COMPANY ANALYSIS 24 July 2015 Summary Anoto Group AB (ANOT.ST) Raised expectations This is a short update following not only the revealing of the aspiring OEM partner (HP). During only the last few weeks Anoto has made several other positive announcements. The recent news with the Penvision acquisition, Optika Display and the TStudy exclusivity agreement has made us even more positive towards Anoto s business operations. With the new information out there we believe it is necessary to revise our short and long-term estimates once again, although no details what so ever has been released regarding the important HP project. In addition, our Rating is strengthened by the stronger financial position. All in all, this results in an increase in our fair value of 66 percent. We have a lot of room for raising our estimates further as soon as we get to calculate with some actual numbers. The uncertainty associated with the coming HP announcement of course makes our assumptions extra uncertain, which means that this analysis update might be obsolete within days. Redeye Rating (0 10 points) List: Small cap Market Cap: 1,364 MSEK Industry: Information Technology CEO: Stein Revelsby Chairman: Jörgen Durban OMXS 30 Anoto Group AB 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 24-Jul 22-Oct 20-Jan 20-Apr 19-Jul Management Ownership Growth prospect Profitability Financial strength 5.0 points 4.0 points 7.5 points 0.0 points 4.0 points Key Financials 2013 2014 2015E 2016E 2017E Revenue, MSEK 144 141 233 313 439 Growth -27% -2% 65% 34% 40% EBITDA -79-49 -24 19 101 EBITDA margin -55% -35% -10% 6% 23% EBIT -163-56 -30 10 95 EBIT margin -116% -40% -13% 3% 22% Pre-tax earnings -168-63 -27 6 93 Net earnings -168-63 -27 6 93 Net margin -117% -45% -12% 2% 21% 2013 2014 2015E 2016E 2017E Dividend/Share 0.00 0.00 0.00 0.00 0.00 EPS adj. n/a n/a n/a 0.01 0.10 P/E adj. -0.3 n/a n/a 230.3 14.6 EV/S 0.7 2.0 5.1 3.8 2.7 EV/EBITDA n/a n/a n/a 64.3 11.7 Share information Share price (SEK) 1.5 Number of shares (m) 897.1 Market Cap (MSEK) 1,364 Net debt 2014E (MSEK) -53 Free float (%) 84 % Daily turnover ( 000) 30000 Analysts: Viktor Westman viktor.westman@redeye.se 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: info@redeye.se
Redeye Rating: Background and definitions Anoto Group AB 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 Growth 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. Growth Outlook Our Growth 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 Growth Outlook are: 1 Strategies and 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. 2
The expectations is rising Anoto Group AB The last few weeks has altered our perception of Anoto s business in several positive ways, apart from the dilution from the acquisition and the latest private placements (which on the other hand we believe was necessary for strengthening the working capital). News in Anoto lately Here we list and go through the recent happenings in Anoto: Extremely busy weeks for Anoto lately 1. Prolonged exclusivity agreement with TStudy 2. Additional orders from both India and South Korea 3. Two new private placements 4. Promising start for the Optika Display partnership 5. The name of the new OEM partner has been revealed 6. Anoto aquires Penvision TStudy has agreed to buy pens of approximately SEK 660 million although with very low gross margins for Anoto.. 1. Prolonged exclusivity agreement with TStudy Anoto recently closed a large, 5 year exclusivity agreement with its partner TStudy. The price TStudy are paying for prolonged exclusivity is a guarantee to buy a minimum of 2 million pens during the period. Calculating with the earlier TStudy pen price of SEK 330 per pen the agreement would mean sales of on average SEK 132 million per year. However we do not expect an even distribution but instead gradually increasing size of the orders. In addition, gross margins are substantially lower, almost 5 times lower than the rest of the Anoto, which would indicate only about SEK 90 million in gross profit. On the other hand the growing pen volumes makes it possible for Anoto to lower the cost of goods sold and hence expand the gross margins. Another important aspect is of course that TStudy must have the financing necessary. According to Anoto, TStudy now has a solid financial position and the new investors that secured the financing ofusd 6.5 million, about a year ago, have strong financial muscles. 2. Additional orders from both India and South Korea Follow-up orders have been received from both India and South Korea. Customers returning for more indicates a strong and relevant value proposition. 3. Two new private placements As mentioned many times before we believe that the private placements of SEK 15.3 million and SEK 40.5 million (before transaction costs) was needed for strengthening of the working capital. 3
Anoto Group AB 4. Promising start for the Optika Display partnership Anoto, last month, together with Optika Display launched Collaborate 65, a large format (65 inch) ultra-high definition 4K interactive display at the InfoComm Expo. We have earlier in the following text http://www.redeye.se/analys/today/anoto-first-demonstration-valueproposition written about Optika and this interesting partnership. 1 Prominent awards for Anoto at InfoComm Recently we learned that Optika Display won the award for Best Personal Workspace for Creatives on the InfoComm Expo. In addition, Anoto s affiliate we-inspire was presented with the Telepresence Options Best Visual Collaboration Solution. These are as impressive wins as they are important, as there were 950 exhibitors and 40 000 attending professionals at the InfoComm Expo, meaning the best possible publicity. The probable rival, Microsoft, also presented its Surface Hub at InfoComm. Below we are listing some reasons why Anoto and Optika s solutions is better or just as good as Microsoft s: but for the rival Microsoft as well 1. The distribution of InfoComm awards suggests that Anoto s solutions is best for the creatives, i.e. the creative niche that Anoto wants to address. Microsoft also won a price at InfoComm for its Surface Hub, which was presented with Best Interactive Display, indicating a more all-round usage area. Microsoft s display is not 4K and thus not specially designed for creative design users but more meant to be a traditional whiteboard. 1 In Our earlier look at Optika Display we wrote the following: What is Optika Display? Optika Display is described by the parent company, Stratacache, as a leader in the LCD enhancement market which provides industries with economical, innovative display solutions. Optika Display addresses customers who want more customized displays that do not fit the sizes and types of the standards and mass-production of the major Asian display manufacturers. Optika Display has been serving the needs of specialty industries, especially for outdoor-usage including military, automotive, aerospace and marine applications etcetera, but also segments of the traditional display market as well. The partnership and the business model Anoto s value proposition is to combine digital writing on paper, large displays and interactive walls.. The partnership has worked to create an industry standard for a collaboration platform where Anoto s solution as a result is coupled with edge-to-edge multi-touch. As we understand it, Optika Display will be the product owner buying all the components and Digital View will help with parts of the assembly. The panels are coming from AU Optronics, and FlatFrog s role is to supply the touch solutions. Anoto will provide rolls of film with its dot pattern. Collaborate 65UHD and the product offering There are, according to Anoto, endless of combination opportunities for the Collaborate 65 UHD. In addition, Collaborate 65UHD will be compatible with a lot of protocols, operating systems, architectures etcetera. In Optika Display s press release it was stated that this adaptability enables Avnet s value-added resellers and professional audio-visual companies in the Avnet communities to create and bundle solutions for both new and upgraded customer environments. Why is this important? Avnet is a Fortune500-company and with sales of USD 28 billion the world s largest distributor of electronics, i.e. a tremendous distribution partner. A potentially huge market As we have written in earlier analysis updates, the market is driven by the transition from projector-based interactive whiteboards to interactive displays in the 4 million corporate boardrooms, meaning a potential billion dollar market. We believe that the large displays partnership has the potential to be Anoto s largest elephant. 4
Anoto Group AB We feel that there is a difference here as Microsoft, as opposed to Anoto, might want to go after the general volume market. Microsoft could probably capture a large part of the market with its large and superior sales force, although there should be enough viable niches to provide Anoto with strong growth possibilities. Microsofts Surface Hub is still not using the N-trig pen, perhaps because it is simply not possible 2. A peculiar thing is that the Surface Hub is not using the N-trig pen, even though the two companies have known each other and been co-operating for several years now. Microsoft made its first investment in N-trig as early as in 2009. We believe the reason why Surface Hub is not using the N-trig pen is that it is simply too hard to do so on such large formats as the Surface Hub. 3. Microsoft started to accept pre-orders of its Surface Hub device on July 1 in 24 markets with shipping estimated to start in September. The larger device will come at a high price of USD 20 000 and have a size of 8 inches. The alternative is 55 inches for USD 7 000. Collaborate 65 will be substantially less costly than the Surface Hub. 4. Microsoft launched the Surface Hub last year and enticed the market demand but for some reason experienced troubles in delivery. 5. Last but not least we have the Anoto technology advantages over the p- cap technology with interoperability and better precision. Anoto s tip is smaller and is about the size of a real pen. The Surface Hub is, as opposed to Anoto, not compatible with other touch displays as it uses a proprietary p-cap controller which is located under the display. Putting sensors and controllers under the display also takes up space which worsens the parallax effect compared to Anoto s totally flat micro dot-pattern. The parallax effect tells the user were the digitizer thinks the pen is, and this is the most important characteristic of an active pen according to Microsoft s Surface Pro leading architect Panos Panay. Two small letters last weeks stopped the trading of the Anoto share 5. The name of the OEM partner has been revealed Last week, Anoto revealed that HP is the OEM partner that Anoto are negotiating with following a confidential document from HP that was leaked on the internet. From the document we learned that there is a road map from HP in which Anoto s pens and dot pattern are included in the HP Sprout 1.5, for both consumer and commercial applications. A less encouraging detail in the document was that it is suggested that Anoto s pens will only be optional and hence not a part included in the offering. We were earlier contemplating the size of volume commitments and these thoughts have now somewhat been altered/extended to a question on how many of HP s workstations that will need a digital pen. HP sold about 57 million computers in 2014 and roughly has a good 18 percent of the total global market according to statistics from Gartner. However, HP Sprout is not a mainstream product. Given the title of the author of the document 5
Anoto Group AB (Workstation Specialist) it is probably a lot more likely that the relevant market for Anoto is HP s workstations. HP has about 40 percent of the total 4 million units in the workstations market meaning that HP sells about 1,6 million workstations a year. But the leaked document from HP did not mention volumes In the absence of volume commitment data etcetera we have compared our 2016 estimates of pen volumes from the OEM sales with HP s workstations and computers just as a sanity check. Our expectations for 2016 has been volumes of 110 000 pens for a price of USD 50 and sales of SEK 44 million. 110 000 pens would mean a penetration ratio of 6,9 percent of all of HP s workstations and two thousandths of HP s total computer sales. Our initial conclusion is that we are not underestimating the initial OEM pen volumes. Anoto makes an acquisition with vertical integration 6. Anoto aquires Penvision Yesterday Anoto announced that the Company is acquiring Penvision, a software company within digital solutions. Penvision will as of yesterday be fully integrated in Anoto with no separate reporting. The acquisition means vertical integration of the value chain with control of the end customer price. Anoto is a current Penvision customer depending on Penvision s core product Formidable to provide Anoto Live Forms (an Enterprise Solutions application for signatues, documents and mobile data capture). Following the acquisition Anoto will have the whole Live Forms solution in-house and will not need to pay license costs related to Formidable. In the table below Penvision s income statement for 2014 and 2013 is displayed: Penvision: Income Statement 2013 2014 Sales 12.5 13.5 other income 0.5 0.1 Total sales 13.1 13.6 COGS -4.9-4.5 Gross profit 8.2 9.1 Gross margin 65.2% 67.4% Other external costs -5.1-5.0 Employee costs -5.1-5.4 EBITDA -2.0-1.4 EBITDA % n/a n/a Depreciation -0.5-0.5 EBIT -2.5-1.8 Financial income 0.0 0.0 Financial expenses 0.0 0.0 Net financials 0.0 0.0 Pre tax profit -2.5-1.8 Net earnings -2.5-1.8 Source: Penvision (annual report of 2014) As can be seen in the table Penvision s gross margins are quite strong, which is not surprising as Penvision is a software company. The operating expenses are only around SEK 10 million. 6
The historical numbers acquired company has so far not impressed The payment seems shareholder friendly Anoto Group AB 30 percent of Penvision s revenue of SEK 13 million was related to Anoto, although Anoto expect sales to grow going forward. Looking back, Penvision has lost 19 percent of the revenue 2014 compared to 2010. Year 2012 is the only year that represents a growth (4 %) in our comparison with 2010. In addition, Penvision s partner network decreased by about 13 percent between 2013 and 2014 as the network consisted of 70 partners at the end of year 2014 compared to 80 the year before. According to Penvision the reason behind the decrease is consolidation of the partners. As we understand it the price of the shares in the non-cash issue is not fully set but we are calculating with the closing share price of yesterday, meaning a price of P/S 2.3x. We like the payment form with a non-cash issue as the share is up almost 200 percent the last three months meaning less dilution effects. The reason why Penvision is accepting a deal with 0 percent cash we believe has to do with a generational shift where the CEO retires. There will be no lock-up period on the new issued shares. The balance sheet of Penvision is really thin as can be seen in the balance sheet table below, suggesting that a large part of the acquisition is motivated by recruiting the employee talent. On the other hand this also means 10 more mouths to feed for Anoto and an increase of the employees with about 10 percent. The perhaps most important part of the deal is that Anoto will get a close, direct access to the partnership network and the customers of Penvision. Penvision: Balance sheet 2013 2014 FIXED ASSETS Intangible assets 1.4 0.9 Financial assets* 1.0 1.0 Total fixed assets 2.4 1.9 Current assets Inventory 0.1 0.0 Accounts receivables 3.4 1.7 Other receivables 0.4 0.5 Total receivables 3.8 2.2 Cash 5.5 2.6 Total current assets 9.3 4.8 Total Assets 11.7 6.7 EQUITY & DEBT Equity 5.3 3.4 Debt Provisions 1.0 1.0 Long term debt 0.0 0.0 Short term debt Accounts receivables 3.1 1.5 Other short term debt 2.3 0.9 Total short term debt 5.4 2.3 TOTAL DEBT & EQUITY 11.7 6.7 Source: Penvision (annual report of 2014) * = Endowment insurance for the benefit of the CEO 7
Financial estimates Anoto Group AB Estimates for the second quarter and forward As for Anoto s Q2 report we are expecting sales of SEK 61 million. As can be seen in the table below this is a substantial increase from the previous quarters. However, it is important to remember that this revenue increase is to a large extent driven from low margin orders from customers like TStudy. Detailed estimates (SEK million) SEKm Q1'14 Q2'14 Q3'14 Q4'14 2014 Q1'15 Q2'15E Q3'15E Q4'15E 2015E 2016E Total sales 37.0 31.0 27.1 46.0 141.1 43.1 60.6 64.2 65.4 233.1 313.3 Gross margin 72.7% 63.0% 64.5% 65.8% 63.3% 58.7% 50.0% 52.4% 58.5% 54.7% 55.7% OPEX 34.6 36.8 37.2 39.4 148.0-37.4-39.0-37.0-38.5-151.9-156.5 EBITDA -7.7-17.2-19.7-3.7-49.2-12.1-8.7-3.4-0.2-24.3 17.9 Depreciation -4.5 0.6-3.0 0.7-6.2-1.4-1.5-1.5-1.5-5.9-8.0 EBIT -12.1-16.6-22.7-4.4-55.9-13.4-10.2-4.9-1.7-30.2 9.9 Net financials -0.8-1.0-2.6-2.8-7.2 7.8-1.5-1.5-1.5 3.2-6.0 Pre tax loss -13-18 -25-7 -63-5.6-11.7-6.4-3.2-26.9-14 Source: Redeye Research Short term changes in our estimates The aforementioned news with especially education (TStudy) but also India, South Korea, Optika Display and Penvision has resulted in the following changes in our estimates. The short term estimates changes can be seen in the table below: Changes in estimates SEKm 2015E 2016E Sales Old 220 263 New 233 313 % change 6% 19% Technology Licensing Old 109 147 New 121 182 % change 11% 24% Business Solutions (Incl C technologies) Old 111 116 New 113 131 % change 1% 13% EBITDA Old -24 15 New -23 18 % change -3% 19% EBIT Old -31 7 New -30 10 % change -3% 42% Earnings per share Old n/a 0.00 New n/a 0.01 % change n/a n/a Source: Redeye Research 8
Anoto Group AB The proportions of our new sales estimates are displayed in the graph below. As the major revenue impact comes from TStudy we have broken out the Education sales to show them separately. Detailed sales estimates (SEK million) 450 400 350 300 250 200 150 100 50 Business Solutions (incl. C Tech & Penvision) Underlying Technology Licensing* Education we-inspire (Interactive Walls) Interactive Displays 0 2015E 2016E 2017E * = Including Smartmatic, Livescribe & Panasonic Source: Redeye Research Cash flow and burn rate Anoto had SEK 33 million in cash following Q1 and raised SEK 15 million and SEK 40.5 million from two more private placements. We have estimated that Anoto will burn SEK 12 million of the cash during Q2. The working capital issue still remains. If the inventory returns to the historical levels we could be looking at cash of about SEK 65 million following Q2, indicating that Anoto s statement that the cash is enough for the next 12 months is valid. It is also important to remember that parts of Anoto s authorization to issue new shares (10 million shares of the total authorization of 80 million shares) is still valid when the acquisition is complete. 9
Valuation Anoto Group AB In our valuation of Anoto we have used a discounted cash flow valuation (DCF) with three different scenarios: our most expected base case, together with a pessimistic as well as an optimistic scenario respectively (bull and bear case respectively). The wide bull and bear range illustrates Anoto s binary win or lose-situation. Valuation conclusion and the share Anoto s recent private placements and the authorization to raise more capital if needed has strengthened our Redeye Rating of Anoto and hence decreased the risk. Our new rating for the stability and the capital strength of 4 (1) lowers our required rate of return from 16.8 percent to 15.0 percent, meaning a major impact on the valuation. Our new fair value for Anoto is SEK 664 million, meaning an increase of 66 percent from the previous SEK 401 million after the dilution effects (Our valuation assumptions are presented further down in this section.). As mentioned, we are very impressed by the performance in Anoto s business operations. However, investing is not only about finding great companies but also to find undervalued businesses. Unfortuneately we are far from the only ones who are impressed by Anoto. Anoto s share has continued to skyrocket. The share price has rose close to 200 percent during the last three months, although not without company-related news as the order intake has been strong during the period together with interesting news on the partnerships A major question is of course if these news is equal to Anoto making profits with a net present value of SEK 900+ million more than three months ago ( i.e. if they can justify a SEK 900+ value increase). To us this is not the case as the essence of the Anoto investment case is virtually the same as one year ago when we first learned about the large OEM (HP) case, which is yet to be seen. What has happened is instead that Anoto has been discovered by numerous of investors. It is not uncommon for the more unknown, small growth stocks to rise fast as more and more people hear about them. We are calculating with a high CAGR sales growth of 24 percent during the coming four years. Nonetheless, Anoto is today valued at EV/EBIT 14x on our 2017 estimates. But then again we have to be humble for the outcome of the HP deal that of course could alter everything. Discounted cash flow valuation In all of our three scenarios in the DCF-valuation of Anoto we have used a new discount rate of 15.0 percent (16,8), due to, as mentioned, the stronger financial stability. The discount rate is a reflection of Anoto s past performance and the uncertainty in the large strategic shift. We have not taken into account any tax payments before year 2019, due to Anoto s large 10
deferred tax assets. Anoto Group AB Our Base case In our Anoto base case we make the following assumptions: 1. 2015: Closing of the deal with the new OEM partner, followed by licensing and NRE revenue from that OEM partner s product development, and pilot pen orders in H2 2. 2016: A reference year where the products are verified. The product development with the OEM partner continues and Anoto builds hype among the most high end creative users together with the partner. Anoto receives the first large OEM orders of pens of around 110 000 units, which means that the Company reaches break-even. In addition, Anoto and the partner Optika Display sells 2500 large interactive displays for a total of SEK 10 million. 3. 2017: Two larger OEM orders as the other creative users follow suit 4. Business Solutions manages stabile sales of around SEK 105-137 million during 2015-2017 meaning a moderate growth. 5. Sales from large format interactive displays (Optika Display), Panasonic, Smartmatic, Education, Livescribe and other underlying Technology Licensing sales goes from SEK 91 million to SEK 206 million during 2015-2017, meaning that we are only counting with a few of these sub-segments to be successful. 6. Anoto with the assumptions above will have a CAGR sales growth of 20 percent during 2015-2021. 7. The EBIT-margin is expected to be on average 17 percent for 2015-2021. In summary, this would correspond to a value per share of SEK 0.74 or a market cap of SEK 664 million. We assume that the probability for base case to manifest is 50 percent. A pessimistic scenario (bear case) Our bear case assumptions are: 1. In a pessimistic, but reasonable scenario, Anoto would suffer from additional working capital needs and increased operating expenses, as the large sales from the OEM deal gets postponed for a few quarters, shows the same disappointing sales results as Panasonic or even capsizes for some reason. We assess that Anoto still can get a deal with another major OEM but the Company would then need to start all over again with new negotiations etcetera. In the meantime Anoto would then not be able to find 11
Anoto Group AB further financing, and burns all capital within 2015. Anoto will not slash OPEX, meaning that the downward spiral could then continue for some years. Anoto has been phenomenal at raising capital throughout the years in the past but that was mostly during bull market conditions and not for instance during the latest financial crisis of 2008-2009. A need for capital during a future recession or market turmoil might be too much to handle. 2. There is still some value in Anoto from tax loss carryforwards of more than SEK 500 million, the technological expertise from focusing on a nisch area for almost 20 years and more than 100 valid patents. Thus, Anoto s products or technology could be of value in someone else s hands. Owners, partners and competitors, such as TStudy, Smartmatic, SOLiD, Panasonic, the new OEM customer and Wacom, all have various reasons for acquiring Anoto. This event would be similar to how Microsoft bought N-trigs technology, and not the whole company, for a price similar to a break-up value. The sale of Anoto (or parts of the Company) could be worth about SEK 180 million in total. Thus, our value of Anoto in bear case amounts to 0.2 SEK per share. Our expected probability for bear case is 25 percent. An optimistic scenario (bull case) Assumptions in bull case: 1. In bull case we believe that everything goes faster and better than expected, first and foremost in the HP project. We also believe that we could have underestimated the Optika Display partnership in its billion dollar market. Anoto in bull case captures 2,5 percent of Touch Display Research s estimated 2017 market for active pens of USD 3 billion, or USD 75 million in sales. Together with the Business Solutions revenue of SEK 137 million the aforementioned sales translates to total sales of close to SEK 600 million 2017. In bull case we are, outside of the strong growth in interactive displays, also counting on most of the customers within Education, Smartmatic, Panasonic and we-inspire to be important sales growth drivers. The CAGR sales growth between 2015 and 2018 will be 31 percent. 2. Anoto s gross margins of 65-70 percent suggests that the Company could likely reach sustainable EBIT margins in bull case of at least 25 percent within about 4 years, if we assume scalability in OPEX. 3. With our assumptions above the fair value would then in bull case be SEK 1698 million, or a value per share of SEK 1.89. Our expected probability for bull case is 25 percent. 12
Summary Redeye Rating Anoto Group AB 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 The financial strength score is raised to 4 (1) due to the private placements. Management 5.0p Ownership 4.0p Anoto has historically not been good at meeting the Company's objectives despite several changes of strategy and numerous of rights issues with poor timing. Until recently, Anoto was still focusing on the decreasing Enterprise Solutions area. On the positive side the new strategy with technology licensing and search for large OEM partners to address viable niches in the creative design industry seems sound. Management has long experience and good understanding of the market and the competitor. Important customers and partners hold large stakes of Anoto and have board positions in the Company. For a higher score larger positions from insiders in the Company is needed, as well as a major shareholder with a larger position. Growth prospect 7.5p Profitability 0.0p The market for active pen solutions and editable displays is large, yet still fast growing and consists of several segments. Anoto has also sold pens for countless of different applications. However, the failure has been to never reach sufficient volumes. Now Anoto has a new strategy meaning that the Company will go to market together with large OEM:s. Panasonic is a good example of an impressive reference customer. What Anoto has done is to evaluate its technology's advantages in relation to the competitors. Anoto then found that the product's precision, interoperability and unique paper to screen solution are strong competitive advantages for high end users in the creative industry. It is this industry that Anoto now will address together with OEM:s. Anoto has never been profitable except for a few quarters, despite sales of around SEK 150 million in 2013-2014 and even more during the previous years. The high gross margins of 60-70 percent indicates scalability. Anoto states that the company has high growth ambitions and therefore will not slash the operating expenses to less than SEK 122 MSEK. This makes the profitability entirely a top line issue. Financial strength 4.0p In relation to the Company's historic revenue, sales levels need a boost to reach break-even. The current burn rate is decreasing, along with OPEX, but is nevertheless still a question mark since the sales cycles with OEM partners in the licensing business until product releases are long and thus require solid financing. Anoto had SEK 33 million in cash following Q1 and has after Q1 made private placements of about in total SEK 59 million after transaction costs. The company states that this is enough for one year's working capital needs, which we find likely. 13
Anoto Group AB Income statement 2013 2014 2015E 2016E 2017E Net sales 144 141 233 313 439 Total operating costs -223-190 -258-295 -338 EBITDA -79-49 -24 19 101 Depreciation -3-6 -1-2 -1 Amortization -9 1-4 -7-5 Impairment charges -72-2 0 0 0 EBIT -163-56 -30 10 95 Share in profits 0 0 0 0 0 Net financial items -5-7 3-4 -2 Exchange rate dif. 0 0 0 0 0 Pre-tax profit -168-63 -27 6 93 Tax 0 1 0 0 0 Net earnings -168-63 -27 6 93 Balance 2013 2014 2015E 2016E 2017E Assets Current assets Cash in banks 7 4 72 63 104 Receivables 28 37 44 56 79 Inventories 28 21 31 42 57 Other current assets 31 20 25 25 25 Current assets 94 81 173 187 265 Fixed assets Tangible assets 3 2 2 2 4 Associated comp. 0 0 0 0 0 Investments 4 4 4 4 4 Goodwill 62 60 63 63 63 Cap. exp. for dev. 0 0 0 0 0 O intangible rights 10 19 17 13 11 O non-current assets 0 0 0 0 0 Total fixed assets 78 86 86 82 81 Deferred tax assets 0 0 0 0 0 Total (assets) 172 167 259 268 347 Liabilities Current liabilities Short-term debt 16 36 19 19 0 Accounts payable 0 0 0 0 0 O current liabilities 88 66 76 80 84 Current liabilities 104 102 95 99 84 Long-term debt 1 2 0 0 0 O long-term liabilities 0 0 0 0 0 Convertibles 0 0 0 0 0 Total Liabilities 105 104 95 99 84 Deferred tax liab 0 0 0 0 0 Provisions 0 1 1 1 1 Shareholders' equity 83 78 180 185 279 Minority interest (BS) -17-16 -16-16 -16 Minority & equity 66 62 163 169 262 Total liab & SE 172 167 259 268 347 Free cash flow 2013 2014 2015E 2016E 2017E Net sales 144 141 233 313 439 Total operating -223-190 -258-295 -338 costs Depreciations total -84-7 -6-9 -6 EBIT -163-56 -30 10 95 Taxes on EBIT 0 1 0 0 0 NOPLAT -163-56 -30 10 95 Depreciation 84 7 6 9 6 Gross cash flow -79-48 -24 19 101 Change in WC -7-12 -14-19 -33 Gross CAPEX -25-15 -6-5 -6 Free cash flow -111-76 -44-5 62 Capital structure 2013 2014 2015E 2016E 2017E Equity ratio 38% 37% 63% 63% 76% Debt/equity ratio 21% 49% 10% 10% 0% Net debt 10 34-53 -44-104 Capital employed 76 96 110 125 158 Capital turnover 0.8 0.8 0.9 1.2 1.3 rate Growth 2013 2014 2015E 2016E 2017E Sales growth -27% -2% 65% 34% 40% EPS growth (adj) 243% -88% -75% -122% 1,474% DCF valuation WACC (%) 15.0 % Assumptions 2015-2021 (%) Average sales growth 20 % Fair value e. per share, SEK 0.74 EBIT margin 17 % Share price, SEK 1.5 Profitability 2013 2014 2015E 2016E 2017E ROE -158% -78% -21% 3% 40% ROCE -150% -61% -21% 5% 42% ROIC -127% -73% -31% 9% 76% EBITDA margin -55% -35% -10% 6% 23% EBIT margin -113% -40% -13% 3% 22% Net margin -117% -45% -12% 2% 21% Data per share 2013 2014 2015E 2016E 2017E EPS -0.96-0.12-0.03 0.01 0.10 EPS adj -0.57-0.12-0.03 0.01 0.10 Dividend 0.00 0.00 0.00 0.00 0.00 Net debt 0.03 0.05-0.06-0.05-0.12 Total shares 389.88 725.37 897.15 897.15 897.15 Valuation 2013 2014 2015E 2016E 2017E EV 103.6 275.1 1,187.2 1,200.3 1,180.1 P/E -0.3-3.5-50.6 230.3 14.6 P/E diluted -0.3-3.5-50.6 230.3 14.6 P/Sales 0.4 1.5 5.8 4.4 3.1 EV/Sales 0.7 2.0 5.1 3.8 2.7 EV/EBITDA -1.3-5.6-48.9 64.3 11.7 EV/EBIT -0.6-4.9-39.3 121.0 12.4 P/BV 1.4 3.9 7.6 7.4 4.9 Share performance Growth/year 13/15e 1 month 87.7 % Net sales 27.3 % 3 month 198.0 % Operating profit adj n/a 12 month 186.8 % EPS, just n/a Since start of the year 261.9 % Equity 57.4 % Shareholder structure % Capital Votes Solid Technologies Inc. 8.5 % 8.5 % Antonio Mugica 7.2 % 7.2 % SEB Enskilda AS - Klientdepå 7.1 % 7.1 % Avanza Pension 5.4 % 5.4 % Fougner Invest AS 4.3 % 4.3 % Nqi Netfonds Asa 3.3 % 3.3 % Kristianro AS 2.5 % 2.5 % Nordnet Pensionsförsäkring 2.1 % 2.1 % JPM Chase NA 1.8 % 1.8 % NTC Various Fiduciary Capacit 1.6 % 1.6 % Share information Reuters code ANOT.ST List Small cap Share price 1.5 Total shares, million 897.1 Market Cap, MSEK 1363.7 Management & board CEO CFO IR Chairman Stein Revelsby Karl Wiersholm Stein Revelsby Jörgen Durban Financial information Q2 report August 14, 2015 Q3 report November 06, 2015 Analysts Viktor Westman viktor.westman@redeye.se Redeye AB Mäster Samuelsgatan 42, 10tr 111 57 Stockholm 14
Anoto Group AB Revenue & Growth (%) EBIT (adjusted) & Margin (%) 500 450 400 350 300 250 200 150 100 50 0 2012 2013 2014 2015E 2016E 2017E 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% 150 100 50 0-50 -100-150 -200 2012 2013 2014 2015E 2016E 2017E 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% -120.0% -140.0% Net sales Net sales growth EBIT adj EBIT margin Earnings per share Equity & debt-equity ratio (%) 0.2 0-0.2-0.4-0.6-0.8-1 -1.2 2012 2013 2014 2015E 2016E 2017E 0.2 0.1 0-0.1-0.2-0.3-0.4-0.5-0.6-0.7 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2012 2013 2014 2015E 2016E 2017E 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio Conflict of interests Viktor Westman owns shares in Anoto: No Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this. Company description Anoto is a global, combined hardware and software company within digital writing, with 90 percent of sales outside of the Nordics. The Company has embarked on a cost cutting journey and has in addition changed priorities, from digitizing forms to a license business with global industrial partners like Panasonic, Smartmatic, and TStudy, by offering solutions for editable screens and interactive walls. 15
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