Gapwaves: On the starting grid
Research Update
2024-05-13
07:00
Analyst Q&A
Closed
Rasmus Jacobsson answered 4 questions.
Gapwaves' net sales and EBITDA, excluding ACI, surpassed Redeye Research estimates (RRe). Also, Hella has achieved the start of production (SOP), marking a significant milestone, although it is financially minor during the ramp-up period expected from 2024-2025. Gapwaves has prepared its organization for higher volumes and is strategically positioned with three signed tier-1 agreements and potentially a fourth. Despite these positive developments, Redeye calibrated its estimates, resulting in a lower fair value range.
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OV
Rasmus Jacobsson
Oskar Vilhelmsson
Contents
Customers and estimates
Quarterly forecast
Investment thesis
Quality Rating
Financials
Rating definitions
The team
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Solid report across the board
Gapwaves’ performance in Q1 2024 exceeded RRe across all metrics, partially boosted by equipment sales totaling SEK5m. Underlying sales still reached SEK11m, marking a 117% y/y growth. EBITDA, excluding ACI, was -SEK8.8m, better than the RRe forecast of -SEK15.1m. The stronger-than-anticipated results were driven by higher sales, improved gross margins, and lower-than-expected operational expenses (OPEX). However, given the expected volatility in Gapwaves’ earnings before achieving a stable license and product-based income level, these quarterly results should not be extrapolated into future expectations. Adjustments to our forecast have been made due to a misunderstanding in the recognition of royalty revenue and a refined ramp-up forecast.
Delivering on promises
Hella has initiated the start of production (SOP), which is expected to scale up during 2024 and 2025. Order cadence remains strong for Gapwaves' undisclosed tier-1 customer, which has placed four orders year-to-date for Gapwaves’ Multi-layer Waveguide (MLW) technology. Additionally, Gapwaves’ associate, Sensrad, has completed preparations for the launch of its new sensor that incorporates a Gapwaves antenna. Sensrad has secured four evaluation orders, including one from a global agricultural machinery manufacturer. However, the timing of Sensrad’s scale-up remains challenging, and financing from Gapwaves may weigh on Gapwaves’ share.
Calibrating the fair value range
Gapwaves has three tier-1 suppliers with supply agreements, of which Hella has reached SOP. We expect Bosch and Veoneer to SOP in 2026e, although there is low visibility regarding Veoneer. We expect Gapwaves sales to accelerate once product-related revenue scales, which is expected in 2026. We revised our fair value range downwards from SEK17-62 with a Base case of SEK44 to SEK11-48 with a base case of SEK34. We expect new Tier-1s or nearing product-related revenue to catalyze the share.
Key financials
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
| Revenues | 70.9 | 33.7 | 55.7 | 131.6 | 235.0 |
| Revenue Growth | 77.7% | -52.4% | 65.2% | 136% | 78.6% |
| EBITDA | -14.8 | -62.8 | -47.0 | -24.5 | 14.7 |
| EBIT | -22.8 | -71.3 | -55.5 | -37.4 | -6.3 |
| EBIT Margin | -35.6% | -259% | -113% | -31.0% | -2.9% |
| Net Income | -18.0 | -69.2 | -55.5 | -37.4 | -5.1 |
| EV/Sales | 16.3 | 28.4 | 12.8 | 5.0 | 2.7 |
| EV/EBIT | -45.7 | -10.9 | -11.4 | -16.0 | -94.0 |
Customers and estimates
Gapwaves currently has three primary contracts within the automotive sector with Hella, Veoneer, and Bosch and an additional undisclosed tier-1 supplier placing prototype orders. The agreements with these suppliers are of two types:
- Royalty Agreements: Gapwaves earns royalties, such as with Veoneer (signed in 2019) and Hella’s first-generation antenna labeled Gen 6 (signed in 2021).
- Supplier Agreements: Gapwaves is responsible for producing antennas, which are largely outsourced to third parties like Frencken Group. Bosch signed in 2022, and we expect Gen 7 and beyond for Hella to involve this type of deal.
We strongly prefer supplier-based agreements as the gross profit is much greater in absolute numbers than pure license revenues, although it has a lower margin. Gapwaves intends for all future agreements to be predominantly supplier-based. However, a supply agreement can also have a mix of license revenues.
We previously believed royalty revenues would be recognized with SOP. However, royalty revenue recognition involves Hella starting production and, with a one-to-two-quarter lag, reporting the produced units to Gapwaves. At this point, Gapwaves recognizes these as revenue. Consequently, we have adjusted our forecast. Additionally, we have refined our ramp-up estimates for other Tier-1 agreements. These revisions have lowered our automotive revenue expectations for the next five years while increasing them beyond this period. We expect Veoneer to ramp up during 2026. However, the visibility is low for us and Gapwaves. Thus, Veoneer remains uncertain.
Gapwaves has an undisclosed tier-1 supplier, which has placed six development orders for Gapwaves’ Multi-Layer Waveguide technology since 2023. We anticipate this customer will eventually move to a supply agreement with Gapwaves, though the timing remains uncertain. We project this customer to reach SOP in 2028.
We are also trimming our mobility estimates based on a cautious outlook for the segment, as investors are more hesitant to fund these types of businesses.
Quarterly forecast
We expect Gapwaves’ quarterly results to be volatile before achieving a stable license and product-based income level. Therefore, we do not place significant weight on these results.
Based on our estimates changes, we have revised our fair value range downwards from SEK17-62, with a base case of SEK44, to SEK11-48, with a base case of SEK34.
Investment thesis
Case
Validated by the automotive market
Evidence
Manufacturing facilities and partners in place
Challenge
Significant dependencies on automotive Tier 1 suppliers
Challenge
Head-to-head vs a larger competitor
Valuation
SOP in 2024 supports accelerated revenue outlook
Quality Rating
People: 3
Jonas Ehinger became CEO in August 2022 but has served as Gapwaves’ chairman of the board since 2019. We assess that top management has excellent market insights and a sound strategy for long-term growth. Moreover, investments and acquisitions tend to strengthen the core business. The company has a controlling owner with a long-term commitment: the family of the late founder Per-Simon Kildal owns 20% of the capital and >50% of the votes. However, management stock ownership could increase, in our opinion.
Business: 3
First, the business model is repeatable and scalable: the company has entered strategic alliances with Hella and Bosch, leading suppliers to the automotive industry. Second, the company operates in a favourable market structure thanks to regulatory tailwinds, long product cycles and limited competition. Last, Gapwaves offers excellent value to customers by solving genuine needs. On the flip side, we argue that the automotive sector is asset-heavy and reports uncompelling underlying profitability. Too much dependency here could hurt Gapwaves’ long-term profitability prospects.
Financials: 2
Gapwaves has a negative cash flow track record and will likely remain unprofitable for some years, investing significant resources in R&D and production. The rating’s retrospective nature limits the company from achieving a higher score. However, we positively regard the high expected sales growth and the solid financial position.
Financials
| Income statement | |||
| SEKm | 2023 | 2024e | 2025e |
| Revenues | 33.7 | 55.7 | 131.6 |
| Cost of Revenue | 9.8 | 24.5 | 60.5 |
| Operating Expenses | 80.7 | 86.8 | 108.5 |
| EBITDA | -62.8 | -47.0 | -24.5 |
| Depreciation | 1.8 | 3.3 | 6.9 |
| Amortizations | 4.8 | 5.2 | 6.0 |
| EBIT | -71.3 | -55.5 | -37.4 |
| Shares in Associates | 32.5 | 32.5 | 32.5 |
| Interest Expenses | -0.01 | 0.00 | 0.00 |
| Net Financial Items | 2.1 | 0.00 | 0.00 |
| EBT | -69.2 | -55.5 | -37.4 |
| Income Tax Expenses | 0.00 | 0.00 | 0.00 |
| Net Income | -69.2 | -55.5 | -37.4 |
| Balance sheet | |||
| Assets | |||
| Non-current assets | |||
| SEKm | 2023 | 2024e | 2025e |
| Property, Plant and Equipment (Net) | 7.1 | 11.2 | 22.4 |
| Goodwill | 0.00 | 0.00 | 0.00 |
| Intangible Assets | 15.8 | 13.1 | 13.1 |
| Right-of-Use Assets | 0.00 | 0.00 | 0.00 |
| Other Non-Current Assets | 3.4 | 3.4 | 3.4 |
| Total Non-Current Assets | 58.7 | 60.1 | 71.4 |
| Current assets | |||
| SEKm | 2023 | 2024e | 2025e |
| Inventories | 1.8 | 4.6 | 12.2 |
| Accounts Receivable | 7.7 | 4.7 | 11.6 |
| Other Current Assets | 0.62 | 7.4 | 18.1 |
| Cash Equivalents | 89.3 | 60.3 | 29.0 |
| Total Current Assets | 112.9 | 77.0 | 70.9 |
| Total Assets | 171.6 | 137.1 | 142.2 |
| Equity and Liabilities | |||
| Equity | |||
| SEKm | 2023 | 2024e | 2025e |
| Non Controlling Interest | 0.00 | 0.00 | 0.00 |
| Shareholder's Equity | 153.3 | 97.8 | 60.4 |
| Non-current liabilities | |||
| SEKm | 2023 | 2024e | 2025e |
| Long Term Debt | 0.00 | 0.00 | 0.00 |
| Long Term Lease Liabilities | 0.00 | 0.00 | 0.00 |
| Other Non-Current Lease Liabilities | 2.7 | 2.7 | 2.7 |
| Total Non-Current Liabilities | 2.7 | 2.7 | 2.7 |
| Current liabilities | |||
| SEKm | 2023 | 2024e | 2025e |
| Short Term Debt | 0.00 | 0.00 | 0.00 |
| Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 |
| Accounts Payable | 4.5 | 12.4 | 29.8 |
| Other Current Liabilities | 4.1 | 17.2 | 42.3 |
| Total Current Liabilities | 15.6 | 36.6 | 79.2 |
| Total Liabilities and Equity | 171.6 | 137.1 | 142.2 |
| Cash flow | |||
| SEKm | 2023 | 2024e | 2025e |
| Operating Cash Flow | -47.5 | -19.2 | -7.2 |
| Investing Cash Flow | -48.6 | -9.8 | -24.2 |
| Financing Cash Flow | 0.00 | 0.00 | 0.00 |
Rating definitions
The team
Disclosures and disclaimers
Contents
Customers and estimates
Quarterly forecast
Investment thesis
Quality Rating
Financials
Rating definitions
The team
Download article