Advenica: Strong quarter confirms the case

Research Update

2024-07-22

07:54

Redeye offers an update on Advenica following the company's Q2 report. Net sales was up by 55% to SEK 48m in the quarter due to solid Design House sales in combination with slightly better than expected sales in Product and Solution. The gross margin was in line, while EBIT was higher than our estimate at SEK 5.4m, representing an 11.3% margin.

Fredrik Reuterhäll

Hjalmar Ahlberg

Contents

Q2 2024

Segment revenue

Financial forecast 2024e to 2026e

Order intake

Valuation

Peer table

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Exceeds Q2 Estimates with strong EBIT margin

Net sales reached SEK 47.9m, driven by better-than-expected deliveries from Product and Solution. Design House aligned with expectations at SEK 29m. Product Solution sales soared 405% y/y to SEK 19.6m. EBIT rose to SEK 5.4m (11.3% margin), outperforming our SEK 2.6m estimate Operating cash flow was SEK 8.7m, and cash flow after working capital changes was SEK 1.7m.

Expecting high growth but lower Ebit in Q3

Based on the order intake, next quarter should be fairly strong even if Q3 is historicly a small quarter due to the summer months . We believe sales will come in at SEK33m, 24% growth Y/Y with an negative Ebit of SEK3m due to lower share of encryption products up for delivery in the quarter.

Reiterate the valuation range

Redeye reiterate the valuation range. We keep th Bear Case SEK5 (5) and Bull Case SEK14 (14) intact, with the Base Case of SEK10 (10). Our projected sales growth is 9% with an flat to slightly positive operating profit for the full year. The share has outperformed the broader market and trades above our Bull Case. YTD the stock is up 104% compared to index of 7.8%. The share trades at EV/Sales c4.1x, inline with peers.

Key financials

SEKm	2022	2023	2024e	2025e	2026e
Revenues	119.9	148.9	162.8	176.2	194.3
Revenue Growth	18.4%	24.2%	9.4%	8.2%	10.3%
EBITDA	-2.4	-5.0	0.45	6.2	9.7
EBIT	-2.4	-5.0	0.45	6.2	9.7
EBIT Margin	-2.0%	-3.3%	0.3%	3.5%	5.0%
Net Income	-2.7	-4.2	2.3	6.6	10.1
EV/Sales	3.1	1.9	4.1	3.8	3.4
EV/EBIT	-153	-58.0	1,473	108	67.4

Q2 2024

Net sales came in at SEK47.9m compared to our estimate of SEK44m due to better delivery from Product & Solution. Design House sales were in line with our estimate at SEK29m vs est of SEK29m. Product & Solution sales were up 405% y/y to SEK19.6m, above our estimates of SEK15m. Gross margins came in at 59% compared to our estimates of 60%. EBIT was up to SEK5.4m, corresponding to an EBIT margin of 11.3% (-28% last year). This was above our estimates of SEK2.6m, mainly due to lower marketing costs and R&D compared to our estimate.

Operating cash flow was SEK8.7m (SEK3m). After the change in working capital, its cash flow was SEK1.7m.

Advenica: Actual vs Estimate (MSEK)
	2023Q1	2023Q2	2023Q3	2023Q4	2024Q1	2024Q2A	2024Q2E	Diff vs Est.	Y/Y Growth
Net sales	46	31	26	46	33	47.9	44.1	9%	55%
Product & Solution	15	4	3	15	3	19.6	15.5	26%	405%
Design House	31	27	23	31	30	28.4	28.6	-1%	6%
Cost of Revenues	18	16	12	16	15	-19.8	-17.6	12%	21%
Gross Profit	28	15	14	30	18	28.1	26.5	6%	90%
Operating Expenses	20	24	21	27	20	-22.7	-23.8	-5%	-4%
EBIT	8.2	-8.8	-6.8	2.8	-2.5	5.4	2.6	105%	-162%
Revenue Growth	112%	16%	6%	-2%	-28%	55%	54%	1pp	55%
Gross Profit Margin (%)	61%	48%	53%	66%	54%	59%	60%	-1pp	23%
EBIT Margin (%)	18%	-28%	-26%	6%	-8%	11.3%	6.0%	5pp	-140%
Basic EPS	0.17	-0.18	-0.18	0.10	-0.03	0.12	0.06	0.95	-167%
Source: Redeye Research & Company data

Segment revenue

Product & Solution

Last twelve months (LTM), sales are up from SEK25m to SEK41m. We expect this segment to reach SEK45m in Q3.

Design House

Design House sales came in at our estimate at SEK29m. Compared to the hardware business, revenue from the design house is significantly more stable and predictable but with a lower margin. Revenue from Design House, looking at the LTM, is up from SEK110m to SEK112m. We expect sales to increase by cSEK1m per quarter going forward.

Advenica: Product & Solution and Design House, LTM, SEKm

LTM sales for segments Y/Y %

As shown above, sales momentum continues to slow down after the strong growth in 2022. The growth run rate for Design House slowed from 18% to 12% in this quarter quarter. We believe the growth rate (Desingn House) will slow to a 5 to 8% run rate over the long run.

Financial forecast 2024e to 2026e

Order intake

Order intake YTD is SEK134m. Based on the announced orders, we are adjusting sales in Q3 and Q4 upward, and we now expect full-year sales to reach SEK163m (previously SEK157m).

Order announcement	Customer	Order value (SEKm)	Type
2024-01-31	Swedish authority	16	Service
2024-03-26	International Customer	2.4	Hardware
2024-04-24	Authority South europé	1.5	Hardware
2024-05-03	Swedish authority	2.5	Hardware
2024-05-08	Swedish authority	8.1	Servie
2024-05-17	Finnish authority	2.1	Hardware
2024-06-05	Swedish authority	58.8	Hardware
2024-06-19	Finnich authority	3.8	Service
2024-06-20	Swedish authority	10	Hardware
2024-07-03	Swedish authority	25	Service
2024-07-09	Finnish authority	4	Hardware/Service

Sum Product & Solution		79
Sum Design House		56
Source: Company data & Redeye Reserach

Estimating 2025 and 2026 is challenging, and we adjust our estimate depending on the announced order inflow. If the order inflow increases, we will adjust our forecast accordingly. For now, we are only making small sales changes but will keep our profitability estimations. If we are to raise our profitability forecast, we need to see an increasing share of encryption products, as hardware has a higher gross margin. Currently, encryption products account for 37% (LTM).

Advenica: Changes vs previous estimates (MSEK)
	2023	2024Q1	2024Q2	2024Q3	2024Q4	2024	2025	2026
Net sales	149	33	48
New				33	49	163	176	194
Old				29	46	157	174	193
Change				10%	6%	4%	1%	1%
Gross Profit Margin (%)	58%	54%	59%
New				59%	59%	58%	58%	58%
Old				59%	59%	58%	57%	58%
Change				0%	0%	0%	1%	0%
EBIT	-5	-2.5	5.4
New				-3	1	0	6	10
Margin (%)	-3%	-8%	11%	-8%	1%	0%	4%	5%
Old				-2	1	1	5	10
Margin (%)				-8%	1%	0%	3%	5%
Change				0pp	0pp	0pp	1pp	0pp
Source: Redeye Research

We anticipate the growth rate to be 8-10% in the coming years for our Base case. In our Bull case, we anticipate a CAGR of 18% between 2025 to 2029. An annual growth rate of 18% should be considered high, given that Advenica has an organizational structure with two different segments that cannot be scaled up quickly and easily. This requires new hires, increased capacity in the development department, new certifications, etc., which takes time. We believe that this growth rate will be challenging to achieve, but not possible, of course. The stock is now trading somewhat above our Bull Case.

Advenica: Financial Forecast (MSEK)
	2023	2024Q1	2024Q2	2024Q3	2024Q4	2024	2025	2026
Net sales	149	33	48	33	49	163	176	194
Gross Profit	86	18	28	19	29	94	101	113
EBITDA	-5	-3	5	-3	1	0	6	10
EBIT	-5	-3	5	-3	1	0	6	10
Basic EPS	-0.1	0.0	0.1	-0.1	0.0	0.1	0.1	0.2

Revenue Growth	24%	-28%	55%	24%	8%	9%	8%	10%
Gross Profit Margin (%)	58%	54%	59%	59%	59%	58%	58%	58%
EBITDA Margin (%)	-3%	-8%	11%	-8%	1%	0%	4%	5%
EBIT Margin (%)	-3%	-8%	11%	-8%	1%	0%	4%	5%
Net Income Margin (%)	-3%	-4%	12%	-7%	2%	1%	4%	5%
Source: Redeye Research

Valuation

Following our adjustments, Redeye reiterates the valuation range: Bear Case SEK5 (5) and Bull Case SEK14 (14) with the Base Case of SEK10 (10). We do not make any adjustments to our WACC of 11%.

Advenica: Fair value range
SEK	Bear Case	Base Case	Bull Case	DCF split per period, Base Case	WACC	11.0%
Value per share	5	10	14	2025-2028	12%	42
				2029-2039	55%	188
Revenue CAGR 2025-2039	8%	11%	12%	Terminal	33%	113
Revenue CAGR 2025-2029	10%	14%	18%	Sum	100%	342
Growth Terminal	3%	3%	3%	Net debt 2024E		-83
				Equity value		425
EBITDA-margin 2025-2039	5%	10%	12%	Shares outstanding		44
EBIT-margin 2025-2039	4%	9%	11%	Value per share, SEK		9.7
Source: Redeye Research				Current share price		17.0

Peer table

	EV		EV/S			EV/EBITDA		Sales CAGR	Avg EBITDAm
Company name	EURm	2024	2025	2026	2024	2025	2026	2021-24	2022-24

Nordic Cybersec
Napatech A/S	248	11.8	6.3	3.1	neg	>100	10.0	23%	5%
Advenica AB	59	4.3	3.8	3.4	neg	108	67	10%	3%
Yubico AB	1,942	9.6	7.8	6.3	48	35	27	19%	22%
F-Secure Oyj	507	3.4	3.3	3.2	9.0	9.0	8.0	11%	38%
SSH Communications Security Oyj	53	2.2	1.8	1.4	30	14	10	13%	8%

Average	688	7	5	4	29	19	14	17%	18%
Median	248	4	4	3	30	25	10	13%	8%
Source: Factset & Redeye Reserach

Investment thesis

Case

Advenica, a leading Swedish cybersecurity firm

Advenica, a leading Swedish cybersecurity firm, has established itself as a trusted provider of advanced encryption systems and products for network segmentation solutions. With 30 years of experience in developing high-quality technical solutions and hardware, the company has garnered an impeccable reputation among demanding clients, including governments and European defense industries. As one of only four companies in the world with EU-approved producing SECRET VPN technology, Advenica occupies a unique position in the market. The company has demonstrated a strong order inflow past years and improved gross margin, which increased from 37% in 2014 to 82% today. This trend suggests that Advenica is well-positioned to capitalize on the growing demand for cybersecurity solutions in the years to come. Furthermore, the company's operational profit has steadily improved over the last five years, with Advenica posting a profit in last two quarters. This performance indicates that the company is poised for profitable growth moving forward. As digitalization accelerates across critical infrastructure systems, for example power distribution and air traffic control, there is an increasing need for robust security measures to protect high-value data. With 80% of its revenue currently derived from the defense industry, Advenica is well-positioned to meet the surging demand from governments and private organizations seeking to bolster their IT defenses against the rising threat of cyberattacks.

Evidence

Growth prospects for the coming years are likely to remain resilient

Advenica’s growth prospects for the coming years are likely to remain resilient, even in the face of a potential recession. The company’s product cycles span multiple years, and the robust demand for its offering should continue to drive revenue growth.

Supportive Analysis

Additionally, all of Advenica’s products are designed and manufactured in Sweden, ensuring the highest level of quality and trust. This emphasis on quality further bolsters the company’s position as a dependable provider of cybersecurity solutions, regardless of broader economic fluctuations.

Challenge

Lack of transparency of orders and clients

Advenica operates in a highly secretive industry, which can mean limited visibility into its order pipeline and client base. This lack of transparency can make it difficult for investors to accurately assess the company’s future prospects and potential risks. However, the historical order book builds trust and should prove just as robust in the future.

Challenge

High R&D costs and scalability issues

The company produces both cutting-edge hardware and software products, and the need for continuous research and development can elevate costs, making it challenging to scale the business. However, Advenica receives funding when developing specific new products together with clients mitigating high R&D costs on their own books.

Valuation

Base case: SEK10

In our base case, we assume FMV will remain Advenica’s largest client for the foreseeable future, while private costumers will increase slightly over time. Continuously stable order intake will smooth out future revenue and support organic growth. Revenues for 2024E: SEK163m Revenue CAGR for 2025–2029: 11% Terminal growth: 3% Avg. EBITD margin for 2025–2029: 5% Terminal EBIT margin: 7%

Quality Rating

People: 3

Advenica scores 3 in our rating. We argue the CEO is passionate, has strong market insight, and has brought extensive experience of the cybersecurity business since she took over as acting CEO in 2014. Low stock ownership in combination with the historical dilution of the stock, hindering shareholder value generation, trims two points from the highest score.

Business: 4

Given the deep moats, solid underlying demand, and strong tailwinds in combination with robust business model, Advenica scores four out of five. Its low percentage of recurring revenues, dependence on one large client, and low returns on capital shave off one point.

Financials: 2

Dilution of the share due to multiple share issues and negative profit for a number of years put the score at two out of five. However, if Advenica can turn profitable, this score would improve. Moreover, communicating financial targets and deliver on these targets would improve the financial scoring as well.

Financials

Income statement
SEKm	2023	2024e	2025e	2026e
Revenues	148.9	155.2	172.3	191.6
Cost of Revenue	62.5	63.2	73.1	80.5
Operating Expenses	91.3	91.3	93.1	101.5
EBITDA	-5.0	0.69	6.1	9.6
Depreciation	0.00	0.00	0.00	0.00
Amortizations	0.00	0.00	0.00	0.00
EBIT	-5.0	0.69	6.1	9.6
Shares in Associates	0.00	0.00	0.00	0.00
Interest Expenses	1.3	0.77	0.80	0.80
Net Financial Items	0.88	1.4	0.40	0.40
EBT	-4.1	2.0	6.5	10.0
Income Tax Expenses	0.10	-0.06	-0.01	-0.02
Net Income	-4.2	2.1	6.5	10.0
Balance sheet
Assets
Non-current assets
SEKm	2023	2024e	2025e	2026e
Property, Plant and Equipment (Net)	3.3	4.9	6.6	8.5
Goodwill	0.00	0.00	0.00	0.00
Intangible Assets	15.5	15.5	15.5	15.5
Right-of-Use Assets	29.4	29.4	29.4	29.4
Other Non-Current Assets	0.00	0.00	0.00	0.00
Total Non-Current Assets	48.3	49.8	51.5	53.4
Current assets
SEKm	2023	2024e	2025e	2026e
Inventories	8.2	8.6	9.5	10.6
Accounts Receivable	36.2	37.7	41.9	46.5
Other Current Assets	9.6	10.0	11.2	12.4
Cash Equivalents	81.7	82.5	88.1	97.1
Total Current Assets	135.7	138.8	150.6	166.6
Total Assets	183.9	188.6	202.2	220.0
Equity and Liabilities
Equity
SEKm	2023	2024e	2025e	2026e
Non Controlling Interest	0.00	0.00	0.00	0.00
Shareholder's Equity	93.7	95.8	102.4	112.4
Non-current liabilities
SEKm	2023	2024e	2025e	2026e
Long Term Debt	0.00	0.00	0.00	0.00
Long Term Lease Liabilities	21.8	21.8	21.8	21.8
Other Non-Current Lease Liabilities	1.3	1.3	1.3	1.3
Total Non-Current Liabilities	23.1	23.1	23.1	23.1
Current liabilities
SEKm	2023	2024e	2025e	2026e
Short Term Debt	0.00	0.00	0.00	0.00
Short Term Lease Liabilities	6.3	6.3	6.3	6.3
Accounts Payable	12.7	13.3	14.7	16.4
Other Current Liabilities	48.1	50.2	55.7	62.0
Total Current Liabilities	67.1	69.7	76.7	84.6
Total Liabilities and Equity	183.9	188.6	202.2	220.0
Cash flow
SEKm	2023	2024e	2025e	2026e
Operating Cash Flow	-13.1	2.4	7.3	10.9
Investing Cash Flow	-4.7	-1.6	-1.7	-1.9
Financing Cash Flow	0.00	0.00	0.00	0.00

Rating definitions

The team

Disclosures and disclaimers

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Contents

Q2 2024

Segment revenue

Financial forecast 2024e to 2026e

Order intake

Valuation

Peer table

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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