Netmore Group: Marching on
Research Update
2023-10-30
07:00
Redeye updates its estimates following Netmore’s Q3 report, where sales managed to beat our forecast, which seems to be largely driven by the roll-out of the Yorkshire water contract. Also, the number of installed sensors by the end of the quarter reached 259,000, showing 310% y/y growth, which lays the groundwork for Netmore’s future high-margin recurring revenue base.
ME
AF
Mattias Ehrenborg
Alexander Flening
Contents
Impressive sales growth
Netmore generated Q3 2023 net sales of SEK27.5m (SEK11.8m), relative to our estimate of SEK21.2m, resulting in an impressive y/y growth of 133% and 37% q/q. IoT Network Services presented SEK18.7m in sales relative to SEK2.9m in Q3 2023. The roll-out of the Yorkshire Water contract is the main driver of this development, which revenues are non-recurring and of low margin. This is, however, supportive of the long-term recurring revenue base of Netmore.
Sensors keep on growing
The sensor growth in Q3 2023 was impressive, growing 23% q/q to 259,029 sensors (310% y/y). We understand this is driven by smart measuring primarily within the water segment, which is expected to show solid growth due to EU-supported financing schemes in the coming years. We find these matters very positive, as they provide a path for Netmore’s high-margin recurring revenue base in the coming years.
Estimate revisions and valuation
We increase our estimated sales for the IoT segment, as the contract of Yorkshire will likely continue to drive revenues going forward. However, assessing how much we will see going forward is difficult from an outside perspective. The revenues are of relatively low margin but will drive the long-term growth of recurring revenues with a higher margin profile. We also reduce our Property revenues going forward as a cautionary measure, as the recurring revenues have not scaled as fast as we have previously expected. We now expect Netmore to generate a 34% sales CAGR in 2024e and a 13% sales CAGR during 2025e-2030e. All in all, our fair value range is updated to SEK0.6(0.8)-SEK4.5(4.8) per share, with a base case of SEK1.7(2.3) per share.
Key financials
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Revenues | 32.1 | 42.8 | 50.7 | 84.1 | 112.8 |
| Revenue Growth | 153% | 33.5% | 18.3% | 66.0% | 34.1% |
| EBITDA | -42.6 | -49.9 | -48.9 | -28.0 | -4.3 |
| EBIT | -57.3 | -67.1 | -65.5 | -41.4 | -18.7 |
| EBIT Margin | -179% | -157% | -129% | -49.2% | -16.6% |
| Net Income | -60.3 | -70.6 | -66.7 | -42.2 | -20.6 |
| EV/Revenue | 6.7 | 9.8 | 9.0 | 3.4 | 2.6 |
| EV/EBIT | -3.7 | -6.2 | -6.9 | -6.9 | -15.8 |
A solid quarter
Netmore generated Q3 2023 net sales of SEK27.5m (SEK11.8m), relative to our estimate of SEK21.2m, resulting in an impressive y/y growth of 133% and 37% q/q. The main driver behind the growth was IoT Network Services, which presented sales of SEK18.7m relative to SEK2.9m in Q3 2023. We note that the roll-out of the Yorkshire Water contract has generated significant revenue, which is the driver of this steep sales growth in the segment. We are, however, pleased to see this development and understand that the geographic split was spread across all regions where Netmore is present.
Recurring revenues amounted to SEK10.5m (SEK9.8m), representing 38% (83%) of sales in the quarter. This meant 20% y/y growth and 9% q/q growth. The main driver of this was Property Network Services, which generated recurring revenue of SEK7.9m relative to SEK7.2m last year, and IoT Network Services, which generated SEK2.1m relative to SEK1.1m last year. The decline of recurring revenue as a share of total sales was due to the Yorkshire Water contract.
The gross margin was 22% in Q3 2023 (47%), which was lower than our estimate of 35%. We believe this is due to the high degree of non-recurring revenues related to the Yorkshire Water contract within the IoT Network Services segment. The margin profile of these revenues is significantly lower than that of recurring revenues (we estimate a margin of around 10%-20%)
OPEX amounted to SEK-17.1m (SEK-17.3m), which was better than our estimate of SEK-18.5m.
All in all, EBITDA amounted to SEK-10.3m (SEK-11.2m) relative to our estimate of SEK-9.2m. The reason behind the deviation is the lower-than-expected gross profit.
Impressive sensor growth
Last quarter, In Q2 2023, Netmore showed very impressive sensor growth, which grew 85% q/q to 211,452 sensors. The growth in Q3 2023 was also impressive, growing 23% q/q to 259,029 sensors (310% y/y). We understand this is driven by smart measuring primarily within the water segment, which is expected to show solid growth due to EU-supported financing schemes in the coming years.
The total backlog, including framework agreements, now sits at 277,059 sensors, declining 9% q/q. These matters are very positive, as they provide a path for Netmore’s recurring revenue base in the coming years.
Cash position and potential earnout from M2M divestment
Netmore stated in its Q3 report, just as it did in Q2 2023, that the work continues to evaluate the liquidity needed to be able to take on the growth possibilities ahead. We find this fair as the free cash flow was SEK-13.1m in the quarter, and the cash position by the end of the quarter was SEK19.3m (SEK13.6m in cash and SEK5.8m in a revolving credit facility). We understand that this work is proceeding according to plan.
It is also worth highlighting that Netmore has the potential to receive an earnout in Q1 2024 and Q3 2024, following the divestment of M2M earlier in 2023. The earnout could be up to EUR2.6m, or SEK30m, which is dependent on how M2M’s EBITDA develops during 2023 and H1 2024. We currently estimate earnouts corresponding to SEK10m in Q1 2024 and SEK20m in Q3 2024 – but it is difficult from our point of view to assess how likely it is that M2M will manage to fully reach its milestones and how much of the earnout will ultimately be received. Nonetheless, the earnouts could come in handy given Netmore’s current cash position and burn rate.
Financial estimates and valuation
We increase our estimated sales for the IoT segment, as the contract of Yorkshire will likely continue to drive revenues going forward. However, assessing how much we will see going forward is difficult. The revenues are of relatively low margin but will drive the long-term growth of recurring revenues with a higher margin profile.
We also reduce our Property revenues going forward as a cautionary measure, as the recurring revenues have not scaled as fast as we have previously expected. We expect a 34% sales CAGR in 2024e and a 13% sales CAGR during 2025e-2030e.
All in all, our fair value range is updated to SEK0.6(0.8)-SEK4.5(4.8) per share, with a base case of SEK1.7(2.3) per share.
Investment thesis
Case
Scalable business model
Evidence
Joint venture with Polar Structure enables rapid IoT expansion
Challenge
Increased competition
Challenge
Execution
Valuation
Wide valuation range
Quality Rating
People: 3
The CEO has worked in the telecom industry for a long time (more than ten years) and holds more than one percent of the share capital in Netmore. Additionally, management appears to have relevant sector experience. The company has made a couple of acquisitions that we believe have strengthened the core business. Also, Netmore's controlling owner, Buildroid, will likely provide consistency in future capital allocation. However, the rating is held back by some staff turnover at the senior management level and historical underperformance on growth targets. Also, higher transparency into long-term incentive plans (employee stock options) could boost the rating further.
Business: 4
Netmore operates an attractive business model with mostly recurring revenue. Moreover, we appreciate the strategic alliances to help drive sales, particularly with Polar Structure and some of the property stakeholders. Generally, we anticipate long product cycles, resulting in high switching costs – an essential moat, in our opinion. Netmore has limited competition at this time, and we see good scope for it to maintain the first-mover advantage. However, there is some uncertainty concerning the long-term industry profitability and pricing power. Successful execution of its commercial rollout would boost the rating further.
Financials: 2
Netmore has a negative cash flow track record and will likely remain unprofitable for some years as it invests significant resources in sales growth. The rating's retrospective nature limits the company from achieving a higher score. However, we have a positive take on the much-improved financial position, following the company's several capital raises during 2021.
Financials
| Income statement | |||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Revenues | 32.1 | 42.8 | 50.7 | 84.1 | 112.8 |
| Cost of Revenue | 25.2 | 28.9 | 28.0 | 61.7 | 73.7 |
| Operating Expenses | 64.4 | 75.1 | 78.7 | 73.8 | 80.1 |
| EBITDA | -42.6 | -49.9 | -48.9 | -28.0 | -4.3 |
| Depreciation | 3.6 | 0.00 | 0.00 | 0.00 | 0.00 |
| Amortizations | 11.1 | 17.2 | 16.6 | 13.4 | 14.5 |
| EBIT | -57.3 | -67.1 | -65.5 | -41.4 | -18.7 |
| Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Interest Expenses | 3.7 | 2.6 | 1.8 | 1.8 | 1.8 |
| Net Financial Items | -3.7 | -2.6 | -1.5 | -0.86 | -1.8 |
| EBT | -61.0 | -70.5 | -67.2 | -42.2 | -20.6 |
| Income Tax Expenses | -0.72 | 0.14 | -0.49 | 0.00 | 0.00 |
| Net Income | -60.3 | -70.6 | -66.7 | -42.2 | -20.6 |
| Balance sheet | |||||
| Assets | |||||
| Non-current assets | |||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Property, Plant and Equipment (Net) | 5.1 | 9.1 | 6.5 | 6.5 | 6.5 |
| Goodwill | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Intangible Assets | 50.7 | 46.3 | 30.2 | 21.8 | 12.8 |
| Right-of-Use Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Non-Current Assets | 0.09 | 0.05 | 4.0 | 4.0 | 4.0 |
| Total Non-Current Assets | 55.9 | 55.5 | 40.7 | 32.3 | 23.3 |
| Current assets | |||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Inventories | 2.5 | 2.5 | 1.5 | 2.5 | 3.3 |
| Accounts Receivable | 4.9 | 7.6 | 6.1 | 12.6 | 16.9 |
| Other Current Assets | 7.4 | 5.8 | 11.0 | 16.8 | 22.6 |
| Cash Equivalents | 25.0 | 98.8 | 41.3 | 5.7 | 5.3 |
| Total Current Assets | 39.7 | 114.7 | 59.8 | 37.7 | 48.1 |
| Total Assets | 95.6 | 170.2 | 100.5 | 69.9 | 71.4 |
| Equity and Liabilities | |||||
| Equity | |||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Non Controlling Interest | 0.00 | 0.80 | 0.07 | 0.07 | 0.07 |
| Shareholder's Equity | 28.4 | 135.4 | 67.2 | 25.0 | 4.4 |
| Non-current liabilities | |||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Long Term Debt | 41.3 | 4.8 | 4.0 | 4.0 | 4.0 |
| Long Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Long Term Liabilities | 0.00 | 0.80 | 0.00 | 0.00 | 0.00 |
| Total Non-Current Liabilities | 41.3 | 5.6 | 4.0 | 4.0 | 4.0 |
| Current liabilities | |||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Short Term Debt | 0.00 | 0.00 | 0.00 | 5.0 | 15.0 |
| Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Payable | 13.2 | 12.0 | 10.0 | 14.3 | 24.8 |
| Other Current Liabilities | 6.1 | 16.3 | 18.6 | 21.0 | 22.6 |
| Total Current Liabilities | 25.8 | 28.3 | 28.6 | 40.3 | 62.4 |
| Total Liabilities and Equity | 95.5 | 170.1 | 99.9 | 69.4 | 70.9 |
| Cash flow | |||||
| SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
| Operating Cash Flow | -42.4 | -50.4 | -53.2 | -54.7 | -4.9 |
| Investing Cash Flow | -33.5 | -17.3 | -3.2 | 14.1 | -5.6 |
| Financing Cash Flow | 73.5 | 141.3 | -1.1 | 5.0 | 10.0 |
Rating definitions
The team
Disclosures and disclaimers
Contents