Shekel Brainweigh Ltd - Sale of Healthweigh Offers Further Valuation Support
Shekel Brainweigh Limited (ASX:SBW) has announced the sale of its Healthweigh business, an own-brand manufacturer/distributor of a range of healthcare and fitness scales including Physician, Special Needs, Portable and Baby/Neonatal, to its key US distributor Rice Lake Weighing Systems. The sale price of US$3.43m represents 1.1x annual revenue of US$3.1m, which is consistent with RaaS estimates. If we valued the balance of SBW’s revenue (US$28.8m – US$3.1m = US$25.7m) at 1.1x we derive a valuation for SBW ex- Healthweigh of A$0.216/share (US$25.7m by 1.1x = US$28.3m/0.68 (AUDUSD) = A$41.6m/192m shares = A$0.216). We view Healthweigh as the lowest growth and most competitive business within the SBW portfolio, so the 1.1x revenue should be seen as a base case, in our view. SBW intends to reduce debt with the proceeds (A$5m) to strengthen the balance sheet. As a reminder SBW has started the CY22 year strongly with H1 CY22 sales growth of 23%, gross profit growth of 17% and a lower annualised cash burn. The company has also managed working capital exceptionally well relative to its hardware peer group. We expect continue momentum in the seasonally stronger H2 CY22.
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 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 include Fast Track, product recognition software/hardware for retail self-checkouts.
Valuation validation – A$0.216/share base case
We view the Healthweigh business as the lowest growth and least focused on division within the SBW portfolio. A sale will free up management time and company resources for the core Retail OEM, Healthcare OEM and Retail Innovation products. From a valuation perspective the US$3.43m sale price or 1.1x revenue implies a base valuation for the balance of the SBW portfolio of A$0.216/share by our calculations. We say base case as we view the growth prospects, positioning and technology behind OEM Retail (including Fast Track), OEM Healthcare (highly specialised) and Retail Innovation (early stages) superior to Healthweigh.
Base-case valuation A$0.37/share supported by Scales profit
Our base-case DCF valuation for SBW remains $0.37/share before any adjustments for the sale of Healthweigh. This valuation is supported by the sale of Healthweigh (at least $0.216/share) and our FY21a divisional EBIT valuation for the Scales division of A$34.5m (8x EBIT or $0.18/share), which implies a negative value for the Retail Innovation division.
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