Gasporox: Keeping its Phot-on the Gas

Research Update

2022-11-14

07:00

Redeye states the Q3 report was strong across the board. The Company continues on its path of profitability with Gross profit-to-asset-ratio continuing to increase with higher revenue and gross margin. We adjust our estimates for Q4'22–Q4'23 and our fair value range.

Rasmus Jacobsson

Contents

Summary of Q3’22

Estimate changes and updated fair value range

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Close to EBIT break-even in 2022

We are more confident in Gasporox’s long-term potential due to a better-than-expected third-quarter report. Gasporox will be close to EBIT break-even in 2022 based on the Company’s YTD performance and our Q4 estimates. Our earlier estimate was 2024. Adjusted for capitalized research and development, EBIT break-even is expected in 2023.

Clear path to profitability

Gasporox has shown a clear path to profitability with Q4 in 2020 and 2021, and now Q3’22 all showing positive EBIT and signs of high profitability. Its gross profit to asset ratio has risen from 3% in 2016 to 52% TTM in Q3’22. We expect the Company to report full-year EBIT profitability in 2023.

Revised estimates and updated fair value range

We increased our gross margin forecast for Q4’22–Q4’23 while increasing our sales forecast for Q1–Q3’23. As a result, we adjust our fair value range to SEK13–SEK54 (Base Case: SEK31) from SEK9–SEK39 (Base Case: SEK22), partially offset by a one-percentage-point increase in our risk-free rate.

SEKm	2020	2021	2022e	2023e	2024e
Revenues	12.5	15.7	27.0	39.0	52.6
Revenue Growth	21.1%	26.4%	71.4%	44.4%	35.0%
EBITDA	-1.1	-2.7	3.7	13.1	15.2
EBIT	-4.4	-5.4	-0.15	10.1	9.8
EBIT Margin	-35.0%	-34.2%	-0.5%	26.0%	18.7%
Net Income	-4.4	-5.4	-0.50	9.4	9.0
EV/Revenue	7.6	5.6	2.3	1.4	0.9
EV/EBIT	-21.6	-16.3	-415	5.5	5.1

Summary of Q3’22

Gasporox did 88% better than our forecast for net sales, making SEK6.5m for the quarter instead of SEK3.5m. The difference is due to the pandemic having less impact than expected and overall sales being higher than expected. EBIT was positive for the first quarter, outside the traditionally strong fourth quarter, reaching SEK0.2m versus our forecast of -SEK3.6m. The primary difference was the gross margin, which was much higher than expected at 83% versus our forecast of 70%. This alone saved SEK0.8m. Better OPEX than expected resulted in higher EBIT as well.

Continued expansion of aftermarket services

With the addition of a new certified reference test add-on for its VialArch module, Gasprox is expanding the services it offers. We anticipate that the Company will focus on expanding its install base in the short term. Still, we believe that Gasporox has the potential to develop a strong service offering over time. The food expansion may hurt gross margins, but the service offering may help offset that. However, aftermarket services may struggle to increase gross margins due to the Company’s already high margins.

Financing sealed

After the quarter, Gasporox raised SEK10m by issuing a SEK5.5m convertible note (convertible at SEK8.5), a SEK3m growth loan from Almi, and a SEK1.5m credit facility from SEB. The convertible note is directed towards Fårö Capital (SEK2.5m), Gobia Enterprises (SEK2.5m), and the CEO (SEK0.5m). Our note stated that these funds should last until the Company is self-sustaining. After a strong Q3, we expect Gasporox to break even on EBIT in 2022, boosting our liquidity confidence. We are also pleased that the CEO has increased her stake in the Company.

Estimate changes and updated fair value range

We are raising our Q1–Q3’23 net sales projections by 18–88% in light of the quarter’s significant revenue beat. Gasporox announced after the quarter that it had received two orders worth SEK2m each from existing customers. The first is due in the fourth quarter of 22 and the second in the first half of 2023. Together, these boost our confidence in our short-term projections. In her shareholder letter, CEO Märta Lewander Xu said seasonality appears to be smoothing out, with H2 strong rather than just Q4. Thus, Q3 may have seen some Q4 sales. Thereby, our Q4 estimate may be slightly exaggerated.

We think the gross margin for the pharmaceutical industry is about 90%, while the gross margin for the food industry is much lower. Our estimate is 60%. But the food industry is a far bigger market. We estimate that the pharmaceutical segment currently makes up about 70% of total sales. So, as the food segment’s share of total sales goes up, the gross margin will gradually decrease. For now, Gasporox continues to have a higher gross margin than we expected. Because of this, we have raised our gross margin prediction from 70% to 75% until the end of 2023.

MSEK	Q123E	Q223E	Q323E	Q424E
Net Sales
Old	4.66	3.58	4.52	20.72
New	5.51	4.23	8.50	20.72
% change	18%	18%	88%	0%
Adj. EBITDA
Old	-1.34	-2.10	-1.43	9.9
margin	-29%	-59%	-32%	48%
New	-1.22	-2.58	1.18	9.73
margin	-22%	-61%	14%	47%
% change	-9%	23%	-183%	-2%
Adj. EBIT
Old	-2.09	-2.85	-2.18	9.15
margin	-45%	-80%	-48%	44%
New	-1.97	-3.33	0.43	8.98
margin	-36%	-79%	5%	43%
% change	-6%	17%	-120%	-2%

EBITDA and EBIT are adjusted for capitalized research and development, reducing each by cSEK1.5m.

As part of a broader review, we have increased our risk-free rate by one percentage point. Hence, our discount rate is 11%. We adjust our fair value range to SEK13–SEK54 (Base Case: SEK31) from SEK9–SEK39 (Base Case: SEK22), partially offset by a one-percentage-point increase in our risk-free rate. Note that we keep our long-term growth rates intact, but the higher base affects long-term revenue and EBIT on an absolute level.

Case

High incremental return

Gasporox is changing the market for quality assurance and testing in headspace analysis (HSA) and modified atmosphere packaging (MAP), moving away from the often destructive sample-based and manual tests (known as at-line tests) and toward testing all products directly on the production line in a non-destructive manner (known as in-line tests). Given the existing core technology, the economics of incremental products (i.e., line extensions) should be excellent. However, because the company is still developing its distribution and sales channels, we believe this is not yet fully transparent. We believe that once these are in place, Gasporox will achieve high returns on incremental capital, similar to what Colgate-Palmolive, Coca-Cola, Unilever, and Nestlé have done in their respective industries.

Evidence

Robust growth and customer interest

Over the last five years, the company's revenue has increased by 47% (or a 66% CAGR excluding the pandemic years of 2020-2021). The company's sales and support teams' productivity has increased as a result of a simplified offering, with installations now possible via over-the-phone support rather than physical presence. Furthermore, end-users have begun to request that the product be installed by themselves rather than by a typical machine integrator, demonstrating the simplicity of Gasporox's offering, which should allow for rapid scalability.

Supportive Analysis

Although Gasporox's in-line testing solution requires three to twelve times the number of sensors as an at-line test, and each sensor costs about twice as much, increasing investment costs by six to twenty-four times, customers still find Gasporox's value proposition compelling. Furthermore, the total cost of a machine with integrated sensors may be 50 to 100 times that of the at-line option, and yet end customers continue to purchase the offering. Gasporox is still unprofitable, but its gross profit to asset ratio has steadily improved since going public, rising from 3% in 2016 to 52% TTM Q3'22. This implies increased profitability and a high return on invested capital is possible. We expect EBIT break-even in 2022.

Challenge

Biting off More Than it Can Chew

Gasporox is a small company with only a few employees. The company targets pharma, food, and beverages. Gasporox may overextend itself in the food and beverage markets, despite their potential. For instance, a few years ago, it had one salesperson (two if you counted the CEO) handling global pharmaceutical and food sales. Gasporox has added sales heads for pharma and food, but its size may cause it to lose focus. If necessary, the company can pivot into an end-segment to succeed.

Challenge

Untested Expansion

Since 2016, Gasporox has focused on pharmaceutical growth. It wants to expand into food. However, execution remains critical, and in some markets, such as the United Kingdom, where supermarkets typically drive which packaging formats are used, there is a trend toward skin packs and vacuum packaging, where Gasporox may not be able to provide as much value. If vacuum packaging becomes mainstream, Gasporox may switch to other leak inspection methods. Vacuum only works on durable products, so pre-made meals and salads will always need MAP. Last, a successful food market expansion is not necessary for the Gasporox investment case, but it makes the difference between a good and a great investment.

Valuation

Growth Runway Not Priced In

We value Gasporox on the back of three difference DCF-scenarios. Our fair value range is SEK13-54 per share with a Base Case of SEK31. We use a discount rate of 11% based on Redeye’s rating model.

People: 4

CEO Märta Lewander Xu, who joined Gasporox in 2011, has a Ph.D. in laser absorption spectroscopy of gas in scattering media. Her technical background aids Gasporox's application. The board is well-balanced and most large shareholders are active board members. We are encouraged by management's increased ownership.

Business: 3

Strategic partnerships and an asset-light business model earn three points for the Company. Gasporox also has a strong customer value proposition and a long growth runway. Last, we expect this score to rise as we learn more about Gasporox's expansion in the food and beverage sectors and as its installed base grows and its aftermarket services generate more recurring revenues.

Financials: 2

Gasporox has seen strong revenue growth since its IPO and has a fantastic gross margin that exceeds 70%. The company loses points because it's still unprofitable. We expect this score to rise as the Company becomes profitable.

Income Statement

Income statement
SEKm	2020	2021	2022e	2023e	2024e
Revenues	12.5	15.7	27.0	39.0	52.6
Cost of Revenue	3.8	5.0	6.4	9.7	15.8
Operating Expenses	19.4	24.8	29.2	26.7	35.0
EBITDA	-1.1	-2.7	3.7	13.1	15.2
Depreciation	0.06	0.12	0.29	0.45	0.68
Amortizations	3.2	2.5	3.5	4.1	4.7
EBIT	-4.4	-5.4	-0.15	10.1	9.8
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	0.00	0.00	-0.36	-0.75	-0.78
Net Financial Items	0.00	0.00	0.36	0.75	0.78
EBT	-4.4	-5.4	0.21	10.9	10.6
Income Tax Expenses	0.00	0.00	0.00	0.00	0.00
Net Income	-4.4	-5.4	-0.50	9.4	9.0

Balance Sheet

Balance sheet
Assets
Non-current assets
SEKm	2020	2021	2022e	2023e	2024e
Property, Plant and Equipment (Net)	0.27	0.70	1.2	1.9	2.8
Goodwill	0.00	0.00	0.00	0.00	0.00
Intangible Assets	10.3	13.7	16.2	18.0	19.3
Right-of-Use Assets	0.00	0.00	0.00	0.00	0.00
Other Non-Current Assets	0.00	0.00	0.00	0.00	0.00
Total Non-Current Assets	10.6	14.4	17.4	20.0	22.1
Current assets
SEKm	2020	2021	2022e	2023e	2024e
Inventories	2.4	3.9	4.0	6.1	9.9
Accounts Receivable	2.6	3.4	5.5	8.0	10.8
Other Current Assets	1.3	1.4	3.2	4.7	6.3
Cash Equivalents	24.2	14.3	10.7	16.9	22.5
Total Current Assets	30.6	23.0	23.6	35.8	49.5
Total Assets	41.1	37.4	41.0	55.7	71.7
Equity and Liabilities
Equity
SEKm	2020	2021	2022e	2023e	2024e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	34.1	28.6	28.1	37.5	46.5
Non-current liabilities
SEKm	2020	2021	2022e	2023e	2024e
Long Term Debt	0.00	0.00	0.00	0.00	0.00
Long Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Other Long Term Liabilities	0.93	1.0	1.0	1.0	1.0
Total Non-Current Liabilities	0.93	1.0	1.0	1.0	1.0
Current liabilities
SEKm	2020	2021	2022e	2023e	2024e
Short Term Debt	0.00	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Accounts Payable	1.3	2.0	2.1	3.2	5.2
Other Current Liabilities	0.15	0.38	9.7	14.0	18.9
Total Current Liabilities	6.1	7.7	11.8	17.2	24.1
Total Liabilities and Equity	41.1	37.4	40.9	55.7	71.7

Cash Flow

Cash flow
SEKm	2020	2021	2022e	2023e	2024e
Operating Cash Flow	-0.64	-3.4	3.3	13.4	13.1
Investing Cash Flow	-5.4	-6.5	-6.8	-7.2	-7.6
Financing Cash Flow	18.0	0.04	0.00	0.00	0.00

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Contents

Summary of Q3’22

Estimate changes and updated fair value range

Download article