Shekel Brainweigh Ltd - Holding Underlying Earnings Despite COGS Pressures/R&D
Shekel Brainweigh Ltd
Holding underlying earnings despite COGS pressures/R&D
Shekel Brainweigh Limited (ASX:SBW) has reported H1 FY22 sales growth of 23.5% to US$13.1m, which included ~165% growth in Retail Innovation sales to $US1.0m. We estimate an adjusted EBITDA loss (before amortisation, one-off costs and share-based payments) of US$1.6m, slightly above the US$1.5m in the pcp on the back of gross margin pressures (down ~240bps) due to supply chain/freight costs. Relative to our selected peers this is a solid effort with the likes of (ASX:RVS) down 770bps, (ASX:AMS) down 770bps and (ASX:PVS) a whopping 3,960bps. Some key orders including the first Smart Cart order (US$1.6m) and a second order from Belgium retailer Colruyt were also delayed for these reasons and are now due in H2 CY22. SBW has also managed inventory well relative to peers and now has a superior WC/sales ratio. From a valuation perspective we continue to highlight a negative A$11.6m value for the Retail Innovation division if we assume 8x adjusted CY21a EBIT of US$2.9m (A$4.2m) for the Scales division. This is despite a number of new products at or near commercialisation, evidenced by three consecutive halves of growth. Our DCF valuation is A$0.37/share.
Business model
SBW produces weighing scale hardware and software that is employed by OEMs for self- checkout and healthcare applications requiring speed and accuracy. Prices received from customers are typically fixed, and gross margins are in-line with that achieved by most OEM equipment suppliers. The group is looking to extend this market-leading technology into new verticals, opening up larger market opportunities, potentially higher gross margins and some recurring SaaS-style revenue from data analytics. New products include automated vending machines Innovendi and Hubz, an Autonomous Micro-market Capsule and weighing systems for smart shopping carts, while products nearing commercialisation includes Fast Track, product recognition software/hardware for retail self-checkouts.
Business well managed relative to peers in tough environment
All our selected hardware with embedded software peers have incurred the same input cost and freight pressures over H1 CY22, but SBW have managed these pressures relatively well evidenced by reported GP% and working capital management. Most peers have seen a sharp reduction in GP% and sharp increase in working capital/revenues with little sales growth. SBW’s was one of few to deliver sales growth and recorded a modest decline in GP% and modest increase in working capital/revenues. SBW has also reduced cash burn by 30% over the period (to US$283k/month), with further improvement expected in 2H FY22.
Base-case valuation A$0.37/share supported by Scales profit
Our base-case DCF valuation for SBW has increased to $0.37/share (from $0.35/share) on the back of a period rollover and lower AUDUSD assumptions despite an increased share count from recently converted shares and forecast CN conversion price. Using our FY21a divisional EBIT estimates we value the Scales division at A$34.5m (8x EBIT and $0.18/share), implying a negative A$11.6m value for Retail Innovation, which supports our DCF.
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