Shekel Brainweigh Ltd - Sales Growth to Continue in CY22 on a Number of Fronts
Shekel Brainweigh Ltd
Sales growth to continue in CY22 on a number of fronts
Shekel Brainweigh Limited (ASX:SBW) has reported CY21 sales growth of 26% to US$23.1m, which included ~240% growth in Retail Innovation sales. On our estimates adjusted EBITDA (before amortisation, one-off costs and share-based payments) was US$2.0m, 10% below CY20 despite a 14% increase in R&D spend. Gross margins were in-line with CY20 at 41% despite supply chain pressures including higher chip costs for SBW’s weighing hardware. Cash conversion was ~45%, impacted by higher inventories in anticipation of strong CY22 sales and higher receivables given the strength in Q4 CY21 sales. CY22 will be aided by a backlog in orders, second year of sales for Hubz and the micro-market capsule, a US$1.6m order for weighing units for A2Z’s Smart Cart (7% of total CY21 sales) and new European customers for the Scales division. From a valuation perspective, if we assume adjusted CY21 EBIT of US$2.5m (A$3.5m) for the Scales division and apply an 8x multiple we get a A$27m value against the current market cap of $23m. This implies a negative $4.5m value for the Retail Innovation division despite >A$10m in R&D spend over the past three years and new products at or near commercialisation.
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 revenues from data analytics. Two new products (Innovendi and Hubz vending machines) are in commercialisation while others are close (Autonomous Micro- market Capsule, Smart Carts and Fast Track product identification software/hardware).
CY22 shaping up as another year of growth and narrowing loss
Cycling 26% sales growth (to US$23.1m) and an underlying (RaaS) EBITDA loss of US$2.0m, we are forecasting 20% sales growth and a further narrowing in underlying EBITDA over CY22. On the sales front the new US$1.6m Smart Cart supply agreement with A2Z alone represents 7% of CY21 sales. The Hubz and Smart Capsule will be year-2 into commercialisation while a backlog of orders should benefit the core scales division, together with new customer additions (mainly in Europe). At the EBITDA line we expect a modest recovery in gross margin and a stabilisation of the cost base, albeit R&D spend remains at elevated levels.
Base-case valuation A$0.35/share supported by Scales profit
Our base-case DCF valuation for SBW is now $0.35/share (down from $0.37/share) following fine-tuning of a number of assumptions including shares on issue following the recent capital raise. Using our adjusted FY21 EBIT forecast for the Scales division and applying an 8x multiple we derive a valuation of A$27.0m alone, well above the current market cap and implying a negative A$4.5m value for the Retail Innovation division despite multiple products in the market. A $0.35/share DCF implies a fully diluted market cap of A$64m.
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