Invisio: Margin expansion potential confirmed and growth outlook strengthened

Research Update

2023-02-15

07:09

Redeye updates on Invisio following its Q4-results which came in much better than expected. The outlook for 2023 is strenghted as well and we have raised estimates and valuation range where our new base case stands at SEK230 (SEK190).

HA

JW

Hjalmar Ahlberg

John Westborg

Solid Q4 with EBITDA 36% above forecast

Invisio's Q4-results came in much stronger than our forecast with revenue 19% above our estimate and EBITDA 36% better than expected. Profitability was also strong with an EBITDA-margin of 25% (we estimated 22%) illustrating strong operating leverage.

Positive outlook for 2023

Invisio was also positive looking into 2023 on the back of the strong order book coupled with expectations of continued strong order intake during the year. Component shortages has also eased creating potential for improved gross margin and better visibility for deliveries.

Hiked estimates and valuation range

Overall, the strong Q4 confirms our expectations for improved profitability while the positive outlook prompts increased topline estimates. As such, we have increased our 2023E and 2024E EBITDA by 24% and 9% while our base case is increased to SEK230 (SEK190).

Key financials

SEKm202120222023e2024e2025e
Revenues592.9775.41,067.11,224.81,408.5
Revenue Growth11.5%30.8%37.6%14.8%15.0%
EBITDA70.0112.7253.2332.7431.4
EBIT24.865.1202.7280.1376.8
EBIT Margin4.2%8.4%19.0%22.9%26.8%
Net Income14.344.3149.0207.1279.6
EV/EBITDA10471.435.026.320.0
EV/EBIT29212443.731.322.9
P/E51018360.443.532.2

Solid beat in Q4 with EBITDA 36% above our forecast

Invisio reported revenue of SEK289m for Q4 2022 which was 19% above our forecast of SEK244m. While gross margin was slightly lower than expected (coming in at 57.4% vs our estimate of 60.0%), the report again illustrated the strong operating leverage in Invisio’s business model with EBITDA coming in at SEK73m (margin of 25%) which was 36% above our estimate of SEK53m (margin of 22%). The strong profitability came despite higher than-normal costs due to an incentive program impacting personnel costs in the quarter (total opex increased to SEK106m in Q4 2022 compared to SEK96m in Q3 2022). Furthermore, the company also saw a continued strong order intake of SEK296m despite few announcements of large orders (we anticipated an order intake in the range of SEK200-250m).

Positive outlook for 2023

Commenting on the outlook for 2023, the company expects continued strong sales and order intake during the year as the company benefits from the growth investments made during recent years. Invisio also comments that the availability of components is improving, which should be positive for both deliveries and gross margin in our view. With an order book of SEK625m at the end of Q4 where the majority is to be delivered during 2023 the potential for continued revenue and earnings growth is strong in our view.

Operating leverage yields margin expansion in 2023-25E

Invisio's recent quarterly reports have illustrated the operating leverage in the business model with EBITDA growing from just above break-even in Q2 2022 to 25% in Q4 2022. These reports have confirmed our outlook for 2023-25E where we expect improved profitability on the back of strong sales growth. With the strong performance in Q4 2022 and the positive outlook for 2023E we have slightly increased our EBITDA-margin forecast where we now expect a margin of 24% in 2023E (previously 22%). Looking into 2024-25E we expect the profitability improvement to continue where we forecast an EBITDA-margin of 27% for 2024E and 30% for 2025E. This is around historical peak levels, however, as the company is now larger, there is likely potential for even higher profitability in the longer term as the company continues to benefit from scale. There could also be an additional improvement from a higher gross-margin where we currently pencil in 60% while the company sees potential for it to be in the range of 60-65%.

Hiked estimates and continued upside potential

Following the strong Q4-results and the positive outlook for 2023, we have raised our EBITDA estimates for 2023-24E with 24% and 9% driven by increased topline estimates. We now expect revenue growth of 38% for 2023 (up from previous estimate of 27%) yielding SEK1,067m of revenue for the full year. This implies a quarterly revenue run-rate in the range of SEK260-270m which could even be slightly conservative given the revenue of SEK289m in Q4 2022. Looking into 2024-25E we expect growth to continue albeit somewhat lower at 15% as it will could be tough to keep a high growth pace after stronger-than-normal growth in 2022 and 2023E. Still, with the generally higher market activity coupled with growing global defence budgets and growth potential from new products (such as the Intercom) there could still be upside potential to our growth forecasts. The table below summarise key financials for 2019-25E.

DCF-Valuation

On the back of the increased estimates we have also increased our valuation range where the new base case stands at SEK230 (SEK210) while the bull case is increased to SEK340 (SEK320) and the bear case to SEK120 (SEK110). The table below summarize our assumptions for our valuation scenarios.

Bear Case SEK120 (SEK110)Base Case SEK230 (SEK190)Bull Case SEK340 (SEK320)
In our bear case, we estimate annual growth of 13% during 2024-28E which thereafter gradually declines to 2% by 2038.In our base case, we estimate annual growth of 17% during 2024-28E which thereafter gradually declines to 2% by 2038.In our bull case, we estimate annual growth of 20% during 2024-28E which thereafter gradually declines to 2% by 2038.
The growth is based on continued orders from existing clients while growth from new clients, new markets and new segments will be limited. In the bear case we assume small volumes of commercial orders for Invisio's Intercom system.The growth is based on continued orders from existing clients in combination with new clients and new markets together with new segments. In the base case we assume good volumes of commercial orders for Invisio's Intercom system.The growth is based on continued orders from existing clients in combination with a large intake of new clients and new markets together with new segments. In the bull case we assume significant volumes of commercial orders for Invisio's Intercom system.
In this scenario with we assume limited scale benefits and assume that the EBITDA-margin we be around 30% by 2026 while terminal EBITDA-margin is set to 25%.With solid growth and scale benefits, we assume that the EBITDA-margin will gradually strengthen to 35% by 2026 while terminal EBITDA-margin is set to 30%.With significant growth and scale benefits, we assume that the EBITDA-margin will gradually strengthen to 40% by 2026 while terminal EBITDA-margin is set to 35%.

Valuation trend

Looking at the valuation trend, Invisio continues to trade at a higher-than-average multiple based on EV/EBITDA while the EV/S multiple is closer to historical average levels. We believe this is fair considering the potential for strong profit growth in the coming years on the back of improved sales growth and margin expansion. Our base case of SEK230 implies an EV/EBITDA multiple of 41x 2023E and 31x 2024E.

Investment thesis

Case

Market leader in niche market with high barriers of entry

Invisio dominates a niche market with high barriers of entry that is growing structurally from greater awareness of the costs of hearing loss and increased radio penetration. The market is characterized by large procurements with framework agreements that can run over several years. With several procurements won over the last decade the company has established a strong position in North American and European defense customers. Ongoing modernization programs supports continued growth from established customers while Invisio also aims to increase the customer base among other in new segments such as the police market. The company has also been successful adding growing its products offer with more headsets as well as peripherals such as cables and the Intercom solution. Overall, this creates a strong growth outlook over many years which supports Invisio’s growth target of 20% average annual sales growth.

Evidence

Strong market position and large market opportunity

Invisio has established a strong position in its segment and while there is extensive confidentiality we believe Invisio has won the majority of all larger relevant procurements which is evidence of its strong market position. This supports our view on potential growth from existing customers and its potential to continue winning new customers from ongoing procurements. The market opportunity for Invisio is also significant where the company in 2022 estimates the total addressable market to around SEK14bn implying ample growth potential with around SEK700m of revenue in 2022.

Challenge

Unpredictable intake of larger orders

Invisio has an unpredictable intake of larger orders which means that revenue can vary widely on a quarterly basis. With a large share of fixed costs this also means large swings in profitability depending on when orders are delivered. However, the company has slightly reduced the dependent on larger orders as it has increased in size and through the acquisition of Racal which typically has a longer orderbook.

Valuation

Base case DCF supported by long growth trajectory

We find a base case valuation of SEK230 per share for Invisio which is derived from a DCF-valuation. The base case implies an EV/EBITDA multiple of c. 41x on our 2023E EBITDA while the share has historically traded in a range of 20x to 50x twelve months forward EBITDA. Our base case assumes growth of around 17% over 2024-28 and 9% over 2029-38 with a terminal growth of 2% by 2038E. We estimate an expanding EBITDA-margin reaching 35% by 2028E whereafter we assume a gradual decline towards a terminal EBITDA-margin of 30% by 2038E.

Quality Rating

People: 5

Since 2014, Invisio has been demonstrating powerful, profitable growth after a rocky past in which the company had never before made a profit. Order inflow has clearly become more stable while average order value has increased. The management have therefore proven that the company is being steered in the right direction and that it was the right decision not to cut back on R&D during the loss years. The CEO has been with the company since 2006 and has important experience from previous executive roles at Ericsson. The options policy that covers all employees and the low employee turnover are also evidence of good management and good staff policies. Management insiders have significant equity holdings.

Business: 4

The prime value driver is increasing awareness of the massive costs of hearing damage. In-ear headsets are thus a market with a potential worth in the SEK billions, but it seems the big fish have thus far considered it too small a pond. The US Army is also the best imaginable reference customer and a springboard into other NATO countries. Awarded contracts also produce multi-year lock-in effects. Invisio's intercom product also has the potential to become a new growth driver while the acquisition of Racal has increased diversification. The combination of audiology expertise and more than ten years of sales to leading special forces give Invisio strong good competitive advantages.

Financials: 4

While Invisio’s earnings can be volatile on a quarterly basis, long term performance has been solid, albeit with temporary dips when the company has increase costs to invest for growth. The company’s capital-efficient business means that ROA and ROE will be high, and low fixed costs provide leverage to earnings, which suggests EBITDA margins around 30 percent in the medium term. Invisio’s higher volumes and business model have also resulted in economies of scale for the gross margin. Invisio has paid down all its debt and gradually built up the interest cover ratio. The company has stable net cash, especially considering the low requirements for investment and working capital. Defence budgets are also relatively stable and there are lock-in effects once contracts are awarded, which reduces the risks.

Financials

Income statement
SEKm202120222023e2024e2025e
Revenues592.9775.41,067.11,224.81,408.5
Cost of Revenue252.6325.7435.0489.9563.4
Operating Expenses270.3337.0378.9402.2413.7
EBITDA70.0112.7253.2332.7431.4
Depreciation5.85.47.08.08.0
Amortizations30.133.935.537.339.3
EBIT24.865.1202.7280.1376.8
Shares in Associates0.000.000.000.000.00
Interest Expenses3.22.74.04.04.0
Net Financial Items-1.4-2.7-4.0-4.0-4.0
EBT23.462.4198.7276.1372.8
Income Tax Expenses9.118.149.769.093.2
Net Income14.344.3149.0207.1279.6
Balance sheet
Assets
Non-current assets
SEKm202120222023e2024e2025e
Property, Plant and Equipment (Net)17.120.824.528.734.8
Goodwill54.556.256.256.256.2
Intangible Assets181.9182.7179.3178.7181.7
Right-of-Use Assets33.722.822.822.822.8
Other Non-Current Assets5.66.56.56.56.5
Total Non-Current Assets292.8289.0289.2292.9302.0
Current assets
SEKm202120222023e2024e2025e
Inventories117.5144.4213.4245.0281.7
Accounts Receivable117.6194.5197.4226.6260.6
Other Current Assets27.328.932.036.742.3
Cash Equivalents134.8127.1221.2313.0436.9
Total Current Assets397.2494.9664.0821.31,021.4
Total Assets690.0783.9953.31,114.21,323.4
Equity and Liabilities
Equity
SEKm202120222023e2024e2025e
Non Controlling Interest0.000.000.000.000.00
Shareholder's Equity417.5510.0636.9769.5945.5
Non-current liabilities
SEKm202120222023e2024e2025e
Long Term Debt85.065.065.065.065.0
Long Term Lease Liabilities34.324.824.824.824.8
Other Non-Current Lease Liabilities35.434.634.634.634.6
Total Non-Current Liabilities154.7124.4124.4124.4124.4
Current liabilities
SEKm202120222023e2024e2025e
Short Term Debt0.000.000.000.000.00
Short Term Lease Liabilities0.000.000.000.000.00
Accounts Payable34.163.764.073.584.5
Other Current Liabilities83.785.9128.1147.0169.0
Total Current Liabilities117.8149.6192.1220.5253.5
Total Liabilities and Equity690.0784.0953.41,114.31,323.5
Cash flow
SEKm202120222023e2024e2025e
Operating Cash Flow91.041.7158.9215.3283.7
Investing Cash Flow-191.9-33.5-42.7-49.0-56.3
Financing Cash Flow73.0-25.1-22.2-74.5-103.5

Rating definitions

The team

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