Q1 19/20 summary. EBIT in the Jul-Sep quarter was slightly better than estimated at SEK5.3m as first signs of improvement in cost/revenue balance was seen. With the large Qatar project now out of comparable figures, sales grew 21% y/y, but the EBIT loss increased.
Cash flow. Zutec continues to work to collect its receivables for the large Qatar project and we expect a haircut. The IPO proceeds enabled Zutec to accelerate investments in development, sales and marketing, but revenues have yet to follow, which is being addressed by new management, partly by lowered costs. Zutec now aims for more resource efficient growth. Per 30 Sep, Zutec had SEK10.4m in cash, down c.SEK5m q/q. In Q1, Zutec negotiated a EUR1m loan facility from shareholder Athanase Industrial Partners (17.16% of shares/ votes per 30 Sep), with the shares in Zutec Inc (Ireland) Ltd as collateral, subject to approval at the AGM. Zutec Holding AB (publ) owns 100% of Zutec Inc (Ireland) Ltd, which in turn owns other subsidiaries and IP. If approved, the EUR1m loan facility can be drawn upon during a two-year period after the AGM, at a 12-15% interest rate.
Estimate revisions. We keep our revenue estimates intact but lower our opex assumptions on the back of cost initiatives, easing estimated cash burn slightly.
Valuation. To reflect the cash flow risk, as we have no insight in the Qatar receivable collection, we lower our valuation range to SEK1.5-6/share (from SEK3-8 previously). We note that the proposed EUR1m loan facility virtually has the full company assets as collateral, with Zutec having to repay the amount borrowed by November 2021. Our valuation approach is based on the assumption that Zutec will be able to meet covenants (operational cash flow or share issue). However, with growth and cost initiatives, management does not expect to have to draw on the full amount and the AGM notice includes a proposal for increased share capital. At 0.4x 2019/20E EV/sales versus 6.0x 2020E EV/sales for the Nordic software sector, we currently find a peer discount warranted given the high risk. Looking past the short term uncertainties, value drivers ahead would be higher growth or continued lower costs than estimated.
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Clíona Farrelly, CEO of Zutec Holding AB
email@example.com +353 1 201 3565
Zutec develops and markets cloud-based software solutions, primarily directed to companies within the building and construction industry. The Company’s products help clients to increase their productivity and cost efficiency. Zutec provides solutions within project management, data and document collaboration tools, data enriched 3D-models, defect management, project handover and the operations and maintenance of buildings.