Shekel Brainweigh Ltd: Relatively Resilient Without R&D Sacrifice
Shekel Brainweigh Ltd
Relatively resilient without R&D sacrifice
Shekel Brainweigh Limited (ASX:SBW) has released its unaudited accounts for 1HCY20, with the results far better than feared in the early stages of COVID uncertainty. Group sales declined only 5% to US$7.9m, driven predominantly by the group’s own brand, Healthweigh, which was impacted by a distributor’s temporary closure. R&D spend remained elevated in order to bring new products to market, and in this light a US$2.0m EBIT loss was well within forecast. Some COVID-related operating cost savings aided the result as management sought to progress commercialisation momentum with existing resources. Cash resources are tight and the company is “intensively dealing with money raising” to sure up the balance sheet. New Retail sales were modest but paid trials and customer interest remains, as too does the strong partnership alliances. While no guidance was given we expect improvement from pent-up demand over 2HCY20, remembering historically the 2H is always stronger (~45/55 skew). Despite a solid share price rally since our last update we still believe no value is being attributed to the New Retail division if the core scales business is valued at 6x ex-R&D EBIT (which we estimate at US2.0m-$2.5m). Our DCF valuation remains relatively unchanged, just impacted slightly from the higher A$ (earnings translation). The group continues to trade well below our selected peer group on an EV/sales basis.
Business model
SBW produces weighing scale hardware/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. One of the new verticals (Innovendi vending machines) is in commercialisation while others are nearing commercialisation (Innovendi Dry (previously called Soter), smart shelving and the Micro- market Capsule).
1HCY20 result and outlook implications
Relative to initial fears unit sales and therefore revenue across the group held up well over the COVID disrupted half, with revenue down 5% to US$7.9m. R&D spend was maintained at elevated levels in order to maintain the momentum of commercial launch, and represented 21.5% of sales over the half. In this light the $2.0m EBIT loss was within expectations. Looking forward the 2H has historically been the strongest period for SBW sales and earnings, and we expect some further pent-up demand this year.
Base case valuation A$0.38/share fully diluted
We have reduced our base case DCF valuation to A$0.38/share ($53m) from A$0.40/share predominantly driven by the higher A$ and resulting US$ translation. While the share price has improved significantly since our last update we still believe there is little value being attributed to the New Retail Division despite a number of products in the early stages of commercialisation. SBW continues to trade at a discount to our nominated peers.
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