Strax: Soft topline and more write-downs
Research Update
2024-02-29
07:00
Redeye updates on Strax following Q4 results, with weaker than expected topline and additional inventory write-offs. The company's outlook remains uncertain due to persistent challenges in the underlying market, leading to adjustments in our estimates and a downward revision of the valuation range.
FR
OV
Fredrik Reuterhäll
Oskar Vilhelmsson
Contents
Review of Q4 2023
Own Brands
The restructuring process and debt situation
Financial estimates for 2024E–2026E
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article
Net sales for the period were EUR5m. According to the management, this result fell short compared to our estimate of EUR8.3m mainly because of weak Health & Wellness products. During the quarter, Strax took a EUR14m inventory write-off (following EUR5m last quarter). COGS came in at EUR-17m. Adjusted for the write-down, COCS was EUR-3m vs our estimate of EUR-5m. OPEX EUR-25m vs our estimate of EUR-3m due to non-recurring costs and charges. EBIT came in at EUR-14.6m.
There is still work to be done by management to reduce debt and get sales back on track. Our projection for net sales is EUR15.8m for the full year 2024E with a positive EBIT of EUR0.6m. Remember that Strax is still going through a very tough time, and more or less everything is on the table, so our estimates are highly uncertain. Moreover, we adjusted the Redeye Financial rating from 1 to 0 due to the uncertainty in the case. It do not affect the cost of capital, WACC is still at 14%.
We made minor adjustments to our growth projections and margin expectations for Own Brands. The negative sentiment is still affecting Strax accessories and audio products. With the new estimations, we derive a new valuation range of SEK0.016 (0.02) to SEK1.48 (2.1), with a base case of SEK0.43 (0.5) using DCF valuation with a WACC of 14%.
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
| Revenues | 130.1 | 70.7 | 15.8 | 19.0 | 22.7 |
| Revenue Growth | nm. | -45.7% | -77.6% | 20.0% | 20.0% |
| EBITDA | -2.6 | -23.3 | 0.79 | 1.5 | 2.3 |
| EBIT | -2.6 | -24.2 | 0.63 | 1.3 | 2.0 |
| EBIT Margin | -2.5% | -52.2% | 4.0% | 7.0% | 9.0% |
| Net Income | -19.7 | -45.1 | 0.50 | 1.1 | 1.6 |
| EV/Sales | 0.6 | 0.4 | 1.9 | 1.5 | 1.2 |
| EV/EBIT | -23.8 | -0.7 | 47.3 | 21.9 | 13.5 |
Net sales for the period were EUR5m. This result fell short compared to our estimate of EUR8.3m mainly because of weak Health & Wellness products, according to the management.
During the quarter, Strax took a EUR14m inventory write-off. COGS came in at EUR-17m. Adjusted for the write-down, COCS was EUR-3mvs our estimate of EUR-5m. OPEX EUR-25m vs our estimate of EUR-3m due to non-recurring costs and charges. EBIT came in at EUR-14.6m.
Operational cash flow came in at EUR1.2m, and EUR2.1m for the full 2023. The cash level at the end of the quarter is EUR1.1m. At the end of Q3, it was EUR0.9m.
Interest-bearing debt is EUR12m (EUR37.6m in Q3-23).
| Strax: Actual vs Estimate (MEUR) | ||||
| Q4'23A | Q4'23E | Diff vs Est. | Y/Y Growth | |
| Net sales | 5 | 8 | -36% | -75% |
| COGS | -17 | -5 | -209% | |
| Gross Profit | -12 | 3 | -512% | -155% |
| Total opex | -25 | -3 | -682% | |
| EBIT | -14.6 | -0.6 | -2493% | -169% |
| Gross Profit Margin (%) | -220% | 34% | -254pp | -320% |
| EBIT Margin (%) | -277% | -7% | -270pp | -377% |
| Basic EPS | -0.15 | -0.07 | -1.2 | |
| Source: Redeye Research | ||||
The prevailing pessimistic sentiment among retail consumers continues to pressure the demand for Strax's core products downward. 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 were EUR2.4m, a negative QoQ growth of -14%( -13%). Sales of their Audio came in at EUR2.1m, a negative QoQ growth of -13% (-6%). There are still some sales within Health & Wellness, but we believe sales will be more or less zero at the end of 2024. In the quarter, it was EUR0.8m, -11% (-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 attention. Sales were disappointing considering the broad roll-out and many point-of-sales, especially in North America.
With 50.1% of Strax distribution business and Urbanista divested during last year, Strax management continues on their 18-month journey to ease the debt burden and streamline their business model. Strax now sits on EUR12.7m in interest-bearing debt, and EUR1.1m cash. Moreover, after the divestments, EUR33.6m (up from EUR12m since last quarter) of Liabilities to associated companies is recognized. According to management, this debt will be netted out partly by the anticipated dividend and partly through other measures from the related companies. When this will happen is unclear.
STRAX did not fulfil the loan agreement with PCP at the end of the quarter. However, after the end of the period, Strax received a waiver from PCP concerning the breach. We believe PCP wants STRAX to continue to operate and, over time, to solve the debt burden.
We estimate the restructuring work will continue for at least two more quarters. Moreover, because the underlying market is still beaten down, the underlying demand is not helping out. If this proceeds for a more extended period, turning the company around will be even more challenging.
Our estimate indicates Strax will deliver between EUR0.5 to 1m of EBITDA for 2024, which makes the net debt to EBITDA around 12x, so more brands need to be divested to get the debt down to a manageable level.
Our estimated run rate for the coming quarters for sales can be seen below. We anticipate a slow first half of 2024 with a better second half.
We believe the gross margin will continue to be volatile. We anticipate STRAX to achieve a normalized gross margin run rate of 35-40%. It is clear that if sales take off, Strax should be able to scale its profitability. We made minor adjustments to our growth and margin projections for Own Brands in the near term compared to our note from 2023-12-27 after the announcement of the Urbanista divestment. 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.
| Strax: Financial Forecast (MEUR) | ||||||||
| 2023 | 2024Q1 | 2024Q2 | 2024Q3 | 2024Q4 | 2024 | 2025 | 2026 | |
| Net sales | 46 | 3.9 | 3.8 | 3.9 | 4.2 | 16 | 19 | 23 |
| Gross Profit | 20 | 1.5 | 1.4 | 1.5 | 1.6 | 6 | 7 | 9 |
| EBITDA | -23.3 | 0.2 | 0.2 | 0.2 | 0.2 | 0.8 | 1.5 | 2.3 |
| EBIT | -24.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.6 | 1.3 | 2.0 |
| Basic EPS | -0.4 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 |
| Revenue Growth | -46% | -80% | -77% | -43% | -85% | -78% | 20% | 20% |
| Gross Profit Margin (%) | 43% | 38% | 38% | 38% | 38% | 38% | 39% | 40% |
| EBITDA Margin (%) | -50% | 5% | 5% | 5% | 5% | 5% | 8% | 10% |
| EBIT Margin (%) | -52% | 4% | 4% | 4% | 4% | 4% | 7% | 9% |
| Net Income Margin (%) | -97% | 3% | 3% | 3% | 3% | 3% | 6% | 7% |
| Source: Redeye Research |
Our projection for net sales is EUR16m for the full year 2024E, including Accessories, Audio, and Health & Wellness. Bear in mind Strax is going through a very tough time, and more or less everything is on the table, so our estimates are highly uncertain.
With the new estimations, we derive a valuation range of SEK0.016 (0.02) to SEK1.48 (2.1), with a base case of SEK0.43 (0.5) using DCF valuation with a WACC of 14%. Moreover, we adjusted the Financial rating from 1 to 0 due to the uncertainty in the case.
| Strax: Fair value range | |||
| SEK | Bear Case | Base Case | Bull Case |
| Value per share, SEK | 0.02 | 0.43 | 1.56 |
| Revenue CAGR 2025-2039 | 8% | 9% | 12% |
| Revenue CAGR 2025-2029 | 13% | 16% | 19% |
| Growth Terminal | 3% | 3% | 3% |
| EBITDA-margin 2025-2039 | 7% | 9% | 11% |
| EBIT-margin 2025-2039 | 6% | 8% | 10% |
| Source: Redeye Research |
As of now, a peer valuation table is not applicable. Strax is currently undergoing a challenging period, making it difficult to anticipate the outcome. A significant upside could be expected if the management succeeds in turning Strax around. However, at present, there is considerable risk in the case and an investment in the stock should be done with this in mind. 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.
Case
Solid track record
Evidence
Divestment to unlock value and stramline Strax
Challenge
Consumer cut spending even more
Challenge
Failures in the processes of managing & growing brands
Valuation
Base Case at SEK0.43
People: 4
Strax receives a strong 4/5 in our People rating. We especially like that the company is run, and largely majority-owned, by the two entrepreneurs who founded it. Together with just compensation, the pilot school approach allows for clear priorities and a focus on shareholder value. Strax has a solid track record in repeatedly undertaking new initiatives to retain its growth. We see several examples of value-creating M&A, where Strax has acquired cheap brands and successfully grown them into strong brands, such as Urbanista. Moreover, Strax performed a clever divestment of Gear4, distributing the created values to shareholders. We believe management communicates with openness and humility. The refreshment rate of board members is somewhat slow, with many members of the board having been in place for a long time. On the other side of the coin, they have extensive, relevant board experience.
Business: 2
Due to third-party manufacturing, the business has good scalability, even though it is essentially a volume business with low margins and no recurring revenues. While market growth is decent, this is an industry that requires constant innovation. Strax has been good at identifying and capitalising on market trends relatively early, most recently when it started the distribution of coronavirus tests and established the new Wellness business arm. It also has a solid record of acquiring and building strong brands. Competition in mobile accessories is fierce due to the low barriers to entry, but Strax has built a strong distribution network. However, the business case has lost one score point, from 3 to 2, due to the complex business strategy and company structure.
Financials: 0
Strax is in the process of divesting a number of its own brands and the Wellness part of its business. We believe 2024 will be a transitory year after two tough years following the pandemic. Strax will hopefully come out on the other side as a stronger company. Due to this uncertainty and the previous poor performance, we have lowered the Financial score from 1 to 0.
Disclosures and disclaimers
Contents
Review of Q4 2023
Own Brands
The restructuring process and debt situation
Financial estimates for 2024E–2026E
Valuation
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article