Ngenic Q2 2023: Financial Review

During Q2 2023, Ngenic achieved solid sales figures, reflected by a substantial y/y growth of 145%. It is evident that their endeavours to reduce the cost of production and shorten production time to accelerate customer deliveries have yielded positive outcomes. This initiative persisted throughout the quarter, and CEO Björn Berg indicates that the beneficial impacts of the cost reduction measures will become more noticeable in the upcoming quarters. He also points out that customer agreements influence the timing of recurring revenues, wihch showed an 11% increase y/y.

Additionally, Ngenic expanded its partnership with Rexel, enabling the company to provide property owners with a comprehensive energy service encompassing heating, solar panels, and electric vehicle charging. This collaboration is not only generating revenue but also broadening Ngenic’s market presence.

Thanks to a combination of decreased demand from other industries and the diligent efforts of its established procurement team, Ngenic has observed an improvement in component availability. While the company acknowledges the persistence of uncertainties and bottlenecks, the situation notably improved during the quarter. This further suggests that the company can maintain its growth trajectory.

Ngenic has additionally unveiled plans to expand its presence in Europe by expanding its product line designed for consumers to manage air-to-air heat pumps. The enhanced product line, Air Patrol, employs local electricity pricing to aid customers in regulating and optimising their energy consumption, allowing them to shift their usage to times when energy prices are lower. This strategic initiative is intended to broaden Ngenic’s operational reach and is a step toward introducing a complete range of products to the European market.

In the second quarter of 2023, Ngenic achieved net revenues of SEK13.2m, reflecting a solid y/y growth of 145% while experiencing a sequential decrease of 7%. Our initial sales projection was SEK15.0m, resulting in a deviation of 12% from the reported figures. Moreover, sales to the single-family house side displayed a 48% y/y growth, notably lower than the substantial 135% y/y growth reported in the previous quarter.

The y/y expansion this quarter can largely be attributed to demand for hardware products in conjunction with Ngenic’s consistent focus on scaling production and accelerating customer shipments. This strategic objective is reflected in the sales breakdown, with hardware sales constituting 81% of the overall sales. This signifies a significant increase of approximately 16 percentage points compared to the previous year’s figure of 65%.

The revenue distribution is skewed, with hardware contributing SEK10.7m it accounts for the majority of sales , while the other two segments collectively account for SEK2.5m. Therefore, analysing the individual segments over time provides a more insightful perspective

When considering a y/y comparison, the revenue generated from products demonstrates a significant growth of 205%, although it experienced a sequential decline of 5%. While the absolute figures for Subscription Services are relatively modest, amounting to SEK1.4m, the percentage growth is more noteworthy, with an estimated y/y increase of 12% and a sequential decline of 7%. This trend also holds true for the Service & Project segment, which generated revenues of SEK1.1m. Viewed on a y/y basis, it displays substantial growth of 78% but experienced a quarterly contraction of about -17%.

The Cost of Goods Sold (COGS) totalled SEK6.3m, resulting in a gross profit of SEK7.2m and a corresponding gross margin of 54% (compared to 73% in the same period last year). This figure fell short from our projected 62% by eight percentage points. The deviation can be attributed to Ngenic’s historical gross margin exhibiting irregularity between quarters. However, considering a normalised perspective, the gross margin was approximately 61% for the trailing twelve-month (TTM) period. The company highlight that foreign exchange (FX) effects have introduced a minor adverse impact on domestic sales, contributing to a two-percentage-point decrease compared to the previous year.

Operating expenses (OPEX) experienced a 12% sequential increase, rising from SEK12.6m to SEK14.1m. Furthermore, there was a significant 24% rise compared to the previous year, primarily driven by higher personnel costs. This increase can be attributed to Ngenic’s ongoing efforts to decrease production costs and expedite customer deliveries.

The EBITDA stood at -SEK4.1m, resulting in an EBITDA margin of -31%. This represents a significant improvement compared to the performance in Q2 2022 (EBITDA -SEK5.1m and EBITDA margin of -85%). Nevertheless, this outcome fell short of our expectations (EBITDA of -SEK1.1m and an EBITDA margin of -7%), mainly due to lower revenue generation coupled with a one-time expense of SEK 1.1m and higher personnel costs than initially projected.

A significant highlight from the report is Ngenic’s remarkable achievement in expanding its delivery capacity, which has increased by a factor of 3 - 5 compared to one year ago. This is a strong indicator of the company’s continued strong sales performance. This advancement is demonstrated on the company’s website, where customers can now expect their NGENIC TUNE orders to be fulfilled within a month, a significant improvement from the five-month delivery period experienced during the winter season 2022/2023. Naturally, the expedited delivery timeline remains subject to various factors, including fluctuations in customer demand.

In the second quarter of 2023, the average cost of 1 kilowatt-hour (kWh) on the Swedish electricity market was SEK0.6, demonstrating a decrease from the previous quarter’s average of SEK0.8 and a more notable decrease with the figure of SEK0.9 recorded in Q2 2022. However, substantial price disparities persist among Sweden’s four electricity regions, with the most significant contrast observed between SE1 (North of Sweden) at SEK0.5kr per kWh and SE4 (South of Sweden) at SEK0.8 per kWh, representing a substantial difference of approximately 72%. Furthermore, there remains a high degree of price volatility throughout the day, with daytime rates considerably higher than nightly rates, and according to Ngenic’s CEO Björn Berg, this has continued during the summer with price variations of up to 20 times a day.  

The electricity rates in Sweden’s four distinct electricity regions are established through the Nordic electricity exchange Nord Pool. These rates hinge on the expense of generating the final (kWh) required to fulfil the demand. This cost for producing the last kWh establishes the foundation for the hourly spot price. Initially, electricity producers prioritise the most economical production methods, such as wind power, hydropower, nuclear power, and combined heat and power. Should demand escalate, producers resort to more costly production methods, in the worst case, fossil fuel electricity generation.

Sweden is currently navigating the possibility of ongoing fluctuations in energy prices, a situation influenced by various factors such as supply-demand disparities, weather patterns, fuel costs, and grid capacity limitations. A strategic approach to lower strain on the grid involves implementing aggregation services. This entails consolidating numerous electricity consumers under a service provider such as Ngenic. The objective here is to alleviate strain on the grid by controlling consumption during periods of high demand.

Through active participation, consumers can trim their electricity expenses by shifting a portion of their energy usage to periods when electricity prices are low. This positively impacts the strain on the energy grid and can cut production with thin profit margins, a scenario often reliant on fossil fuels. This approach can benefit consumers and energy companies while positively impacting the environment.

In the second quarter of 2023, Ngenic achieved a total operating cash flow of -SEK9.2m. The cash flow from financing activities amounted to SE14.5m, primarily attributed to securing funds through a SEK5m expansion loan and issuing a convertible loan of SEK10.2m. Cash flow from investing activities amounted to -SEK3.1m. As a result, total cash flow amounted to SEK2.2m, resulting in a cash position of SEK3.5m. When accounting for its credit line of SEK4.5m, Ngenic’s total available funds amounted to SEK8m at the beginning of Q3 2023.

Ngenic’s continuous emphasis on expanding production and delivery capacity is reflected in its high cash burn, which amounted to -SEK12m during the quarter. This trend is further evident in the increasing burn rate for the trailing twelve-month (TTM) period, with a quarterly average cash burn of approximately -SEK9m. Although the report indicates forthcoming positive impacts from cost reduction measures, we expect a continued high cash burn, albeit on a declining trajectory. Thus, considering Ngenic’s current cash position, it’s likely that the company will require external funding to sustain its operations and growth trajectory.

Based on this report, we expect continued robust growth, supported by the positive order intake and Ngenic’s focus on expediting customer deliveries. The increased attention from partners also suggests a sustained positive trajectory in sales growth. As a result, we are making only slight revisions to our sales forecast. Additionally, we are slightly lowering the EBIT projection by a few percentage points, to reflect our expectation of higher OPEX than previously estimated, albeit at a decreasing rate. Our updated forecast is presented below:

After reviewing Ngenic’s Q2 2023 report and considering the current state of the company’s cash reserves, external funding is likely necessary to support its ongoing operations and growth trajectory. Furthermore, based on insights from the report, we have made minor adjustments to our forecast projections. As a result, our updated view of the company gives rise to a new fair value range.

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 SEK10 – 41, and our base case is SEK19 (SEK25). The fair value range is wide, owing to the unpredictable nature of Ngenic’s long-term growth and profitability.