Research update Risk Intelligence, Q4 2022: Large global customers can give a boost
6 Mar 2023
Research update, Risk Intelligence
Read the full research update here:
Risk Intelligence has adopted new accounting principles for its revenue recognition. Net sales were slightly above our adjusted forecast, while profitability lagged. Critical systems ARR grew year-on-year by 9.7% to DKK 16.0m. We estimate a fair value per share of DKK 5.7 (6.7).
Revenue above expectations and new revenue recognition method
To better compare Risk Intelligence to other companies with a high proportion of recurring revenues, the company has chosen to periodise the recurring revenues. That is, instead of recognising them as revenue when the customer is invoiced.
The change in accounting was implemented ahead of the Q4 report. During the past quarter, net sales increased by 11.1% to DKK 4.8m. That was slightly above our forecast of DKK 4.6m. In parallel, the main businesses continue to make progress. At the end of Q4 2022, recurring system revenue (System ARR) amounted to DKK 16.0m, corresponding to a growth of 9.7%. Note that changes in accounting policies negatively impacted the ARR figure. ARPU grew by 9.4% year-on-year. Revenues from the existing customer base increased by approximately 11%.
The cost base, excluding depreciation and amortisation, increased by 42.5%. At the same time, the negative EBITDA result of minus DKK 2.5m increased by a factor of 2.2x, YoY. We had expected an EBITDA result of minus DKK 0.8m. Free cash flow was minus DKK 1.4m, compared to minus DKK 1.2m in Q4 2021. At the end of Q4 2022, cash amounted to DKK 0.3m. Finances are thus under pressure. In our scenario, the company will need to raise new external capital. Also, during the current quarter, the company has reimbursed loans of DKK 3.9m via newly issued shares.
Risk Intelligence has recently signed a contract with DSV Road Belgium for LandRisk Logistics – a gateway to a potential giant customer. Discussions are also well underway with another giant, DHL. During 2023, the company expects System ARR to grow to 18.5-DKK 20.9m. We have assumed System ARR to rise to DKK 19.9m. After adjustments for the new method of revenue recognition, we expect net sales to reach DKK 21.1m in 2023, corresponding to a growth of 19.0%. Over the period 2023-2027, we expect a CAGR of 28.0%. Further, we expect to break even at the EBITDA level to be reached in 2024. By 2027 the EBITDA margin is assumed to rise towards 27.7%.
Low valuation to recurring revenues
In a base case scenario, a fair value of DKK 5.7 per share (DKK 6.7) is calculated. The downward revision is mainly explained by lower valuation multiples for the reference companies, slightly lower margin assumptions, a higher risk-free interest rate and pressured finances (higher risk premium). Our valuation corresponds to EV/Sales NTM of 5.7x, a discount of 28% to the reference group (information systems and SaaS companies). Meanwhile, the stock trades at an unjustly low 2.9x our revenue forecast NTM and 3.8x last reported System ARR.
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