Equity research Observit, Q2 2023: Strong performance from software company

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In H1 2023, Observit reported recurring software revenue of SEK 8.5 million. That indicates that new cameras are connected to the company’s software solution faster than expected. Net sales grew in H1 by 43% to SEK 21.6 million. At the same time, EBITDA fell by 62%. We have made minor adjustments to our forecasts. A fair value per share is estimated at SEK 0.27 (0.28).

Strong growth and positive EBITDA

During the first six months of 2023 (H1), Observit reported recurring software revenue of SEK 8.5m, corresponding to a growth of a high 36%. In the initiation report, we had expected a growth rate of 9.4% for the full year 2023. The number of cameras connected to the software solution is thus increasing at a rate above expectations. Including hardware- and recurring service revenue, net sales in H1 amounted to SEK 21.6m, corresponding to a growth of 43%. For the full year 2023, we had expected an increase of 23%. Overall, the company is on a strong pace, above expectations for the full year. However, the quarterly recurring software revenue (QRR) fell sequentially to 4.0 MSEK in Q2 2023 from 4.5 MSEK in Q1 2023. That is due to one-time effects that make QRR in Q1 a little high while QRR in Q2 a little low.

In H1, hardware and software (non-recurring) accounted for 51% of net sales. During the same period, the gross margin ended up at 55%. In the initiation analysis, we assumed 58% hardware and a gross margin of 51%. Thus, there should be an upside in the gross margin. However, it should be noted that a higher proportion of revenue from hardware (and an initially lower gross margin) is a prerequisite for the long-term growth of valuable recurring high-margin software revenue.

The EBITDA result for H1 came in at SEK 0.7m, corresponding to a negative growth of minus 62%. Adjusted for non-recurring items related to the listing, the EBITDA result was SEK 1.7m, corresponding to a minor negative growth of minus 5.5%. Our previous forecast for EBITDA for the full year 2023 was SEK 2.2 million.

Minor adjustments to forecasts and the fair value per share

Based on the outcome for H1 2023, we have adjusted software revenue upwards and made a marginal adjustment to the net sales forecast. In 2023, we expect net sales of 47.0 MSEK and a CAGR 2022-2027 of 40.0% driven by international expansion. The EBITDA margin rises from 5.6% in 2023 to 16.2% by 2027. In the final forecast year 2032, we have assumed an EBITDA margin of 24.6%.

Combining a multiple valuation with a DCF valuation, we calculate a fair value per share of SEK 0.27 (0.28). Our valuation corresponds to EV/Sales 2023 of 3.1x. The reference group consisting of Swedish SaaS companies trades at a median EV/Sales 2023 of 3.4x. Today, the stock is traded at EV/Sales 2023 of 1.8x – an unjustified discount.

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