Research update Adverty, Q4 2022: Increased value after topped expectations

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Equity Research Adverty

Adverty delivered a robust Q4 2022 report with revenues and profitability above our expectations. The substantial increase in gross margin significantly improves the profitability outlook. We raise our justified value per share to SEK 5.7 (4.9) in a base case scenario.

Revenue and profitability above expectations

Adverty delivered a strong report for the fourth quarter of 2022, with net sales up 197 per cent to SEK 8.6 million, well above our forecast of SEK 6.0 million. Two key growth drivers are; (i) the number of games and (ii) the ad space fill rate. In 2022, the number of mobile games in the company’s ad network nearly doubled to 250. In parallel, full-year net revenue grew 250 per cent. That indicates that more ad space is being filled with ads. In light of this, we see good prospects for continued growth as the market matures.

On a year-on-year basis, the gross margin increased in the fourth quarter of 2022 by a whopping 21.4 percentage points to 44.0 per cent. We had anticipated a gross margin of 22.6 per cent. That is an effect of scalability in the platform ad server. That can possibly also be explained by the company no longer making payments to users for their use of the platform. If the gross margin can remain at these levels, the profitability outlook will improve significantly. With revenue sharing at, on average, 50 per cent (part of Raw materials and consumables), it is doubtful whether the gross margin can be normalised around the levels reported in the past quarter. Therefore, we leave our assumption of a normalised gross margin of 40 per cent over time for now.

The EBITDA result for the fourth quarter of 2022 landed at minus SEK 2.9 million. That compares to our estimate of minus SEK 4.2 million. Free cash flow amounted to minus SEK 7.4 million. At the end of January 2023, it was announced that a loan of SEK 8 million had been raised. We estimate the current cash on hand at around SEK 9 million.

Good prospects translated into high growth expectations

In light of the outcome for the fourth quarter of 2022, we have slightly upwards revised our revenue and profitability estimates. We expect a continued rapid growth rate in the coming years, corresponding to a CAGR 2022-2025 of a robust 123 per cent. In 2023, we expect the gross margin to rise to 38.8 per cent, compared to 28.4 per cent in 2022. We expect a positive EBITDA result in 2025. Over time, we expect the EBITDA margin to increase to 14.5 per cent. If the strength and value of the patents can be made clear, a significant upside is created in our forecasts and valuation.

Upwards revised fair value

Combining a DCF model with a multiple valuation, a fair value of SEK 5.7 per share (4.9) is calculated for the next 6-12 months. Our valuation corresponds to an EV/Sales multiple 2023 of 4.7x and a valuation multiple on expected sales adjusted for revenue sharing (50 per cent) 2024 of 4.2x. The peer group, consisting of companies in Adtech, is currently trading at an EV/Sales multiple 2023 of 3.8x.

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