Q1 2023: Financial Review

In Q1 2023, Ngenic achieved exceptional performance, marked by remarkable sales growth and significant margin expansion. Although the report does not disclose the specific details of the order book for the quarter, management has confirmed a positive order intake and expressed confidence in the sustained demand for their products and services. In this update, we will comment on Ngenic's quarterly financials, provide a market overview, and examine Ngenic’s strategy to further accelerate growth. Finally, we will present our updated financial forecast and valuation.

Since Ngenic had already disclosed preliminary sales figures for the quarter, there were no significant surprises in terms of top-line. Consequently, Ngenic's reported net sales of SEK14.1 million (SEK5.9m) align precisely with our projected figures, indicating a noteworthy 139% y/y and 69% q/q growth. Moreover, sales to the single-family house side demonstrated a 135% y/y growth compared to 102% in Q4 2022.

The robust growth in the quarter can largely be attributed to Ngenic's ongoing emphasis on expediting deliveries to customers. This strategic priority is demonstrated in the sales breakdown, whereby hardware sales constitute 80% of the overall sales, signifying a notable increase of approximately 22 percentage points compared to the preceding quarter (68%). Furthermore, the company indicates minimal churn, with a simultaneous growth of 15% in Subscription revenues.

The gross profit amounted to SEK8.4m, yielding a gross margin of 61% (74%). This was 7% lower than our previously estimated figure. We believe that the considerable sequential margin improvement of c12 percentage points can be attributed primarily to the company's strategic stockpiling of components during Q4 2022. Additionally, we anticipate that the gross margin will continue to improve with the expansion of subscription revenues.

OPEX decreased from SEK14.3m to SEK11.2m, with the largest attribution being from lower personnel expenses and other external expenses. EBITDA stood at -SEK0.7m, resulting in an EBITDA margin of -5%. This was a much better outcome than our estimated EBITDA of -SEK2m. Furthermore, this figure represents a significant improvement compared to the previous year's performance (EBITDA -SEK3.8m and EBITDA margin of -61%). The stellar margin expansion can be attributed to the quarter’s substantial revenue growth, as well as the company's proactive measures to enhance its delivery capacity in the preceding quarter.

During the quarter, Ngenic experienced a burn rate of -SEK2m, and the cash flow from operating activities totalled -SEK8.2m.. Cash flow from investing activities amounted to -SEK3.5m, while cash flow from financing reached SEK2.2m. Consequently, by the end of the reporting period, Ngenic had approximately SEK1.3m on its balance sheet. In addition to its cash reserves, Ngenic has secured an expansion loan of SEK5m and maintains a credit line of SEK4.5m, with SEK2.6m remaining untapped. With the inclusion of the convertible loan of SEK10.2m, we estimate that Ngenic's available funds will total approximately SEK19.1m.

Ngenic's technology offers benefits to consumers, energy producers, and grid operators alike. By optimizing energy usage, Ngenic's system has the potential to reduce overall energy demand, thus helping to balance the energy grid. This is particularly important during periods of high energy usage when the strain on the grid is a concern. The advantages of Ngenic's solutions include lower energy costs for consumers and energy companies, improved stability and reliability of energy supply, and a more efficient and sustainable energy system overall.

In the first quarter of 2023, the average cost of 1 kWh on the Swedish electricity market was SEK0.8kr, demonstrating a notable decrease from the previous quarter's rate of SEK1.4kr and aligning more closely with the figure of SEK0.7kr recorded in Q1 2022. However, substantial price disparities persist among Sweden's four electricity regions, with the most significant contrast observed between SE1 (North of Sweden) at SEK0.6kr per kWh and SE4 (South of Sweden) at SEK1.0kr per kWh, representing a substantial difference of approximately 67%. Furthermore, there remains a high degree of price volatility throughout the day, with daytime rates being considerably higher than nightly rates.

Despite the decrease in energy prices since winter, Ngenic maintains a strong demand for its products and services, with no indications of a slowdown in order intake. While the company's accelerated growth is primarily attributed to hardware sales, Ngenic aims to position itself as an aggregator and offer its energy flexibility solutions to energy companies. Ngenic's hardware offerings, such as smart thermostats and meters, enable the collection of energy consumption data. By deploying these devices, energy companies can better manage energy demand during peak loads, reducing strain on the grid and the need for costly generator activation, which also has a negative environmental impact.

On 26th April, the Swedish parliament approved the government's proposal for implementing the EU energy directive into Swedish legislation, specifically regarding electricity supply and aggregation services, the proposition involves regulations on aggregation services, to enable electricity users to adjust their consumption based on different market signals. Companies providing aggregation services will be allowed to offer these services if someone has taken on a balancing responsibility specifically related to the imbalances that the services may cause.

We find this development promising and is a step in the right direction. However, there remain uncertainties that could potentially affect Ngenic's business, particularly concerning the compensation mechanism for economic losses resulting from imbalances. EU legislation stipulates that all market participants should bear economic responsibility for the imbalances they create. It appears that the Swedish definition includes potential imbalances created by companies offering flexibility services.

However, following discussions with Ngenic's CEO, Björn Berg, we have learned that Ngenic's current operations are largely unaffected by this. Nonetheless, the future trajectory of rules and regulations, notably the compensation mechanism, may engender the imperative for Ngenic to make certain adaptations to their business model, thus harmonizing it with forthcoming market dynamics.

The energy market is intricate, and rules and regulations surrounding it can impact Ngenic's business.  However, it is worth noting that Ngenic's flexibility solution has demonstrated its effectiveness across a range of use cases, delivering benefits to both consumers and energy companies. Moreover, the company has experienced impressive growth, with its momentum continuing to gather pace. Each new installation and the accumulation of additional data enable Ngenic to continually refine its algorithms and enhance its flexibility offering. We believe these advancements position the company favourably to become a key player in the emerging market for flexibility services.

In Ngenic's Year-end report, management stated that the company has the means to finance its operations throughout 2023 without external financing. However, this was based on the existing budget and planned operations at that time. In the Q1 2023 report, management reported a growing order intake and indicated that its partners were preparing for winter, suggesting growth in the B2B segment. In light of these positive developments in 2023 thus far, Ngenic made a strategic decision to increase its capacity and accelerate deliveries to its customers. To support this scale-up, a liquidity boost was deemed necessary, as reflected in the company's financial position at the end of Q1 2023.

To address this, Ngenic obtained a SEK5m loan and decided to issue a convertible loan of SEK10.2m. The added funds are aimed at optimizing procurement processes and expediting the pace of deliveries. The terms of the convertible loan specify that the holder can convert the entire or parts of the loan, along with accrued interest, into new shares from 15 October 2024 to 31 October 2024. The conversion price will be set at 85% of the volume-weighted average price (VWAP) of the company's shares during the period from 1 October to 14 October 2024, with a floor of SEK14 and a cap of SEK25. The convertible loan carries a fixed annual interest rate of 10%. If the entire loan, including interest, is converted into shares, existing shareholders may experience a dilution ranging from 6% to 11%, contingent upon the conversion price.

We consider the terms of the convertible loan to be fair. While there is a possibility of dilution for existing shareholders, it is important to note that the company has strengthened its financial position. The increased liquidity enables Ngenic to seize emerging opportunities and accelerate deliveries. The company acknowledges the ongoing challenge with certain components but reports improvements and is strengthening its organization to optimize procurement. This function plays a vital role in acquiring the necessary resources at the right time and volume to operate efficiently, ultimately reducing capital tie-up, and accelerating sales, thereby improving liquidity.

We believe that the raised funds position Ngenic favourably to seize emerging opportunities and leverage its potential for accelerated delivery processes. By capitalizing on these opportunities, Ngenic is well-positioned to meet the growing demand for its products and services, resulting in increased sales and improved profitability.

Based on this report, we have adjusted our sales estimates upwards. We believe that Ngenic’s improved financial position enables it to capitalize on emerging opportunities and accelerate its sales efforts. The increasing order intake and heightened interest from partners further indicate a continuous positive trend in sales growth.

Moreover, the improved profitability is a result of the increased top-line revenue, while keeping operating expenses (OPEX) at a lower level. This indicates efficient cost management and highlights the potential for improved profitability going forward.

As a result of this report, we have adjusted our forecast as presented below:

Following the issuance of the convertible loan, we have made necessary adjustments to account for the potential impact on Ngenic's total number of shares (diluted) and net debt. In addition, we have revised our estimates to reflect the positive development in sales and profitability. These adjustments are based on our assessment of Ngenic's performance and the anticipated impact of the added funds on its future growth potential While our updated forecast has a positive impact on our valuation for Ngenic, we account for a future potential dilution, which would reduce the fair value per share.

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% across all scenarios. Our updated fair value range is SEK13–50, and our base case is SEK25 (SEK26). The fair value range is wide, owing to the unpredictable nature of Ngenic’s long-term growth and profitability.