Litium: Improved long-term outlook - Introduce
Solid ARR growth, cost control drives Q2’20
Litium reported Q2’20 ARR of SEK 47m, +22.4% y-o-y and 2.7pp above our estimate. Despite strong COVID-19 headwinds in terms of customers delaying investment decisions, which was somewhat counteracted by increased volumes through existing digital channels, Litium was able to maintain ARR growth in line with its new financial target of 20-40%. Litium signed new clients like Thunderful Group and NTM, contributing to ARR. The gross margin of 74.0% was 2.0pp stronger than our estimate, following a favourable mix. During the quarter, Litium displayed solid cost control, with opex growing 12% y-o-y to SEK 16m, a strong showing given the ARR growth. This ultimately yielded EBITDA of SEK -2m, +45.2% vs. ABGSCe, and EBIT of SEK -4m, +21.9% vs. ABGSCe.
Increased long-term demand, est. changes from small base
We make only minor ARR estimate changes (+2.3% ‘20e-‘22e), and our EBIT estimate changes, which appear large in percentage terms, are from a small base. In the mid- to long-term, however, we believe that demand for Litium’s products will rise following COVID-19, as customer behaviour changes push retailers to realise the importance of offering products through digital channels. We would also like to highlight the new global partnership with Columbus, which is an important step in facilitating Litium’s geographical expansion.
31.7% ARR CAGR ’19-‘22e, estimate 11.5% EBIT-m ‘22e
Following our estimate changes, our DCF scenario indicates a fair value range of SEK 10-25 (8-19) per share. We have lowered our DCF WACC from 13.0% to 11.8% based on a lower company-specific risk premium, as Litium is successfully diversifying its revenue base and COVID-19 has created long-term demand tailwinds. Further, by discounting our ’22 estimates by a WACC of 11.8% and applying the applicable peer group median multiples (with a 10% discount), we find a multiple-based fair value range of SEK 16-27 per share (10-22).
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