Gasporox: Orders up, but earnings linger for 2024

Research Update

2024-02-16

07:00

Redeye states that net sales were slightly higher than expected, but OPEX was also higher. EBITDA was still in line. After a solid 2023, we believe 2024 will be a transitional year with continued net sales growth but higher OPEX. We estimate Gasporox’s order book to be SEK12.6m (35% of 2024e net sales). Redeye lowers its base case, but bull and bear cases remain unchanged.

Rasmus Jacobsson

Martin Wahlström

Contents

Estimate vs outcome

Estimates and valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Q4 2023 — Highs and lows

Net Sales came in at SEK 7.4m, 0% y/y, slightly higher than our estimate of SEK 7.1m (deviation 5%). Sales were broad-based, with sensors and instruments contributing to the strong results. EBITDA came in at SEK 0.3m, corresponding to an EBITDA margin of 4% (EBITDA SEK 0.1m, EBITDA-margin 1% last year). Thus, it is almost in line with our estimate of SEK 0.4m. The main reason is higher OPEX than expected, offset by higher sales. The highlight for the quarter was the working capital release, resulting in a strong cash flow from operations of SEK3.36m (45% of sales).
Gasporox’s financial goals are continued net sales growth in 2024, and the cash raised in 2022 will last until Gasporox is cash flow positive.

Order book and low risk for share issuance

Gasporox has secured a SEK9.1m order for its VialArch product from MaxCann, with deliveries scheduled throughout 2024 in three batches. With the previous MaxCann order and the order from Weber, we estimate Gasporox has an order book worth SEK12.6m for 2024e.
Gasporox has SEK10.6m in cash and had a burn rate for 2023 of SEK3.9m. Thus, its cash should last 2.5 years at the current burn rate. Therefore, we view the risk of stock issuance as low, and the CEO reiterated in a Redeye interview that Gasporox has a supportive ownership base if it needs more capital.

Estimate changes and reduced base case

While sales were 5% better than expected, OPEX was 21% ahead of our estimates. The main reason is higher investments in the organization and inflationary pressure. We have increased our net sales estimate by 1% 2024e-2027e and our OPEX estimate, resulting in a 21%-0% lower EBITDA for the same period. We reduce our base case from SEK21 to SEK18 but keep our bear (SEK9) and bull (SEK36) cases.

Key financials

SEKm	2021	2022	2023	2024e	2025e
Net Sales	15.7	21.4	31.4	35.8	48.3
Sales Growth	26.4%	36.3%	46.5%	13.9%	35.0%
EBITDA	-2.7	-0.90	3.6	4.7	8.7
EBIT	-5.4	-4.2	-0.58	-0.69	2.5
EBIT Margin	-34.2%	-19.7%	-1.8%	-1.9%	5.2%
Net Income	-5.4	-4.4	0.09	-1.5	2.0
EV/Sales	7.4	4.7	4.3	3.3	2.4

Estimate vs outcome

Net Sales came in at SEK7.4m, 0% y/y, slightly higher than our estimate of SEK 7.1m (deviation 5%). Sales were broad-based, with sensors and instruments contributing to the strong results. Gasporox’s new product, AutoMap (launched in May 2023), contributed to sales. EBITDA came in at SEK0.3m, corresponding to an EBITDA margin of 4% (EBITDA SEK0.1m, EBITDA-margin 1% last year). Thus, it is almost in line with our estimate of SEK0.4m. The main reason is higher OPEX than expected, offset by higher sales. OPEX showed a deviation of 21%. Not adjusted for capitalized R&D, Gasporox continues to show positive EBITDA, which it has now done six quarters in a row. The highlight for the quarter was the working capital release, resulting in a strong cash flow from operations of SEK3.36m. Our initial belief was that the strong working capital was related to prepayments for large orders. However, Gasporox said these prepayments were mainly received in January 2024.

The significant increase in short-term liabilities, which increased by SEK9.5m q/q, is related to a reclassification of the convertible debt that matures in the autumn of 2024. We expect this loan to be converted to shares.

Estimates and valuation

Gasporox has secured a SEK9.1m order for its VialArch product from MaxCann, with deliveries scheduled throughout 2024 in three batches. This follows a SEK4m order from MaxCann on 28 August 2023, indicating a trend of increasing order frequency and value. Gasporox’s total orders for 2023/2024, including pending deliveries from MaxCann and Weber, amount to SEK16.1m. If half of these orders are fulfilled in 2023, the 2024 order book stands at SEK12.6m, which is 36% of the net sales forecast for 2024e, with MaxCann orders comprising approximately 32%.

While sales were 5% better than expected, OPEX was 21% ahead of our estimates. OPEX was higher than expected, and according to CEO Märta Lewander Xu, this is partly explained by inflationary costs and increased investment in the organization. We have increased our net sales estimate by 1% and our OPEX estimate by 7% for 2024e-2027e. Consequently, we reduced our EBITDA estimate between 21%-0% for 2024e-2027e. We lower our base case from SEK21 to SEK18 but keep our bear (SEK9) and bull (SE36) cases.

We estimate that orders from MaxCann and Weber already cover 35% of our 2024e net sales estimate. We estimate MaxCann comprise about 31% of total sales in 2024e. While we are concerned about the customer concentration, we note that the concentration has decreased as Gasporox has moved away from exclusive agreements.

H1 2023 was unusually strong. As such, we expect a slight decrease year-over-year, with growth remaining in H2 2024e. Our estimates for the next twelve months are:

Versus peers, Gasporox trades at a discount on EV/S for 2024e-2026e, with our base case indicating a slight premium. On EV/EBITDA and EV/EBIT, Gasporox trades at a premium on the current valuation and our implied base case.

Investment thesis

Case

High incremental return

Gasporox is changing the market for quality assurance and testing in headspace analysis (HSA) and modified atmosphere packaging (MAP), moving away from the often destructive sample-based and manual tests (known as at-line tests) and toward testing all products directly on the production line in a non-destructive manner (known as in-line tests). Given the existing core technology, the economics of incremental products (i.e., line extensions) should be excellent. However, because the company is still developing its distribution and sales channels, we believe this is not yet fully transparent. We believe that once these are in place, Gasporox will achieve high returns on incremental capital, similar to what Colgate-Palmolive, Coca-Cola, Unilever, and Nestlé have done in their respective industries.

Evidence

Robust growth and customer interest

Over the last five years, the company's revenue has increased by 47% (or a 66% CAGR excluding the pandemic years of 2020-2021). The company's sales and support teams' productivity has increased as a result of a simplified offering, with installations now possible via over-the-phone support rather than physical presence. Furthermore, end-users have begun to request that the product be installed by themselves rather than by a typical machine integrator, demonstrating the simplicity of Gasporox's offering, which should allow for rapid scalability.

Supportive Analysis

Although Gasporox's in-line testing solution requires three to twelve times the number of sensors as an at-line test, and each sensor costs about twice as much, increasing investment costs by six to twenty-four times, customers still find Gasporox's value proposition compelling. Furthermore, the total cost of a machine with integrated sensors may be 50 to 100 times that of the at-line option, and yet end customers continue to purchase the offering. Gasporox is still unprofitable, but its gross profit to asset ratio has steadily improved since going public, rising from 3% in 2016 to 52% TTM Q3'22. This implies increased profitability and a high return on invested capital is possible. We expect EBIT break-even in 2022.

Challenge

Biting off More Than it Can Chew

Gasporox is a small company with only a few employees. The company targets pharma, food, and beverages. Gasporox may overextend itself in the food and beverage markets, despite their potential. For instance, a few years ago, it had one salesperson (two if you counted the CEO) handling global pharmaceutical and food sales. Gasporox has added sales heads for pharma and food, but its size may cause it to lose focus. If necessary, the company can pivot into an end-segment to succeed.

Challenge

Untested Expansion

Since 2016, Gasporox has focused on pharmaceutical growth. It wants to expand into food. However, execution remains critical, and in some markets, such as the United Kingdom, where supermarkets typically drive which packaging formats are used, there is a trend toward skin packs and vacuum packaging, where Gasporox may not be able to provide as much value. If vacuum packaging becomes mainstream, Gasporox may switch to other leak inspection methods. Vacuum only works on durable products, so pre-made meals and salads will always need MAP. Last, a successful food market expansion is not necessary for the Gasporox investment case, but it makes the difference between a good and a great investment.

Valuation

Growth Runway Not Priced In

We value Gasporox on the back of three difference DCF-scenarios. Our fair value range is SEK9-36 per share with a Base Case of SEK18. We use a discount rate of 11% based on Redeye’s rating model.

Quality Rating

People: 4

CEO Märta Lewander Xu, who joined Gasporox in 2011, has a Ph.D. in laser absorption spectroscopy of gas in scattering media. Her technical background aids Gasporox's application. The board is well-balanced and most large shareholders are active board members. We are encouraged by management's increased ownership.

Business: 3

Strategic partnerships and an asset-light business model earn three points for the Company. Gasporox also has a strong customer value proposition and a long growth runway. Last, we expect this score to rise as we learn more about Gasporox's expansion in the food and beverage sectors and as its installed base grows and its aftermarket services generate more recurring revenues.

Financials: 2

Gasporox has seen strong revenue growth since its IPO and has a fantastic gross margin that exceeds 70%. The company loses points because it's still unprofitable. We expect this score to rise as the Company becomes profitable.

Financials

Rating definitions

The team

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Contents

Estimate vs outcome

Estimates and valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

Download article