positive impact on both gross- and EBIT margins.
The investment willingness in the pig industry was low, and the company was highly dependent upon the Chinese industry. Not all key markets are fully profitable yet, but will be in the future. Because at least the retail-, security-, and livestock divisions are (partly) based on RFID, let’s begin with what the technology entails.
RFID (Radio Frequency Identification) technology
You can see RFID as a sophisticated bar code. An RFID tag looks like a sticker and can be used to label an asset or a product. You can use it to track your assets and create a total overview. The technology you use to pay with your phone is called NFC (Near-Field Communication), which is actually a sub category of RFID, and is based on a similar technology. These are some advantages of RFID:
The tag doesn’t need to be visible in order to be read by a reader. That’s because it uses radio waves.
RFID technology allows you to read tags from multiple meters of distance, instead of just a few centimeters.
With RFID, multiple items can quickly be scanned at once.
As illustrated by the overview below, the data of those assets/products can be used to create some sort of ‘digital twin’ as a dashboard. This could offer many valuable insights for businesses, in Nedap’s case, especially for retailers.
Now you have an understanding of the basics of RFID, let’s delve into all Nedap’s key markets to gain more understanding of their business model. We go from highest to lowest revenue, but the last one (retail) is definitely not the least! It’s good to mention that we will also discuss some of the industry characteristics and competition in this chapter. If this would be discussed in a special chapter, it would be more difficult to refer to the actual market groups.
Livestock
Nedap started their livestock division in 1977. In this division, Nedap offers a combination of hard- and software to farming companies. Currently, Nedap is only active in the cattle industry. To give you some understanding of their main proposition, here is a picture from their brochure.
Nedap offers SmartTags, attached to every cow that a farmer owns. It can measure many health-related things, like fertility, milk production, diseases, heat detection, herd performance and location measurement. It helps the farmer to identify unproductivity or the need for help at early stages, increasing production and well-being of cows. This information can be, via a processing unit, sent to the cloud. It offers farmers a complete overview of their livestock. Especially with big farms, this is a great tool because it’s impossible for a farmer to track hundreds or even thousands of cows manually.
It might still be difficult to get a grasp of the actual proposition, this video explains it all.
Connected to this explained ‘Cow Control’ product offering, Nedap offers ‘Milking Control’ to track the milk yield and flow rate of individual cows during milking sessions and ‘Farm Control’ to identify cows, lead them to specific directions in the farm and to feed each cow the right concentration of feed in the right amount. Nedap offers integrations with big farming equipment companies like Lely, BouMatic and Waikato.
Nedap is the worldwide market leader within this industry, with a 40% market share, 30.000 connected farms and a massive 5.5 million cows.
The company is growing in the industry by both leveraging their position to grow their installed base at existing clients, while also expanding the portfolio to increase revenue per connected cow (both for the farmer and for Nedap).
As can be seen above, the market trends are definitely in favour of Nedap; there is a worldwide growing demand for dairy products and more and more farmers adopt smart monitoring solutions. That last number is logical, since the number of cows in each farm is increasing rapidly. Small farms are coming down.
Looking at the figure above, you can see that small farms are in decline, while bigger farms are growing in absolute numbers. If you own 100 cows, monitoring them by yourself seems doable. However, if you own 2.300 cows (biggest cattle farm Netherlands) or even 100.000(!) cows, then you definitely need cow- and farm monitoring solutions. Here is a video of the world' s biggest farm, located in Bengbu China, so you can get a grasp of what it looks like.
Nedap doesn’t conduct acquisitions in general, although there are some exceptions. This allows Nedap to build an integrated software suite and to add new features regularly.
Healthcare
The division where Nedap has the strongest position in my eyes is the healthcare division. Also, it’s probably the most profitable in the future, because it’s all software. In figure 7, you can see the different offerings for Nedap’s key markets. You can view the ‘Core’ category as the cash cows for Nedap. As you can see, two of the healthcare solutions are still in the ‘Create’ stage, while Ons is in the scaling phase. Let’s check out those products and start with the latter, where I managed to speak to a user of the product.
Ons Nedap is a platform that tackles the load of administrative tasks that healthcare professionals in The Netherlands have to deal with nowadays. The benefit is, as a result, that these care professionals can do what they do best: delivering the best care for their patients/clients.
Think of Ons Nedap, the main proposition, as an all-in-one platform where you can perform these activities:
Electronic patient file management: health overview, medications, quality monitoring.
Care logistics: calendar, scheduler, planning, capacity management.
Administration: financial dashboard, billing, cross-health traffic (safely exchange of sensitive health information to and from other health organizations).
I’m not a user of this product, but I managed to speak to a user of Nedap Ons Suite. He works at a nursing home (elderly care), which is part of a larger group of nursing homes. As a caregiver, he has to perform many administrative tasks, such as reporting the provided medications, accidents that happened, hygiene-related tasks etc. He stated: “I find Nedap Ons a great platform, because it makes it very easy to find information about my clients. The program is quick and allows me to find the right information in a matter of time.”
What’s interesting about the product is that switching is very difficult, making the software sticky. “If the organization would change the system, all caretakers would definitely disagree. We are used to this way of working and our clients' information is in the system.” That’s from a behavioural perspective. Also from a technical point of view, switching is not easy. It demands a long period of time to transition from one platform to another. Especially because all the information needs to be transmitted carefully and safely. Also, this would cost a substantial amount of money, which is not worth it in most cases (especially when your employees like to work with the product). The numbers are clear with the retention rate being over 99%.
Aging is a big challenge for The Netherlands. For Nedap, it’s an opportunity because the demand for their healthcare products will rise. In figure 9, you see how the relative amount of 65+ aged people will grow in the coming decades per region. In 2035, Flevoland (in the middle) will be the only province that does not have more than 20% of its population over 65 years of age.
Nedap’s market share in the elderly care market is 60%. In the disability care market, this percentage is around 50% following M&I partners.
If you have reviewed the solution pipeline in figure 7, you’ve probably mentioned that Nedap has some other offerings, including Luna (digital (day)calendar for people with cognitive issues) and Caren (part of Ons which facilitates the client in its rights, for example when it comes to health insights).
In the end of 2023, Nedap made an unusual move by acquiring MediKIT. It is like a digital colleague/assistant for doctors. It offers quick patient information and lowers administrative burden. The difference between MediKIT and many other ‘Doctor Information Systems’, is that MediKIT focuses on user friendliness. The companies can learn from each other and with Nedap as an owner, MediKIT gains more trust from the industry, as stated by MediKit founder Pieter van Tiel.
Security
In security, Nedap is mainly active in access management. Think about personnel access management solutions for employees of Amsterdam Schiphol Airport. The badge and connected employee rights, determine which departments an employee can enter. That last offering is called PIAM (Physical Identity and Access Management). An employees’ badge is connected to the HR system, and when HR changes the role of an employee, its access rights are being adjusted automatically. Especially in Europe, Nedap has a strong market position with 36% of the top 250 European organizations as a client, including Airbus, Vodafone, Volkswagen and Unilever. Worldwide, 2.500 organizations are making use of Nedap’s security solutions.
Trust seems to be an important topic when it comes to security, which is why it’s important to see so many big corporations as clients. Nedap’s access readers are also being used to detect numberplates on vehicles, and it’s possible to unlock rooms with just your phone (NFC). Growth in this sector is coming organically, where Nedap can roll out more SaaS solutions at existing customers, while also growing market share to other organisations.
With more and more security threats for organizations, investments are a need to protect intellectual property and company secrets. That’s why the TAM is growing by 10.3% in the next 10 years in the USA; Europe has similar growth projections (Grand View Research). Although I believe that Nedap offers a high-quality solution, this market is more fragmented than the others. The technology is relatively simple and many (strong) players such as IBM and Nexus Group are active in this industry. The fact that Nedap doesn’t provide a market share estimate, could confirm this belief.
Retail
Do you know that bleeping sound when someone walks out of a store with unpaid products? For decades, Nedap has been known for the system that detects whether a product is paid and alarming the shop owner when someone walks out of a shop with an unpaid product. Although it still sells those gates to customers, based on RF or RFID, it is not Nedap’s core focus within the retail area. By the way, RF is the technology before RFID, where you know that something is stolen or missing, without knowing what item exactly.
Currently, Nedap is scaling its iD Cloud Platform for retail giants such as Adidas, Decathlon, G-Star Raw and Under Armour. It is a platform that connects inventory data of all stores to realize a real-time single source of truth. Why is this needed? Well, if you don’t connect all inventory levels of your store, then you’re working in silos and have no idea of the overall picture. If you know exactly what products are located where, this increases the efficiency of inventory management, revenues and customer satisfaction. How is this possible? Yes, RFID again. It allows Nedap, and its customers, to track down products from production sites, to warehouses, to stores, to the end customer. No need to manually check inventory levels anymore, just scan a whole badge or make one walk through the store and you’re all set. The good thing is that RFID has become much cheaper (around €0.05), making it possible to put RFID labels on every product.
CEO Ruben Wegman explained in an interview with business podcast BNR that large retail chains have on average around 70% inventory accuracy. Nedap can ensure a 99% inventory accuracy within just two weeks with their technology.
A great thing is that Nedap is bigger than competitor 1, 2 and 3 together with a total market share of 35% of retail RFID users. Besides, RFID adoption within retail will double in the coming five years (Lebrowsky Research). That being said, in an interview between Tegus and the CIO of Fast Retailing, the latter stated that competitors Checkpoint and Impinj are more expensive, but more complete.
In the figure below, you can see the market potential of RFID in retail. For the biggest chain category, 56% still doesn’t use RFID. For the smallest chains, at least 87% still can be captured. It’s interesting to see that Nedap has the strongest market position in the markets where the room to grow is the highest. If you’re wondering, the orange part is Nedap, the grey part on the left bottom means that the retail chain created their own solution. Blue is the second biggest competitor.
A second substantial proposition of Nedap within retail is iSenseGo. This is the technology that is being used for safe and secure self checkouts in supermarkets. Companies like Tesco and Ahold Delhaize are clients of Nedap with this regard. Also companies that sell expensive products like perfumes, such as Sephora (owned by LVMH) and A.S. Watson, use the product to prevent stealing practices and to ensure a smooth checkout.
Retail shops with self checkouts, are struggling with the rise of stealing practices as a result. The roll-out of iCloud for supermarkets could be a big tailwind for Nedap, especially because they already have some clients for iSense in this industry. The thing is that RFID is still too expensive to use for €1,- products like in supermarkets, especially because it’s a low-margin business. So who knows when RFID chips can be made for 1-2 cents in the future. In the end, a supermarket could save a lot of money by preventing theft.
Chapter 3 - Competitive Advantage
I think Nedap has different moats in multiple of its propositions. First, I want to stress the fact that it is a huge advantage for a business as Nedap to focus on niche markets. I think they did a good job in minimizing their number of value propositions over the past couple of years. Besides, Nedap benefits from cross-synergies; the same technologies are being used in different propositions. That makes it possible to learn from each other and to improve product offerings. Divisions in Nedap are based on the propositions, so actually four different companies within one. That doesn’t mean that there is no technology transmission over the different market groups.
Switching costs
For the healthcare offering (99% retention rate), but also in livestock, security and retail, switching costs protect Nedap from losing customers. For healthcare, it takes a lot of time to change systems. Transition and implementation time demands external consultants and organizations to take care of the job. This means that there is a financial burden here as well. Also, caretakers wouldn’t want to switch systems, creating a natural barrier to switch. For the other propositions applies that it takes time to create a ‘perfect’ digital twin of your farm or group inventories. Besides, hardware needs to be purchased and connected. The good thing is that Nedap keeps developing its offerings. A quick LinkedIn research teaches us that more than 30% of Nedap employees are active in developing roles. Computer science is the most common education of employees. Java and Javascript are the most mentioned skills by Nedap employees. A solid product that improves in combination with high switching costs is a very strong competitive advantage. Especially given the fact that Nedap is going more and more to a recurring revenue model.
Network effects
For Nedap’s health division, there seems to be a network effect in place. The more people use Nedap’s product, the more people are used to the platform, the higher the demand, the higher the chance that more organizations will adopt Nedap’s ‘Ons’ platform for healthcare. With a dominant market leadership position in The Netherlands, this effect is positive for Nedap. Also, it’s very important in this sector to make it as easy as possible for caretakers to perform administrative tasks. These people are busy enough with handling their day-to-day caretaking tasks.
Besides the two aforementioned competitive advantages, I would also like to argue that there is a moat in security. It is a very important topic for organizations nowadays with (e)spionage and hacking practices, meaning they search for reliable partners in this industry. Nedap is such a company with a track record of over 40 years and big customers such as Airbus, HSBC, Schiphol and The European Parliament. Important to note is that this is not a durable moat; one big security breach, and Nedap will be questioned and lose its reliable status.
Chapter 4 - Management
Nedap’s CEO is Ruben Wegman. Before Wegman joined Nedap in 1997, he studied computer science at one of the best universities in The Netherlands, called Nyenrode University. Afterwards, he started working in sales roles for Royal Dutch Shell, before becoming employed for Nedap. He served as business unit manager for the security proposition and became a member of the board in 2002. Since 2009, Wegman has been the proud CEO of Nedap (this month exactly 16 years).
I’ve listened to many interviews with Ruben Wegman, such as those from Rowan Nijboer and BNR. He looks like a very smart and fair man, admitting past mistakes and explaining how they deal with difficult situations. He also places emphasis on rewarding employees in a fair way and aligning their interests with the stakeholders. One of Nedap’s big shareholders once said: “If Nedap’s employees do a good job financially, then I do a good job.”.
The words ‘focus’ and ‘added value per employee’ are words he often speaks out. He also gives context as per how he tries to enhance this. It looks like he’s also loved by the employees of Nedap, with a 100% appreciation score on Glassdoor. On average, Nedap receives 4.5/5 stars, which is exceptional.
Nedap’s CFO is 52-year old Daniëlle van der Sluijs. She performs almost 5 years in her current role at Nedap and has previously worked in financial roles for The Port of Rotterdam and ForFarmers (also publicly traded). Nedap’s financial KPIs are quite simple; revenue growth, operating margin and ROIC. There are no adjusted terms to be found in their annual report.
Last but not least is Rob Schuurman, the CCO of Nedap. He works at the company for almost 20 years and worked in various roles, such as general manager for the healthcare division and as global director retail.
Aligned interests
Each year, Nedap makes 6.5% of the profit before tax available for its employees, who can choose to buy Nedap certificates with it. This idea fits with the spirit of entrepreneurship, following Nedap’s management philosophy. Currently around 3.6% of all outstanding shares are owned by Nedap and ¾ of the employees opted in for the plan in 2023.
If you look at the remuneration report, you can see that all three board members choose to fully participate in the participation plan. The board is required to invest at least 50% of variable remuneration into the plan. If you participate in the program, there is a lock-up period of four years in which employees can’t sell their certificates.
50% of the variable remuneration is based on financial targets, 25% on employee engagement targets (such as interaction, participation, retention etc.) and 25% on sustainability and revenue model targets (i.e. female leadership and clear key market strategy). In 2023, 32% of fixed annual income was paid out in financial target variable compensation.
In my view, these are healthy financial targets, aligned with Nedap’s strategy to improve recurring revenue and bolster margins. I’m just missing ROIC as part of the remuneration schedule. Especially because this is part of Nedap’s strategic ‘Step Up!’ plan. Also, it’s part of their 2025-2028 objectives, as communicated during their investor day from November. The communicated ROIC here was at least 30%, with operating margin levels at mid-teens and high-single digit revenue growth.
Skin in the game
Ruben Wegman owns a total of 44.436 certificates and shares, against a base salary of €466.000 in 2023, implying he has around 5x his base salary in stock. The other two board members own less, with Van der Sluijs owning 2579 certificates (0.4x base salary) and Schuurman owning 4864 certificates (0.9x base salary). Although there is some skin in the game, this could be a lot better. However, it’s good to know that almost all of Nedap’s employees do benefit from Nedap stock doing well. This enhances the feeling of togetherness and entrepreneurship.
Chapter 5 - Financial Analysis
5.1 Financial key ratios
Over the past 10 years, the revenue of Nedap has grown 4.5% per year on average. During that same period, earnings per share did twice as good with an annual growth of 8.5%. The realized revenue growth seems low, but if we look at the past five years, it gets substantially better with around 8% revenue growth per year. Nedap’s target is to continue that line up until 2028.
When looking at the graph, we see that growth is catching up in the latest years. There is some catch-up effect, because of shortages during COVID-19 in 2020-2022. Besides, Nedap is growing its recurring revenue at a faster rate, bringing a more reliable revenue stream. In 2024, revenue will be a bit lower compared to 2023, which is understandable given the strong 2023.
Let’s now look at the development of recurring revenue versus total revenue in the past five years. Check out the table on the following page.
Things are really taking off lately, with recurring revenues at 39.5% in the first half of 2024. In the third quarter, recurring revenues accounted for 40%. Also here, the picture is a bit twisted. The catch-up effect in 2023 had mainly to do with hardware, which isn’t recurring revenue. That’s why the recurring growth between 2023 and 2024 seems higher than it actually is. From now on, we should see normalized recurring revenue growth again.
Nedap’s gross profit in 2023 was 69%, while it was 67% in 2022. Operating margins are stable at around 10% for the past years, while net margins are 8% normally. As stated, Nedap wants to move towards mid-teens (15%) operating margins as they further implement their set strategy.
R&D costs, mostly to improve and develop existing products and services, is stable at 18% of revenue. They are only capitalized when meeting IAS 38 criteria, which basically means that you should capitalize it when it’s about new propositions and when the goal is to bring the proposition to market.
Around 3.3% of Nedap’s R&D costs were capitalized in 2023, meaning that almost all of the R&D is spent on improving current propositions. Therefore, you shouldn’t expect any new propositions popping up soon. In my view, these statistics align perfectly with Nedap’s focused strategy.
Nedap’s debt position is very healthy with a net debt/EBITDA ratio of under 0.5 and ⅔ of the total debt in cash. With a net debt/EBITDA target of below 1.5, Nedap is conservative and I think we don’t have to discuss their financial health any further.
5.2 Capital Allocation
Nedap pays out large dividends. Over 2023, Nedap paid out €3.20 to shareholders, which comes down to almost 6% dividend yield based on today’s prices (€55). The management stresses that they only pay dividends after all needed investments for growth are being made. What’s left, is simply paid out as a dividend. Nedap doesn't buy back stock, which makes sense because of the stock’s low liquidity. As mentioned before, Nedap doesn’t participate in acquisitions normally, as they focus on organic growth.
This picture from their CMD presentation perfectly describes their strategy:
It’s difficult to determine whether the company really first invests and then pays out dividends. With such a high ROIC, you would expect the company to be able to reinvest more into the business against high returns. Or is it just excellent capital allocation where Nedap only invests in high-ROIC projects? What definitely does not help, is the location of Nedap. As stated before, the company is based in the village of Groenlo, with the nearest university half an hour away. It makes it harder to attract the right talent. And without people, investing in new projects is harder.
So we can discuss it for a long time, but Nedap’s capital allocation strategy is simple; invest in the business for profitable future growth and pay the rest as dividend.
5.3 ROIC
In 2023, the return on invested capital for Nedap was 23.6%. It definitely is a high number and it says something about the profitability of the overall propositions. However, Nedap turns out to be unable to reinvest their profits back into the business. Almost all of their profit was paid out to shareholders in the past few years. Although ROIC is a good parameter, the theoretical ROIC of Nedap is less important because of low reinvestment rates.
Important to note here is that Nedap is a very capital light business, especially from the moment they quitted manufacturing hardware products. So the R&D costs on their profit and loss statement are actually investments into the company. It’s just not capitalized and therefore not visible on the balance sheet of Nedap. If you capitalize those investments, NOPAT will jump. Because also the ‘invested capital’ goes up, but relatively less, ROIC will rise compared to the current calculation.
Still, we saw that 18% of revenue is spent on R&D so the reinvestment rate still isn’t that high. I appreciate the fact that Nedap is careful in appointing where it invests their money. However, as a shareholder you would love to see more reinvestment opportunities against such a high rate of return. The solution as a shareholder might be to reinvest your dividend back into the company.
5.4 Financial KPIs
Nedap focuses on three financial areas specifically for the coming 3-4 years.
Revenue growth. High single-digit organic growth, by shifting to recurring business models and growing market share in current growth markets.
Operating margin. Mid-teens operating margin, by increased share recurring revenue and becoming more efficient with higher focus.
ROIC. 30% or higher, by continuing to move towards asset-light models and limited growth invested capital because of this.
I think the financial targets are fair and can help Nedap to become a solid investment. If I could improve one thing, I would add the specified reinvestment rate to create a better image of the incremental ROIC. This would give a better image of the return you can expect as a shareholder of Nedap.
Chapter 6 - Risks & Opportunities
6.1 Risks
Attracting the right amount of talent
We talked about this issue various times in this report. Nedap tries to minimize this risk by having their own modern Nedap Campus to educate and develop talent. Besides, employee retention is good with an average tenure of 6 years according to LinkedIn stats. If Nedap is unable to attract the right amount of talent, that would slow growth.
Security breach(es)
Hacking practices or spies breaking into Nedap’s access systems would cause huge reputational damage that’s difficult to turn around again. I think it was Warren Buffett who once said: “It takes 20 years to build a reputation, but only 5 seconds to ruin it.” Especially within the security proposition, that would be catastrophic.
Unable to reach revenue- and margin goals
Nedap has some ambitious targets for revenue and operating margin. Previously, the company aimed for the aforementioned targets in 2025, which was changed to 2025-2028. Given the low reinvestment rates, it would be very clever if they reach the targets. If this doesn’t work out, Nedap becomes a much less attractive investment as it appears to be based on management’s targets.
6.2 Opportunities
RFID getting cheaper
If RFID adoption becomes cheaper, this would open new worlds for Nedap. Supermarkets could get interested in Nedap’s retail offerings for example. The trend is already going on, so a lot to be hopeful about.
Increase offering within propositions
Nedap is continuously working on creating add-ons and new products within propositions to serve its customers better. For example, they’ve been working on ‘Vision’ for the livestock proposition in the past couple of years. With that product, cameras within farms can detect irregularities and inefficiencies. Nedap is just getting started with selling that product to customers. Expanding offering and increasing market share is a great combination.
Chapter 7 - Valuation
7.1 P/E ratio development
As shown in figure 16 below, the PE ratio of Nedap lays currently around 20. It is way cheaper than in some other periods within the last 10 years. Earnings have risen, while Nedap’s share price hasn’t moved along over that same period. Because there were also periods in which Nedap was cheaper, the current valuation looks quite normal P/E-wise.
7.2 Scenario analysis
For Nedap, I have chosen to base the valuation on five years into the future. That’s because I can’t predict the market well enough to assign growth percentages over a 10-years period.
Based on the management’s expectation and on industry growth reports, I expect Nedap to deliver 8% growth per year for the next five years (2025-2029). The management aims for 15% operating margin, so adjusted for tax and interest, 12% seems doable.
For the final price-to-earnings ratio, I am using 15. This is lower than the average for Nedap, but justified in my opinion. After five years, Nedap has become more mature and, generally speaking, has less room for growth.
A great 13.2% expected CAGR, if you believe the assumptions that I made above. It’s not easy, let’s make that clear. Nedap has to improve its net profit margin by 4 base points, from 8% now to 12% in five years. I think that the pessimistic scenario above is more realistic than the optimistic (green) scenario.
So in the scenario with just 6% growth and 10% profit margin only 5.6% return? That’s too low, you might conclude. No, because this is excluding dividend. If we add up 6% dividend, you’ll face a 11.6% annual return in this scenario.
For the scenario that I expect is realistic (the middle), the return including dividends is a stunning 19.2% per year for the coming five years. The risk of losing money is very low in my opinion.
Chapter 8 - Conclusion
The question that I asked myself at the beginning of this analysis was whether I would sell or add to my current Nedap position. After conducting this research, I’m convinced that Nedap is doing the right thing by focusing on markets where they possess leading market positions with fantastic product offerings. Many propositions still have to be fully marketed to customers and the growth in recurring revenue is impressive. I mainly acknowledge the strong and leading positions within livestock & healthcare. Nedap also offers great products in retail and security, but there is a more competitive landscape. Nedap’s management is capable and its risk averse attitude leads to a healthy balance sheet.
I have to admit that there are some doubts as well. Is Nedap able to attract enough talent and to market their new solutions effectively? Based on their past product successes, I tend to say ‘yes’, but you never know. If they can roll out their strategy as planned, operational leverage will kick in and the company will turn out to be very cheap right now.
In that sense, I think the chance of losing money is very low, compared to a high potential caused by recurring revenues with associated higher margins. The business reminds me of Buffett’s first two rules. I will (at least) double my position in this great company at a fair price, bringing it to 6+% of my total portfolio. Remember that this is not personal advice, just my own decision based on this analysis. I recommend you to also conduct your own research before making a buying decision.