Sensys Gatso: Strong Momentum Into 2023
Research Update
2023-02-27
07:25
Redeye states that Sensys Gatso has gained strong momentum during 2022, resulting in a record high order book and a strong sales pipeline as it enters 2023. While the company has increased its cost base, Redeye believes the revenue acceleration will weigh heavier, leading to financial momentum and margin expansion. Redeye raises its valuation range.
Jesper Von Koch
The quarterly figures came in above Redeye’s estimates on both top line and especially on EBIT. This was even though no revenues from the new agreement from Trafikverket were recognized in the quarter, and some SEK2m in one-off costs from ERP implementation. The company has gained a strong momentum in Latin America and delivered four system-sales projects during the quarter.
Sensys Gatso has gained significant business momentum, and the sales pipeline remains strong. After a year with several large orders, the order book is at all time high. This paves the way for strong financial performance in 2023 and 2024.
On the worrying side, the company has increased its cost base lately. This makes the financial performance more vulnerable to any top line weakness. On the other hand, the added cost base stems from offensive actions in US sales and forward-tilted R&D efforts.
Due to the strong report, we raise our sales estimates by c4% for 2023-2025. Meanwhile, we raise OPEX estimates just more than so, resulting in slightly lower EBIT estimates. We raise our Base Case from SEK1.5 to SEK1.6 and our Bull Case from SEK2.2 to 2.5. our Bear Case remains as SEK0.9.
| SEKm | 2021 | 2022 | 2023e | 2025e |
| Revenues | 506.8 | 494.7 | 623.0 | 747.2 |
| Revenue Growth | 11.4% | -2.4% | 25.9% | 11.1% |
| EBITDA | 77.9 | 73.7 | 90.7 | 137.6 |
| EBIT | 40.3 | 31.0 | 45.2 | 92.1 |
| EBIT Margin | 7.9% | 6.3% | 7.3% | 12.3% |
| Net Income | 36.2 | 20.2 | 36.0 | 73.9 |
| EV/Revenue | 1.9 | 1.9 | 1.6 | 1.3 |
| EV/EBIT | 23.4 | 30.2 | 22.4 | 10.3 |
Case
Growing recurring revenue with higher margin
Sensys Gatso's primary focus is growing its recurring revenues from Traffic Enforcement as a Service (TRaaS). In particular, the Managed Services business, with its high margins, long contracts, and repeat revenue, is a critical factor in securing sustainable growth and will determine the stock's long-term performance. The Gatso part of Sensys Gatso has, during the past decade, committed a lot of hard work and investments in building a strong foothold in the US. Moreover, the Managed Services model is straightforward and steadilyy spreading across the World. The Company has never lost a Managed Services contract, but has taken over several contracts from competitors.
Evidence
Potential in expanding its strong position
The strongest market driver in Managed Services is school zones, where Sensys Gatso can leverage its expertise and competitive advantages in other adjacent areas and opportunities e.g. distracted driving, parking, etc. Besides the evidence integrity issues, there are two other important barriers to entry for smaller, local players: The size and stability requirements of customers in order for them to assure reliable long-term delivery and the unique type of approval procedures in each country.
Challenge
Cost base for two business areas has historically been hard to handle
Sensys Gatso has during the last few years had poor profitability despite growing its revenue base. We believe this is due to the large cost base it has received from building up its two separate business areas - system sales and the US TRaaS business. However, we are now seeing improved profitability as the US TRaaS business seems to have grown into its cost suit.
Valuation
Base Case at SEK 1.6
Our valuation range spans between SEK0.9 and SEK2.5, with Base Case at SEK1.6. With a growing base of recurring revenue with a higher margin profile, we believe continued growth and margin expansion will fuel the share price.
Disclosures and disclaimers