Q2 19/20. Revenues of SEK6.5m were slightly below our estimate but up 53% y/y. However, costs increased quarter on quarter. Due to a hesitant (on Brexit) UK market, revenues were down slightly quarter on quarter but it seems as though Zutec could grow from here. After Q2, Zutec announced it had entered arbitration procedures in Qatar and hoped to collect its overdue receivable. In Q2, it signed two promising deals in Ireland with potential long-tailed revenues.
Cash flow. Q2 19/20 cash burn was higher than estimated and cash was SEK6.2m at 31 December, meaning free cash flow was SEK-6.9m in Q2 (SEK-4.3m in Q1). However, some of the costs were temporary according to management, meaning that cash burn could ease ahead, especially if recent deals and a better UK construction market leads to improved sales. Our estimates include a partial collection of the Qatar receivable. Zutec has negotiated a EUR1m loan facility from shareholder Athanase Industrial Partners (17.16% of shares at 31 December), with the shares in Zutec Inc. (Ireland) Ltd as collateral. Zutec can draw on the facility over a two-year period and has utilised EUR0.6m. The 28 February EGM will see a vote on a proposed new board, with Stefan Charette of Athanase proposed as the chair.
Estimate revisions. Our revenue estimates are mostly intact, but we raise our opex assumptions.
Valuation. To reflect the cash flow risk, we lower our valuation range from SEK1.5-6 per share to SEK0.9-5.1 per share. We note that the EUR1m loan facility virtually has the full company assets as collateral, with Zutec having to repay the amount borrowed by November 2021, of which it has already drawn EUR0.6m. We base our valuation approach 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 company has a mandate for increased share capital. At EV/sales 2019/20E of 0.6x versus EV/sales 2020E of 6.1x for the Nordic software sector, we currently find a peer discount warranted given the high risk. Looking past the short-term uncertainties, potential value drivers ahead include higher growth or lower costs than estimated.
For the full research piece see attached Danske Bank report:
Clíona Farrelly, CEO of Zutec Holding AB
firstname.lastname@example.org +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.