Tessin’s Q1 report came in lower than our estimates in terms of sales, while profitability significantly exceeded our expectations due to lower Opex than expected. Net sales amounted to SEK10m, up 14% y/y, but below our estimate of SEK12.5m.

In terms of profitability, Tessin’s EBITDA landed on SEK-2.1m and EBIT on SEK-3.8m, which is significantly better than our estimates of SEK-5.0m respective SEK-6.2m. The deviation is primarily due to lower opex, where Tessin has had good cost control in the quarter.

The value of brokered loans amounted to SEK184m, a 16% decrease compared to Q1 2022 and lower than our expectations of SEK290m. However, despite this, Tessin managed to grow 14% which is a result of price increases. This is visible in the arrangement fee, which amounted to 4.9% of the value of brokered loans, up from 3.4% in Q4 2022 and 3.7% in Q1 2022.  Regarding the sales mix, Arrangement fees amounted to SEK9.0m compared to our estimate of SEK11.6m, and rental income amounted to SEK0.9m, in line with our estimation of SEK0.9m.

Despite not meeting our sales estimates, Tessin's Q1 report reveals a relatively strong performance given the current market uncertainty and the significant cost reductions during the period. This is particularly impressive given the 16% year-over-year decrease in the value of brokered loans, demonstrating Tessin's pricing power. Furthermore, Tessin's careful cost control measures during the quarter indicate a clear path toward profitability. All in all, Tessin's Q1 report reflects a solid performance and a promising outlook for the company.

The arrangement fee landed at 4.9% (net sales / brokered loans) during the quarter; up from 3.4% in Q4 2022 and 3.7% in Q1 2022. The higher arrangement fee demonstrates that Tessin has managed to increase its prices which in turn means that the loan demand is still high despite the uncertain macro environment.

Tessin has successfully reached brokered loans worth SEK5bn since its inception in the quarter and is still adding new projects to its platform in a challenging market. Our earlier research updates show that Tessin's interest rates on the platform are comparable to historical rates. This should give Tessin an edge over traditional bank loans in the current high-interest environment where banks are forced to increase their rates. Despite the challenging conditions, we believe that Tessin's platform is still attracting a healthy inflow of new projects. However, we believe the real challenge for Tessin is accessing sufficient capital to fund these projects

After the quarter, Tessin obtained its crowdfunding license from the Swedish Financial Supervisory Authority (Finansinspektionen).  This license is vital for Tessin to offer crowdfunding services, and starting from November this year, it becomes a legal requirement. The new EU regulation will allow Tessin to expand its services to new markets in the coming years. Tessin’s licensing is an exciting development for the company as it opens up new avenues for growth and opportunities.

Tessin's net sales have shown significant growth, increasing from SEK30.5m in 2019 to SEK52m in Q1 2023 (R12M). Additionally, the value of brokered loans (R12M) has increased from SEK627m in Q4 2019 to SEK1,239m in Q1 2023, indicating steady growth in the core business. This growth is a testament to the company's execution capabilities and resilience in a challenging market. Despite this, the share price has hit new lows due to concerns about the company's financial situation and its need for further capital injections. To improve investor confidence and reduce the risk premium, Tessin must convince the market that additional capital injections are not necessary.

At the current share price of about SEK0.1, the market capitalization is SEK26m. Adding net debt of SEK16m, the enterprise value amounts to SEK42m. We estimate a net income of SEK4.5m in 2023e and SEK14.9m in 2024e, resulting in an earnings yield of 11% and 35%, respectively, suggesting that the share price is way below intrinsic value if our projections are met. However, before the company demonstrates that its cash position, cost-saving measures, and additional capital injection from outstanding warrants are sufficient to achieve positive cash flow, pressure on the share price may persist. Nevertheless, if/when the financial concerns are alleviated, the stock has significant upside potential.

Following the Q1 report, we make changes to our estimates where we trim both sales and OPEX for 2023-2024e. As a result of the lower-than-anticipated value of brokered loans in Q1, we have revised our expectations for the full year 2023. We now anticipate the value of brokered loans to be SEK1,014m, which is a reduction from our previous estimate of SEK1,360m. However, this decrease in loan value will be partially offset by a higher arrangement fee, which we now project to be 5% compared to the previous 4%. This increase is attributable to Tessin's recent price adjustments. We expect the arrangement fee to be somewhat higher than in Q1, as we think some of the brokered loans in the quarter were signed before the price increases took effect.

For the coming quarter, Q2 2023e, we estimate net sales of SEK13.4m, whereas SEK12.5m is expected to come from arrangement fees and SEK 0.9m in rental income. We estimate the value of brokered loans to reach SEK250m, compared with SEK353m in Q2 2022 and SEK184m in Q1 2023. At the end of Q4, Tessin stated that it has signed loan agreements of a total of SEK756m, which should convert to brokered loans in coming quarters.

We anticipate Q2 to be a pivotal quarter for Tessin in terms of profitability, as we expect the company to report its first quarter with positive EBIT and net income. We estimate an EBITDA of SEK3.5m and an EBIT of SEK2.0m. This, as both higher revenues and somewhat lower opex compared to Q1, should improve the profitability significantly q/q. However, as the cost base is relatively slim already, lower revenue in the quarter will significantly impact the earnings.

All in all, given the price increases and the backlog of signed loan agreements, we think it is likely to see q/q growth in the top line and a significantly improved bottom line.

We have used a WACC of 13.5% in all scenarios, derived from Redeye’s Rating model, and a tax rate of 20.6%. The discount analysis extends to 2036, and the key financial assumptions for the scenarios are summarized below.

In our Bear Case, we estimate a lower growth rate and lower scalability owing to ongoing market share losses in Sweden and lower growth because of external factors, such as interest rates and higher building costs for property developers.

In our Base Case, we estimate Tessin successfully maintains healthy top-line growth despite external challenges. We also estimate scalable growth, with Tessin brokering larger and more loans without adding additional staff at the same pace. Moreover, we expect a long growth runway thanks to overall market growth and continued house shortages. We do not estimate any M&A.  

In our Bull Case, we estimate only a slightly higher growth rate. Instead, the big deviation is seen in the margins, where we estimate in our Bull Case that Tessin can maintain a high arrangement fee despite higher loan sizes. Moreover, we forecast Tessin to earn more money on other products, such as Tessin Services and management fees, leading to high gross margins and higher profitability. We do not estimate any M&A.