Shekel Brainweigh Ltd: Significant Convertible Note Deal Provides Two-Year Window
Shekel Brainweigh Ltd
Significant convertible note deal provides two-year window
Shekel Brainweigh Limited (ASX:SBW) has announced the issue of a US$5m 4- year convertible note to a single investor, Kvutzat Yavne, a Kibbutz from the central district of Israel. The note holder will receive a 7% interest rate paid quarterly and have the right to convert ALL notes into equity two years from the issue date, or upon a transaction involving the sale of all or part of the business at 75% of the 25-day VWAP. For existing shareholders the company now has significant funding and a two-year window to deliver both renewed sales in the core scales business and meaningful sales in the new retail innovation division to ensure a higher share price and limited equity dilution. There are a number of positives for sales growth heading into CY21 including the first “Hubz” vending kit sales expected from Q2CY21, the annualisation of three new scales customers late in 2H20 and an expected “FastTrack” self- checkout launch in 2HCY21. The group is also cycling a 10% decline in retail self-checkout sales and a 45% decline in own brand weighing equipment. From a numbers viewpoint we have increased our operating costs by 12% or US$1.2m as new human resources are added, while incorporating for the first time some revenue from “Industrial special projects” given greater resources.
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 (Micro-market Capsule and the Hubz).
Keys to the convertible note issue
We view the convertible note terms issued to Kvutzat Yavne as attractive to both Kvutzat Yavne and existing SBW shareholders. For Kvutzat Yavne, it secures a 7% interest rate for 2- years and a 25% discount to the VWAP on conversion from March 2023. For existing SBW shareholders, funding now looks sufficient to deliver the promises and potential of new products, predominantly the Hubz, Micro-market capsule and Fast-track. Delivery of such sales should result in a higher share price and limited dilution from the note issue.
Base case valuation A$0.35/share with implied dilution
Our base case DCF valuation for SBW remains at $0.35/share, with higher cost assumptions offset by new revenue assumptions. In terms of potential dilution from the convertible note issue, we have assumed a share price at conversion of $0.40, which is our DCF before any dilution, implying dilution of 15% to the current share count. We continue to highlight investors are paying nothing for the “new retail” division if the underlying core scales business is valued at 8x our estimated underlying EBIT.
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- Shekel Brainweigh Ltd: Significant Convertible Note Deal Provides Two-Year Window01 Apr 2021