Smart Eye: Comment on Terms for Rights Issue

Research Update



Redeye comments on the subscription price for the ongoing rights issue - which was set below Redeye's expectations. Redeye lowers its Base Case and Bull Case by c10%. This text has been updated.


Jesper Von Koch

Subscription price below estimates - higher dilution

Last night, Smart Eye announced the terms of its ongoing rights issue.

Key take aways from the terms:

  • Subscription price set at SEK25.5 per share - well below our estimated SEK35, implying a bigger dilution than expected
  • Gross proceeds is SEK324m, and net proceeds SEK289m, implying transaction costs of SEK35m
  • Existing owners will receive 4 BTA for every 7 shares held on 31 January - each BTA grants preferential right to subscribe for one new share
  • Trading in BTA will start on 2 February to and including 23 February

The key takeaway is the low subscription price, which was set c42% under yesterday's trading price. We argue that this discount was bigger than what would likely have been needed. The subscription price implies a 57% dilution of existing shareholders. We had previously estimated a subscription price of SEK35 and a dilution of 42%. However, the subscription price was in line with our Bear Case estimates.

As such, the higher-than-expected dilution makes us lower our Base Case from SEK168 to SEK152, and our Bull Case from SEK230 to SEK207. Our Bear Case is reiterated at SEK60 per share.


In pole position within eye tracking for mandated driver monitoring

Due to EU and Euro NCAP's decisions to mandate driver monitoring, the market for driver monitoring systems (DMS) is about to explode. Smart Eye has devoted ~20 years of 100% focus to and investments in this very niche. The company is in pole position with an unmatched 194 design wins for 18 car OEMs. As for barriers to entry, the technology needs to cope with e.g. changing light conditions, tunnels, sunshine, darkness, vibrations, etc. and at the same time never fail. Competition is, therefore, basically limited to one other tier-2 player aside from the tier-1 customers’ own solutions. However, we believe it is unlikely that the customers, in the long run, are willing to put up with all investments and maintain the focus necessary for in-house sourcing. Smart Eye states that being platform-independent and hardware agnostic, it has a competitive edge as its technology can be locked late in the development process. With very predictable hyper-growth between 2022 to 2025 (exp. CAGR of 68%) and a highly scalable business model, we are probably looking at a low single-digit EBIT multiple for 2025. We think this lays the ground for a potential multi-bagger in the years to come.


The revenue acceleration is highly predictable

Design wins are worth more than presented because OEMs use *platforms* of software + hardware that they typically use for all car models launched in a 7-year period. As each car model is sold for ~7 years, cars from a single platform are sold for 14 years. As OEMs often copy platform components to other cars, getting into one car model implies a high probability of getting into several additional models. Thus, Smart Eye has likely secured a solid market share well into the 2030s.

Supportive Analysis

The market for DMS will explode in the coming years driven by regulation. We estimate that penetration will go from < 1m cars a year to ~35m by 2026. In the EU, Euro NCAP demands DMS in all new models launched from 2023 to get a five-star safety rating - which typically 75-80% of all cars have. The EU General Safety Regulation requires all new car models from 2024, and all new cars sold from 2026 to include DMS. Adoption in the US will follow suit from requirements by IIHS and NHTSA.


Head-to-head competition with main competitor

The market for DMS is an oligopoly. While Smart Eye is the market leader, main competitor Seeing Machines offers strong competition. While Smart Eye's software is hardware agnostic, Seeing Machines has chosen to specialize its software to some specific processors over the years, currently with a close partnership with Qualcomm. While it's a risky move to bet everything on one horse, should Qualcomm's processor be the leader, Seeing Machines could take over the market leadership in DMS.


Rapid, predictable growth to a low price

Even though the exact ramp-up of sales is hard to predict, we believe rapid sales growth between 2022 and 2026 is rather safe to assume. The ramp-up of sales stems from already awarded design wins and expected design wins on existing platforms. Considering an estimated low/mid-single-digit EBIT multiple for 2025, combined with the highly predictable ramp-up of sales, we think Smart Eye has a good journey ahead. Redeye's Base Case is at SEK168, Bear Case at SEK60, and Bull Case at SEK230.

People: 4

Smart Eye is governed by an owner operator as the co-founder is the CEO, which is positive in many ways. Compensation is moderate and just. We especially like the tendency to include all employees in the stock option programs, which indicates a healthy HR policy that could explain the relatively low employee turnover. The solid growth trend during the years prior to the listing implies that so far investments have been savvy and execution essentially flawless. Overall the Management score is hampered by Smart Eye's short period on the stock market where e.g. there is not much history of Smart Eye's communication to the shareholders as a listed company. As mentioned Smart Eye is governed by owner operators where the founding family (Martin & Mats Krantz) together owns ~15% of the company. Overall, insiders in the Board as well as Management own a lot of shares and keep on adding to their positions. The founding family really has put their money where their mouths are. Thus, the ownership structure is in short very appealing. Our only concern is if there are enough financial muscles to back up the Company should there be need for future supplementary investments.

Business: 4

Smart Eye is the market leader in a viable niche within driver monitoring whose Automotive business unit is expected to grow at a CAGR of more than 100 percent until 2025, especially driven by autonomous vehicles and traffic safety. Following an 18 year focus in automotive Smart Eye has established important relations with all potential tier 1 customers. Smart Eye's automotive focus and the recurring software licenses together imply sticky and predictable revenue for the foreseeable future. In addition, high barriers to entry mean limited competition. All in all, it is a great business.

Financials: 2

Our profitability rating is fully retrospective and requires consistent, positive earnings. As Smart Eye is not profitable at the moment it therefore cannot have a higher score for now. However, Smart Eye has a scalable business model with low costs, meaning the stage is set for a gradually increased rating ahead should the Company keep up its growth trend. The cash position and liquidity measurements of Smart Eye are currently tight and the company will need additional cash before the end of 2022. Smart Eye also loses some points as the company at the moment has negative earnings and cash flow. In addition, there is a risk in the cyclicality of the automotive industry as the customers must be able to afford to fully embrace the new driver monitoring technology. However, the amount of customers and their respective share of total sales is reasonably diversified.

Income statement
Cost of Revenue-40.212.430.055.994.3
Operating Expenses153.2185.9375.0378.0400.0
Shares in Associates0.
Interest Expenses0.40-0.190.770.000.00
Net Financial Items-0.200.20-0.770.000.00
Income Tax Expenses0.000.00-
Net Income-75.6-131.2-332.4-222.5-40.3

Balance sheet
Non-current assets
Property, Plant and Equipment (Net)4.24.711.711.711.7
Intangible Assets129.6616.5555.7485.5396.3
Right-of-Use Assets0.
Other Non-Current Assets0.
Total Non-Current Assets133.81,381.61,327.91,257.71,168.5
Current assets
Accounts Receivable17.578.876.993.2137.1
Other Current Assets11.
Cash Equivalents218.7278.4-8.436.968.8
Total Current Assets252.7363.772.2154.6242.5
Total Assets386.51,745.31,400.01,412.21,411.0
Equity and Liabilities
Non Controlling Interest0.
Shareholder's Equity352.61,449.91,117.51,170.11,129.8
Non-current liabilities
Long Term Debt0.
Long Term Lease Liabilities0.
Other Non-Current Lease Liabilities0.0075.875.875.875.8
Total Non-Current Liabilities0.0078.978.978.978.9
Current liabilities
Short Term Debt0.000.0060.00.000.00
Short Term Lease Liabilities0.
Accounts Payable8.820.226.429.837.4
Other Current Liabilities25.0196.3117.2133.5165.0
Total Current Liabilities33.8216.5203.6163.3202.3
Total Liabilities and Equity386.51,745.31,400.01,412.21,411.0

Cash flow
Operating Cash Flow0.00-104.0-251.5-78.7111.9
Investing Cash Flow0.00-314.0-95.3-91.0-80.0
Financing Cash Flow0.00478.060.0215.00.00

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