Sensys Gatso: Underestimated potential in the USA
Research Update
2023-11-17
07:25
Redeye believes Sensys Gatso has just entered a very interesting period with increasing momentum in both sales and earnings growth. Further, Sensys Gatso reiterated its ambitious 2025 targets. With only two years to go, Redeye suspects that the company has some significant postive news imminently awaiting. With an estimated P/E ratio of only 10 and 8 for 2024e and 2025e respectively, Redeye anticipates a strong share-price momentum going forward. Redeye raises its valuation range.
Jesper Von Koch
Total revenue was SEK157m, +65% y/y, and just below our estimates of SEK163m. All business units were roughly in line with our estimates. EBIT was SEK8.3m, corresponding to an EBIT margin of 7.1% (-4.4% last year).
It should be noted that the Netherlands order did not generate any revenues in Q3, which we had anticipated. Instead, it will start generating revenues in Q4. Also, the last SEK39m of the Saudi order is expected to be delivered in Q4. With revenues from Trafikverket, Netherlands, and Saudi, we expect a very strong Q4 and that the growth momentum will increase in 2024.
There has recently been a trend shift in the USA, where traffic fatalities are now increasing. This has caused many states to favor speed cameras more positively. Two major additions from the last months are Florida and California - states that substantially increase the market potential for Sensys Gatso. Florida is starting with school zones only (which is typical), whereas California starts with only the large and semi-large cities. While this start offers significant potential, there is likely even more to come as these states adopt more use cases and include all sizes of cities. Apart from Florida and California, Sensys Gatso states that there is positive momentum throughout the USA.
Following the Q3 report, we stand by what we stated after the Q1 report half a year ago: "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 believe will attract investors and close the gap between share price and our Base Case." Due to the robust momentum in the USA, we have increased our EBIT estimates for 2025 and 2026 by 17 and 47%, resulting in a higher Base Case. Base Case is raised from SEK125 to SEK130, Bear Case remains at SEK65, and Bull Case is raised from SEK180 to SEK190.
| SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
| Revenues | 506.8 | 494.7 | 605.0 | 776.9 | 882.5 |
| Revenue Growth | 11.4% | -2.4% | 22.3% | 28.4% | 13.6% |
| EBITDA | 77.9 | 73.7 | 73.8 | 145.0 | 185.0 |
| EBIT | 40.3 | 31.0 | 28.4 | 99.0 | 133.0 |
| EBIT Margin | 7.9% | 6.3% | 4.7% | 12.7% | 15.1% |
| Net Income | 36.2 | 20.2 | 17.3 | 79.6 | 109.6 |
| EV/Revenue | 130 | 133 | 1.5 | 1.2 | 1.0 |
| EV/EBIT | 1,637 | 2,128 | 31.8 | 9.1 | 6.5 |
| P/E | 1,824 | 3,264 | 48.3 | 10.5 | 7.8 |
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
We think the gap between price and value will be closed during 2024
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 - leading to an estimated P/E ratio at 10x for 2024e and less than 8x for 2025e. We believe the strong momentum combined with the obvious low valuation will attract investors and close the gap between the share price and our Base Case.
Disclosures and disclaimers