Net sales for the period were EUR6m. This result fell short of our estimated figure of EUR10.8m mainly because no sales from distribution were recognized. Therefore, our estimate for distribution is not valid. COGS came in at EUR-10m vs our estimate of EUR-7m. The reason was mainly due to a EUR5m inventory write-off in the quarter. Adjusted for this, gross margin is 17%. OPEX EUR-8m vs our estimate of EUR-5m. Adjusted EBIT EUR-8.3m vs our estimate of EUR-1m.

The prevailing pessimistic sentiment among retail consumers continues to exert downward pressure on the demand for Strax's core products. While we had anticipated improved sales figures consecutively for Own Brands. Unfortunately, both the Accessories and Audio segments have experienced a decline quarter over quarter.

Sales in Accessories was EUR2,778k, a negative QoQ growth of -13%. Sales of their Audio came in at EUR2,363k, a negative QoQ growth of -6%. Within own brands, there is still some sale in Health & Wellness. In the quarter, it was EUR889k, -7.4% QoQ. Overall, sales were weaker than expected. Demand from retail seems to continue to be soft and STRAX products do not attract enough attension. Q3 is usually weaker due to the summer months. But sales were disappointing considering the broad roll-out and many point-of-sales, especially in North America.

After STRAX Q2 report, Strax's CEO, the anticipated pick-up in sales would shift slightly, with a notable increase expected from late 2023 extending into early 2024. Going into the Christmas sale season, Q4 is usually strong and we will see if sales can surprise on the upside.

Accessories R12M +53% YoY and Audio +4% YoY.

We've previously covered Strax's ongoing restructuring endeavours, and the company is struggling to make headway and carry out its action plan. Earlier in the year, management expected to finalize the divestment of Telecom Lifestyle Fashion and Health & Wellness, in Q2 2023, but this will likely now be deferred to H1 2024. Moreover, the divestment of 25-33% of Clckr that management has been communicating is still on the table. Moreover, in this market environment, the risk is that a potential buyer is lowballing and not willing to pay up to the level management is willing to sale at.

Short-term interest-bearing debt in the quarter is EUR37m. STRAX is not fulfilling the loan agreement with PCP and we have written about it before. Management continues to argue it has a good relationship with PCP and is working to solve the debt. One key component to lighten the debt is to divest Health & Wellness and the licensing business. With R12M revenue of around EUR29m for Strax own brands, the outlook to repay the loan from cash flow is more or less zero in the short term. The key is to divest Health & Wellness, the licences business and at the same time increase sales of Urbanista, Clickr and Planet Buddies, its core brands. We believe PCP want STRAX to continue to operate and, over time, in order to solve the debt burden.

Canalys said the global smartphone market fell by 1% to 294.6m units in Q3 2023. Samsung continued to be number one and shipped 58.6m units, while Apple saw good initial demand for iPhone 15 and sold 50m units. Xiaomi is in third place, shipping 41.5 units.

iPhone 15 was launched on September 22, and the initial demand looks good. This was confirmed on November 14 when Foxconn, the Taiwanese Apple supplier, surprised on the upside in its Q3 report with an 11.3% jump in profit and beating analysts’ expectations. As mentioned, smartphone sell-through volume declined YoY but increased 2% QoQ with a positive performance in September, which is a positive sign as we advance. So the question is if we have seen the bottom. Q3 2023 is the third quarter with positive momentum (see below). If the uptick in smartphone sales continues, this should support demand for STRAX products.

Our estimated run rate for the coming quarters for Accessories and Audio (R12m) can be seen above. We anticipate Y/Y growth of 53% to EUR12.4m for Accessories and 4% to EUR11.4m in Audio next quarter (Q4 2023E).

Own Brand’s adjusted gross margin was 17% in this quarter. Over the last quarters, gross margins have fluctuated a lot. The fluctuations in STRAX's cost of goods sold (COGS) can be attributed to including various items. These items encompass rebates offered to customers, expenses related to freight and shipping, costs associated with direct e-market marketing activities, and a range of discounts such as bundling offers and other promotional reductions.

We believe the gross margin will continue to be volatile. We anticipate STRAX to achieve a normalized gross margin run rate of 33-35%. It is clear that if sales take off, Strax should be able to scale its profitability.

We made minor adjustments to our growth projections for Own Brands in the near term. As mentioned earlier, we are surprised that the negative sentiment still affects Strax accessories and audio products. However, management said the iPhone 15 release was weak, explaining the soft demand for its accessories. So STRAX saw a weak demand in the quarter, quite the opposite of the Canalys analyst above.

We have cleaned the table by removing the Distribution section, ensuring it only features STRAX Own Brands from now on.

Our projections for net sales is EUR29m for the full year 2023, including Accessories, Audio, and Health & Wellness.

Despite prevailing conditions, the management remains optimistic for the end of 2023, primarily fueled by the execution of initiatives and the anticipated launch of new Urbanista products in combination with an increased point of sales for Clckr going into the Christmas sale. The expected critical catalysts for growth are with these products in North America. The new Urbanista Malibu speaker will be released before Christmas, and should be favourable for sales development in the last quarter of the year. If sales volume increases, the operational margin stands to gain due to the scaling effect.

We anticipate FY net sales of EUR3.6m for the remaining Health and Wellness segment. And as mentioned, we include revenue from Health and Wellness for the next three quarters. After that, it should have been divested.

The primary risk in the case is the substantial debt burden of EUR37m of interest-bearing liabilities. If STRAX reaches our estimated EBITDA 2025E of EUR2.6, it will be a NetDebt/EBITDA of 14x. So, divestment of business units is a must, but as we mentioned before, at the same time, increase sales of their core product brands to generate cash flow.

However, the prolonged divestment process sends negative signals to investors, suggesting difficulties in attracting buyers in the current market climate. This is reflected in the share performance. The share trading at SEK 0.60, -55% YTD, and -85% for the last five years. The stock market is hesitant that management will be able to solve the challenging financial situation. On the other hand, STRAX's CEO and management are very experienced and have been through many boom-and-bust periods. On the positive balance, we have a solid and experienced management team. At the same time, on the negative side, STRAX faces a challenging financial situation compounded by the current unfavourable market sentiment.

With the new estimations, we derive a valuation range of SEK0.06 (1) to SEK4.3 (5), with a base case of SEK1.30 (2.5) using DCF valuation with a WACC of 14%, which is 50bp higher than our previous valuation due to higher risk-free rate.

If we assume STRAX can get the debt down to EUR10m, by divesting Health & Wellness, its licensing business operated under Telecom Lifestyle Fashion and part of Clickr as earlier communicated for a total of EUR27m, SOTP valuation assuming a EV/Sales multiple of 0.6x will generate an equity value of EUR10m, or SEK1 per share. Well within our valuation range.

Based on our 2023e estimations, Strax trades at an EV/Sales 2023E multiple of 3.2x, higher than the peer median valuation.