Activity remains high, and TH1NG has recently entered into several new partnerships, received a breakthrough order, and won a county-wide IoT procurement. TH1NG’s conscious strategy is to continue developing the smart city reference and to scale operations to other areas. We consider this a good strategy, allowing other municipalities to see success in Skellefteå. We thus believe the recent win in the Jönköping region can be attributed to this reference object. The public sector is not known for quick decision-making, visionary plans, or technical competence in this area, and so this reference city can serve TH1NG’s marketing immensely. In this update, we will provide our thoughts on the capital raise, present a summary of our discussion with new board member Anders Pettersson, comment on recent company wins, and conclude with our updated valuation.

On 6 December, TH1NG announced its intention to carry out a rights issue and a directed issue that would bring in SEK29.5m (before costs) in total, if fully subscribed. The rights issue was 82% subscribed (including subscription commitments of c20% from guarantors), providing TH1NG with cSEK16m in gross proceeds. In addition to the rights issue, the company raised cSEK10m through a directed issue towards Skellefteå Kraft, which led to a c19% dilution for existing shareholders. In total, we estimate the company gains cSEK22m in net proceeds, and we thus believe TH1NG now has funding into 2024.

It intends to use the proceeds for:

1. Current operations (50%)

2. Sales and marketing (25%)

3. Product development (25%)

In addition to the topped-up war chest, TH1NG adds strategic partner Skellefteå Kraft, which has, through the directed issue, taken the top position on the shareholder list. Skellefteå Kraft and TH1NG have had an ongoing collaboration since 2018, working closely to develop a smart city. The development of communication solutions carried out in Skellefteå has made the municipality TH1NG’s most outstanding reference case. With Skellefteå Kraft, TH1NG gains a strong strategic and financial shareholder and a partner that will take an active role in the company.

At an extraordinary general meeting on 22 December, Anders Pettersson, CEO of Skellefteå Kraft Fibernät AB, was elected as a regular member of TH1NG’s board. We believe Skellefteå Kraft as an owner strengthens TH1NG in many ways: in addition to gaining the expertise of Anders Pettersson, TH1NG is now backed by a company with substantial funds that could help with future financing of operations and offer financial muscle in larger transactions that could benefit TH1NG and speed up its growth journey.

Anders Pettersson holds a BSc in Economics and has worked for Skellefteå Kraft since 2010, having been in the CEO role since 2016. Having talked to Anders, it is our understanding that he will bring extensive expertise to the board table. Prior to Skellefteå Kraft, he worked at LEAB Group in different roles for 15 years. We believe technology is the name of the game for this new board member. Our discussion also covered the synergies between Skellefteå Kraft and TH1NG, Skellefteå’s ambition to become a smart city, and how the partnership has progressed so far. We touched on the different solutions they use and why TH1NG was the company it partnered with. Anders mentioned several reasons for Skellefteå’s adoption of TH1NG’s solution, but one key factor stood out: TH1NG’s IoT platform; or rather, the one platform to rule them all (applications, that is). IoT Open is a vertical platform with horizontal solutions – one platform for all applications within IoT. Consequently, the partnership started in 2018 with the installation of sensors in a vehicle wash to check availability but has since expanded to many other uses. The companies have ongoing discussions regarding additional utilisation of the solution. Some examples of use are connected sensors in buses, road lights, schools, public spaces, real estate, and electricity poles to name but a few. Anders also described the growing number of possibilities, ranging from IMD to tracking of mobile industry hardware to crowd monitoring. While the project phase is ongoing, with several pilots underway or in the pipeline, Skellefteå Kraft has entered the operational phase on several projects. This is exciting as it implies the hard work and money put into creating this reference city will start to bear fruit. In conclusion, we are encouraged that Anders is joining as a member of TH1NG’s board as we believe his expertise will add great value to the company.

On 7 July 2022, TH1NG received a breakthrough order with an estimated volume of 150,000 IoT subscriptions for M2M communication over three years. The expected value is SEK30m. In addition to the hardware, TH1NG will also deliver the IoT Open platform for GARO Group AB, which develops and manufactures products and systems for the electrical installation market. It operates in Sweden, Norway, Finland, Ireland, the UK, and Poland. GARO offers a wide range and is the market leader in several product areas, where its customers comprise electrical wholesalers, but also end-customers like electrical installers, OEM manufacturers, and industrial companies. The group had a turnover of cSEK1.3bn in 2021 and approximately 520 employees.

On 17 November, 2022, one day prior to the release of TH1NG’s Q3 report, the company announced it had delivered 10,000 M2M SIMs to Garo Group AB, corresponding to c6.7% of the expected total order volume. The first delivery was expected in Q4. It is reassuring to see the rollout has begun.

IoT subscriptions cannot be compared with IoT platform revenues, as the subscriptions have lower margins. The business for IoT connections in terms of margins should thus be seen as a broadband business, with approximately 20–30% gross margins. However, the agreement has immense signal value and sets TH1NG up for similar contracts and additional revenues for its platform: IoT Open.

Recently, Swedish IoT company Netmore Group AB agreed to sell its M2M business to Melita Ltd for an initial cash purchase price of some SEK19.6m plus a conditional additional cash purchase price of up to SEK29m. The latter will be calculated based on Netmore M2M’s EBITDA in 2023. In Q3 2023, Netmore’s recurring revenues from this business amounted to SEK0.8m and its expected 2022 revenues are cSEK4m. Considering the purchase price and expected revenues for 2022, the acquirer bought the business at a multiple of 5–12x sales, depending on the additional conditional price. However, if we compare the large order of SEK30m over three years that TH1NG won with GARO Group to the lower multiple based on sales amounting to one third of the total order value (SEK10m), it would translate into a supposed purchase price of SEK50m – a sum as large as TH1NG’s current market value of around SEK50m. Bear in mind, this only takes this specific order in consideration. That said, we might not know the full intentions of the buyer and subsequent synergies from this specific purchase, and there may well be other factors to consider in this specific case. Nevertheless, one idea for investors could be to consider TH1NG as a sum-of-the-parts situation, although a difficult task as we do not know the breakdown of TH1NG's revenue sources. Nevertheless, the potential for future margin expansion, can serve as an indicator of more revenues stemming from IoT Open.  

TH1NG has also entered several new partnerships recently, and we are particularly encouraged by its agreement to supply Tele2’s customers with its secure IoT platform, IoT Open. In the Q3 report, TH1NG’s CEO Klas Westholm mentioned that the collaboration is off to a flying start, with great opportunities for many new deals. We belive this partnership establishes Tele2 and TH1NG to compete at a higher level and it is a statement in itself that a leading telecommunication company has approved TH1NG and its IoT Open platform.

Telia’s IoT platform appears one of the most apparent competitors to IoT Open, and now TH1NG has strengthened its position through this partnership. As we know, TH1NG needs to scale the usage of its platform to expand its high-margin platform revenues. Furthermore, the potential to scale is significant as Tele2 IoT has partnerships with more than 500 telecom operators globally. We see this partnership as an excellent step for TH1NG and its platform.

On 20 January 2023, TH1NG announced the signing of a partnership agreement with Semcon regarding IoT Open. TH1NG thus expands the ecosystem around IoT Open further and strengthens its offering to the market. Semcon contributes expertise and experience in connected products across various industries, such as MedTech, vehicles, and industry, covering everything from sensors, and data collection to processing, analysis, and storage and visualisation of data.  

On 26 January, TH1NG announced a national agreement with Transtema, which builds, maintains, and operates various types of IoT and communication networks. Through this collaboration, TH1NG can offer customers installation, service, and monitoring of IoT systems across Sweden. A prerequisite for a smart and sustainable society on a large scale is to extend the reach and include all regions, regardless of geographical position. This collaboration thus expands and strengthens TH1NG’s position in the Swedish market. TH1NG’s customers are now aided with installations, operation, and maintenance, regardless of where in Sweden the installation takes place.

On 8 November 2022, TH1NG announced it had won the public procurement of an IoT platform in Jönköping. The press release stated the municipality’s procurement of the platform had been completed together with 54 county-wide organisations, including 13 municipalities and several energy companies and real estate companies. The estimated total contract value over 10 years is SEK15m. It aims to reach one million connected sensors, an amount that could increase, depending on the need of the organisations.

The contracted value appears small considering the time frame and the large number of organisations included in the procurement. However, this is only the first step as the contract is only for the IoT platform – a prerequisite for creating smart societies. We thus see considerable potential, as the contract positions TH1NG for additional sales as the organisations involved start to connect sensors to the platform.

TH1NG strives to be the enabler of smart cities in Sweden and to scale its solution in Sweden and internationally. TH1NG submitted the most advantageous tender in Jönköping. This supports our view that the IoT segment will be the main growth driver for TH1NG, which will scale the company’s gross margins.

TH1NG continues to gain ground and is now positioned at the centre of IoT development in Jönköping, where 55 organisations have approved its IoT platform. We believe this large win constitutes an important part in TH1NG’s ambitious goal of becoming the enabler of smart societies, with the delivery of the IoT Open platform to the Jönköping region an important step towards this. We will monitor this development closely. In a recent interview, CEO Klas Westholm mentioned that the rollout of deliveries in the region has begun. We are encouraged the company is beginning to capitalise on its investments and that the effort put in to establish the reference city is beginning to pay off.

With its ongoing partnerships, newly signed agreements, and contract wins, the company is set up to expand with its smart city solution – IoT Open – and reach its goal to be the enabler of smart cities and societies. Although there has been an increase in inflation and interest rates recently, which may impact new investments for some entities, TH1NG’s has an appealing pay as you grow approach and its solutions can improve efficiency for customers, saving them money and reducing their environmental impact. We thus believe the smart city reference project with Skellefteå Kraft constitutes an important component of its marketing strategy. Skellefteå Kraft, now TH1NG's largest shareholder with a 19% stake in the company, is strengthening the ownership structure and we believe the strategic partnership between TH1NG and Skellefteå Kraft will reach a higher level thanks to increased incentives to work for TH1NG’s success. With all these developments and a growing number of possibilities for TH1NG's IoT platform, we see the company's future as promising.

Following the recent capital raise, TH1NG’s cash position has strengthened. We estimate the net proceeds from the two issues amount to cSEK22m. Given a burn rate of cSEK4m in Q3 2022, TH1NG’s cash position stood at cSEK5m at the end of that quarter. We expect a similar burn rate going forward, giving us confidence that TH1NG's cash position will suffice to cover its cash burn for 2023.

In the beginning of 2022, TH1NG sold its entire portfolio of private customers to Bredband2, which has had a significant impact on its income statement since year-end 2021. The private customer stock previously accounted for a significant share of TH1NG’s revenues and COGS. As a consequence of the divestment, sales have declined, while gross margins have improved substantially, increasing from 11% in 2021 to 38% in 2022e.

After reviewing the first three quarters of 2022, we have revised our short-term sales and cost projections. Our sales forecasts have been reduced by 17% in Q4 2022 and by 23% in 2022, while our COGS estimates have been adjusted downward due to the better-than-expected gross margins. Despite lowering our OPEX estimates, we still anticipate it to grow alongside sales, although not at the same rate as previously estimated. See below for our updated estimates:

We derive our fair value range from a fundamental DCF framework for three scenarios, base case (most likely), bear case (pessimistic), and bull case (optimistic), using a WACC of 14% across all scenarios. Our fair value range is SEK1–14, and our base case is SEK3.8 (4). The fair value range is wide, owing to the unpredictable nature of TH1NG’s long-term growth and profitability; this depends on the product mix and expansion plans, to name some. We forecast high long-term gross margins and a terminal EBIT margin of >20%. The overall effect of our estimate adjustments combined with the dilution stemming from the directed issue results in a lower base case valuation. Sales growth and signs of near-term scalability are key metrics, and so we will keep a sharp eye on margins and likely adjust for these going forward.