Redeye states that Doro’s Q1 2023 report was weaker than our expectation due to lower sales and higher OPEX pushing down Ebit-margins. However, a higher gross margin of 36% is encouraging.

Net sales were up 1.8% y/y to SEK208m. Taking into account the currency effect, organic growth was -7.6%. This was below our estimates of SEK238m.

EBIT was SEK3.2m, corresponding to an EBIT margin of 1.5% (2% last year). This was below our estimates of SEK8m.

COGS came in at SEK134, lower than our estimates of SEK160m. Gross margin came in at 35.8%, higher than our estimate of 33%. The currency effect of SEK-6m hit cash flow. The higher gross margin came higher following the lower shipping cost and better sea-to-air transport ratio. There were also a positive effect coming from changes in the portfolio mix.

The order intake came in at SEK210m in Q1’23 vs SEK217m in Q1 ’22, -3%. The R12M order entry continues to decline sequentially, however, the decline was only -0.8% vs Q4’22 so we might see a bottom here.

Nordics

Revenue was SEK51.7m, 9.3% y/y.

Sweden primarily drove sales growth in the Nordics due to customers restocking their inventories from last year. Management also attributed the early Easter weekend to improved sales performance. The Q4'22 call featured the CEO suggesting that the most significant decline in the Nordics might be behind Doro, and this quarter's results appear to support that notion. We project a 2% growth (previously flat) for the region over the full year.

West Europe

Revenue was SEK83.8m, 25.3% y/y.

The quarterly revenue surge in Western Europe was driven by high demand from major mobile operators in France, primarily due to the rise in smartphones and 4G feature phones. While general retail demand decreased, electronic chains experienced strong demand. We estimate that sales in the region will grow by 4.5% (previously 8%) over the full year, reaching SEK365m (previously SEK376m).

Central and Eastern Europe

Revenue was SEK36.6m, -32% y/y.

The German market exhibited a steep decline, with the significant one-time sales in Q1'22 skewing the figures. With a dedicated sales force focusing on the German market, we believe the downturn may be halted. However, it seems that growth is taking longer than expected, so we slightly reduce our regional growth estimate for Central Europe to SEK206m (previously SEK228m) in sales for 2023e.

UK  and Ireland

Revenue was SEK36.2m, flat

The negative trend in the UK and Ireland persisted this quarter. For the full year, we expect Doro to maintain its market share and achieve approximately SEK162m in sales, reflecting flat growth.

Management emphasized several measures to enhance growth:

We believe these initiatives are the appropriate steps to counter the declining growth rate, and in due course, achieve positive net growth.

DSO and DPO continue to be at satisfying levels. The inventory decreased by 3% Y/Y and inventory as part of sales are well inline with the historic level. The disruption from the pandemic is more or less over and as the management highlights, freight costs have been coming down sharply.

DPO (how many days before Doro pays its bills) increased by one day and DSO (how many days before Doro gets paid) was up by one day. It is a very healthy sign DPO and DSO are stable.

Inventory levels increased from 23% of R12m sales in Q4’22 to 24% in Q1’21.

DSI in the quarter was 201 days compared to 212 last quarter. The cash conversion cycle came down to 85 days, more or less in line with last quarters.

5^th of April the investor Peter Gyllenhammar bought 807 363 shares at SEK14, adding to his position of 430 039 shares. Peter Gyllenhammar is now the 6^th largest shareholder, owning 5.04% of the capital and votes owning a total of 1 237 402. Peter Gyllenhammar AB is a privately owned investment company investing long-term in industry, real estate and other financial investments. According to Holdings, it managed SEK938m so Doro makes up 2% of his AUM.

This year, Doro aims to establish a foundation for future growth. As is often the case, turnarounds tend to take longer than expected, leading us to reduce our growth projections for 2023 and decrease margins due to increased costs from higher spending on sales, R&D, and growth initiatives. We forecast improved growth and better EBIT margins in the coming years.

We maintain that the DACH region plays a crucial role in Doro's growth story. The sales team is expected to be finalized and fully operational during 2023, with an estimated headcount of around 7-10 people.

Our growth assumptions for 2023e have been lowered, but we have increased growth projections beyond 2025e. The positive momentum in e-commerce and online sales will contribute to this growth. Management estimates that 5-10% of net sales originate from online channels.

We have adjusted the EBIT margin due to marginally higher selling and R&D expenses, but we anticipate that the EBIT margin will approach 8 to 9% in the long run.

We value Doro using a DCF valuation approach backed by a multiples-based valuation.

Weighted Average Cost of Capital (WACC) for Doro is 13.1% and our valuation range is raised to between SEK13 to SEK35, with a base case of SEK24.

Finding relevant peers for Doro is somewhat challenging. Doro is a niche player selling hardware, and after the break-up and given its lower sales and margins, the market now values Doro at low multiples. On EV/Sales, Doro trades at a 62% discount to peers and a deep discount on 2023e EV/EBIT.

An EV/EBIT of 4.6 2024e is very low and paints the picture of very low expectations from the market. Applying the modest EV/EBIT multiple of 11x suggests a valuation of SEK23 per share, in line with our DCF valuation.

Doro is a typical value company with low growth and stable profitability. We expect 2023 to be a transition year, with 2% sales growth thanks to the ramp-up of sales activities and R&D on the cost side. For 2023, we forecast EBIT margins of around 3%, leading to EBIT of SEK51m, which translates into a 2023e EV/EBIT of 8.4. The net cash position at the end of the quarter was SEK55m. We believe the downside is limited here at around SEK15 if Doro posts modest revenue growth.

It is clear that the market has low growth expectations and that Doro’s poor capital allocation weighs on its valuation. Given no communicated financial targets and no decision on a share buyback programme or dividend policy, investors put Doro in the value trap box. If the board and management improve the capital allocation, it should be a positive trigger for the stock.