Tessin’s Q3 report came in somewhat lower than our estimates in terms of sales and profitability. Net Sales amounted to SEK11.2m, a y/y decline of 22%. This is somewhat lower than our expectations of SEK11.9m. Looking at the profitability, Tessin’s EBITDA landed on SEK0.5m and EBIT on SEK-0.8m, which is slightly below our estimates of SEK0.8m respective SEK-0.6m. The deviation was primarily due to lower sales where Opex came in below our expectations.

The value of brokered loans amounted to SEK133m, a 64% decrease compared to Q3 2022 and significantly lower than our expectations of SEK220m. The decline in brokered loans was once again offset somewhat by price increases, resulting in a relatively modest 22% decrease in Tessin's overall sales. This is visible in the arrangement fee, which amounted to 7.8% of the value of brokered loans, up from 3.7% in Q3 2022 and 4.8% in Q2 2023. The price increases demonstrate Tessin’s value proposition in this tougher macro environment, where the demand from property developers is still high. Regarding the sales mix, Arrangement fees amounted to SEK10.2m compared to our estimate of SEK11m, and rental income amounted to SEK1m, in line with our estimation of SEK0.9m.

Despite a significantly lower loan volume than expected, Tessin delivered a relatively solid quarter due to good cost control and price increases. Once again, the management is clear that the funding side limits the growth while the demand from developers is still high due to more restricted banks. Hence, securing a larger institutional player continues to be vital to accelerate growth from these levels. Although this is the second quarter in a row with positive EBITDA, the cash flow is still negative, and the company intends to secure more capital before the company reaches positive cash flow. Given, Tessin’s slim organization, we think the company is in a good position to grow profitable when the capital market rebounds.

The arrangement fee landed at 7.8% (arrangement fee / brokered loans) during the quarter. The higher arrangement fee demonstrates that Tessin has managed to increase its prices which in turn means that the loan demand is still high despite the uncertain macro environment.

Tessin has successfully reached brokered loans worth SEK5.3bn since its inception in the quarter and is still adding new projects to its platform in a challenging market. However, we can see that Tessin has adjusted interest rates on new projects. According to the company, this has resulted in slightly longer fill rates, which may also have negative impact on sales. Brokered loans past twelve months stand at SEK890m, which is quite solid in this challenging economic environment.

Alongside the Q3 report, the company announced its plans to secure additional capital, with the board of directors set to present a financing plan in the current quarter, Q4. As we have mentioned in our earlier research updates, we think the poor share price performance has been due to concerns about the company's financial situation and its need for further capital injections. Despite an extended period of weak investor risk appetite and the need for additional capital before its resurgence, we think interest rates are about to peak. Consequently, we expect the return of risk appetite in 2024 and a subsequent increase in capital flow to Tessin's platform, supporting revenue growth. In such a scenario, the company should have a positive cash flow in H2 2024, relying on a relatively minor capital injection. Therefore, we estimate a maximum capital injection of SEK10m.

Tessin's loan brokerage relies on effectively connecting investors with property developers. Prior to the economic downturn and the subsequent rise in interest rates, we anticipated that limited demand from developers would constrain growth, given the absence of new projects. However, Tessin's focus on smaller developers has revealed a continued high demand for funding. With traditional banks tightening their lending criteria in the current climate, Tessin remains well-positioned to provide critical funding support.

Instead, capital constraints are currently dampening growth. However, we view this limitation as preferable compared to restrictions from developers, considering the potential for a faster resurgence in risk appetite among investors. Moreover, the prospect of securing institutional players, as demonstrated by the partnership with LCM Partners in Q2 2022, holds promise for rapid deployment of capital. This was evident last year, with Tessin achieving record loan volumes in Q2-Q4 2022. With Tessin's implemented price adjustments and streamlined operations, an increase in loan volume would significantly boost the bottom line.

Following the Q3 report, we have adjusted our sales estimates for 2023e-2025e, lowering them by approximately 11-4% due to a decrease in loan volumes. Although we are taking down our loan volume estimates quite significantly, we calculate with a higher arrangement fee, mitigating some of the impact of the decreased volume. Our estimates indicate a cautious outlook for Q4 2023e and H1 2024e, followed by a gradual recovery in H2 2024e. As a result, we anticipate a total loan volume of SEK670m in 2024e, slightly lower than our estimate of SEK676m for 2023e. However, with the higher fee, we still expect a solid growth of 22% in 2024e. While growth of 22% may seem aggressive, it represents a comparatively modest 6% increase from 2022. We have also made some cost adjustments for 2023e-2025e, lowering them by 3-9% 2023e-2024e and 4% 2025e. We expect Tessin to report a positive EBIT of SEK2.4m in 2024e.

For the upcoming quarter, Q4 2023e, we project net sales of SEK10.3m, with SEK9.4m expected to come from arrangement fees and SEK0.9m from rental income. We estimate the value of brokered loans to reach SEK120m, compared to SEK334m in Q4 2022 and SEK130m in Q3 2023. It is worth noting that Q4 typically experiences weaker seasonality compared to Q3. We anticipate a q/q increase in costs and estimate an EBIT of SEK-2m.

We have used a WACC of 14% in all scenarios, derived from Redeye’s Rating model, and a tax rate of 20.6%. Due to higher interest rates, we have increased the risk-free rate from 2.5% to 3% and our WACC from 13.5% to 14%. The discount analysis extends to 2036, and the key financial assumptions for the scenarios are summarized below.

In our Bear Case, we estimate a lower growth rate and lower scalability owing to ongoing market share losses in Sweden and lower growth because of external factors, such as interest rates and higher building costs for property developers.

In our Base Case, we estimate Tessin successfully maintains healthy top-line growth despite external challenges. We also estimate scalable growth, with Tessin brokering larger and more loans without adding additional staff at the same pace. Moreover, we expect a long growth runway thanks to overall market growth and continued house shortages. We do not estimate any M&A.  

In our Bull Case, we estimate only a slightly higher growth rate. Instead, the big deviation is seen in the margins, where we estimate in our Bull Case that Tessin can maintain a high arrangement fee despite higher loan sizes. Moreover, we forecast Tessin to earn more money on other products, such as Tessin Services and management fees, leading to high gross margins and higher profitability. We do not estimate any M&A.