Redeye updates its financial estimates on Smart Eye following the announcement of a fully covered rights issue of cSEK325m before deductions for transaction costs. Although the full terms of the rights issue, including the subscription price and thus the ultimate dilution is not known yet, we estimate possible ranges in our new fair value range.

The company will hold an extraordinary general meeting (EGM) on 30 December to grant the authorization to resolve the planned rights issue. The full terms of the rights issue, including subscription price, the number of new shares issued, and the increase of the share capital, will be resolved and available around 24 January 2023. The rights issue will be priced “at a customary discount.” The rights issue is fully covered by a mix of existing shareholders, including The First Swedish National Pension Fund, Handelsbanken Fonder, Swedbank Robur, Consensus Asset Management, Vasastaden, and Aktia Asset Management, members of the Board of Directors and executive management, and external guarantors. The group of certain existing shareholders covers around SEK117m (i.e., around 36%), and the external guarantors another SEK209m (approximately 64%).

Smart Eye writes that “the purpose of the Rights Issue is to strengthen the Company’s financial position and finance the remaining capital requirement until the Company becomes cash flow positive, which is expected during the second half of 2024.” At the end of Q3 2022, Smart Eye’s cash balance amounted to cSEK82m, and the cash burn would have emptied the remaining balance in Q4 2022 or early Q1 2023 without a cash injection.

The prospectus is expected to be published on or around 30 January 2023, and the subscription period for the rights issue is projected to take place from and including 2 February 2023 up to and including 16 February 2023. Smart Eye will give financial guidance around 20 January 2023 for Q4 2022 but will postpone the year-end report to the end of March. This will enable insiders, such as the management team, to participate in the rights issue.

In the meantime, Smart Eye will finance itself with the help of a bridge loan of approximately SEK60m at customary terms. The company is set to repay the loan facility after concluding the rights issue.

Moreover, the use of proceeds will go to the following:

Redeye’s old estimates included a combination of a directed rights issue and debt financing, with a total dilution of about 10%, translating into about 2.2 million new shares. Our new estimates for the base and bull case use a standardized discount to the current share price level and would lead to c10.8 million new shares, or a 33% dilution rate. In our bear case, we have lowered the subscription price to SEK25, which would lead to 13 million new shares and a dilution rate of 37%. Keep in mind that the ultimate subscription price is not yet determined, and our dilution rates are thus only hypothetical at this point in time.

On December 5, Smart Eye announced a new design win with a European luxury sports car manufacturer. Smart Eye commented on the deal: “This new design win signals an important breakthrough for AIS, Smart Eye’s end-to-end Driver Monitoring System (DMS) for small-volume OEMs, vehicle fleets, and aftermarket customers.” Smart Eye estimates that the revenue of the order, based on product cycle projections, amounts to SEK40m. The new car model is anticipated to go into production in mid-2024, and Smart Eye adds that the potential value from additional design wins from the same OEM is about SEK70m.

On December 18, Smart Eye announced four new design wins from two global Japanese OEMs. Martin Krantz, CEO and founder of Smart Eye, is quoted: “Existing customers extending their programs to additional car models is getting more common.” The two Japanese car manufacturers were existing customers before and had chosen Smart Eye’s software for implementation in 14 of its earlier car models. The new design wins are additional models on the same platform and are expected to go into production in 2023 and 2024. Smart Eye writes in the press release: “One of the cars is an electric midsized sedan with expected high production volumes, another one is one of the world’s more popular compact crossover SUVs. The estimated revenue for the order is SEK 100 million, based on product life cycle volume projections.”

And lastly, on December 12, Smart Eye received its largest DMS deal to date. In total, there were 34 design wins from three different OEMs, two existing customers and one new. The three car manufacturers belong to a European-American automotive alliance, which constitutes one of the largest vehicle producers in the world, likely Stellantis. The new design wins mean that Smart Eye has 34 new car models to fulfill before the European legislation comes into effect. Most of the design wins are updates of existing production programs that are expected to go into production in 2025 and be fully ramped up in 2026. After 2026, the models will be gradually replaced with new vehicles launched on new platforms. The estimated order value, based on product life cycle volume projections, is SEK350m.

In just one week’s time, Smart Eye added 39 new design wins with predicted revenues of approximately SEK500m based on estimated product life cycle projections. The combined estimated lifetime value from current design wins is now larger than SEK3.035bn. The estimated value over the product lifecycle from possible additional design wins with the car manufacturers on existing platforms is SEK4.075bn. In total, Smart Eye has now received a total of 141 design wins from 17 different OEMs.

In our previous estimates, we had included more additional design wins, as we regard Smart Eye as the market leader. Thus, our new estimates will be impacted by a few different forces, which we will list below.

We are lowering our near to medium-term sales estimates following the press release of the intended rights issue. In the press release and the subsequent conference call, management expressed its view of the delayed start of production of new vehicle models. Smart Eye now expects to become cash flow positive in the second half of 2024, which means that the ramp-up is expected to be slightly delayed again compared to our previous estimates, which pointed to positive cash flow in the first half of 2024.

Consequently, we are reducing the total take rate of DMS (i.e., the speed of the global adoption rate) in our near to medium-term projections to mirror the delays and current supply chain issues. Our new global take rate of DMS is c1% in 2022 and 38% in 2026. In our previous estimates, we had a similar take rate in 2022 but almost 43% in 2026. We have lowered the whole period between 2023 and 2026 by 1-5 percentage points, impacting Smart Eye’s sales negatively.

However, we increase Smart Eye’s market share slightly over the same period, thanks to the announced design wins. As mentioned, some of this was already included in our old estimates, but we have decided to increase the market share at the end of our explicit forecast period from 35% to 38%, which impacts the average market share between 2022 and 2029 upward from 41% to 42%. Nevertheless, we are still forecasting a slight decline in Smart Eye’s market share over the period, from about 46% in 2022 to 38% in 2029, because of competitive forces and partly dual sourcing.

We are also lowering the opex base, or specifically personnel expenses, by SEK30m per annum in 2022 and 2023, in line with company guidance, and by SEK15m in 2024 and 2025. Smart Eye comments on the opex cuts: “In order to further strengthen Smart Eye’s financial position, the Company also has decided on certain measures to adapt the Company’s cost profile and development to the aforementioned market conditions and its effects on the Company’s operations. To execute on these measures the Company expect to reduce personnel expenses of around ten per cent on a yearly basis, which corresponds to approximately SEK 30 million per annum. The measures are initiated and are expected to be fully implemented by the end of the second quarter 2023, out of which the majority of the measures will be completed already during the fourth quarter 2022, and will not entail any significant costs for the Company as it primarily refers to external consultants.”

The net effect of these adjustments is slightly negative on the DMS revenue side in the near-to-medium term. Following the Q3 2022 report, we re-adjusted sales downward across the board as well, and this time we have not made any changes to the Interior Sensing, AIS, or Research segments. However, the market share increase does support higher sales numbers in the long term compared to our previous estimates, from 2027 and forward.

DMS/interior sensing

No changes were made.

Increasing Smart Eye’s market share slightly between 2022 and 2029, upping the average market share over that time period from 41% to 42%.

The market share in 2029 is now estimated to be 38%.

Lowered take rates by 1-5 percentage points between 2023 and 2026 due to delays and supply chain issues.

As a result, the global take rate in 2026 is expected to be 38%, down from 43%.

AIS

Research

Lowering the personnel expenses by SEK15m in 2025 and 2025, driven by a reduction in external consultants.

Lowering the personnel expenses by SEK30m in 2023 and 2024, driven by a reduction in external consultants. This is in line with company guidance.

We estimate that Smart Eye will issue 10.83 million new shares at a subscription price of SEK30 in the base and bull case.

In the bear case, we instead use a lower subscription price of SEK25, leading to 13 million new shares and a higher dilution.

Lowering the terminal EBIT margin from 34% to 25%.

Based on the impact of dilution and lowered near-to-medium-term sales, we decrease our fair value range to SEK55 to SEK205, down from SEK90 to SEK275. The base case is lowered from SEK200 to SEK155. However, since the rights issue’s full terms have not yet become available, some of the input is up for discussion and will probably change as the ultimate dilution rate is cemented in January 2023.

We have thus included a range to show different dilution outcomes on the base case with the same forecasted sales and margin estimates as we use in the current SEK155 base case. Since the rights issue is fully covered, we have not included a worst-case scenario with no funding in our bear case, but instead, a share price that continues to drop and thus impacts the dilution for current shareholders. Due to the customary discount, the final dilution rate is subject to the share price movements in the coming weeks. Mind that in our previous base case of SEK200, we had already included a dilution rate of 10%.