Image Systems: Expecting upward business momentum
Research Update
2023-05-09
07:00
Redeye returns with an update following the Q1 report. We expect some negative impact on 2023 earnings due to higher costs. Our long-term view remains intact however, as we see good prospects for profitable growth within both business segments. Our Base case fair value is virtually unchanged at SEK2.7 suggesting an appealing potential from current share price levels.
HA
AH
Henrik Alveskog
Anton Hoof
No drama in Q1
The Q1 report presented no big surprises. Sales were a little higher Y/Y while EBITDA was unchanged. RemaSawco had a rather slow quarter, as expected. Both due to seasonality but also weak and uncertain market conditions for the sawmill industry. Motion Analysis is speeding up its product development which has incurred higher costs, weighing on margins. On Group level, a couple of one-off items relating to write-downs also had a negative impact on reported earnings.
Optimistic outlook despite current uncertainty
The sawmill industry has been going through some turbulent times holding back investment decisions. This is clearly reflected in RemaSawco’s order intake dropping to SEK21m in Q1 vs SEK 34m in Q1’22. The company is still rather optimistic and expects demand to recover gradually over the next few quarters. Motion Analysis on the other hand, is experiencing a solid market climate and improved its order bookings by around 20% Y/Y.
Some changes to near-term forecasts
We are lowering our 2023 earnings forecast while leaving 2024-25 basically unchanged. The 2023 revision relates to higher costs within Motion Analysis and the write-downs mentioned above. The impact on our valuation is minimal. Following the recent share price decline, we now see a significant upside potential to our Base case fair value around SEK2.7 per share. The share is trading at attractive EV/EBIT multiples around 5-6x on our 2024-25 estimates.
Key financials
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Revenues | 162.7 | 152.2 | 171.1 | 185.0 | 205.6 | 222.2 |
| Revenue Growth | -21.3% | -6.5% | 12.4% | 8.2% | 11.1% | 8.1% |
| EBITDA | 4.6 | 19.3 | 28.4 | 25.8 | 37.0 | 39.8 |
| EBITDA Margin | 2.8% | 12.7% | 16.6% | 13.9% | 18.0% | 17.9% |
| EBIT | -13.2 | 0.70 | 9.1 | 7.5 | 21.0 | 22.5 |
| Net Income | -18.8 | 0.00 | 8.6 | 5.8 | 18.9 | 20.3 |
| EV/Revenue | 0.8 | 0.9 | 0.8 | 0.9 | 0.7 | 0.5 |
| EV/EBIT | -10.1 | 201 | 15.0 | 21.6 | 6.7 | 5.3 |
Q1 highlights
- Group net sales of SEK38m were higher Y/Y and in line with our estimates.
- EBITDA of SEK2.3 is unchanged Y/Y and a little lower than we expected.
- Higher depreciation weighed on EBIT. SEK2.3m (out of total D&A of SEK6.9m) was however a one-off write down relating to the termination of a rental contract for premises in Finland. Also, net financial items were impacted by a one-off write down of a receivable relating to the divestment of Digital Vision back in 2014. Hence a reported net loss of SEK6m for the quarter.
- Order bookings amounted to SEK31m vs. SEK43m in Q1’22. This is no big surprise given the current situation in the sawmill industry. RemaSawco saw declining order booking (SEK21 vs SEK34m in Q1’22) while Motion Analysis had continued solid growth in order intake (SEK10.5m vs SEK8.3m in Q1’22).
- As shown in the graph below, order bookings have declined in the last two quarters. Order backlog end of Q1 was still robust at SEK75m.
RemaSawco
The charts below show revenues and EBITDA margins, four quarters trailing. The restructuring and transformation of RemaSawco is quite evident from the improving margins, currently around 13%. Demand for sawn timber is still low and many customers are postponing investment decision as there is a high degree of uncertainty in the market. However, the company does not seem too worried and expects a gradual recovery in the coming quarters.
Motion Analysis
Motion Analysis has seen higher business volumes (both sales and order intake) in the past year, recovering from negative impact caused by the Covid pandemic. Some of this growth is certainly related to positive currency effects, since sales are global. As most costs are fixed and gross margins from software sales are naturally high, EBITDA margins have been railing revenues. In the last quarter the company has incurred more costs related to product development, which is reflected in the margins turning down somewhat. From what we understand these higher costs will remain through 2023.
Financial forecasts
We are making some changes in our 2023 forecasts while 2024-25 remain virtually unchanged. We expect Motion Analysis to have higher costs through 2023 for product development relating to the new software platform. Moreover, the one-off write-down in Q1 means higher depreciation with a negative impact on 2023 EBIT.
Our overall view and mid-term forecasts are intact:
RemaSawco’s transformation during the last couple of years will likely enable more stability in earnings while also providing better long-term growth opportunities. Given the current uncertainty in the sawmill industry, we are a bit cautious on the near-term outlook. But sawmills are today well financed, and we expect good market conditions with increasing investments in the coming years. The expansion needs support from more skilled staff being hired, mitigating some of the margin improvement.
Motion Analysis is back to pre-covid levels, and we expect to see continued rather stable growth rates going forward. The new software platform will better enable product development and new releases that will drive sales in the coming years. The SaaS business model comes with lower near-term sales growth, but obviously more recurring revenues.
Valuation
Our valuation is based on the forecasts above and the assumptions outlined below. Our Base case fair value is around SEK2.7 per share, virtually unchanged. Our long-term projections and assumptions:
- CAGR 2026-31: 7%.
- Average EBIT margins ~12%.
- WACC: 11.5%
The share has been trading south lately and we see an appealing potential of almost 100% to our Base case fair value. Our view that the share is undervalued is supported by very attractive earnings multiples. Based on our estimates, EV/EBIT multiples 2024-25 are currently around 5-6x.
Investment thesis
Case
Well positioned to enter growth phase
Evidence
Improved productivity
Challenge
Proof is still in the pudding
Challenge
Motion Analysis facing challenges for sustainable growth
Valuation
We see considerable potential
Quality Rating
People: 3
Overall, Image Systems has an experienced team with in-depth market knowledge. The CEO (Johan Friberg) is an internal recruitment and had the position as Managing Director of Motion Analysis since 2012. The management’s focus on profitable growth is clear, showing that they aim to create value for the company’s customers. The company has a solid list of shareholders and the three largest own around 50%. To improve our ownership scoring, we would like to see higher shareholdings by management. On the positive side, we believe that the three largest shareholders have the financial strength to back up a potential future share issue.
Business: 3
Image Systems has high gross margins in both business areas, particularly in Motions Analysis' software business. While RemaSawco has a solid market position in Scandinavia and Northern Europe, Motion Analysis is a dominant global player in its specific market niche. Image Systems has a huge distribution network in Motion Analysis, making it possible to develop or add products to the portfolio and distribute them very efficiently. Both target markets for Image Systems are expected to grow by more than 5 % annually in coming years.
Financials: 2
The poor financial score for Image Systems is related to the company’s history. Operating cash flow and earnings have been negative historically, although clearly improving lately (21-22). The company is currently (summer 2022) net debt free. Hence, financial flexibility has improved. The business should be cash flow positive given normal market conditions, but still need higher volumes to reach decent profitability. The company has a large number of clients but obviously the majority are in the sawmill industry which is quite cyclical. If the company delivers according to our expectations, its Financial rating will gradually improve.
Financials
| Income statement | ||||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Revenues | 162.7 | 152.2 | 171.1 | 185.0 | 205.6 | 222.2 |
| Cost of Revenue | 64.5 | 49.0 | 56.4 | 59.7 | 72.6 | 80.6 |
| Operating Expenses | 93.6 | 83.9 | 86.3 | 99.6 | 95.9 | 101.8 |
| EBITDA | 4.6 | 19.3 | 28.4 | 25.8 | 37.0 | 39.8 |
| Depreciation | 4.3 | 4.0 | 3.7 | 3.7 | 1.1 | 1.2 |
| Amortizations | 13.5 | 14.6 | 15.6 | 14.6 | 15.0 | 16.1 |
| EBIT | -13.2 | 0.70 | 9.1 | 7.5 | 21.0 | 22.5 |
| Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Interest Expenses | 3.5 | 1.3 | 1.1 | 0.40 | 0.00 | 0.00 |
| Net Financial Items | -3.5 | -1.3 | -1.1 | -1.8 | 0.00 | 0.00 |
| EBT | -16.7 | -0.60 | 8.0 | 5.7 | 21.0 | 22.5 |
| Income Tax Expenses | 2.1 | -0.60 | -0.60 | -0.10 | 2.1 | 2.3 |
| Net Income | -18.8 | 0.00 | 8.6 | 5.8 | 18.9 | 20.3 |
| Balance sheet | ||||||
| Assets | ||||||
| Non-current assets | ||||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Property, Plant and Equipment (Net) | 25.5 | 23.2 | 3.7 | 2.0 | 3.0 | 4.2 |
| Goodwill | 36.1 | 36.1 | 36.1 | 36.1 | 36.1 | 36.1 |
| Intangible Assets | 64.8 | 61.3 | 58.8 | 52.2 | 45.6 | 38.5 |
| Right-of-Use Assets | 0.00 | 0.00 | 13.8 | 13.8 | 13.8 | 13.8 |
| Other Non-Current Assets | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 |
| Total Non-Current Assets | 145.5 | 139.7 | 131.5 | 123.2 | 117.6 | 111.6 |
| Current assets | ||||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Inventories | 11.5 | 11.9 | 13.6 | 16.7 | 20.6 | 22.2 |
| Accounts Receivable | 17.3 | 22.1 | 20.1 | 22.2 | 24.7 | 26.7 |
| Other Current Assets | 15.2 | 15.5 | 7.0 | 7.4 | 10.3 | 11.1 |
| Cash Equivalents | 3.8 | 7.1 | 22.5 | 34.0 | 54.8 | 76.6 |
| Total Current Assets | 47.8 | 56.6 | 63.2 | 80.3 | 110.3 | 136.6 |
| Total Assets | 193.3 | 196.3 | 194.7 | 203.5 | 227.9 | 248.2 |
| Equity and Liabilities | ||||||
| Equity | ||||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Shareholder's Equity | 113.8 | 114.0 | 122.9 | 128.7 | 147.6 | 167.9 |
| Non-current liabilities | ||||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Long Term Debt | 0.00 | 2.3 | 0.40 | 0.40 | 0.40 | 0.40 |
| Long Term Lease Liabilities | 15.9 | 12.8 | 8.5 | 8.5 | 8.5 | 8.5 |
| Other Long Term Liabilities | 7.2 | 6.6 | 6.0 | 6.0 | 6.0 | 6.0 |
| Total Non-Current Liabilities | 23.1 | 21.7 | 14.9 | 14.9 | 14.9 | 14.9 |
| Current liabilities | ||||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Short Term Debt | 11.4 | 4.6 | 5.0 | 5.0 | 5.0 | 5.0 |
| Short Term Lease Liabilities | 3.8 | 5.2 | 4.9 | 4.9 | 4.9 | 4.9 |
| Accounts Payable | 16.3 | 16.1 | 12.6 | 13.0 | 14.4 | 15.6 |
| Other Current Liabilities | 24.9 | 34.7 | 34.4 | 37.0 | 41.1 | 40.0 |
| Total Current Liabilities | 56.4 | 60.6 | 56.9 | 59.9 | 65.4 | 65.5 |
| Total Liabilities and Equity | 193.3 | 196.3 | 194.7 | 203.5 | 227.9 | 248.2 |
| Cash flow | ||||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e | 2025e |
| Operating Cash Flow | 26.1 | 15.7 | 26.7 | 21.5 | 31.2 | 33.1 |
| Investing Cash Flow | -17.7 | -8.2 | -9.8 | -10.0 | -10.5 | -11.3 |
| Financing Cash Flow | -7.8 | -4.3 | -1.5 | 0.00 | 0.00 | 0.00 |
Rating definitions
The team
Disclosures and disclaimers