Uncertain outlook persists for H221

Artec technologies 11 October 2021 Update
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artec technologies

Uncertain outlook persists for H221

Technology

Scale research report - Update

11 October 2021

Price

€3.31

Market cap

€9m

Share price graph

Share details

Code

A6T

Listing

Deutsche Börse Scale

Shares in issue

2.86m

Net cash (€m) as at 30 June 2021

0.13

Business description

artec technologies develops cloud-based software solutions for the recording and analysis of video and audio, in two sectors: video security technology and crime prevention; and broadcast media.

Bull

IP-based, patent-protected technology solutions.

Operational diversification from serving DACH security and international media sectors.

Growing list of reference clients in the security sector across the DACH region.

Bear

Scale and growth potential limited by operational and resourcing constraints.

Economic uncertainty clouding revenue visibility.

Volatile trading history, with financial outcome subject to contract delays.

Analyst

Richard Williamson

+44 (0)20 3077 5700

artec’s H121 results showed a 12% y-o-y fall in net revenues to €1.14m, as the group continues to suffer from the economic impact of the pandemic. Global supply chains remain under stress, leading to difficulty in sourcing hardware and project delays. Although management remains positive for FY21, this increases the uncertainty for the FY21 outcome, with projects liable to slip into H122 from the seasonally busiest quarter, Q4. Good cost control with expenses restricted under COVID-19 offset these factors, meaning that H121 EBITDA was up marginally to €0.07m, with the H121 EPS loss in line with H120 at €0.10 per share. Gross cash rose to €0.53m, although artec is considering a further bond issue to support investment.

H121 results: 12% fall in revenues, flat profit

An extended sales cycle, together with hardware supply issues, resulted in a drop in sales of c 12% to €1.14m in H121. This was partly offset by a reduction in costs, with cost of materials falling as a percentage of total output to 29.5%. With no trade fairs, reduced marketing and limited travel costs due to the pandemic, H121 operating expenses fell to €0.21m (H120: €0.35m). As a result, artec reported H121 EBITDA of €0.07m, with the PAT loss in line with H120 at €0.27m. Benefiting from a €0.4m loan from KfW in H121, gross cash rose to €0.53m.

Outlook: H121 looks very much like H120

With COVID-19 issues starting to recede, management continues to face the challenges of an uncertain global economic outlook in FY21, with an extended sales cycle and persistent supply chain issues. Where possible, artec is prioritising the software component of projects over hardware installation. Management remains optimistic for an influx of new orders, but we note the absence of the usual discussion around new contracts coming through in Q421. With business as usual not expected before FY22, new orders may well slip into H122 from Q421.

Valuation: Growing recurring revenue base

In our opinion, given both the continuing impact of the pandemic and supply chain challenges, consensus forecasts for FY21 look optimistic. artec trades on 2.2x consensus FY21e EV/revenues and 20x EV/EBITDA (around half that of European software peers), falling to 11x consensus FY22e EV/EBITDA. artec continues to trade substantially below capacity but, assuming both security and media segments can deliver on their potential, the group’s medium-term prospects remain strong. Given sustained growth following the SaaS transition, this could lead to a share price uplift over the medium term, as artec moves more into line with its peers.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

EV/EBITDA
(x)

P/E
(x)

12/19

2.01

(0.16)

(0.42)

0.00

N/A

N/M

12/20

3.08

0.91

0.06

0.00

10.4

55.2

12/21e

4.22

0.46

(0.02)

0.00

20.5

N/M

12/22e

5.59

0.84

0.24

0.00

11.2

13.8

Source: Refinitiv

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Business review: Business as usual to resume in FY22

As has been seen in the H121 results, artec continues to suffer from the economic impact of the pandemic, with global supply chains under stress, leading to difficulty in sourcing hardware and project delays, exacerbated by slow decision making by potential clients. This increases the uncertainty for the FY21 outcome, although given the seasonality of the business, with the majority of revenues in FY20 being received in the last two months of the year, management remains positive for the FY21 outcome.

With hardware delivery timelines prohibitive for timeline tenders, artec has started to separate hardware installation from software implementation and training. This is intended to ensure that higher-margin software projects can be delivered in the current year, although it comes at the expense of lower-margin hardware revenues, sourced directly by the client. The hardware component of tenders is typically between a quarter and a third of overall tender value.

In terms of products, artec’s video security solution, MULTIEYE, now offers a number of software modules including: MULTIEYE BOS Manager for situation centres and security control centres, data protection-compliant video surveillance (MULTIEYE PrivacyShield), MULTIEYE licence plate recognition, as well as cash register data acquisition and recording, and MULTIEYE PeopleCounter, for measuring customer footfall in retail outlets.

In H121, artec expanded the functionality of BOS Manager, testing the integration of drone surveillance, as well as offering customers the integration of face and object recognition technologies to improve the monitoring of major events. In Q421, artec’s partner, Vivotek, plans to roadshow Multieye STORM, artec’s mobile surveillance system, offering mobile surveillance towers and camera equipment alongside artec’s cloud platform. artec expects this activity to lead to sales in the DACH region. For BOS Manager, artec has stated it is in advanced negotiations with several state authorities, which could lead to additional orders being placed in Q421, artec’s seasonally strongest quarter.

On the media side of the business, XentauriX, among other contracts, has won an order to support manned space travel, to be implemented in H221. After 18 months, trade fairs are starting to resume, with artec notably presenting at Cabsat 2021 (26–28 October) in Dubai, in partnership with Ariston. The restarting of trade fairs boosts artec’s prospects for FY22. In addition to its core activities, artec is exploring the opportunities offered by blockchain to secure the group’s video technology and ensure the integrity of video data, with various prototypes undergoing testing.

With these developments and the ongoing discussions with new and existing customers, management is optimistic for an influx of new orders but, given the uncertainties noted above, these orders may slip from Q421 into H122. Management does not expect normal business to resume until FY22.

Financial review: H121 looks similar to H120

Management continues the transformation of artec’s business model towards a recurring revenue, SaaS-based model in both the security and media sectors.

The extended sales cycle noted above, particularly for international orders, together with hardware supply issues, resulted in a drop in sales of c 12% to €1.14m in H121 (H120: €1.30m). Including capitalised costs (H121: €0.24m, H120: €0.31m), total output fell by 14% to €1.39m (H120: €1.61m). Cost of materials as a percentage of total output fell to 29.5% (H120: 31.4%), with personnel expenses falling marginally to €0.73m (H120: €0.76m) as average staff numbers fell from 29 to 21 people (excluding interns). With no trade fairs, reduced marketing and limited travel costs due to the pandemic, H121 operating expenses fell to €0.21m (H120: €0.35m).

Despite the reduced revenues and as a result of reduced costs, artec reported a small y-o-y improvement in H121 EBITDA to €0.07m (H120: €0.04m), with an EBIT loss of €0.25m in line with the H120 loss of €0.25m. The H121 PAT loss was also in line with H120 at €0.27m (H120: €0.27m).

In a credit review in June 2021, the Deutsche Bundesbank raised artec’s credit rating from BBB- to BBB. After raising a €0.4m loan from KfW in H121, as at 30 June 2021, gross cash amounted to €0.53m (H120: €0.12m).

Lingering impact of the pandemic raises FY21 uncertainty

Arrtec is still experiencing the impact of the COVID-19 pandemic, in particular in its international business, where sales have suffered from travel restrictions and the absence of trade fairs. Supply chain issues have created capacity bottlenecks that remain a concern for timely delivery of hardware components in FY21. Management is actively managing the issue, prioritising the software component of projects at the expense of hardware sales. As a result of the drawn-out sales cycle, slow contract awards and hardware shortages slowing contract execution, we believe there is a material risk of revenue slippage from Q421 into H122.

Management also announced in July 2021 it is considering the issue of a blockchain-based security token, potentially in the form of a convertible bond, that would allow artec to diversify its financing and target new investor groups. Proceeds would be used to fund continuing investment, as well as funding a potential increase in inventories to mitigate hardware supply issues.

Valuation: Upside potential in the medium term

artec has no clear peers; however, with the quoted European software peer group showing strong revenue growth and a positive outlook, this group trades in a range of c 4–5x EV/sales and 15–20x EV/EBITDA in FY21e. Palantir, a US$48bn market cap US big data analytics company focused on the security sector, which is now starting to move into public sector contracts in the UK and Europe, offers parallels to the security side of artec’s business and trades on c 20x EV/sales and 96x EV/EBITDA in FY21e. Another US business, Veritone, which operates a similar model to artec, integrating third-party solutions into its platform, trades on c 6x revenues in FY21e, despite being loss-making for the foreseeable future.

The group’s prospects in the medium term remain strong. However, in our opinion, given both the continuing impact of the pandemic and supply chain challenges, consensus forecasts for FY21 look optimistic. artec trades on 2.2x consensus FY21e EV/revenues and 20x EV/EBITDA, falling to 11x EV/EBITDA in FY22e. It continues to trade substantially below capacity but, assuming that both the security and media segments can deliver on their potential, there is scope for sustained profit progression as the group’s recurring revenue base grows. This could lead to a share price uplift over the medium term, as artec moves more into line with its European software peer group.



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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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60325 Frankfurt

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NSW 2000, Australia

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