Redeye comments on Ngenic’s Q3 report, where Ngenic reported impressive net sales, which completely beat our estimate, growing 184% y/y. Profitability was, however, softer than expected, and the EBITDA beat was not as significant as the topline beat. However, we are very positive to see that the growth trend continues despite the current macroeconomic environment, which should bear fruit going forward given Ngenic’s scalable business model.

Ngenic reported impressive net sales of SEK19.6m (SEK6.9m), representing an 184% y/y sales growth. We had expected a sales figure of SEK15.3m. We, therefore, consider this very impressive, showcasing that the business model has been resilient topline-wise to the current macroeconomic environment and with Q3 electricity prices not being as high as the previous year. On the other hand, district heating prices have, and will continue to increase significantly, which drives the demand from the residential side using district heating. We consider this a good mix of market exposure.

We also note that recurring revenues grew 15% in Q3 2023, thus implying that the vast majority of growth is related to hardware.

The gross profit (Net sales-COGS) came in at SEK9.1m (SEK5.9m) vs our estimate of SEK8.7m. This implies a gross margin of 46% (85%) vs our expected 57%. We believe that the main reason for this is the higher share of hardware sales in the quarter than we had expected, but we hope to get additional insights into this matter.

We also note that in the CEO word, Björn Berg highlights that the bottlenecks in the supply chain have been removed, which we consider positive for the future delivery capacity.

OPEX came in at SEK-13.3m (SEK-8.5m) vs our estimate of SEK-12.6m, which we find largely in line with our estimate and consider fair given the sales growth and expansion of the company. All in all, EBITDA came in at SEK-1.3m (SEK-1.4m) vs our estimate of SEK-1.9m. Given the significant topline beat, we had expected EBITDA to reach a higher level. We believe that the main reason for this is the lower-than-expected gross margin.

Going forward, we expect to increase our sales estimates and possibly reduce our gross margin assumptions. We will get back with additional comments.

AroCell

Northbaze

Ngenic

* The majority of Ngenic's sales come from one-time product sales, lacking a strong recurring revenue base which could impact business stability and predictability.
* The company is currently unprofitable with negative cash flow, potentially leading to shareholder dilution through fundraising.
* The smart energy solutions market is fragmented with intense competition, potentially limiting Ngenic's ability to dominate the market.
* There's a risk that heat pump OEMs could overtake Ngenic's core market in the future, as new heat pumps often include similar solutions by default.
* Ngenic's business is affected by raw material costs and potentially by energy sector policies, which could impact profitability and operations.

* Ngenic benefits from megatrends like smart energy solutions, electrification, and sustainability, positioning it for long-term growth in a rapidly evolving market.
* The company's business model is not capital-intensive, allowing for efficient scaling without significant reinvestment costs.
* Ngenic has successfully expanded into new geographic markets, primarily in the Nordics, demonstrating adaptability and growth potential.
* The company's growing pool of installations increases its total earnings potential and adds optionality for offering new products and solutions.
* Ngenic's products contribute to the greater good by addressing increasing energy demand, smart homes, and sustainability concerns.

* Operating margin (EBIT) below 20%, suggesting potential challenges in maintaining profitability.
* Return on Equity (ROE) and Return on Assets (ROA) underperforming industry averages, indicating inefficient use of capital.
* Weak financial health indicators, including low current ratio and high debt levels relative to cash flows.
* Lack of dividend payments or growth, limiting appeal for income-focused investors.
* High likelihood of raising cash in capital markets within 12 months, potentially leading to shareholder dilution.

* Strong gross profit margin exceeding 40%, indicating profitable product mix and pricing power.
* Operating margin (EBIT) has increased for three consecutive years, suggesting improved cost management and operational efficiency.
* One-time charges to sales averaged less than 3% over the past five years, demonstrating financial transparency.
* High Operating Cash Flow (OCF) and Free Cash Flow (FCF) conversion rates above 80% over the past five years, indicating strong cash generation.

* Inconsistent delivery on promises: Historical communication has been somewhat optimistic compared to current company performance, suggesting potential challenges in meeting stated objectives.
* Weak financial returns: The current market capitalization is lower than total retained earnings and invested equity, indicating suboptimal returns on capital.
* Limited gender diversity in leadership: Less than one-third of board seats are held by women, potentially limiting diverse perspectives in decision-making.
* Lack of sustainability-linked incentives: Executive compensation plans do not include important non-financial metrics or sustainability-related performance measures.
* Increased share count without corresponding EPS growth: The number of shares has increased over time without a proportional increase in earnings per share, potentially diluting shareholder value.

* Strong leadership with long-term vision: CEO Björn Berg demonstrates deep industry knowledge, focuses on long-term growth, and challenges conventional practices with original ideas.
* Lean, decentralized organization: Ngenic operates with a business-focused structure promoting self-direction and accountability, fostering innovation and adaptability.
* Commitment to innovation and R&D: The company prioritizes research and development as a pillar for maintaining its position as a front-runner in its markets.
* Transparent and balanced communication: Management provides direct, timely business updates, focuses on long-term value creation, and is candid about both successes and challenges.
* Significant insider ownership: Management and insiders own substantial stakes in the company, aligning their interests with shareholders and demonstrating confidence in Ngenic's future.