Advenica: Profitable growth focus

Research Update

2024-02-21

07:20

Advenica delivered a solid 2023 with a 25% increase in sales, primarily driven by substantial gains in the Design House segment.

Fredrik Reuterhäll

Hjalmar Ahlberg

Contents

Advenica Q4 2023: Design House continues driving the growth

Segment revenue

NIS 2

Geographical markets

Financial forecast 2023e to 2026e

Valuation

Peer table

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Q4 sales came in slightly better than expected, while EBIT inline

Net revenue was flat y/y to SEK46m. This was above our estimates of SEK45m. Advenica's gross margin of 66% was better than our estimate of 59%. However, the gross margin fluctuates between quarters, and for the full year, it came in at 58%. EBIT was up to SEK2.8m, corresponding to an EBIT margin of 6%. Operating cash flow was SEK11.8m, with lower inventory levels helping out.

Focus on profitability in 2024

After increasing the number of employees by 20% during 2023 (and 20% in 2022), Advenica will focus on profitable growth in 2024. We expect revenue growth of 11% with an EBIT margin of around 1%. During 2024, the main focus will be on its Design House projects, teaming up with more partners to increase the market opportunity for their Diodes and Gateways products and developing new products. The overall outlook for the long term remains strong due to the rapid rise in cybersecurity attacks. A new cybersecurity regulation from the EU, NIS 2, will take effect on October 17th. We believe the regulation will be positive for Advenica in the medium term.

Sales adjustments and new valuation range

Redeye has revised the valuation range downward by 9%, attributing this adjustment to a reduced estimated sales growth rate of 13% for 2024. Our projected operating profit remains at SEK1m, maintaining an operating margin of 1%. Redeye's new valuation range is between the Bear Case SEK5 (5.5) and Bull Case SEK13.7 (15), with a Base Case of SEK10 (10.9).

Key financials

SEKm	2023	2024e	2025e	2026e
Revenues	148.9	165.6	183.8	204.2
Revenue Growth	24.2%	11.2%	11.0%	11.1%
EBITDA	-5.0	1.4	7.3	10.2
EBIT	-5.0	1.4	7.3	10.2
EBIT Margin	-3.3%	0.9%	4.0%	5.0%
Net Income	-4.2	1.1	5.8	8.1
EV/Revenue	1.9	1.8	1.6	1.4
EV/EBIT	-58.0	204	38.8	27.3

Advenica Q4 2023: Design House continues driving the growth

Net revenue was flat y/y to SEK46m. This was above our estimates of SEK45m. Revenue from Service was up 25% to SEK31m during the quarter, higher than our estimations of SEK28m. It´s Hardware sales came in at SEK15m.

Advenica's gross margin of 66% was better than our estimate of 59%. Going forward we continue to model a gross margin at around 56% to 59%. For the full year 2023, the gross margin is 58%.

EBIT was up to SEK2.8m, corresponding to an EBIT margin of 6%. This was in line with our estimates. Operating cash flow was SEK11.8m, with lower inventory levels helping out.

Advenica: Actual vs Estimate (MSEK)
	Q4'23A	Q4'23E	Diff vs Est.	Y/Y Growth
Net sales	46	45	1%	-1%
COGS	-16	-19	16%	-9%
Gross Profit	30	27	12%	3%
Total opex	-27	-24	-14%	33%
EBIT	3	3	4%	-68%
Gross Profit Margin (%)	66%	59%	7pp	3%
EBIT Margin (%)	6%	6%	0pp	-67%
Basic EPS	0.1	0.0	1.5	-48%
Source: Redeye Research

Segment revenue

Hardware

Revenue LTM from hardware was down -2% y/y to SEK37m. Hardware (i.e., own products) is very volatile between quarters and depends on order backlog and delivery timing. To smooth out single quarters, it is better to look at the LTM sales, visualised below.

Service

Revenue from Service LTM is up 39% y/y to SEK112m.

Advenica: Hardware and Service, LTM, SEKm

R12M sales Y/Y %

As shown above, sales momentum is slowing down. The growth run rate is 39% (43%) this quarter, coming down from over 100% in Q3 2022. We expect Service growth LTM to reach 11% in Q4 2024.

Service continues to be the main driver of sales and stood for 68% (54%) of total revenue in the quarter. According to the CEO, the goal is to drive the hardware products part of sales to a more even balance. This will probably take a few years to achieve.

The gross margin of the company is significantly influenced by its product mix, and there are three key factors at play. The hardware products yield the highest gross margin, likely ranging between 75-80%. On the other hand, Design House projects contribute a lower gross margin, estimated at approximately 10-15%. Additionally, the in-house development of new products also plays a role in shaping the overall margin.

The sales mix, or the proportion of sales attributed to each product category, becomes pivotal in determining the ultimate gross margin. This implies that fluctuations in the sales mix can lead to variations in gross margin from quarter to quarter. Despite these fluctuations, a projected average gross margin of around 58% is anticipated over the next few years.

It's important to note that if there is an uptick in the sales of hardware products, a subsequent increase in the overall gross margin should be observed. In essence, the company's strategic focus on product development and the interplay between different product categories contribute to the dynamic nature of its gross margin.

NIS 2

The upcoming cybersecurity regulation set by the EU, is poised to have a significant impact on the landscape. Effective October 17th, NIS 2 mandates that member states adopt and disclose measures aligning with the directive. This regulatory framework gains prominence against the backdrop of escalating cybersecurity threats. As companies navigate the evolving digital risk landscape, compliance with NIS 2 becomes a pivotal factor influencing strategic decisions and operational resilience, presenting both challenges and opportunities in the cybersecurity sector. Advenica will be perfectly positioned for the increased demand of Swedish and European customers. We believe NIS 2 will not drive growth in the short term but regulation is important in order to raise the awareness and will most likely be net positive in the long term perspective.

Geographical markets

Sweden - Revenue in Sweden was up 5% y/y to SEK42m and continues to be the most important market for Advenica. Finland's revenue was up 14% y/y to SEK3.5m. Revenue from Other countries was up 47% y/y to SEK1.1m.

Geografical markets

Financial forecast 2023e to 2026e

Following the report, we review our annual projections, leading to adjustments to our previously estimated sales growth. As the focus will be on profitability, we estimate Advenica will deliver a positive operational margin in 2024E of c1%. The underlying demand for Advenicas products will support growth in the coming years but at a lower pace than our previous updates.

Advenica: Financial Forecast (MSEK)
	2023	2024Q1	2024Q2	2024Q3	2024Q4	2024	2025	2026
Net sales	149	51	36	29	49	166	184	204
Gross Profit	86	29	21	17	28	96	107	118
EBITDA	-5	6	-2	-4	2	1	7	10
EBIT	-5	6	-2	-4	2	1	7	10
Basic EPS	-0.1	0.1	0.0	-0.1	0.0	0.0	0.1	0.2

Revenue Growth	24%	10%	17%	12%	7%	11%	11%	11%
Gross Profit Margin (%)	58%	58%	58%	58%	58%	58%	58%	58%
EBITDA Margin (%)	-3%	13%	-7%	-15%	4%	1%	4%	5%
EBIT Margin (%)	-3%	13%	-7%	-15%	4%	1%	4%	5%
Net Income Margin (%)	-3%	10%	-5%	-12%	3%	1%	3%	4%
Source: Redeye Research

Valuation

Following our adjustments, Redeye lowers the valuation range downward by 9% to reflect the change due to the revenue growth cut by -15%.

Redeyes new valuation range is between the Bear Case SEK5 (5.5) and Bull Case SEK13.7 (15) with Base Case of SEK10 (10.9). We do not make any adjustments to our WACC of 11%.

Advenica: Fair value range
SEK	Bear Case	Base Case	Bull Case	DCF split per period, Base Case	WACC	11.0%
Value per share	5.0	9.9	13.7	2025-2028	12%	42
				2029-2039	55%	195
Revenue CAGR 2025-2039	8%	10%	12%	Terminal	33%	117
Revenue CAGR 2025-2029	10%	15%	17%	Sum	100%	354
Growth Terminal	3%	3%	3%	Net debt 2024E		-82
				Equity value		435
EBITDA-margin 2025-2039	5%	10%	12%	Shares outstanding		44
EBIT-margin 2025-2039	4%	9%	11%	Value per share, SEK		9.9
Source: Redeye Research				Current share price		9.0

Peer table

Advenica is trading at par with its Nordic median counterpart at 1.8x EV/S.

	EV		EV/S			EV/EBITDA		Sales CAGR	Avg EBITDAm
Company name	EURm	2023	2024	2025	2023	2024	2025	2021-24	2022-24

Nordic Cybersec
Napatech A/S	137	5.5	4.2	3.1	neg	>100	19.5	7%	4%
Advenica AB	32	1.9	1.8	1.6	neg	204	39	54%	-4%
Clavister Holding AB	35	2.1	1.8	1.6	15.7	8.3	6.1	13%	20%
Cyber Security 1 AB	22	0.4	0.3	0.3	na	na	na	22%	na
SSH Communications Security Oyj	96	2.2	3.3	1.8	23	15	10	18%	-4%

Average	64	2.4	2.3	1.7	19	76	19	23%	4%
Median	35	2.1	1.8	1.6	19	15	15	18%	0%
Source: Factset & Redeye Reserach

Investment thesis

Case

Advenica, a leading Swedish cybersecurity firm

Advenica, a leading Swedish cybersecurity firm, has established itself as a trusted provider of advanced encryption systems and products for network segmentation solutions. With 30 years of experience in developing high-quality technical solutions and hardware, the company has garnered an impeccable reputation among demanding clients, including governments and European defense industries. As one of only four companies in the world with EU-approved producing SECRET VPN technology, Advenica occupies a unique position in the market. The company has demonstrated a strong order inflow past years and improved gross margin, which increased from 37% in 2014 to 82% today. This trend suggests that Advenica is well-positioned to capitalize on the growing demand for cybersecurity solutions in the years to come. Furthermore, the company's operational profit has steadily improved over the last five years, with Advenica posting a profit in last two quarters. This performance indicates that the company is poised for profitable growth moving forward. As digitalization accelerates across critical infrastructure systems, for example power distribution and air traffic control, there is an increasing need for robust security measures to protect high-value data. With 80% of its revenue currently derived from the defense industry, Advenica is well-positioned to meet the surging demand from governments and private organizations seeking to bolster their IT defenses against the rising threat of cyberattacks.

Evidence

Growth prospects for the coming years are likely to remain resilient

Advenica’s growth prospects for the coming years are likely to remain resilient, even in the face of a potential recession. The company’s product cycles span multiple years, and the robust demand for its offering should continue to drive revenue growth.

Supportive Analysis

Additionally, all of Advenica’s products are designed and manufactured in Sweden, ensuring the highest level of quality and trust. This emphasis on quality further bolsters the company’s position as a dependable provider of cybersecurity solutions, regardless of broader economic fluctuations.

Challenge

Lack of transparency of orders and clients

Advenica operates in a highly secretive industry, which can mean limited visibility into its order pipeline and client base. This lack of transparency can make it difficult for investors to accurately assess the company’s future prospects and potential risks. However, the historical order book builds trust and should prove just as robust in the future.

Challenge

High R&D costs and scalability issues

The company produces both cutting-edge hardware and software products, and the need for continuous research and development can elevate costs, making it challenging to scale the business. However, Advenica receives funding when developing specific new products together with clients mitigating high R&D costs on their own books.

Valuation

Base case: SEK10

In our base case, we assume FMV will remain Advenica’s largest client for the foreseeable future, while private costumers will increase slightly over time. Continuously stable order intake will smooth out future revenue and support organic growth. Revenues for 2024E: SEK166m Revenue CAGR for 2023–2027: 12% Terminal growth: 3% Avg. EBIT margin for 2023–2027: 3% Terminal EBIT margin: 7%

Quality Rating

People: 3

Business: 4

Financials: 2

Financials

Income statement
SEKm	2022	2023	2024e	2025e	2026e
Revenues	119.9	148.2	213.1	246.9	288.8
Cost of Revenue	47.1	65.4	93.4	103.8	121.3
Operating Expenses	73.7	88.1	116.8	133.3	153.1
EBITDA	-2.4	-5.3	2.9	9.8	14.4
Depreciation	0.00	0.00	0.00	0.00	0.00
Amortizations	0.00	0.00	0.00	0.00	0.00
EBIT	-2.4	-5.3	2.9	9.8	14.4
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	1.4	1.8	0.00	0.00	0.00
Net Financial Items	0.08	-0.49	0.00	0.00	0.00
EBT	-2.3	-5.8	2.9	9.8	14.4
Income Tax Expenses	0.43	1.1	0.60	2.0	3.0
Net Income	-2.7	-7.0	2.3	7.8	11.5
Balance sheet
Assets
Non-current assets
SEKm	2022	2023	2024e	2025e	2026e
Property, Plant and Equipment (Net)	2.0	4.0	6.1	8.6	11.5
Goodwill	0.00	0.00	0.00	0.00	0.00
Intangible Assets	19.7	19.7	19.7	19.7	19.7
Right-of-Use Assets	11.5	11.5	11.5	11.5	11.5
Other Non-Current Assets	2.1	2.1	2.1	2.1	2.1
Total Non-Current Assets	35.3	37.3	39.4	41.9	44.8
Current assets
SEKm	2022	2023	2024e	2025e	2026e
Inventories	10.0	17.0	17.0	19.8	23.1
Accounts Receivable	33.7	59.7	59.7	69.1	80.9
Other Current Assets	7.8	14.9	14.9	17.3	20.2
Cash Equivalents	92.1	59.5	59.7	56.2	53.9
Total Current Assets	143.7	151.1	151.3	162.4	178.1
Total Assets	179.0	188.4	190.7	204.2	222.8
Equity and Liabilities
Equity
SEKm	2022	2023	2024e	2025e	2026e
Non Controlling Interest	0.00	0.00	0.00	0.00	0.00
Shareholder's Equity	97.8	90.8	93.1	100.9	112.4
Non-current liabilities
SEKm	2022	2023	2024e	2025e	2026e
Long Term Debt	0.00	0.00	0.00	0.00	0.00
Long Term Lease Liabilities	8.8	8.8	8.8	8.8	8.8
Other Long Term Liabilities	2.1	2.1	2.1	2.1	2.1
Total Non-Current Liabilities	10.9	10.9	10.9	10.9	10.9
Current liabilities
SEKm	2022	2023	2024e	2025e	2026e
Short Term Debt	0.00	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	3.0	3.0	3.0	3.0	3.0
Accounts Payable	7.3	12.8	12.8	14.8	17.3
Other Current Liabilities	60.0	70.9	70.9	74.7	79.3
Total Current Liabilities	70.3	86.7	86.7	92.4	99.6
Total Liabilities and Equity	179.0	188.4	190.7	204.2	222.8
Cash flow
SEKm	2022	2023	2024e	2025e	2026e
Operating Cash Flow	5.2	-30.6	2.3	-1.0	0.57
Investing Cash Flow	-3.0	-2.0	-2.1	-2.5	-2.9
Financing Cash Flow	0.00	0.00	0.00	0.00	0.00

Rating definitions

The team

Disclosures and disclaimers

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Contents

Advenica Q4 2023: Design House continues driving the growth

Segment revenue

NIS 2

Geographical markets

Financial forecast 2023e to 2026e

Valuation

Peer table

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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