Research update Risk Intelligence, Q1 2023: Good growth but below our expectations

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Equity Research Risk Intelligence

In Q1 2023, Risk Intelligence increased important recurring system revenue by 12% to 15.8 MDKK. However, this was below our expectations. Net sales were lifted by consulting revenues while profitability is weakening. We adjust forecasts and estimate a fair value of DKK 3.8 per share (5.7) for the coming 6-12 months. The valuation requires growth to accelerate.

Revenue above expectations but ARR and ARPU lagging behind

In Q1 2023, Risk Intelligence’s net sales increased by 17% to DKK 5.1m. This was above our forecast of DKK 4.9m. Net sales were lifted by consulting revenues, e.g., from the collaboration with DeepOcean. Important total recurring system revenue (total system ARR) increased by 11.8% to DKK 15.8m. This was below our forecast of DKK 17.1m. Also, both total system ARR and total average revenue per client (ARPU) declined sequentially (compared to Q4 2022). We consider this somewhat worrying as we had expected a positive sequential growth for both KPI:s since DSV and DHL were signed as new customers for land-based solution. However, the company’s estimate of ARPU for clients on the land-based solution remains at DKK 425,000. This gives hope for a fast future growth in total ARPU and ARR as more clients sign up for the land-based solution.

On a yearly basis, contract was cancelled with one customer. This corresponds to a low churn of 0.8%. In parallel, the revenues from the existing customer base continues to increase in line with the company’s strategy. That is demonstrated by the NRR which reached 105%. However, the cost base also increased, by 19%, which is partly explained by increased activity in sales and marketing. This also weighed on the reported EBITDA result, which came in at minus 1.6 MDKK. We had expected an EBITDA result of minus DKK 1.4 million. With reported investments of about 0.5 MDKK, the free cash flow ended up at minus 2.5 MDKK and at the end of Q1 2023 the cash amounted to 0.3 MDKK. Finances are thus still under pressure, which adds a layer of risk.

In anticipation of an increase in revenue

In addition to the important agreements with DSV and DHL, the company’s focus on commercial partnerships has borne fruit. The company expects these partnerships to provide a revenue boost by the end of this year. The company’s target for System ARR remains in the range of 18.5-20.9 MDKK until the end of 2023. ARR and ARPU must increase and in 2023 we model with net sales increasing to 20.5 MDKK. Over the period 2023-2027 we expect a CAGR of 25.9%. We expect positive EBITDA to be reached in 2025 and until 2027 we have assumed that the EBITDA margin rises to 21.6%.

Reduced fair value but potential upside remains

In a base case scenario, a fair value of DKK 3.8 per share (DKK 5.7) is calculated. The downward revision is explained by lower valuation multiples among peer companies and lower revenue forecasts and margin assumptions. Our valuation corresponds to EV/Sales NTM of 4.3x, a 38% discount to the reference group (information systems and SaaS companies). Today, the stock is trading at a valuation of 2.3x our revenue forecast NTM and 3.0x last reported System ARR.

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