SenzaGen Q4: Leaving Q4 behind and looking forward to a new year
Research Update
2025-02-14
07:00
Analyst Q&A
Closed
Gustaf Meyer answered 5 questions.
Redeye provides an update following SenzaGen’s Q4 2024 report. The sales during the quarter were disappointing, although we maintain that the long-term investment case remains intact. We have made sales estimate adjustments, which is the main reason for our lowered fair value range.
Gustaf Meyer
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Investment Thesis
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The Q4 sales amounted to SEK15.5m (SEK16.2m), reflecting a y/y decline of 5% and a q/q increase of 17%. This was below our estimate of SEK21.1m. The report disclosed that GARD sales for the quarter reached SEK10.9m (SEK7.7m), marking a 41% y/y increase. While we recognised that exceeding SEK20m in sales would be challenging, the reported figures were weaker than anticipated. Operating expenses for the quarter amounted to SEK-13.2m (SEK-16.8m), including depreciation/amortisation, which was below our estimate of SEK-16.6m. The key cost components were selling expenses of SEK6.5m and administrative expenses of SEK4.9m, both in line with our expectations. The primary deviation from our estimates was lower-than-anticipated R&D costs, as the company reported only minor expenditures in this area during the quarter. EBIT came in at SEK-4.5m (SEK-4.8m), compared to our estimate of SEK-1.5m. The weaker-than-expected result was primarily driven by softer sales and a lower gross margin for the quarter.
Overall, the Q4 sales were disappointing, particularly given our expectations of a record quarter in terms of sales. However, while the report fell short of expectations, we believe the long-term investment case remains intact.
Our fair value range is derived from a DCF model covering 2025e–2037e. Based on the report, we have made adjustments to our sales and OPEX estimates. Our revised estimates result in a new fair value range, with a base case of SEK14.5 (17.5), a bull case of SEK25 (26.5), and a bear case of SEK6 (6.5). We argue that the company now must earn trust from the market in order for the share to rise. The main focus will be on the company's reports during the year. Therefore, we highlight the importance of rising sales and closing in on profitability, which will be the main triggers for the share.
| Key Financials | |||||
|---|---|---|---|---|---|
| SEKm | 2023 | 2024 | 2025e | 2026e | 2027e |
| Total Revenue | 49.9 | 57.7 | 75.9 | 100.4 | 145.1 |
| Revenue Growth | 19.4% | 15.7% | 31.6% | 32.2% | 44.6% |
| Operating Expenses | 57.4 | 57.5 | 58.2 | 67.3 | 82.2 |
| EBIT | -22.5 | -18.9 | -3.2 | 6.4 | 26.6 |
| EBIT Margin | -45.1% | -32.8% | -4.3% | 6.4% | 18.3% |
Case
Ethical testing method
SenzaGen exposes investors to the in-vitro toxicology testing market. Following a bumpy ride for shareholders, with a downward share price trend over the past couple of years, the company has changed its strategy to also focus on acquisition-driven growth. In 2021, it acquired its first entity, VitroScreen. Despite its still relatively low sales (FY´24 SEK58m), we expect sales to increase significantly until 2026e, taking sales to SEK100m. This growth is underpinned by a trend favoring non-animal testing as regulatory requirements are changing where we believe that SenzaGen´s testing methods can become well-positioned in its targeted industries.
Evidence
Great long-term potential
In the middle of 2022, OECD validated SenzaGen’s GARDskin, unlocking its great sales opportunities. Currently, a majority of sales stem from existing customers (around 70%), and we believe that the OECD validation will result in a higher percentage of recurring sales as larger customers can use GARDskin in both product development and use the data in product filing. In 2013, the EU banned animal testing in the development of cosmetic products, and we anticipate a scenario of more bans in other industries in the future. Because of this, we judge that animal testing is set to decrease because of potential future bans and that in-vitro testing methods become more common since it is cheaper, more cost-effective, and provide more reliable test results than in-vivo.
Supportive Analysis
SenzaGen offers a comprehensive product portfolio, covering what is necessary to evaluate a substance’s sensitization. Studies have shown that SenzaGen’s products have higher accuracy and provide unique features compared to competitors.
Studies show that one of SenzaGen’s main products, GARDskin, has the highest accuracy in determining if a substance should be classified as a sensitizer or not. The GARD technology uses up to 200 biomarkers (measurable indicators) and machine learning to generate deeper and more comprehensive test results and includes complex mixtures that traditionally have been difficult to test. This helps cosmetics, medical devices, pharmaceutical, and chemical companies to develop safer products.
As studies have shown the advantages of SenzaGen’s products, we believe the company can become well-positioned in non-animal testing market.
Challenge
Acquisition strategy
SenzaGen focuses on both organic and acquisition-driven growth. We assume that the company intends to acquire profitable companies with sales up to SEK75m that offer non-animal testing methods and innovations that can expand its available market. Naturally, there is a risk related to acquisitions through several aspects, all with the potential to destroy rather than create value. Thus, finding the right companies, and integrating these successfully, could pose challenges – especially for a company that has limited experience in acquisitions.
Proof of sales
Another challenge for SenzaGen is to prove that it can increase sales. The company is still in the relatively early stages and increasing sales could be challenging. We consider the next couple of years crucial for SenzaGen to prove that its testing methods deliver results by attracting large companies and keeping them recurring.
Valuation
Current valuation does not reflect the potential
Key assumptions in our base case are an increased demand on GARD tests and that its acquisition-oriented strategy results in significant sales growth in the years ahead. Thus, we believe that the current share price levels do not reflect the changed case we have identified in SenzaGen. As we advance and the company delivers according to its new strategy, we expect the market to re-evaluate the equity story. Our valuation is based on a DCF model covering 2025e-2036e. In addition to our base case of SEK14.5, our bull case of SEK25 assumes a faster ramp-up in sales, while our bear case of SEK6 assumes lower sales growth than in our base case.
Disclosures and disclaimers
Contents
Investment Thesis
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