We have earlier stated that 2022 was a transitional year for Heliospectra. Last year was dedicated to product development, cost-savings initiatives, and restructuring to become more robust in 2023 with best-in-class product offerings for Smart Farming. It is intended for this year to mark a turning point. We see some early indications in the Q4 report with well-managed cost control, improved sales and solid order intake. Combined with the recent news, expanding the product portfolio with the new MITRA flex and the ambition to reach break-even by the end of 2023 boost our confidence in the transition.

Net sales of SEK9.98m, -12%%  y/y, were higher than expected. We believe it to be an effect of Heliospectra selling a significant portion of its older fixtures at a discount to new pilot customers testing the new SMART lighting solution.  We note improvement in 12m trailing (sales and order intake) and that Q2 in 2022 probably was the low point. That is to say; we expect to see a reinforcement of the positive trend from here, especially regarding order intake starting from H1 2023 when the new product offering is set to market. We expect the order intake from Q4’22, SEK14.3m, to be delivered during H1’23

Net sales of SEK9.98m, -12%%  y/y, were higher than expected. We believe it to be an effect of Heliospectra selling a significant portion of its older fixtures at a discount to new pilot customers testing the new SMART lighting solution.

 We note improvement in 12m trailing (sales and order intake) and that Q2 in 2022 probably was the low point. That is to say; we expect to see a reinforcement of the positive trend from here, especially regarding order intake starting from H1 2023 when the new product offering is set to market. We expect the order intake from Q4’22, SEK14.3m, to be delivered during H1’23.

The reported gross margin of 14% was significantly lower than our expectations. We believe the low gross margin is an effect of Heliospectra selling a significant portion of its older products at a discount. Heliospectras business segment is not a high gross margin segment, but we anticipate the gross margin to grow from here and stabilize at 25-45% depending on the product mix. Heliospectra has lately worked on reducing its production costs. By negotiating directly with A-brand component suppliers and cutting out the go-betweens, the company claims to have reduced its COGS, resulting in higher margins as we move forward.

Significant savings have been made during the year on the cost side. This includes the reduction of staff and legal entities, among other things. The number of employees is now 16. Two years ago, it was over 30. In the fourth quarter, OPEX stood at -SEK12.3m compared to -SEK19.6 a year ago.

The CEO letter in the Q3 report mentioned that the full effect of the cost-saving programs would be in place in November 2022. We, therefore, expect to see the total impact in the Q1’23 report. We believe these last cost cuts are related to the new distribution strategy in the US, Canada and Japan, where Helicospectra onwards will use partners instead of in-house sales teams. The new strategy further includes an in-house sales team penetrating the European market. The cost base has improved by c35% from 2021 to 2022. Most notable is the effect on staff costs, which decreased from SEK25.1 to SEK13.4 in 2022.

Cash flow from operating activities stood at -SEK30.4m for FY’22; by the end of 2022, cash and cash equivalents amounted to SEK 13.5m. The three principal shareholders supported the company with a credit facility last year. In 2022, this agreement resulted in loans of SEK42.6m being set-off in exchange for new shares.

First Smart LED Light Solution Order

This first commercial order for the smart LED solution comes from a non-disclosed customer in the Northeast of the US. The customer provides farmers innovative crop growth, pests, and disease protection solutions. We believe this is an order from the new distribution/partner network recently announced by Heliospectra and expect this order to be followed by more in 2023. We think the order value of USD795,000 is quite significant for Heliospectra, which will be delivered in Q1 2023.

New, unique product line

On February 23rd, Heliospectra announced an expansion of the product portfolio and the MITRA platform with MITRA Flex, the market’s first available wireless controlled lamp with flexible dark red light. The new solution offers customers three light spectrums in one without losing power, making it suitable for custom and application-based cultivation. The lamp is particularly suitable for plants that benefit from light treatments with a dark red light at the end of the day or the end of production or to ensure a healthy crop all year round, even in seasons with low natural light.

The new solution enables growers to optimize the lighting strategies on daily/hourly basis without losing power in the system. Combined with the Heliocore system, it lets growers create multiple growing zones. According to the company, this will enable growers to increase production and produce healthier crops. Further, the high efficiency of Heliospectra’s LED lamps saves up to 40% compared to the standard HPS solutions used today; the Heliocoresystem can save a further 30% of energy costs by limiting the unnecessary use of artificial light during the day or in specific cultivation zones. The new MITRA flex solution will be commercially available in May 2023.

Permanent CEO appointed

On February 28^th, Heliospectra announced that Bonny Heeren had been appointed permanent CEO. Bonny was appointed interim CEO on January 1st, 2022. At the same time, Bonny will also take over as interim CFO from Annika Westlund, who will step down as CFO. To show their belief in Bonny, the three major shareholders have granted him call options as part of an incentives program for 5,000,000 shares with a strike period in H1 2026. According to Bonny Heeren, it represents a significant investment for him.

The Horticulture Lighting Market has an expected CAGR of around 20% from 2023-2028, with LEDs expected to have a sizable market share. In 2025 LEDs are expected to have a 75% market share (of new orders), growing to 87% in 2030. One of the most significant factors driving the demand for horticulture lights is maintaining a controlled agricultural environment to combat the effects of weather changes. Moreover, global population growth is increasing food demand, which is difficult to meet through conventional farming. In Europe, The European Union’s initiatives to promote LED technology adoption are expected to increase opportunities for providers of LED lights for the horticulture sector[1].

With their new product offering consisting of SMART lighting and MITRA Flex, Heliospectra claims that they both can save up to 30% energy compared to regular LED lights and, in addition, optimize photosynthesis leading to better crops. As Heliospectra will be the first actor on the market to supply this wireless offering, we expect they can target and gain larger orders than previously. The strong USD (Heliospectra purchases its inputs in USD) and short-term instability in the European AgHort market are on the headwind side.

As a result of the new sales strategy with partner sales in the US and Canada, we expect sales from these markets to decrease in importance in favour of in-house sales from the European market going forward. Focus is now on the European greenhouse market, with a particular focus on the ornamental market and leafy greens and herbs. Two segments that the company assesses are very suitable for its Heliocore and MITRA platform. We expect the gross margin on non-European sales to decline due to revenue share with partners.

The financial situation is under control but restricted by the fact that Heliospectra will need further funding this year. We estimate Heliospectra will need to take up a new (or in tranches) loan of around SEK30m from the three principal shareholders to secure the growth capital required for 2023. This will likely happen in Q1, with set-off issue(s) to follow.

The short-term outlook is negatively affected by the high energy prices in Europe, which forces growers to shut down production during the winter and put investments on hold. Mid-term to long-term, the same scenario is expected to drive the demand for LED lighting. The lighting season in the Northern Hemisphere begins after the summer, meaning our expectations on H1’ 23 are modest. However, we expect sales to pick up in H2’23 and expect a strong year-end.

[1] https://www.mordorintelligence.com/industry-reports/horticulture-lighting-market

Heliospectra expects to finish 2023 in a break-even situation. We take a more modest approach. Our forecast still implies that Heliospectra will reach break-even in 2025. Following the Q4 report, we revise our near-term forecasts mainly on the topline side. The first half of 2023 is expected to be soft, with a stronger H2 to follow.

We still expect significant growth as of H2’23, when the new product offering has started gaining traction in the market. The tables below summaries our forecast and forecast changes.

Our valuation remains intact, with a Base case fair value of around SEK 1.7 per share. This is based on the financial forecasts in the table above and long-term assumptions outlined in the table below, including: