Sensys Gatso: Upcoming Earnings Momentum
Research Update
2023-08-18
07:25
Redeye thinks the Q2 report was solid and that Managed Services is continuing its journey with solid growth, good order intake, and with positive regulatory changes in both Florida and California. Redeye assesses that System Sales will increase in the remainder of 2023 and in 2024, while costs will come down, leading to an upcoming earnings momentum. Redeye makes a slight positive adjustment to its estimates and fair value range.
Jesper Von Koch
Total revenue was SEK133m, +7% y/y, and above our estimates of SEK121m. Higher System sales explains almost the full difference, although TRaaS sales also beat our expectations. EBIT was SEK5.6m, corresponding to an EBIT margin of 4.2% (5.7% last year). This was above our estimates of SEK -5.8m. Higher sales, higher gross margin, and lower OPEX explain the beat.
With five new contracts in Q2 and early Q3, the company's US TRaaS business is gaining momentum. As such, the company's investments in increased sales efforts on this market appears to bear fruit. Management is confident about being on track to reach its aggressive 2025 target of SEK1bn sales of which at least SEK600m TRaaS. The company believes its pipeline of leads in the USA, as well as the positive ongoing regulation flow in the US, are the keys to reaching these targets.
Having had a period with no sales from both Sweden and Saudi Arabia, as well as a heightened cost base, the company is now entering a period in which sales growth should accelerate and costs be reduced. H2 2023e will gain sales momentum from Sweden, the Netherlands and Saudi Arabia delivering System sales. This implies a likely earnings momentum that could trigger the share price. New Base Case is SEK125 (120), Bear Case is SEK65 (64), and Bull Case is SEK185 (180),
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Revenues | 506.8 | 494.7 | 597.9 | 750.1 | 749.6 |
| Revenue Growth | 11.4% | -2.4% | 20.9% | 25.5% | -0.1% |
| EBITDA | 77.9 | 73.7 | 82.7 | 146.9 | 142.0 |
| EBIT | 40.3 | 31.0 | 31.9 | 92.5 | 87.6 |
| EBIT Margin | 7.9% | 6.3% | 5.3% | 12.3% | 11.7% |
| Net Income | 36.2 | 20.2 | 19.5 | 74.4 | 73.5 |
| EV/Revenue | 129 | 132 | 1.5 | 1.1 | 1.1 |
| EV/EBIT | 1,627 | 2,115 | 27.3 | 9.2 | 9.2 |
| P/E | 1,813 | 3,244 | 42.6 | 11.2 | 11.8 |
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 SEK125- we think the gap between price and value will be closed during 2024
Our valuation range spans between SEK65 and SEK185, with Base Case at SEK125. We expect strong momentum for Sensys Gatso from Q3 2023 until the end of 2024. During this period, we expect strong y/y revenue growth and strong margin expansion - something we belive will attract investors and close the gap between share price and our Base Case.
Disclosures and disclaimers