Ngenic reported impressive net sales of SEK23.0m (SEK8.3m), representing a 177% y-o-y sales growth. However, of these SEK23m, SEK4.9m are one-time revenues bearing the equivalent COGS (which we also saw in Q3 2023). As such, investors should focus on the adjusted sales figure of SEK18.1m, which still represents a very impressive y-o-y sales growth of 118%. This significantly beat our estimate of SEK14.1m, and we are pleased to see that the growth journey has continued despite the somewhat turbulent macroeconomic environment.

We also note that recurring revenues grew 24% in Q4 2023, which is better than 15% in Q3 2023. However, the vast majority of growth is related to hardware (Ngenic Tune).

The gross profit (Net sales-COGS) came in at SEK10.4m (SEK3.8m) vs our estimate of SEK8.3m. This implies an adj. gross margin of 57% (45%) vs our expected 59%.

OPEX came in at SEK-16.5m (SEK-14.3m) vs our estimate of SEK-12.0m. This is higher than our estimate but something we consider fair given the sales growth and expansion of the company. We know that the company is focusing on spending its costs wisely, so we are not too worried about this.

All in all, EBITDA came in at SEK-2.9m (SEK-7.5m) vs our estimate of SEK-1.5m. Given the significant topline beat and solid gross margin, we had expected EBITDA to reach a higher level. However, it is still a very solid improvement y-o-y, and the company is clearly on the verge of reaching EBITDA-positive territory, which we expect to happen in H2 2024.

We note that the cash balance by the end of Q4 was SEK0.8m (plus SEK3.6m in an unutilized credit facility), and raising funds to finance Ngenic’s future growth journey is necessary. Ngenic highlights that the board is working actively with a number of different financing alternatives and that it deems the conditions to be good for finding a solution. We have highlighted this matter before and would not be too surprised if we get additional news regarding this in the coming months.

The financial markets have been turbulent in the past two years. However, we argue that Ngenic’s offering is attractively positioned in the electricity- and energy market, which is seeing increasing input costs (such as bio- and fossil fuels ), which in the end transfers to the end customers who might start looking for solutions to handle this. We, therefore, believe that Ngenic’s growth journey will continue, and given that the company is close to EBITDA-breakeven, we believe that there should be a relatively good opportunity to raise cash at fair conditions – relative to other companies that struggle in the cleantech space (who are far from positive cash flow).

Ahead of the Q4 report, we anticipated a SEK15m share issue at a price of SEK9 per share (30% discount to SEK13 per share). We have now updated our assumptions regarding the share price, given where Ngenic’s shares are currently trading. We still expect a SEK15m share issue but at an updated price of SEK8 per share (20% discount to SEK10 per share).

As previously mentioned, the high Q4 sales figure was primarily driven by Ngenic Tune (B2C). However, recurring revenue managed to grow 24% in the quarter, which is primarily driven by Tune Highrise (B2B), where we see very solid market fundamentals for the segment going forward on the back of district heating prices seeing record high price increases, which has caused much despair among customers. We argue that this is very positive for Ngenic’s offering and will support recurring revenue growth going forward.

We note that the number of protest applications for the mediation in the district heating board throughout Sweden saw 925 applications in 2023, from 237 in 2022 and 4 in 2021 – clearly illustrating that the price increases (on avg. 12% in Sweden 2023 to 2024) are hurting district heating consumers (households). This is driven by increasing bio- and fossil fuel prices, which we believe could continue in the coming years.

We believe that Ngenic’s software solution is a perfect fit for many of the existing apartment buildings in Sweden, where new and more advanced solutions from for instance Siemens and Schneider cannot provide an attractive payback time for the customer since they typically demand bigger areas of space (the total building) to provide an attractive ROI. This type of customer is, therefore, not prioritized by these companies. As such, we believe that Ngenic provides an easy-to-implement solution that starts saving money from day one, which should appeal in today’s market environment.

As seen in the chart below, electricity prices are still at elevated levels (especially compared to pre-2021 figures), which supports the Tune sales (B2C). We also note that grid fees are increasing, which further increases the incentives to reduce electricity consumption.

We also understand that the partnership with Rexel is progressing according to plan, which we find positive and believe could bear fruit in the coming years. Furthermore, we also understand that as Ngenic has increased its presence in its markets, digital marketing spending has increased on behalf of physical marketing, which we find positive (as we believe it is more efficient).

Due to seasonality effects, Q3 and Q4 are typically the strongest quarters for Ngenic. This seems to be driven by customers purchasing Ngenic’s energy-saving solutions ahead of the winter when energy consumption and electricity prices are high. As such, we take a conservative approach going into H1 and estimate a gradual ramp-up in sales throughout 2024, with the majority of sales coming in Q3 and Q4. One should also bear in mind that Q3 2023 sales and Q4 2023 sales were boosted by around SEK5m per quarter (which did not affect the result). As such, the estimated sales drop between H2 2023 and H1 2024 is not as severe as it might look.

Given the rapid growth in recent years, this seasonality effect might have been blurred, but it is still there underneath it all. As Ngenic is focusing more on its Tune Highrise solution (typically for apartment buildings), which often relies on district heating where the price is constant, as opposed to the spot market for electricity, we believe the seasonality effect will diminish because the incentives look the same throughout the year.

Furthermore, lead times are longer than B2C, as the board of an apartment building often needs to vote for this type of question. This is also why Ngenic is targeting private landlords who own several buildings, as it will grow the rate of installations, which in turn will grow high-margin recurring revenue.

On the back of all this, we reduce the B2C sales somewhat and increase the recurring revenues somewhat (which positively affects the gross margin). As there is a lagging effect on the recurring revenue, as opposed to time B2C sales (which has no recurring element but has a higher selling price), this has a negative effect on our near-term estimates but a positive effect on our long-term estimates, as the margin profile is also more favourable.

We also adjust our cost assumptions going forward on the back of Ngenic’s increased cost, efficiency, and profitability focus. Furthermore, due to changes in accounting principles regarding D&A related to activated work (the D&A of the assets starts earlier than before, which increases the pace), the D&A level has increased by approx. SEK1.3m pa.

Our estimate changes are concluded in the table below.

Taking our updated estimates into account, we derive an updated fair value range of SEK8(10)-SEK40(41) with a base case of SEK18(19) per share. We expect Ngenic to reach EBITDA-positive territory in H2 2024. We also wish to highlight the uncertainty regarding the financing situation, where an equity raise could negatively impact our fair value range if the terms differ from what we expect.