anoto group ab...2018/12/14 · brand-new company that looks nothing like before. to re-phrase the...
TRANSCRIPT
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]
Update
Equity Research 14 December 2018
KEY STATS
Ticker ANOT.ST Market Small Cap
Share Price (SEK) 2.6 Market Cap (MSEK) 308 Net Debt 18E (MSEK) -15 Free Float 100 %
Avg. daily volume (‘000) 4
BEAR BASE BULL 1.4
2.6
10.7
KEY FINANCIALS (SEKm)
2016 2017 2018E 2019E 2020E 2021E Net sales 236 173 131 196 237 260 EBITDA -170 -21 -1 43 63 66 EBIT -240 -37 -14 22 37 40 EPS (adj.)
2016 2017 2018E 2019E 2020E 2021E EPS (adj.) -0.1 -0.5 0.0 0.1 0.3 0.3 EV/Sales 44.6 2.7 2.2 1.2 0.6 -0.1 EV/EBITDA -61.8 -22.5 -321.8 5.2 2.3 -0.5 EV/EBIT -43.7 -12.8 -20.7 10.2 3.9 -0.9 P/E -34.0 -8.4 -77.0 17.3 9.0 8.3
ANALYSTS
Viktor Westman [email protected]
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13-dec 13-mar 11-jun 09-sep 08-dec
OMXS 30
Anoto Group AB
Pending Loyal customers, motivated employees & insiders leading the way
The Q3 report did not meet our expectations as it neither discussed any customer projects
nor contained license revenue - despite customers having accepted the new pricing. We
have not been able to reach Management after the report. At the Lisbon Partner
Conference we made the following positive observations though: Overall, customers are
loyal ambassadors of the technology that support the new solution-based strategy and
(reluctantly) have accepted the new pricing as there is simply a lack of good alternatives.
Second, the company is supported by a patient and resourceful main owner. Third, the new
employees are skilled, motivated by the technology as well as incentivized from profit
sharing (stock options). Last but not least, the main owner and the insiders increased their
ownership more than their pro rata in the recent offering. Together, their investment
accounted for two thirds of the stocks and warrants that were subscribed for without unit
rights. We therefore raise our ownership rating from 3 to 6.
C.AI – an education solution that can increase students learning efficiency by over 100x
C.AI is the World’s first AI-based test diagnosis solution for offline education. It is piloted by
around 1 000 students in South Korea. To listen to the test results from C.AI was the most
exhilarating part of the Lisbon Conference. Students using C.AI on average spent less than
80 % time on homework compared to the students that did not use C.AI and still the results
were better than in the peer group. With compounding, this implies over 100 times greater
studying efficiency over a school period. The reason is that the pen data from C.AI show
the teacher exactly what each student is struggling with. In our view, this is a powerful
value proposition.
Our base case moves from SEK 2.5 to 2.6
While C.AI is promising Anoto’s turnaround will apparently require more time. We lower our
estimates but raise our ownership rating from 3 to 6 due to the insiders’ activity in the
offering. Even though insiders’ timing has not been good in the past this is still an important
sign that implies slightly less risk. Consequently, our required rate of return drops from 17.0
% to 15.8 %. These changes altogether lead to a minor jump in our base case to SEK 2.6
per share from previously 2.5, or SEK 3 rounded up. Our bear and bull case amounts to SEK
1.4 and 10.7 respectively.
Anoto Group AB Sector: Information Technology
REDEYE RATING
ANOT.ST VERSUS OMXS30
FAIR VALUE RANGE
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REDEYE Equity Research Anoto Group AB 14 December 2018
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Pending In Lisbon we talked to employees, customers and board members of Anoto as well as its
main owner. One major impression (more will follow below) is that this is a fresh start for a
brand-new company that looks nothing like before. To re-phrase the message from the
Redeye Tech Day, forget what you know about Anoto. On the Tech Day presentation, Anoto
said it failed in the past because it did not have a killer application on its own. Therefore,
Anoto is now building a solutions-based business. We can see the logic here but creating your
own applications requires extensive knowledge of the specific verticals, as we have pointed
out before. Therefore, we are especially enthusiastic about C.AI because the education
industry is something the CEO and the people in his network know by heart (we will come
back to C.AI below).
Most emphasis in the Q3 report was on the new products and there were no mentions of any
customer projects. For instance, the report did not touch Cevahir or Trata at all. Both are still
on the table, but we assume Cevahir needs to be renegotiated due to the Turkish currency
depreciation. Also, Cevahir has gone through some restructuring where the contracts with
Anoto now have been transferred to another company in the group and we assume this could
be another reason for the delays.
Most of the value of the SMark investment was written down in Q3 due to change of
accounting standard. The re-valuation of SMark suggests that it has not taken off. To us this
is not a total surprise. When we asked Anoto employees about Digiwork in Lisbon we were
met by confused faces, suggesting Digiwork is likely on hold or discontinued, i.e. the
communication around the partnerships seems to have some room for improvements.
Intense work – several new products launched
The Korean team has completed lots of projects within a short timeframe. Apart from Forms,
there is now three new business legs.
1. The education solution - C.AI
2. Anoto DNA
3. The biometric Dr Watson pen (incl. its security and verification software)
The Watson pen can see who writes what at what time plus if he or she is certified by using a
fingerprint sensor. Anoto states that this is crucial for e.g. pharmaceutical companies as they
require digital review from certified quality assurance specialists. We will describe the other
two areas (C.AI and ADNA) in more detail below.
Then, there is of course also the four new AEGIR pen models for retail sales from Livescribe.
Livescribe’s B2C model is a decent bread and butter business. We expect the growth to come
from the other areas though, but after trying out the new pens we do have to say that they
look and feel like real pens.
Hours needed for homework decreased by more than 80 % in C.AI tests C.AI, World’s first AI based test diagnosis solution for offline education, was the most
important part of the Lisbon Conference. First, a few words on Anoto’s new partner, Sana
Labs, from whom Anoto will license an AI platform for education.
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Sana Labs uses neural networks to individualize education based on each student’s best way
of learning. This is done in a similar manner as the AlpaGo robot who beat World’s best
human Go player by learning from playing an extremely large number of Go games, in
comparison to IBM’s Deep Blue chess computer who merely studied the best chess players.
Sana Labs platform can optimize each student’s learning by studying the strength and
weaknesses of each student. Individualized education can speed up the learning process by
50 % according to studies from the Bill & Melinda Gates Foundation, which according to Sana
Labs means that students can learn 100 times more over a 12-year school period.
Sana Labs, is very impressive even though it is a two-year old start-up. Sana Labs e.g.
participated in a competition hosted by Duolingo and won in all categories, against prominent
competitors from MIT, Stanford etc. The competition was about predicting what future
mistakes the students would do. Sana said it won since it is specialized in machine learning
whereas the competitors were experts in (human) learning and education.
Sana Labs has huge amounts of data from e.g. one customer who hosts language courses
for 70 million users worldwide. The data is related to pauses, number of attempts and how
long solving every question takes etc. Based on this data Sana Labs can chose the most
appropriate next question for the student. Another key learning for Sana Labs is that a 70 %
chance of a correct answer to the question maximizes the student’s engagement.
With this understanding of AI based education, let us now get back to Anoto’s role in this
exciting area. Like Anoto’s other activities, the C.AI business will be all about bridging the
digital and analogue worlds. The offline education market is worth USD 7 trillion per year and
the online education is 2 % the size of that. Thus, Anoto could be an important partner for
Sana Labs as Anoto gives Sana Labs access to the offline education market. In our view, C.AI
will be bigger than ADNA, not due to the huge market size but simply because C.AI seems like
a need-to-have and its value proposition is more compelling, as we will now outline.
Anoto’s C.AI pilot consists of 1 000 students with Time Education, the largest private
education company in South Korea. The test results so far, presented in Lisbon, were
remarkable. When students used C.AI they spent on average less than 80 % time on
homework compared to the other students that did not use C.AI and still their results were
better than the peer group. Even if the efficiency “only” increases by 50 %, as in the
aforementioned studies, this is still remarkable. But why is this? With C.AI the teachers know
exactly what the student is struggling with. The pen captures data of every stroke and knows
what the student writes, how fast/slow and when the student is hesitating and so on. Such
pen data are crucial for education algorithms in various solutions, but we expect the C.AI
technology to be relevant for all kinds of cognitive disorders and conditions, ADD, Alzheimer’s
etc.
It is always questionable to include brand new areas in the estimates, especially for
companies with baggage that have yet to succeed and reach sustainable profits, let alone
when the revenue model and go to market strategy are not yet known. Nonetheless, we have
decided to include some C.AI sales in our estimates (see further the estimates section),
although this is offset by lowered estimates in other parts of the business.
Toppan deal for ADNA As mentioned in our note, the deal with Toppan, one of the World’s largest printing
companies, verifies the potential. Using the expected Toppan volumes of up to 10 million
ADNA markers for 2020 and the estimated order value of USD 0.5m per year we arrive at a
theoretical price per ADNA marker of no lower than USD 5 cent. We do not know if this is the
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right way to think about the ADNA prices, but if it is, it’s higher than what we first thought. We
will wait and see what the other contracts look like before changing our estimates.
ADNA is a competitive alternative to QR codes as it, unlike QR, is aesthetically pleasing (i.e.
invisible) and secure. The projected CAGR of the QR code market 5 years out is 33 %,
meaning a market size of USD 5.3 billion in 2022. Anoto says the reason that ADNA is more
secure is that it does not allow others to create ADNA readers or markers, in order to prevent
fraud. In China, USD 13m was recently stolen by using false QR codes. Anoto says it can
create limitless unique patterns and ADNA markers. As for competition one can easily build
an app that uses the mobile camera but not for unique patterns. Thus, Anoto’s offering is
strong when there is a need for identifying each unique object. For traditional counterfeit
applications, such as identifying Canada Goose jacket copies, we do not see a need to identify
each individual jacket, but as mentioned before, there are plenty of other use cases where
unique patterns could come in handy.
Loyal customers supporting the new strategy & (reluctantly) accepting new pricing As mentioned, in Lisbon, we talked to employees, customers, board members and the main
owner. From our conversations with Anoto’s customers in Lisbon we conclude that the
customers in general are loyal and good ambassadors of the technology. Several customers
have been with the company for long periods, in some cases over 10 years. They have seen a
lot of changes over the years and experienced various problems, but they are still convinced
regarding the merits of the technology. In general, the customers like the new solution
strategy. One customer said that XMS Penvision was good at holding the customers’ hands
and exemplifying what the technology could be used for but for the rest of Anoto the
applications approach and thinking in terms of solutions is new. However, there is still some
concern over how the road map of Anoto will evolve. We assume it is related to the risk
whether Anoto will, once again, pivot to other areas. Given the long list of discontinued
projects (no names, no pack drill) it is a natural, reasonable concern and this risk should not
be underestimated.
As for the potential, the customers specifically like ADNA, according to Anoto. Putting ADNA
on metal was one intriguing example mentioned in our discussions with customers. The
customers are understandably not happy about the new pricing model and some have lost
customers of their own when trying to pass on the price hikes. One important aspect in this
context is that the customers’ alternatives are limited to using a tablet or pen and paper,
which we think is not good enough for certain applications. One customer said he would have
preferred earlier notice from Anoto. When we asked Joonhee Won about this Won said that
the customers have had one year, i.e. plenty of time to adapt.
Skilled & motivated employees With a humble note to self that there is usually a liking bias associated to meeting people we
got positive vibes after meeting the Anoto staff in Lisbon. Here are our key thoughts. Joonhee
Won is building a start-up culture of motivated people. Several new employees have accepted
significantly lower salaries compared to previous jobs when switching to Anoto. However,
employees own shares and many have been given stock options. We prefer these kind of
broad incentive programs as they instill a sense of teamwork in the company. Similar to the
customers, the employees, especially the new ones, are passionate and confident about the
unique technology and they are looking to build something big. “I am not here for a four-year
turnaround” one of the new guys said. The new CFO Rui de Sousa was nine years at
OutSystems and helped it grow to a big SaaS company with a valuation of USD 1bn. He now
wants to do the same thing with Anoto.
REDEYE Equity Research Anoto Group AB ANOT.ST 14 December 2018
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As we had anticipated, there is a great admiration for and trust in the CEO, meaning he is the
key. This also means that the organization is fragile given the dependence of the CEO. It has
previously been much of a one man show although the situation is improving due to recent
recruitments. Several employees are convinced that the organization had not survived
without the CEO.
Anoto employees also mentioned that Hojae Hwang resigned for personal non-Anoto-related
reasons.
Joonhee Won will enter the Board following board member Will Reeb tragically passing away.
Will Reeb (R.I.P) was instrumental in creating Anoto DNA.
Last but not least, in Anoto’s current phase, having a patient main owner who supports and
believes in the company plus has the resources to back it up is crucial. We met the main
owner Nerthus in Lisbon and believe he is one of those good owners. This lowers the risk and
together with insiders increasing their ownership in the rights issue, it means that we need to
raise our ownership rating from 3 to 6.
Q3: Anoto turning to a loss due to absence of license revenue Considering that there were no licenses sold during the period, and the sales mix consisted of
100 % hardware, the gross margin of 44 % was once again strong and in line with the
previous quarter. No licenses sold also suggests that sales of new pens should have been
negligible. Nevertheless, the Q3 figures represented a step backwards in relation to the
previous quarters (see the graph below) and much of the difference can be explained from a
total lack of license revenue in Q3. We had expected at least a few SEK million licenses and
we are a bit puzzled since most customers have accepted the new pricing. In our quick Q3
report comment, we confused the Q3 licenses with the YTD licenses due to changed
reporting method and unclear headlines in the report.
Sales and EBITDA (SEK million)
Source: Redeye Research, Anoto
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REDEYE Equity Research Anoto Group AB ANOT.ST 14 December 2018
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Anoto said the following about the weaker sales (reiterated from Q2): “the decline in Net Sales
is primarily attributable to Forms customers timing their pen orders to coincide with the
availability of enterprise quantities of the new Anoto pen (AP-701)”. The same should likely be
the case for Livescribe.
The lower gross profit from zero license sales explains only parts of the operating loss of SEK
-13m in relation to our estimate of SEK +1m (see the table below). OPEX are also up.
However, Anoto says overhead costs are stable at the same levels as in the previous
quarters. Most of the discrepancy between the Q3 OPEX and the overhead costs seems to
stem from amortizations of USD 0.6m related to capitalized AP-701 R&D but we do not know
for sure. We will model higher OPEX going forward from the new employees.
Q3 was yet another quiet quarter in terms of news of larger orders, one exception being the
renewed contract with Deutsche Telekom of USD 0.9m. Deutsche uses Anoto’s technology in
over 800+ outlets in Germany and processes over 128 million pages every year, making it one
of the most prolific users of the dot pattern, says Anoto. The technology is primarily used in
forms for enrolling new customers.
Anoto has raised SEK 24m after Q3 Anoto only had SEK 5m in cash at the end of Q3 but managed to raise SEK 24m in an almost
fully subscribed rights issue (92 %) after the period. As we have written before, in our note on
October 18, insiders increased their positions in the offering, which is very positive. The main
owner’s and insiders’ investment together account for about two thirds of the shares and
warrants that were subscribed for without unit rights. As mentioned above, this raises our
ownership rating. Following the offering, Anoto writes in the report that it has financing for 12
months ahead. We note that the company’s sales and earnings are close to break-even levels
on a rolling 12 basis, but we have been burned too many times before to take the
aforementioned statement into account.
Anoto - expected vs. outcome
SEK million Q3'17 Q3'18E Outcome Diff
Sales 52 32 28 -13%
EBITDA 0 4 -11 -15
EBIT 4 1 -13 -14
PTP -1 -4 -14 -10
EPS (SEK) 0.00 -1.04 -0.12 1
Sales growth -38% -37% -46%
Gross margin 41% 58% 44%
EBIT margin 8% 3% -46%
Earnings growth (YoY) n.a n.a n.a
Source: Redeye Research, Anoto
REDEYE Equity Research Anoto Group AB ANOT.ST 14 December 2018
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Financial estimates As for the sales estimates we need to bring out the brush cutter, again (see the table below).
We continue to lower our Cevahir and Trata estimates as there are still no signs of sales from
these large contracts. Fortunately, we had only discounted minor sales expectations for these
two players to begin with. We have also lowered our license revenue as few customers thus
far have paid for licenses. In addition, we do not expect any material sales related to Digiwork.
We cannot judge how much of the increased OPEX in Q3 that are definitely 100 % one-time
costs. For instance, we do not view the Livescribe marketing and recruiting (head hunter) fees
of in total USD 0.2m as non-recurring. The number of employees increased by 10 from Q2.
Even though the company seems frugal we would expect that there should be increased
costs ahead from having a larger employee base. By moving the UK office to Lisbon, Anoto
says it lowers cost. It almost sounds like cost was the only reason for moving the UK office.
There are some expectations on the stock market of a USD 7m Cevahir pen order to be
included in the Q4 sales – something we do not find likely. Nevertheless, we expect Q4 sales
to improve a fair amount compared to the previous quarters due to the renewed Deutsche
Telekom contract (see the table below). It should be noted that while we model a SEK -4m
Changes in estimates
SEKm 2018E 2019E 2020E 2021
Sales Old 151 240 272 299
New 131 196 237 260
% change -13% -18% -13% -13%
EBITDA Old 19 79 90 85
New -1 43 62 66
% change -105% -45% -31% -22%
EBIT Old 7 58 62 56
New -14 22 37 40
% change -317% -62% -41% -29%
Earnings per share Old 0.14 0.42 0.48 0.43
New -0.03 0.15 0.28 0.31
% change -124% -65% -41% -28%
Source: Redeye Research
Estimated sales per segment (SEK million)
Source: Redeye Research, Anoto
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2016 2017 2018 2019 2020 2021
Education pens (Pen Gen & Tstudy) Note taking pens (Livescribe)
Royalty & license sales (incl. ADNA) Forms, Cevahir, C.AI & other
Trata E systems pens
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operating loss we expect a better EBITDA of SEK +7m. The difference is due to amortization
of Livescribe.
Detailed estimates (SEK million)
SEKm 2016 Q1'17 Q2'17 Q3'17 Q4'17 2017 Q1'18 Q2'18 Q3'18 Q4'18 2018
Total sales 236 46 49 52 26 173 28 32 28 43 131
Growth y/y (%) 22% 1% -41% 30% -61% -27% -38% -35% -46% 61% -24%
Gross margin 34% 37% 43% 41% 48% 41% 61% 48% 44% 57% 53%
OPEX -274 -44 -15 -17 -16 -91 -16 -17 -24 -17 -73
EBITDA -170 -28 7 5 -5 -21 2 1 -11 7 -1
Depreciation -70 -4 -1 0 -11 -16 0 0 -2 -11 -13
EBIT -240 -32 7 4 -16 -37 1 1 -13 -4 -14
Net financials -6 -6 -8 -8 2 -20 5 8 -1 -2 10
Pre tax profit -246 -37 -1 -3 -14 -56 6 9 -14 -6 -4
Source: Redeye Research, Anoto
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Investment Case • A totally different company with a software business model is born
• CEO’s deal-making skills are yet unknown among Swedish investors
• Successful business model shift should move the share
A totally different company with a software business model is born Mocked by many, Anoto has been a punching bag on the stock market all the way since inception in 1999. However,
we argue that Q4’17 marked the end of Anoto as we know it. From the old Anoto with 180 employees there is
nothing left but a lean software start-up of about 35 people where e.g. the CEO, Joonhee Won, long was the CFO as
well as the sales “team”. The old Lund office has been completely shut down, among many other things, and the
company is now basically Korean. Shares have tanked following a business model transition where all customers
instead of just hardware sales from now on are required to pay licenses for the pattern and the software as well.
Even if many customers where to leave we believe the bottom line effect will be positive but in the short-term we
expect a few more soft quarters.
CEO’s deal-making skills are yet unknown among Swedish investors Anoto is headed by a Korean dealmaker who is completely unknown to the public in Sweden. In South Korea
however, Won is recognized for having built an education empire with sales in the billions and prior to that leading
large transactions as a record young Managing Director of the investment bank Salomon Brothers. Swedish
investors have thus far seen indications of Won’s deal-making capabilities in the Cevahir deal of USDm 10, the Trata
contract worth USDm 100 and another Indian deal of USDm 8 but more should follow. It is important to note that
these contracts still only have translated into negligible sales. Nevertheless, the deals mentioned suggest that there
are sound fundamentals in the business and strong value propositions that customers are willing to pay up for, big
time. Won apparently has a knack for seeking out and zooming in on this kind of deals. When he enters the
negotiations, he is as decisive as he is ruthless when his employees do not deliver (all sales people have e.g. been
fired). Won is also totally indifferent and relentless towards the risk of losing all existing customers as he firmly
believes he can replace them, making him a good negotiator. In the end, we expect many of the customers to
succumb as there are few, if any, suitable alternatives for them.
Successful business model shift should move the share Anoto shares have a heavy legacy and clearly institutional investors won’t at the moment touch the shares with a
ten-foot pole. It will take a long, long time for the perception of Anoto to change but the eventual effect should be
rather large, especially as the share price is driven solely by retail investors. When it is proven that the business
model shift works, say a couple of quarters from now, we expect to see sustainable increases in the share price (not
ephemeral, speculation driven price gains like in e.g. September 2017). Our bear and bull case amount to SEK 1.4
and SEK 10.7 per share while our base case is SEK 2.6.
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Valuation
Bear Case 1.4 SEK Base Case 2.6 SEK Bull Case 10.7 SEK Our bear case assumptions for years 2017-2021 are the following: In our bear case we expect that Anoto will, due to the new pricing strategy, lose more than half of its customers and volumes in forms and education compared to 2017, meaning only about 100 000 pens sold each in these areas per year. In education this translates to a negative sales growth of CAGR -13 percent during 2017-2021. The few customers who chose to remain will contribute to the license revenue growth, which we estimate to 29 percent during the same period. We expect no ADNA revenue in our bear case though as we assume that ADNA will be discontinued similar to HP, large displays and many other investments in Anoto’s long history. We expect only a slow growth in forms revenue from 2019 on, as Anoto fails to get other large customers like Cevahir on board. During 2017-2021 the forms growth CAGR reaches 18 percent but compared to 2016 the growth is actually negative. We also assume that Trata sales will only be negligible. All in all, we expect Anoto to be able to grow with a sales CAGR of 13 percent. Given the growing software revenue Anoto should be able to reach an average EBIT margin of 8 percent. We assume the long-term EBIT margin will decrease to 5 percent related to squeezed gross margins.
In our Anoto base case we make the following assumptions for years 2017-2021: We assume Anoto initially loses about half of its existing customers and pen volumes due to the new pricing but gradually starts to build a new customer base with the more profitable software approach. The recurring license/royalty revenue will grow by on average 27 percent per year. Out of prudence and due to lack of information we do not include any ADNA sales in our base case at this point of time. We assume education pen sales will drop by a CAGR of -5 percent but Forms should be able to grow by CAGR 26 percent thanks to C.AI. It should be noted though that we in base case do not assume Cevahir volumes of 700 000 but instead expect volumes to remain on about 1/20 of that. We expect Livescribe to grow by a CAGR of 7 percent, meaning it will still be smaller than in 2016 by the end of 2024. Last, we expect Trata sales to reach about SEKm 13 in 2020 and remain around those levels. Anoto will, with the assumptions above, have a total CAGR sales growth of 11 percent during 2017-2021. The EBIT-margin is expected to be on average 9 percent followed by a long-term EBIT margin of 10 percent.
These are the assumptions in bull case for years 2017-2021 that differ from base case: In bull case we assume that almost all customers accept the new pricing and stay with Anoto, meaning volumes in education and forms return to previous levels. Education and forms sales should therefore be considerably higher, growing with a CAGR of 18 and 80 percent respectively. As all these customers also start to pay recurring license fees this would lead to a higher license/royalty growth of 77 percent, which is also enhanced by new, big deals in ADNA, from e.g. the large retail customer, the biometric pens or C.AI. In bull case we are also counting on the CEO to keep on pulling rabbits like Cevahir out of his hat, together with C.AI explaining why forms can have a fast growth of 80 percent. We assume that Trata becomes as good as in the press release (USDm 100), suggesting about 1 million pens during the first three years, meaning a run rate of half a million pens would not be unrealistic. Driven by especially Trata, Cevahir and the software business the CAGR sales growth for total sales between 2017 and 2021 will be 58 percent. In bull case we expect that Anoto rapidly can reach an average EBIT margin of 30 percent as early as in 2020, courtesy of the fast growing software sales. The long-term EBIT margin is estimated to 20 percent.
REDEYE Equity Research Anoto Group AB 14 December 2018
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Catalysts ADNA Orders
Anoto DNA is the new business area and a scalable one with license margins of 100 percent. Orders verifying that
this strategy is correct will move the share price.
Proven business model shift
If the business model shift to software proves to work without too many customers leavning the positive bottom
line effect from the higher software revenue should affect the shares positively.
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Summary Redeye Rating The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated
on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points.
Rating changes in the report Ownership score increased from 3 to 6 due to insiders adding to their positions.
Management: 3.0
Anoto has historically not been good at meeting the Company's objectives despite several changes of strategy and
numerous rights issues, with poor timing. Previous focus in e.g. enterprise solutions, HP and large displays did not
yield any profit. Anoto’s new strategy to address the pattern market by selling its ADNA technology solves the
volume problem a quintillion times but we have yet to see how strong Anoto’s position is. For a higher score we
need to see continuous improvement in especially execution, capital allocation and communication.
Ownership: 6.0
Overall, the ownership structure is an issue but it has improved following Nerthus becoming a main owner. For a
higher score larger share holdings from insiders in the Company are required, as well as institutional ownership and
a major shareholder taking a larger position. There is currently no single shareholder with a corner. On the positive
side the CEO and the COB own a lot of shares and added to their positions in the right issue in the fall of 2018.
Profit Outlook: 5.5
ADNA is a new market with strong prospects when it comes to volumes (quintillions). Given Anoto’s long
development of in house pattern technology we see a logic in addressing the ADNA market with a license offering,
meaning margins of 100 percent, as opposed to the previous hardware margins of some 20 percent. We are not
sure on the competitiveness of ADNA yet or how strong the value proposition is but the onboarding of the first
customers and partners might give some clues.
Profitability: 0.0
Prior to Q2'17 Anoto had never been profitable since inception 1996, except for a few occasional quarters, despite
sales of around SEK 150 million in 2013-2014 and even more during the years before that. Thus, the profitability
score can only be 0 at the moment but following the massive cost cuts and a new strategy with more focus on
profitability we believe the current earnings trend from stable revenue in Livescribe, Pen Gen and Forms can
continue, meaning the outlook for the profitability score looks promising.
Financial Strength: 3.0
Anoto turned to profit in Q2'17 but in relation to the Company's historic revenue, sales levels likely need a boost for
the positive earnings to continue. The burn rate is decreasing steadily but losses remain a risk since we believe
sales cycles with the ADNA customers could be long given the large size of these companies. We cannot rule out
the risk for another smaller offering to cope with the demand, investments or inventory/working capital.
REDEYE Equity Research Anoto Group AB 14 December 2018
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PROFITABILITY 2016 2017 2018E 2019E 2020E ROE -99% -22% -1% 6% 9% ROCE -88% -12% -4% 7% 9% ROIC -90% -13% -5% 8% 13% EBITDA margin -72% -12% -1% 22% 26% EBIT margin -102% -21% -11% 11% 16% Net margin -103% -31% -3% 10% 16%
Please comment on the changes in Rating factors……
INCOME STATEMENT 2016 2017 2018E 2019E 2020E Net sales 236 173 131 196 237 Total operating costs -406 -194 -132 -153 -174 EBITDA -170 -21 -1 43 63 Depreciation -18 -4 -3 -2 -2 Amortization -53 -11 -10 -18 -24 Impairment charges 0 0 0 0 0 EBIT -240 -37 -14 22 37 Share in profits 0 0 0 0 0 Net financial items -6 -20 10 -3 0 Exchange rate dif. 0 0 0 0 0 Pre-tax profit -246 -56 -4 19 37 Tax 3 3 0 0 0 Net earnings -243 -53 -4 19 37
BALANCE SHEET 2016 2017 2018E 2019E 2020E Assets Current assets Cash in banks 6 32 27 87 170 Receivables 35 28 18 25 31 Inventories 49 52 38 45 50 Other current assets 35 11 15 20 21 Current assets 125 123 98 177 271 Fixed assets Tangible assets 8 3 4 5 6 Associated comp. 0 0 0 0 0 Investments 19 18 2 2 2 Goodwill 163 153 153 153 153 Cap. exp. for dev. 0 0 0 0 0 O intangible rights 74 102 115 120 119 O non-current assets 0 0 0 0 0 Total fixed assets 264 277 274 280 280 Deferred tax assets 0 0 0 0 0 Total (assets) 389 400 372 456 551 Liabilities Current liabilities Short-term debt 29 11 7 0 0 Accounts payable 112 65 56 78 95 O current liabilities 1 0 0 2 4 Current liabilities 143 76 64 80 99 Long-term debt 28 0 2 2 2 O long-term liabilities 0 0 0 0 0 Convertibles 0 44 2 2 2 Total Liabilities 171 121 68 85 103 Deferred tax liab 0 0 0 0 0 Provisions 7 3 9 12 13 Shareholders' equity 213 276 296 360 435 Minority interest (BS) -2 -1 -1 -1 -1 Minority & equity 212 276 296 360 435 Total liab & SE 389 400 372 456 551
FREE CASH FLOW 2016 2017 2018E 2019E 2020E Net sales 236 173 131 196 237 Total operating costs -406 -194 -132 -153 -174 Depreciations total -70 -16 -13 -21 -26 EBIT -240 -37 -14 22 37 Taxes on EBIT 3 2 0 0 0 NOPLAT -237 -34 -14 22 37 Depreciation 70 16 13 21 26 Gross cash flow -167 -19 -1 43 63 Change in WC 8 -20 12 5 7 Gross CAPEX -58 -29 -11 -26 -26 Free cash flow -217 -67 0 22 44 CAPITAL STRUCTURE 2016 2017 2018E 2019E 2020E Equity ratio 54% 69% 79% 79% 79% Debt/equity ratio 27% 20% 4% 1% 1% Net debt 51 24 -15 -83 -166 Capital employed 263 300 280 277 269 Capital turnover rate 0.6 0.4 0.4 0.4 0.4 GROWTH 2016 2017 2018E 2019E 2020E Sales growth 22% -27% -24% 49% 21% EPS growth (adj) 8% 292% -94% -545% 91%
DATA PER SHARE 2016 2017 2018E 2019E 2020E EPS -0.13 -0.52 -0.03 0.15 0.28 EPS adj -0.13 -0.52 -0.03 0.15 0.28 Dividend 0.00 0.00 0.00 0.00 0.00 Net debt 0.02 0.24 -0.13 -0.63 -1.20 Total shares 2340.83 102.07 120.61 130.12 137.96 VALUATION 2016 2017 2018E 2019E 2020E EV 10,501.8 467.1 292.7 225.6 142.5 P/E -34.0 -8.4 -77.0 17.3 9.0 P/E diluted -34.0 -8.4 -77.0 17.3 9.0 P/Sales 35.0 2.6 2.3 1.7 1.4 EV/Sales 44.6 2.7 2.2 1.2 0.6 EV/EBITDA -61.8 -22.5 -321.8 5.2 2.3 EV/EBIT -43.7 -12.8 -20.7 10.2 3.9 P/BV 49.4 1.6 1.0 0.9 0.7
SHARE INFORMATION Reuters code ANOT.ST List Small Cap Share price 2.6 Total shares, million 120.6 Market Cap, MSEK 307.6 MANAGEMENT & BOARD CEO Joonhee Won CFO To be announced IR Joonhee Won Chairman Jörgen Durban ANALYSTS Redeye AB Viktor Westman Mäster Samuelsgatan 42, 10tr [email protected] 111 57 Stockholm
SHARE PERFORMANCE GROWTH/YEAR 16/18E 1 month -26.9 % Net sales -25.4 % 3 month -16.1 % Operating profit adj -75.7 % 12 month -42.7 % EPS, just -50.0 % Since start of the year -41.4 % Equity 18.2 %
SHAREHOLDER STRUCTURE % CAPITAL VOTES Nerthus Investments LTD 9.9 % 9.9 % Avanza Pension 6.2 % 6.2 % Nordnet Pensionsförsäkring 2.0 % 2.0 % Swedbank Försäkring 1.4 % 1.4 % Dimensional Fund Advisors 0.7 % 0.7 % SEB Trygg Liv 0.6 % 0.6 % Annika Lindh 0.5 % 0.5 % Larssons Utvecklings AB 0.5 % 0.5 % Stefan Linderholm 0.5 % 0.5 % XACT Fonder 0.5 % 0.5 %
DCF VALUATION CASH FLOW, MSEK WACC (%) 15.8 % Assumptions 2017-2023 (%) Average sales growth 16.1 % Fair value e. per share, SEK 2.6 EBIT margin 9.9 % Share price, SEK 2.6
REDEYE Equity Research Anoto Group AB 14 December 2018
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Redeye Rating and Background Definitions The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating
risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 –
Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted
differently according to how important they are deemed to be. Each key factor is allocated a number of points
based on its rating. The assessment of each valuation key is based on the total number of points for these
individual factors. The rating scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the
bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to
manage the company in the best interests of the shareholders. A good board and management can make a
mediocre business concept profitable, while a poor board and management can even lead a strong company into
crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 –
Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner
commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a
dispersed ownership structure without a clear controlling shareholder have historically performed worse than the
market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner
commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.
Profit Outlook
Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit
growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not
grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit
Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 –
Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to
generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company
has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on
total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit
margin or EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term.
The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no
benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength
is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick
ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.
REDEYE Equity Research Anoto Group AB 14 December 2018
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Redeye Equity Research team
Management Björn Fahlén
Håkan Östling
Technology Team Jonas Amnesten
Henrik Alveskog
Dennis Berggren
Havan Hanna
Kristoffer Lindström
Fredrik Nilsson
Tomas Otterbeck
Eddie Palmgren
Viktor Westman
Editorial Jim Andersson
Eddie Palmgren
Ludvig Svensson
Life Science Team Anders Hedlund
Arvid Necander
Klas Palin
Mathias Spinnars
Erik Nordström (Trainee)
Jakob Svensson (Trainee)
REDEYE Equity Research Anoto Group AB 14 December 2018
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Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization). Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis. Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies:
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Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument. Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making. Redeye Rating (2018-12-14)
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Rating Management Ownership Profit outlook Profitability Financial Strength
7,5p - 10,0p 47 47 20 11 21
3,5p - 7,0p 89 84 118 39 52
0,0p - 3,0p 14 19 12 100 77
Company N 150 150 150 150 150
CONFLICT OF INTERESTS
Viktor Westman owns shares in the company : Yes Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.