Net sales amounted to SEK21.9m in Q1 2023, relative to our estimate of SEK24.2m, down 9% y-o-y. We consider this largely in line with our estimates, and we understand Alelion’s customers are still affected by component shortages which affect Alelion’s near-term sales.

The gross margin came in at 35% (30%), relative to our estimate of 26% - which we find very positive. Previously announced price increases have driven the gross margin development, and we also believe some “old inventories” played a positive part in this, as they have been acquired at a lower cost than current market prices.

Going forward, we expect similar gross margin levels, supported by an additional price increase in H2, which might be somewhat offset by raw material costs driven by overall cost inflation.

Total OPEX amounted to SEK-20.5m relative to our estimate of SEK-22.0m. capitalised own development work amounted to SEK2.6m, and other operating income of SEK1.0m, relative to our estimate of SEK0m, respectively – thus boosting the result by the equivalent amount.

Still, total EBITDA amounted to SEK-9.1m, beating our EBITDA estimate of SEK-15.7m. We find this positive. The main drivers behind this beat are the higher-than-expected gross margin, slightly lower OPEX than expected, and higher-than-expected other income.

It is also important to point out that Alelion reactivated old immaterial assets in the quarter, which boosted D&A by SEK5.7m – thus leading to a higher EBIT than EBITDA in the quarter. This is, however, a non-cash effect.

Exide partnership – significant potential for both parties

Another true highlight from the quarter was the partnership with lead-acid battery giant Exide Technologies, which we find very positive. We have previously written a research note on this subject, which we recommend reading. We argue the partnership holds great potential for Alelion from several perspectives. We understand that negotiations are still ongoing, and we expect to hear more from this during H2 2023.

Reactivated IP rights – early days but attractive potential

Alelion also highlighted that it had reactivated its old intellectual property rights (impaired in 2020) following a rigorous evaluation of the patents. This has led to an initiated project with a potential new customer that Alelion expects to generate positive cash flow in the future. As a result, this has resolved in reactivation of the IP rights of SEK5.7m.

We are positive about this fact and believe this is an area that holds great potential given the current environment for the electricity market and grids in general throughout Europe, increasing the demand for smart solutions and storage, and we have seen similar initiatives within the EV market taking place. We still think it is early days, but we are encouraged by the development of new projects with potential new customers that sees the value potential in this area. We expect to hear more regarding this area from Alelion in the future.

Financing situation – we expect a share issue in the coming quarter

Another important matter is the financing situation for Alelion. We have previously highlighted that we expect Alelion to conduct a share issue during the coming quarters. During Q1, Alelion managed to utilise tax credits equivalent to SEK13.4m – which we find very positive. And Alelion has also extended several existing loans.

Also, cash flow was very strong in Q1 due to a working capital release and the Covid-related short-term loan (SEK13.4m). This resulted in an operating cash flow of SEK10.7m. All in all, this resulted in a cash position of SEK7.8m by the end of Q1.

We still expect a share issue to occur during the coming quarters to finance Alelion’s growth and working capital requirements. This is further supported by Alelion’s press release from 28 March, where the chairman of the board, Alf Blomqvist, stated that the work of securing the long-term financing is underway and that the company expect to present a solution to this by June.

Summary – a solid quarter which lays the ground for an exciting H2 2023

All in all, we argue the report was largely in line with our estimates, and we are positively surprised by the increased gross margin – driven by price increases. Deliveries are still affected by component shortages among Alelion’s customers, which negatively affects Alelion’s near-term sales curve – even if the problem is not on Alelion. Cash flow in the quarter was strong, and the cash position has increased. However, we expect a share issue to occur in the coming quarter. Furthermore, Alelion's total order book of SEK230 for 2023, coupled with price increases that support the margin, lays the foundation for a very solid H2 2023.

Positive market signals  – but component shortages postpone deliveries

In Alelion’s Q1 report, the company states it is “receiving distinct signals of growing demand for electrified vehicles from several of our customers”. We find this very positive and argue that it gives good support for our estimates beyond 2023, where the total order stock for delivery amounts to SEK230m (of the total order stock of SEK350m). However, component shortages are still a bottleneck that postpones deliveries among Alelion’s customers. It is difficult to assess when this will normalise, but we understand conditions could improve during H2 2023, which is also when Alelion will ramp up its production significantly.

Alelion is still only scratching the surface of the electrification of off-highway vehicles, as orders to date only reflect a 2-5% electrification penetration of the total fleet. Alelion has presented a chart of the market potential, where it has examined the potential in its current customer base and the closest peers of its customers (see chart below). The chart illustrates a total market opportunity of SEK4bn-5bn by 2030, which would correspond to an 80% penetration in the existing customer base and a 40% penetration in the peer customer base.

This potential does not include the potential in aftermarket and service, which we believe will offer great potential as well, both in terms of sales and margins.

Another interesting event in recent times is the EU approving an effective ban on new fossil fuel cars from 2035 to speed up the switch to electric vehicles and fight climate change. Even if the ban does not yet include off-highway vehicles, we believe it will likely spill over to other types of vehicle manufacturers, including Alelion’s customers.

A new standardised battery

As we highlighted before, Alelion has started capitalising its work made on the new battery system (SEK2.8m in Q1). We understand a team of around 10-15 engineers are working on the battery system to get it through the various stages of product development (sampling, prototypes, data analysis from real-life conditions, certification processes etc.).

We argue this new modular battery system will allow for higher margins while reducing the price toward Alelion’s customers. In 2022 Alelion received a SEK130m order from Terberg which is based on the “old” battery system. We now believe any new orders will be for Alelion’s new standardised battery. Therefore, it is important to get it ready for the market – which we expect to take place during H2 2024.

The new standardised battery is developed to better meet the demand of its customers and their specific needs. This new standardised battery will allow more standardised parts to go into battery modules, and the vast majority of customer customisation will take place in the software (battery management system). This could also open up an attractive aftermarket business in the future, where used batteries can replace other batteries operating in less challenging environments.

A standardised battery also allows for increased sourcing synergies as larger volumes can be ordered of each component, and it also allows Alelion to handle its inventories more efficiently. For instance, a high-voltage battery required for vehicles lifting 10’s tons in a certain industrial environment needs a completely different configuration than a vehicle pulling the same weight but in a different industrial environment.

This complexity is what primarily differentiates Alelion’s current niche market (off-highway vehicles) from its old key market (forklifts). Apart from the complexity - volumes and production series are much lower in this segment, further lowering the incitement for customers to insource production, as was the case with Toyota.

We slightly reduce our near-term sales forecast due to postponements in deliveries, which also affects our long-term estimates. This does, however, not affect our view or our confidence in the sales ramp-up – but the timing.

We slightly increase the near-term gross margin, as price increases have borne fruit already.

We also increase the level of capitalisation regarding the development of Alelion’s new standardised battery. As a result, total income is increased by SEK10m in the coming two years.

We keep our OPEX base intact even though it was lower than expected, as we wish to be conservative and take height for increased costs as Alelion will ramp up deliveries throughout the year.

All in all, our EBITDA estimates are reduced by around 5% (adj. for capitalisations) throughout our estimate period of 2023-2025

Regarding our valuation, we have previously expected a share issue to occur within the coming quarter. Our previous assumption assumed a share issue of SEK50m, which at a subscription price of SEK0.4 per share would imply 125m new shares for a dilution of 29%.

We now update our assumptions and expect a lower subscription price than before due to Alelion’s shares trading lower than before. We, therefore, now expect a share issue of SEK50m, which at a subscription price of SEK0.26 per share (implying a 30% discount to yesterday’s closing price) would imply 190m new shares for a dilution of 39%. This effect alone reduces our base case by SEK0.15 per share.

Overall, our base case is reduced from SEK1.0 per share to SEK0.8 per share – with a fair value range of SEK0.1(0.1) – SEK2.0(2.5) per share.