Ngenic reported Q3 net sales of SEK19.6m (SEK6.9m), which included a one-time revenue of SEK5.7m. Adjusted for this, net sales amounted to SEK13.9, which still makes it the second-best quarter in terms of sales in the company’s history, growing 101% y/y. Including other operating income, it was the best quarter ever for the company. We had, however, expected net sales of SEK15.3m, but from an earnings perspective, this was compensated by the underlying gross margin.

We consider the sales figure very impressive. Especially in this current macroeconomic environment and as Q3 electricity prices were not particularly high. We also note that recurring revenues grew 15% sequentially in the quarter, which we find positive.

The one-time revenue did not affect the result, as the same amount is booked in the COGS. As such, the reported gross profit of SEK9.1m (SEK5.4m) remains representative and managed to beat our estimate of SEK8.7m.

The reported gross margin of 44% is significantly lower than the underlying margin of 66% (79%). We had expected a gross margin of 57% and therefore consider the estimate beat solid. The beat seems to be due to a higher margin on the hardware sales than we had previously expected. As far as we understand, this one-time effect is related to Ngenic changing suppliers, and Ngenic has, during this process, traded components as an intermediary, thus affecting the result. This work also affected the Q2 2023 figure by SEK-1.1m, but there should be no further effects on the P&L from this in the future.

OPEX came in at SEK-13.3m (SEK-8.5m) vs our estimate of SEK-12.6m, which we find largely in line with our estimate and consider fair given the sales growth and expansion of the company. All in all, EBITDA came in at SEK-1.3m (SEK-1.4m) vs our estimate of SEK-1.9m. The beat is primarily driven by the higher-than-expected gross profit and other operating income, which stems from various projects with authorities that Ngenic is associated with (such as the Swedish energy agency).

During Q3, Ngenic managed to utilise COVID-related tax credits equivalent to SEK9.5m – which we find positive. We understand Ngenic has the option to start amortising the loan one year from its issuance, which we believe could be further extended. We also believe the interest rate to be very beneficial relative to other types of loans.

Operating cash flow before changes in working capital was SEK-2.0m in the quarter and SEK7.2m after working capital changes. The difference (SEK9.2m) between the two cashflows is primarily related to the “Covid loan” of SEK9.5m.

Investments in intangible assets amounted to SEK-3.0m, and cash flow from financing activities amounted to SEK-1.0m due to the amortisation of loans.

All in all, the period’s net cash flow amounted to SEK3.2m, and the cash position amounted to SEK6.7m by the end of Q3. The company also has an available credit facility of SEK4.5m.

Ngenic is getting closer to becoming cash flow-positive and could get just there by restrictive cash spending and using its existing cash and credit facility of SEK4.5m. However, given that Ngenic is active in what we consider a perfect storm in the energy market, we believe it should continue to focus on growth and product development. As such, we argue that external capital could be used to provide breathing room for the company to focus on growth (although with a cost-conscious mindset).

We have previously modelled a capital raise of SEK20m, leading to net proceeds of SEK17m and a dilution of 21% given a strike price of 30% discount relative to the share price of SEK16 by the time. Given the Covid-loan of SEK9.5m, we reduce our capital raise to SEK15m, and we also update our share price assumption to a 30% discount of SEK13 per share (where the shares are trading today). Using these assumptions, we believe that the company will receive net proceeds of SEK13m, leading to a dilution of 19%.

We consider the Q3 sales growth impressive, especially since Q3 includes the warm summer months with typically low electricity prices. Q3 2023 was no exception, especially since the storm Hans increased hydrological levels, resulting in high hydro production and low spot prices.

Despite this, Ngenic managed to grow its sales by 101% y/y (adjusted for one-time revenues). Long-term electricity prices are expected to be high in the coming years (in a historical context), which bodes well for Ngenic. Especially since consumers have, since the energy crises in 2021 and 2022, become aware of the energy market and how they can reduce their electricity bills. Going into Q4 2023, where both electricity prices and district heating prices have increased, we argue that Ngenic’s growth saga should continue and that the company should approach EBITDA breakeven relatively soon.

The graph below illustrates that electricity prices were relatively low in Q3 but have picked up significantly in Q4, which could bode well for order intake going forward. Furthermore, as seen in the additional chart below, district heating prices have increased significantly in recent times and will probably continue to do so as the announced price increases in Q2/Q3 come into full effect. This is a result of increased fuel costs used in the heat-making process. This is also something that we believe will benefit Ngenic.

While we consider high electricity prices extra beneficial from Ngenic’s B2C sales towards private households, we consider the increased district heating prices beneficial for B2B, commercial buildings, or larger apartment buildings. We consider this type of sales extra attractive, as it warrants a smaller degree of hardware sales and a larger degree of recurring revenues.

Also, apart from the revenue split, one large apartment building (Sw. Bostadsrättsförening) consumes significantly larger volumes of energy than a single house, given the many households it can contain. Therefore, the total lifetime value of large apartment buildings is significantly higher than that of a house. We understand Ngenic currently has around 8000 million square meters of connected area, of which the majority stems from larger buildings.

Furthermore, In the CEO word, Björn Berg also highlights that the bottlenecks in the supply chain have been removed, which we consider positive for the future delivery capacity.

We incorporate Ngenic’s Q3 numbers and adjust our profitability assumptions. We believe that Q4 2023 has the potential to be an exciting quarter and that 2024 should be able to continue to provide growth – despite the high growth in 2023. We also believe that Ngenic’s product offering towards large buildings (primarily Sw. Bostadsrättsföreningar), which often rely on district heating, should provide attractive opportunities. The service provided here is characterised by good revenue per building, a relatively low degree of hardware, and a high degree of software and recurring revenues – which is attractive.

All in all, this results in relatively small estimate changes. Given that the underlying net sales in Q3 2023 were lower than our expectations, we have decided to trim our expected growth assumptions somewhat going forward (primarily in Q4 2023). However, as the underlying gross margin was higher than expected, we have decided to increase it in the near term. All in all, our EBIT estimates remain largely intact.

As mentioned earlier, we have updated the assumptions regarding a potential capital raise to SEK15m, and we also update our share price assumption to 30% discount of SEK13 per share (where the shares are trading today). Using these assumptions, we believe that the company will receive net proceeds of SEK13m, leading to a dilution of 19%, which is all included in our valuation.

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 remains intact at SEK10 – SEK41, and our base case is SEK19. The fair value range is wide, owing to the unpredictable nature of Ngenic’s long-term growth and profitability.

We believe that the long-term potential for Ngenic is very exciting and that additional product launches and expansion in various geographies in Europe hold great potential. Furthermore, as Ngenic’s installed capacity increases, the opportunity to become an aggregator in the energy market opens up to support the electricity system in times of volatility in the supply and demand of electricity. In the CEO word, Björn Berg also highlights that the bottlenecks in the supply chain have been removed, which we consider positive for the future delivery capacity.