Northbaze reached net sales of SEK48m (43) in Q4 2022, representing an 11% y/y increase. While this growth rate may appear low at first glance, it's worth noting that the comparison number includes revenue recognition of cSEK11.3m from a large Russian order which was discontinued following the invasion of Ukraine. Additionally, the company recorded costs related to the Russian deal in Q4 2022, which temporarily depressed the gross margin to 28% from 54% in the previous quarter. This non-recurring cost interrupted the positive trend of margin expansion seen in the first three quarters of 2022.

We had projected sales of SEK51m, which represents a deviation of -6% compared to the reported figure of SEK48m. The primary factor contributing to this deviation was slower-than-expected sales in the Mobility segment, which amounted to SEK16m compared to our estimated SEK22m, resulting in a deviation of -31% from the reported figure.

Adiantes reached SEK21m in sales, translating to a y/y growth of 23% and 22% q/q which was higher than our estimate of SEK18m. The growth was primarily driven by existing customers but also by moving B2B Workplace from Northbaze Distribution to Adiantes. This business brought in revenues of a total SEK67m in 2022.

Audio & Sound generated sales of SEK11m which represents a 45% y/y decrease from last year’s SEK20m. However, the comparison number includes revenue recognition of SEK11.3m from the aforementioned Russian deal. Adjusting for the Russian order, the business achieved a y/y sales growth of c26% in the. Nevertheless, the total sales for the segment in 2022 declined by 10% compared to the previous year.

Smart Mobility reported sales of SEK16m, translating to a y/y growth of 173% and 1% q/q. This was below our estimates of SEK22m. The strong y/y growth was largely attributed to the inclusion of Copter, which contributed with SEK9m in the quarter. Excluding copter, the segment grew by 20%. All in all, this segment achieved sales of SEK65m in 2022 compared to SEK37m in 2021.

In Q1 2021 Northbaze announced it had received a large Russian order with an initial value of cSEK37m. This is a significant order value, especially when considering the size of Northbaze’s annual sales (SEK133m in 2021). Following the Invasion of Ukraine, Northbaze discontinued its deliveries to Russia and terminated all supplier contracts which resulted in significant costs. In addition, the company returned the 2021 recognized profits of cSEK9.3m in Q4 2022.

Excluding the one-time cost for the quarter, the adjusted gross and EBITDA margins are 47% and 1%, respectively. Nevertheless, these margins are relatively weak compared to the company’s exceptional cost control, which resulted in an average EBITDA margin of 10% for the first three quarters of 2022. Therefore, the lower margins in Q4 2022 can not be entirely attributed to the SEK9.3m non-recurring cost.

CEO Henrik Andersson points out several notable factors that we believe have contributed to Northbaze’s lower margins in Q4 2022, beyond the SEK9.3m non-recurring cost. The company is facing, higher inflation, currency effects, and an overall slowdown in the smartphone market, which are all having a direct impact on its top and bottom line. The Mobility segment, in particular, is highly reliant on smartphone sales. Moreover, we think that Copter's business has substantial potential for scalability, and thus, its revenues could have a considerable impact on Northbaze's margins.

In the first half of 2022, Northbaze faced common challenges experienced by many companies, such as component shortages and logistics issues. However, the company has seen improvement in these areas, with shipping prices from Asia returning to near pre-pandemic levels. While the semiconductor shortage has also improved, it has not yet fully recovered to pre-pandemic levels.

Throughout 2022, Northbaze has focused on cost control, resulting in improved margins in the first three quarters of the year. The company plans to continue this effort in 2023. Additionally, Northbaze is planning to integrate its warehouse and logistics operations at its Kumla factory in Sweden. This change is expected to increase the capacity through bulk transportation and localized processing of its products. By leveraging synergies across its business segments, Northbaze aims to become a more attractive partner and win over new customers. We believe that these changes have the potential to yield further sales growth and margin improvement once implemented.

Looking at Northbaze’s balance sheet, we noticed a substantial increase in both Goodwill and Other provisions since Q3 2022. According to CEO Henrik Andersson, the increase in provisions is due to the additional purchase price related to the acquisition of Copter. Northbaze acquired Copter through a directed offset issue to Copter's shareholders in 2021. Copter's majority shareholder at that time was Never Eat Alone Invest AB (NEA), an investment company focused on building networks to developing the companies in its portfolio. As a result of the transaction, NEA became and currently is Northbaze’s top shareholder, owning c18% of the shares and votes.

The press release regarding this acquisition states that the additional purchase price is to be calculated on Copter’s EBITDA in 2022. Although we do not have details on the EBITDA level, Henrik Andersson mentioned in a recent interview that the company has factored in the maximum potential purchase price amount of approximately SEK19m.

We acknowledge the possibility that the company may have to pay an additional purchase price at some point, which could raise concerns about the company's cash position of SEK20m at the end of 2022. However, considering the company's burn rate of -SEK10m in 2022, including investments and non-recurring costs of SEK9.3m, we believe that Northbaze’s financial position is comfortable. Furthermore, the company's low burn rate of -SEK2m for Q1-Q3 2022 supports this view.

Northbaze has set financial targets that include an annual growth rate of over 20%, an EBITDA of over 10%, and a solvency ratio exceeding 30%. Additionally, the group aims to increase the share of revenue within B2C and online by approximately 10% per year over the next three-year period.

Northbaze was moving in line with its long-term financial targets during the first three quarters of 2022. However, due to the discontinued Russian order, the company fell short of its targets in the fourth quarter. Although the company exceeded its long-term growth target by 5 percentage points, it fell short of its EBITDA target by 9 percentage points for 2022.

At year-end, Northbaze’s order book was SEK19m, which marks a significant decline from last year's SEK41.1m, but represents an increase from the previous quarter's SEK17.1m. Broken down by business area, Adiantes accounted for SEK14.0m (compared to SEK6.5m last year), Smart Mobility for SEK2m (compared to SEK5.7m last year), and Audio & Sound for SEK3m (compared to SEK28.9m last year, including discontinued orders).

The correlation between sales and the order book has historically been weak. Over the past 2 years, quarterly sales have ranged from 110% to 330% of reported order book figures (adjusted for the Russian order). The CEO has explained that this discrepancy is due to orders coming in after the order book has been closed. While the order book may not be a reliable predictor of future sales, it is a useful tool for gauging market conditions for Northbaze's business segments and estimating the minimum level of sales for the following quarter.

We have adjusted our near-term sales growth forecast to account for challenging market conditions. Additionally, we have revised the gross margin downwards to reflect an increased input costs. However, we anticipate higher EBITDA margins due to expected synergy effects between the business segments. It's worth noting that the sales mix will also play a role, particularly considering Copter's strong operating margin.

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 13% for all scenarios. While we have revised our estimates, they have not had a significant impact on our fair value range. As a result, we are leaving our fair value range unchanged at SEK0.6–1.9, with our base case at SEK1.1.