Research update Adverty, Q1 2023: Outcome below expectations, but goal remains

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Equity Research Adverty

Adverty increased net sales by 138% to SEK 4.4m during Q1 2023. The EBITDA result also improved to minus SEK 4.2m. However, the outcome was below our forecast. The company asserts that the operations are progressing in line with the goal, but there still some to go and considering the outcome for Q1 2023, we lower the fair value per share to SEK 5.0 (5.7).

Weaker revenues and profitability than expected

Adverty’s net sales in Q1 2023 were SEK 4.4m, representing a strong growth of 138%. However, we were expecting net sales of SEK 5.3m. On an annual basis, the gross margin increased, but declined sequentially from 45% in Q4 2022 to 34% in Q1 2023. Our expectation for the gross margin was 40%. The EBITDA result improved to minus 4.2 MSEK from minus SEK 4.9m in Q1 2022. Our forecast was minus SEK 2.5m. Personnel costs increased by 30% annually, despite a decrease in the workforce from 26 to 23 since Q1 2022. Considering the streamlined workforce, we believe the cost base can decrease slightly in the future.

The free cash flow amounted to minus SEK 4.9m. As of the end of Q1 2023, the cash balance was SEK 6.8m, after taking up a loan of SEK 8m. The loan runs until November 30, 2026, with an annual interest rate of 3 months Stibor plus 10%. According to the company, this financing should be sufficient until the operations become cash flow positive. The company’s goal is to achieve SEK 50m in revenue in 2023 and be cash flow positive by the end of 2023. However, there is still a significant distance to cover, and given our base case scenario, we see a risk of additional external capital in 2024.

Good outlook with a hidden value in technology

Given the outcome for Q1 2023, we have adjusted our revenue and profitability forecasts slightly downwards. In 2023, we now expect net sales to increase by 118% to SEK 36m. This is down from the previous SEK 43m. At the same time, the number of publishers is increasing rapidly and over the coming years, 2023-2025, we model a high average annual growth rate of 119% (123). Furthermore, we anticipate a gross margin in 2023 (calculated on net sales) of 36.3% (38.8), rising to 40% already by 2025, the same year the company reaches a positive EBITDA result. Over time, we expect the EBITDA margin to increase to 14.3% (14.5). Additional information that increases the likelihood that the company’s target for 2023 can be achieved creates upside in our estimates and valuation.

Fair value pressured by lower valuation multiples

By combining a DCF model with a multiple valuation, we calculate a motivated value of SEK 5.0 per share (5.7). The fair value is pressured by falling valuation multiples for Adtech companies and slightly lowered forecasts. Our valuation corresponds to an EV/Sales multiple NTM of 3.8x and an NTM EV/Sales multiple, adjusted for revenue sharing (50%), of 7.6x. The reference group, consisting of Adtech companies, is currently trading at an EV/Sales multiple NTM of 3.7x. Today, the stock is trading at a valuation corresponding to 6.5x our forecast for adjusted sales NTM.

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