Equity research Observit, Q3 2023: New licenses to boost software revenues

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In Q3 2023, Observit reported software revenues of 4.5 MSEK and net sales of 10.2 MSEK. Lower hardware revenues hampered net sales. Software revenues are expected to increase as new licences will be activated during the current quarter. We have made minor adjustments to our forecasts and leave the fair value per share unchanged at SEK 0.27.

 Strong growth and positive EBITDA

In Q3 2023, Observit increased its recurring software revenues by approx. 31% to SEK 4.5m and net sales by 5.7% to SEK 10.2m. Hardware revenues, which fell by about 10%, held back net sales. Hardware sales must turn around. Otherwise, there is a risk of a lower growth rate for software revenues as well. However, it should be noted that several customers, such as Nobina, purchase hardware through other retailers. Therefore, the growth rate in software revenues does not necessarily fall with falling hardware revenues.

The gross margin in the past quarter was at 61.1%. The high gross margin is explained by a lower share of hardware revenue relative to the previous two quarters. EBITDA came in at SEK 1.7m, corresponding to a margin of 15.4%. That is an improvement of 1.6 percentage points compared to Q2 2022.

Free cash flow also improved annually, amounting to SEK 1.6 million in the past quarter. That can be compared with minus 0.7 MSEK in Q2 2022. The cash at the end of the quarter amounted to 2.8 MSEK. The financial space is thus limited.

Investment case remains with good potential upside in the share

As stated in the Q3 report, a pilot project with a bus operator in France has been completed successfully, while new projects in Switzer-land are underway. Our investment thesis remains: Upsales to existing customers can drive growth in the short term. The international expansion will take effect in 2024-2025 and drive growth over time. With scalability in the growth strategy, profitability can increase in parallel with revenues.

We adjusted our estimate for software revenue 2023E upwards to SEK 18.2m, corresponding to a growth of 24.2%. In parallel, we are lowering our forecast for net sales to SEK 42.2m, corresponding to an increase of 15.1%. With lower revenues, we have adjusted our 2023E EBITDA estimate downwards to SEK 2.6m. However, the EBITDA margin of 5.7% is slightly up. Growth and profitability pick up in 2024E. CAGR 2022-2027E is assumed to be a strong 40%, driven by the international expansion. By 2027E, we expect the EBITDA margin to increase to 13.3%.

By combining a multiple valuation with a DCF valuation, we calculate a fair value per share of SEK 0.27 (0.27). That corresponds to an EV/Sales 2024E of 2.6x and an EV/EBITDA 2025E of 16.4x. The reference group is trading at an EV/Sales NTM of 2.9x and an EV/EBITDA NTM of 16.7x. The stock is currently valued at an EV/Sales 2024E of 1.4x – an unjustified discount.

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