Net Sales came in at SEK8.1m, 151% y/y, well ahead of our estimated SEK4.2m (deviation 93%). Sales were mainly related to sensors for integration, but instruments also contributed to the strong results. The main markets driving sales are Europe, Japan, and China. EBITDA came in at SEK0.4m, corresponding to an EBITDA margin of 4% (EBITDA SEK-1.6m, EBITDA margin -50% last year). Thus, well ahead of our estimate of SEK-1.8m. The main reason for the deviation is higher net sales and stronger gross profit than our estimate. OPEX is 21% higher than expected, likely related to the significant increase in sales. Gasporox has now had four consecutive EBITDA-positive quarters, indicating it is moving closer to sustained profitability.

We were cautious going into Q2’23 as we expected most of Gasporox’s order book slated for delivery in H1’23 to be the main factor of the solid performance in Q1’23. There appear to be signs that more orders than expected were delivered in Q2 rather than Q1 from this order book, as Q2 sales seem to be more driver by sensor modules while Q1 was strong across product categories. While we remain unsure what quarter was the most driven by the order book, we conclude that H1’23 net sales surpassed the order book by SEK10.4m (H1’23 net sales SEK18.9m vs. press released order book of SEK8.5m. Note that Gasprox only press releases orders above 10% of the previous year’s net sales.) Moreover, H1’23 net sales showed a 23% increase over H2’22. The results indicate a diminishing quarterly seasonality, and Gasporox’s customer base is widening. However, we also note that speaking to the CEO, there appears to have been some pent-up demand from certain customers for 2023, positively affecting the results.

During Redeye’s growth day, Gasporox was candid that its US expansion had gone slower than expected. This prompted us to conduct further research on the market. We conducted channel checks strictly focusing on pharmaceutical applications, and the food potential is out of scope in this context. While we discussed VialArch, the main focus was on the GPX1500 product line. Our high-level takeaways are that Gasporox’s technology is superior to the competition but is seen as a substitute for existing solutions. Consequently, customers hesitate to switch equipment unless they replace old equipment, resulting in a slow rollout. While not a focus in our discussions, we found that Gasporox’s solutions are considered high-end in the food segment, and customers are much more price sensitive than pharma customers.

Lighthouse Instruments is the clear leader in the US market for at-line equipment. Our conversations indicate that Lighthouse sells about 100 instruments annually at cUSD100k. As we have written in a previous update, according to FMI, the US market for at-line equipment was cUSD26m (cSEK270m) in 2021. Assuming this is correct, Lighthouse Instruments would have a c40% market share in the US. While Bonfigioli and Wilco are present, their offerings are considerably weaker in the US, according to our channel checks.

Customers recognize that Gasporox offers better accuracy, is more intuitive, requires less maintenance, and comes at a better price. However, our conversations pointed to most potential customers already having an instrument (primarily from Lighthouse Instruments) that does the job. Thus, customers view Gasporox as a substitute and hesitate to switch unless they replace old equipment. Therefore, we expect a slow rollout of Gasporox’s products in the US market. Gasporox must educate the market on its product offering, build distribution, and find customers replacing their equipment. However, one conversation pointed to customers either having non-destructive instruments that they were severely dissatisfied with from Lighthouse Instruments or using destructive tests they had a strong desire to switch from. We believe Gasporox has managed to sell about 1-2 instruments so far versus Lighthouse instruments c100 instruments annually.

Contrary to our previous understanding, most customers already appear to have non-destructive headspace analysis instruments. This indicates that the transition from destructive to non-destructive testing is much further ahead than expected, and equipment sales will follow a replacement cycle. This helps explain why there seems to be an upper limit to Gasporox growth in the 30%-45% range annually (although our estimates imply 68% net sales y/y for 2023e.) While customers found Gasporox’s instruments superior to the competition, they were even more impressed by the VialArch module for in-line testing.

Price is not a differentiating factor for pharmaceutical customers. However, Gasporox is about 1/3 as expensive as Lighthouse Instruments at USD30k-40k vs. cUSD100k for Lighthouse Instruments. The price difference is also consistent with what we have heard in other markets. While we have found some customer segments, mainly CMOs and contract labs, to be price sensitive within pharma, most conversations point to price generally not being the principal purchase factor. However, purchasing departments will always try to push prices down. Consequently, we believe Gasporox has latent pricing power and suggest the company should match its price with Lighthouse Instruments and drive sales through product rather than price differentiation. This would have several benefits. First, the price increases would fall straight to the bottom line. Second, agents selling on a commission are more incentivized to sell Gasporox products as the absolute commission fee would be higher. One partner we talked to believes Gasporox could sell at a premium to Lighthouse Instruments but are cautious due to the partner’s limited experience with Gasporox so far. Yet, we note that Gasporox is trying to penetrate more of the production market while Lighthouse Instruments specifically focuses more on the labs, which could skew the price picture.

We estimate the US market sells 250-300 units annually. At Gasporox’s current price point, we find its market potential for the pharma industry in the US for instruments to be SEK7.5m-12.0m annually. However, as we have argued previously, we believe the market will expand as it moves from at-line solutions to in-line solutions. This is because the at-line equipment can serve many different lines while the in-line solution can only service the relevant production line. If we assume one at-line instrument can do 2-6 lines, solely moving to in-line would increase the market by 2-6 times. As we mentioned previously, Gasporox’s technology for in-line testing, VialArch, was perceived as even further ahead of the competition than its at-line solutions.

Paradoxically, we believe Lighthouse Instruments’ strong US position is positive for Gasporox. This is because it is evidence of high switching costs. Thus, we have increased confidence that Gasporox will maintain its market share in its established markets. Our channel checks indicate that convincing a manufacturer to switch equipment is challenging if it already has a fully vetted and FDA-approved production with manufacturing up and running. It would be costly to close down the line to trial a different supplier and take time to approve the new system. However, it is not impossible if the product is compelling. So far, we have only found people that speak highly of Gasporox’s product portfolio. However, further checks are needed on partners mainly dealing with Lighthouse Instruments or Lighthouse Instruments themselves, but so far, we have been unsuccessful in reaching them.

Finally, our conversations confirmed that the pharmaceutical industry is stable and relatively immune to economic fluctuations compared to other sectors, and no discussion pointed to a slowdown. One person even said the market was growing the fastest they had ever seen. Consequently, we believe Gasporox can maintain a solid growth rate.

In summary, our US expedition confirmed that Gasporox is a technology leader. However, we expect the US expansion to be slow. The market size of the instruments also highlights that the market adopting Gasporox’s in-line equipment is the most crucial factor in our investment thesis.

In the European market, we have found that Gasporox has managed to gain a foothold in two large French corporations, which hold good potential for future sales and will be good reference customers as Gasporox grows in the market.

While the report was strong, and we view Gasporox favorably, we are cautious as not to extrapolate a few strong quarters. Our H2’23 net sales estimates imply a slight increase from H1’23 results, with H2’23e totaling SEK18.9m vs. SEK17.3m in H1’23. We have not changed our 2024 estimate on an absolute basis, which implies a 25% growth rate rather than 40% as our previous estimate. We believe 2024 will be a hard comparison year, particularly H1’24e, given the strong H1’23, partly driven by pent-up customer demand. Our NTM quarterly estimates are set out below.

Gasporox’s gross profit to asset ratio continued to advance and reached 60% Q2’23 TTM. These figures suggest that Gasporox operates an asset-light business model, with the potential for high returns on capital once profitability is attained. We expect to see proof of this soon as the company hovers close to profitability on a TTM basis.

Compared to Gasporox’s historical EV/S LTM (a more extended data series available LTM) valuation, the current valuation is well below the 5-year median at 4.8x vs. the median of 6.7x. However, its current EV/EBITDA NTM is much closer to its 2-year average at 13.3x vs the median of 13.8x.

Compared to peers, Gasporox trades at a discount on EV/S 2023e-2025e between 36%-41%. On an EV/EBITDA basis, the company is trading at a premium for 2023e-2024e of 49% and 25%, respectively, and a 3% discount on 2025e. Our base case implies a 10% premium on EV/S 2025 and a slight premium on NTM EV/S compared to the 5-year median.

We have made minor adjustments to Redeye’s rating resulting in one point increase in people score 4 (3) and a one-point decrease in financial score 2 (3). We expect the financial score to increase in the future as the score hinges on one question relating to quarterly acceleration in EPS. Due to Gasporox’s quarterly volatility, the current quarter resulted in an EPS deceleration for the company. The net effect is zero on our discount rate.

We reiterate our fair value range of SEK12-45 per share with a base case of SEK25. We expect a continued strong performance to be the main driver of the share.