Northbaze Q1 2023 - Financial review

Northbaze reached net sales of SEK31.9m (35) in Q1 2023, representing a y/y decline of 10%. We had projected Northbaze to achieve sales of SEK43m, which represents a deviation of -25% compared to the reported figure. The primary factor contributing to this deviation was again slower-than-expected sales in the Mobility segment, which amounted to SEK9m compared to our estimated SEK18m, resulting in a deviation of -48%.

The y/y decline of 10% can be attributed to challenging market conditions, specifically the global decrease in smartphone sales that directly affects Northbaze's business. The Mobility segment, in particular, was significantly impacted by this decline. Furthermore, some of Northbaze's existing partners may have revised their sales forecasts, leading to a decrease in sales to these partners. Aditionally, the company has encountered delays in the development of specific new concepts, surpassing the initially projected timelines.

Adiantes

Adiantes reached SEK19m in sales, representing a strong y/y growth of 25%. However, this figure fell slightly below our projected sales of SEK21m, resulting in a deviation of -10%.

Audio & Sound

Audio & Sound recorded sales of SEK4m, marking a 35% decline compared to the previous year's figure of SEK6m. However, this result aligned closely with our projected sales of SEK4m, resulting in a minor deviation of 2%. Management attributes the decline in sales to a strategic shift in focus within the business area. The segment is now primarily concentrated on securing long-term private-label contracts, which may have influenced sales performance during the period.

Mobility

The Mobility segment reported sales of SEK9m, reflecting a significant y/y decline of 37%. With a deviation of -48%, sales from this segment came in significantly below our estimated SEK18m. The notable decline in the Mobility segment can primarily be attributed to the decrease in demand for smartphones, which directly affects the market for smartphone accessories. However, management believes that this decline is temporary. Despite the contraction experienced by the Mobility segment during the quarter, Copter, a subsidiary within the business area, achieved modest growth of a few percent compared to last year.

The gross margin for the period was 48%, representing a decline of approximately 8 percentage points compared to the previous year. Although this development may be considered weak, it aligns with management's previous indication of expecting a normalized gross margin of around 50%. It is important to note that the gross margin is highly influenced by Northbaze's product mix.

Operating expenses (OPEX) decreased by 8% y/y and amounted to SEK17m, resulting in a negative EBITDA of -SEK1m and an EBITDA margin of -4% (compared to 6% in the previous year). he recent decrease in margins during this quarter represents a deviation from the otherwise positive trend observed in the company's financial performance. Prior to this quarter, Northbaze had consistently achieved positive margins over a span of six consecutive quarters leading up to Q1 2023.

The CEO of Northbaze, Henrik Andersson explains that the decline in margins is directly linked to the lower top line, indicating that the company's short- and long-term growth and profitability prospects remain unaffected by this quarterly result. Furthermore, in the 2022 annual report, Henrik stated that the overall operations of the group are expected to demonstrate increasing profitability throughout 2023, and to achieve and maintain a minimum operating margin of 10% by the end of the year. The CEO remains positive, and while he mentions that the weak result in the quarter will be recouped in the remaining quarters of 2023, it should be noted that the ongoing war in Ukraine and uncertainties surrounding inflation and interest rates are anticipated to continue exerting a negative impact on the group's results in the immediate term.

The company has decided to discontinue the practice of reporting the backlog in its quarterly reports. However, it is important to note that, as discussed in our Q4 2022 update, the correlation between sales and the order book figures has historically been weak. Over the past two years, quarterly sales have ranged from 110% to 330% of the reported order book value. This trend is once again observed in the current quarter, with sales amounting to 167% of the Q4 2022 order book figure. This highlights the fact that sales figures can deviate significantly from the reported order book values, reinforcing the limited predictive power of the order book in terms of sales performance.

In terms of Cash flows, the company experienced a burn rate of -SEK1.8m, and the total cash flow amounted to -SEK7.4m, leading to a cash position of approximately SEK12.3m at the end of the reporting period. However, it is worth noting that sales and earnings are typically weighted towards the latter part of the year. This pattern is primarily influenced by the company's product mix and the timing of new smartphone releases.

Moreover, we have previously had concerns regarding the additional purchase price that the company brought up in Q4. This concern has now been alleviated as the company recently announced that the total amount to be paid is SEK10m, significantly lower than SEK19.5m as it had previously accounted for. Consequently, this adjustment will have a positive impact of approximately SEK9.5m on EBIT in Q2 2023. In conjunction with this announcement, the company also disclosed that Copter achieved a total EBITDA of SEK7.85m in 2022, resulting in a margin of 24%.

During the first quarter, Northbaze placed a strong emphasis on fostering synergies among the business segments in its group. A key initiative in progress is the construction of an integrated distribution center at the Kumla factory, which will serve both Copter and the company brands. This project is scheduled to be completed during the summer, and it represents a strategic step towards enhancing operational efficiency and streamlining processes.

Northbaze remains committed to advancing its private label concept for its brands, as well as for Adiantes and Copter. Additionally, the sales department is focusing on acquiring new customers and securing long-term contracts. It is important to note that the CEO acknowledges the prevailing decline in the smartphone market. This recognition demonstrates the company's awareness of market dynamics and its readiness to navigate challenges in an evolving industry landscape.

During 2022, Adiantes has been dedicated to growth and expansion through product development and a focus on improving quality and delivery reliability. In 2023, the company plans to continue these efforts by implementing various improvement initiatives aimed at maintaining customer satisfaction.

In the first quarter, Audio & Sound underwent a restructuring of its business model, shifting its operations towards long-term customer contracts. Under this new approach, Northbaze designs and distributes its products under private label agreements, emphasizing the company's commitment to meeting the specific needs of its customers.

The Mobility segment experienced a slight slowdown in demand due to decreased sales of smartphones. Although deliveries in the first quarter did not meet expectations, Copter, within the Mobility segment, demonstrated positive growth compared to Q1 2022. Management remains optimistic about the future, expecting further positive effects from the segment in terms of logistics coordination and cost reduction.

In summary, the company's primary focus in the first quarter of 2023 has been on integrating its Swedish businesses to leverage synergies among them. CEO Henrik Andersson acknowledges the impact of decreased smartphone demand on the company's immediate growth and profitability prospects. However, he assures stakeholders that the company is well-prepared to adapt to evolving market conditions. Furthermore, Henrik highlights the improved efficiency resulting from the group's transformation efforts and mentions the signing of new customer agreements, with plans to communicate these collaborations to the market shortly.

Northbaze has set financial targets that include an annual growth rate of over 20%, an EBITDA of over 10%, and a solvency ratio exceeding 30%. Additionally, the group aims to increase the share of revenue within B2C and online by approximately 10% per year over the next three-year period. Furthermore, Northbaze aims to achieve a 10% EBITDA in 2023.

In light of the challenging market landscape, our previous update necessitated downward revisions to our sales projections. However, based on this report, we will further decrease our short-term sales estimates to align with the prevailing uncertainties in the macro environment.

We have revised our near-term sales growth forecast to reflect an overall decline in demand within the smartphone market. Nonetheless, we maintain our projected gross margin for 2023, albeit acknowledging that this metric is contingent upon the sales-mix. Furthermore, we anticipate a slightly reduced EBITDA margin due to lower expectations for the top line. We anticipate that the EBITDA margin will gradually expand as synergy effects between the business segments and the integration in the Kumla factory take effect. It is important to note that the margins will be highly influenced by the sales mix, particularly considering Copter's robust operating leverage.

Since the start of 2023, Northbaze's share price has witnessed a substantial decline and is currently trading below our bear case. However, we believe that the current market valuation does not accurately reflect the company's potential for various reasons.

Firstly, the company has demonstrated its ability to navigate and overcome several challenging situations and threats, such as a tougher smartphone market and inflation's impact on consumer behaviour. Moreover, the cancellation of a substantial SEK37m Russian order did not significantly affect operations, thanks to management's quick response to the development in Ukraine. At the same time, Northbaze has exhibited strong cost-control measures, which have enabled the company to tackle challenges while improving margins.

Secondly, Northbaze is actively streamlining its organization by near-shoring and utilizing resources to enhance synergies within the group. The current integration of logistics and operations into the Kumla factory is a prime example of this, expected to reduce overhead costs, improve customer offerings, and potentially lead to increased growth and margin expansion.

Lastly, Northbaze is currently trading at a discount compared to its peers, which we discuss further on the next page.

As of closing on 19 May 2023, Northbaze's market capitalization stood at SEK71m, resulting in an Enterprise Value (EV) of SEK86m. This corresponds to an EV/Sales multiple of 0.5x and an adjusted EV/EBITDA multiple of 7x for the year 2022.

Looking ahead to 2023, we project that sales will reach SEK169m, and EBITDA will amount to SEK17m. Based on these estimates, the EV/Sales multiple would remain at 0.5x, while the EV/EBITDA multiple would decrease to 4.9x.

The peer group is trading at a 2023 median EV/Sales multiple of 0.6x and an EV/EBITDA multiple of 6.8x. These valuation multiples suggest that Northbaze's shares are currently trading at a discount compared to the peer group, in particular when comparing the earnings multiple.

In addition to its financial targets, Northbaze aims to achieve a 10% EBITDA in 2023, which, when combined with its long-term growth target of 20%, implies an EV/EBITDA multiple of 4.1x and an EV/Sales multiple of 0.4x for the same year. When considering its financial targets, the comparison indicates that Northbaze's shares are trading at an even larger discount compared to the peer group.

However, it is important to consider that the peer-group multiples should be interpreted as a reflection of market sentiment rather than a direct comparison, as there may be variations in company size, business segments, offerings, target markets, and other factors among the peers. Nevertheless, the comparison suggests that Northbaze is currently trading at a discount.

We believe the primary catalysts for Northbaze’s share performance are announcements of significant customer contracts and margin expansion following the establishment of productivity and cost-saving measures currently being implemented.

We derive our fair value range from a fundamental DCF framework for three scenarios: base case (most likely), bear case (pessimistic), and bull case (optimistic), using a WACC of 13% for all scenarios. Our updated view of the company and current market conditions has led us to revise our base case. As a result, we are leaving our fair value range unchanged at SEK0.6–1.9, with our revised base case at SEK1.0 (1.1).