Hoylu: Proposes a fully secured rights issue

Research Update

2023-02-14

13:01

Redeye comments on Hoylu’s rights issue that was revealed yesterday, proposing a fully secured rights issue of SEK82.6m to clear debts and strengthen the balance sheet. As the dilution effect is significantly higher than our expectations, we downgrade our valuation to match the terms.

Jacob Svensson

Fredrik Nilsson

Contents

Proposes a fully secured rights issue

Investment thesis

Quality Rating

Financials

Rating definitions

The team

Download article

Proposes a fully secured rights issue

Yesterday evening, Hoylu announced a fully secured rights issue of SEK82.6m to clear debts and strengthen the balance sheet. Following negotiations between holders of convertible loan notes (approximately SEK72.9m, including aggregated interest) and the board of directors, the convertible holders have committed to participate in a rights issue and to offset all claims for newly issued shares. In order to further strengthen the balance sheet Alden AS, TTC Invest AS, Fougner Invest AS and Windchange Invest AB have each undertaken to subscribe for an additional amount of up to SEK2.5m in the rights issue, which thereby will be fully secured.

The key takeaways from the terms of the right issue:

The contemplated rights issue will provide Hoylu with approximately SEK82.6m before transaction-related costs

All existing shareholders will receive one (1) subscription right for each share owned on the record date, 31 March 2023. One (1) subscription right gives the right to subscribe for nine (9) shares

The subscription price for each share in the contemplated rights Issue will amount to SEK0.10

Through the rights issue, the number of shares may increase with a maximum of 825,695,298 shares - from 91,743,922 shares to 917,439,220

We argue that the subscription price was clearly below our expectations, implying a dilution effect of 90% for existing shareholders. Worth mentioning is that Hoylu will use a large share of the proceeds from the rights issue to offset the current convertibles. As such, we argue that external financing will still be needed ahead and will be a continuing risk despite the announced rights issue.

Accordingly, as the dilution effect is significantly higher than our expectations, we downgrade our valuation to match the rights issue terms. We lower our Base Case to SEK0.10 (SEK0.80) and our Bear and Bull Case to SEK0.02 (SEK0.10) and SEK0.50 (SEK4.00), respectively.

Investment thesis

Case

Niche construction and engineering focus to drive future growth

Hoylu is currently transitioning into a fully SaaS business with an increased focus on the construction and engineering vertical. We consider this niche focus the right move, giving Hoylu a stronger value proposition while limiting its competitors. In addition, its well-known large enterprise customers often start as free or premium users, only deploying a fraction of its operations, suggesting future upselling potential. Additional quarterly reports with solid growth serve as the main catalyst.

Evidence

Well-known enterprise validation through upselling

Hoylu’s customer base includes several well-known enterprises that have validated its product, such as FedEx, Procter & Gamble and AF Gruppen. For example, Procter & Gamble has scaled up to ~2,700 paying users and AF Gruppen has included the platform in several new projects after the initial order. Furthermore, the ARR-SaaS has grown from one-third of the total ARR in 2019 to today’s >50%, and we expect this transition to continue. Given the segment’s gross margins of ~90%, this can drive future margins.

Challenge

Convert leads to accelerate growth

Although Hoylu is growing its annual recurring revenues (ARR), one challenge is to convert leads and free users into revenues to a greater extent to accelerate its growth further. However, we believe the increased focus on the construction and engineering segment boosts Hoylu’s value proposition and can improve its growth prospects. Furthermore, its well-known customer base can give rise to future growth opportunities through upselling.

Challenge

Approach profitability to avoid external financing

One other challenge is to approach profitability to avoid facing external financing challenges. As Hoylu’s cash position implies the possibility of such challenges, a dilution effect is likely, which we argue can put pressure on the stock. However, if Hoylu can accelerate its growth, we believe it is possible to achieve long-term profitability.

Valuation

Low EV/ARR If growth accelerating

Based on our DCF model, we see a Base Case of SEK0.10 per share and SEK0.02 and SEK0.50 in our Bear and Bull cases. Hoylu is currently traded at an attractive EV/ARR multiple versus peers. However, this can be justified to some extent by its low market cap and unprofitable phase, as reflected in our Base Case. At the same time, if Hoylu can capitalise on its large enterprise customers and grow its ARR, the upside is significant, approaching a median peer valuation, as reflected in our Bull Case.

Quality Rating

People: 2

Hoylu receives the score for the People rating thanks to its management, board members, and owners. CEO Truls Baklid has a solid background, international experience, and a sales-driven approach. The board has relevant and complementary expertise, including entrepreneurial skills and experience from publicly listed and SaaS companies, which we like. To achieve a higher score in the future, we want to see management with more skin in the game and Hoylu executing the current strategic plan.

Business: 3

Hoylu achieves an average rating in the Business category for several reasons. First, the SaaS business model is scalable, with non-cyclical, recurring revenue streams, resulting in good predictability. Second, Hoylu’s product offers explicit value creation for its customers. And third, several structural trends drive the underlying market, such as increased tech, cloud-based applications, and the increased adoption of collaboration platforms in the wake of the pandemic. However, to improve this rating further, we want to see Hoylu’s products win a more significant market presence.

Financials: 0

Hoylu receives a lower rating in Financials than in the other categories mainly because it remains unprofitable, implying future external financing needs. Thanks to the scalable business, however, we see that margins can gradually improve as the company grows, providing room for Hoylu to achieve a higher rating in this category in the future.

Financials

Income statement
SEKm	2020	2021	2022e	2023e	2024e
Revenues	29.2	33.3	47.6	61.9	78.8
Cost of Revenue	8.7	8.6	15.4	17.6	20.0
Operating Expenses	43.0	63.7	59.6	55.0	60.1
EBITDA	-22.5	-39.0	-27.4	-10.6	-1.3
Depreciation	0.26	0.38	0.51	0.62	0.79
Amortizations	7.1	10.5	13.8	14.0	14.2
EBIT	-29.8	-49.9	-41.7	-25.2	-16.2
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	2.3	2.4	3.8	4.0	4.0
Net Financial Items	-2.3	-2.4	-3.8	-4.0	-4.0
EBT	-32.1	-52.3	-45.5	-29.2	-20.2
Income Tax Expenses	0.01	0.07	0.03	0.00	0.00
Net Income	-32.1	-52.3	-45.5	-29.2	-20.2
Balance sheet
Assets
Non-current assets
SEKm	2020	2021	2022e	2023e	2024e
Property, Plant and Equipment (Net)	0.82	0.67	0.32	0.63	1.0
Goodwill	4.1	4.9	4.9	4.9	4.9
Intangible Assets	38.4	45.5	42.9	43.2	44.0
Right-of-Use Assets	0.00	0.00	0.00	0.00	0.00
Other Non-Current Assets	0.58	0.63	0.63	0.63	0.63
Total Non-Current Assets	43.9	51.7	48.7	49.3	50.5
Current assets
SEKm	2020	2021	2022e	2023e	2024e
Inventories	1.8	1.8	2.6	3.1	3.9
Accounts Receivable	9.4	9.7	14.3	18.6	23.6
Other Current Assets	3.5	2.3	3.3	4.3	5.5
Cash Equivalents	4.8	4.3	10.1	6.3	7.4
Total Current Assets	19.5	18.1	30.3	32.3	40.5
Total Assets	63.4	69.8	79.0	81.6	90.9
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	48.5	28.4	-17.2	36.2	16.0
Non-current liabilities
SEKm	2020	2021	2022e	2023e	2024e
Long Term Debt	0.08	0.10	0.10	0.10	0.10
Long Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Other Long Term Liabilities	0.00	0.00	0.00	0.00	0.00
Total Non-Current Liabilities	0.08	0.10	0.10	0.10	0.10
Current liabilities
SEKm	2020	2021	2022e	2023e	2024e
Short Term Debt	0.00	20.0	69.0	10.0	30.0
Short Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Accounts Payable	3.8	5.9	5.7	7.4	9.5
Other Current Liabilities	11.1	15.4	21.4	27.8	35.4
Total Current Liabilities	14.9	41.3	96.1	45.2	74.9
Total Liabilities and Equity	63.4	69.8	79.0	81.6	90.9
Cash flow
SEKm	2020	2021	2022e	2023e	2024e
Operating Cash Flow	-43.1	-34.0	-31.8	-12.3	-2.8
Investing Cash Flow	-14.4	-16.6	-11.4	-15.2	-16.1
Financing Cash Flow	61.7	50.0	48.9	23.6	20.0

Rating definitions

The team

Disclosures and disclaimers

Premium Plan required to unlock

Contents

Proposes a fully secured rights issue

Investment thesis

Quality Rating

Financials

Rating definitions

The team

Download article