Redeye updates on W5 Solutions following Q3-results which were weaker than expected while order intake continued to improve. The company’s focus is to continue expanding the order book and create potential for topline growth and improved profitability.

W5 Solutions reported net sales of SEK67m and EBITDA of SEK-2.8m, which was below our forecasts of SEK91m and SEK4.7m, respectively. The company saw a solid gross margin of 61%, slightly above our forecast of 60%. Overall opex was somewhat lower than expected, driven by lower personnel costs while other opex was higher than our forecast. Still, the lower topline resulted in negative EBITDA while we had expected a positive result. The table below summarizes Q3-results outcome compared to our forecasts.

Invisio

W5 Solutions

* High revenue concentration in Sweden (over 60%), limiting geographic diversification and potentially exposing the company to regional economic risks.
* Historical weak returns on invested capital, partly due to M&A activities, though improvements are expected.
* Significant regulatory oversight in the defence sector, which can impact operations and create compliance challenges.
* Potential dependence on key individuals, particularly in acquired companies, which may pose succession and retention risks.
* Limited evidence of proactive environmental sustainability initiatives, which may become increasingly important for stakeholders and investors.

* Strong recurring revenue from long-term contracts, providing stability and visibility for future earnings.
* Significant growth potential in the defence sector, with opportunities for organic growth and M&A in a fragmented market.
* Asset-light business model with limited capex requirements, allowing for efficient scaling and strong profit generation.
* Long product lifecycles and high switching costs for customers create a sustainable competitive advantage.
* Ability to increase prices above inflation without losing customers, indicating strong pricing power and value proposition.

* Operating margin below 20% and not increasing for three consecutive years, suggesting potential cost management or competitive pressure issues.
* Return on Equity (ROE) and Return on Assets (ROA) performance below desired thresholds, indicating potential inefficiencies in capital utilization.
* Inconsistent earnings growth, failing to maintain a 10% growth rate over the last five years or show stable growth over the past decade.
* Lack of consistent dividend growth, with no significant increases over the past three years and no track record of annual increases over the past decade.

* Strong gross profit margin exceeding 40%, indicating profitable product mix and pricing power.
* Consistent revenue growth above industry average over the last five years, signaling market share gains and competitive strength.
* Healthy current ratio with current assets 1.5 times greater than current liabilities, demonstrating strong short-term liquidity.
* Efficient debt management with net debt less than five times free cash flow and interest coverage ratio above five.
* High operating and free cash flow conversion rates (above 80%) over the past five years, indicating quality earnings and efficient cash generation.

* Recently appointed CEO (2024) lacks long-term track record with the company, creating some uncertainty in leadership continuity.
* Weak historical returns on capital, though expected to improve in coming years.
* Share dilution due to equity raises and acquisitions, without corresponding EPS growth in the short term.
* Limited information on sustainability-related performance incentives and reporting, potentially indicating a weak commitment to ESG factors.

* Strong leadership with a focus on long-term growth, as evidenced by the CEO's vision and financial targets for 2027.
* Decentralized organizational structure promoting accountability and efficiency, with sector heads responsible for their respective businesses.
* High insider ownership, including significant stakes held by board members and executives, aligning management interests with shareholders.
* Commitment to innovation and product development, with a focus on customer collaboration.
* Transparent communication and candid approach to addressing challenges, such as slower than expected order intake.

SEKm	2022	2023	2024e	2025e	2026e
Revenues	176.0	387.0	387.7	465.5	558.6
Revenue Growth	23.9%	120%	0.2%	20.1%	20.0%
EBITDA	24.4	56.0	22.5	62.5	83.1
EBIT	17.6	4.8	-27.7	12.5	31.1
EBIT Margin	10.0%	1.2%	-7.1%	2.7%	5.6%
Net Income	13.7	-1.3	-33.4	9.4	23.3
EV/Sales	3.9	3.5	1.7	1.3	1.0
EV/EBITDA	28.1	24.2	29.9	9.8	7.1
EV/EBIT	39.1	283	-24.3	49.2	18.9

Q3-results below forecast

Continued improving order intake

Lowered estimates and valuation

Key financials

Q3-results below forecast