Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]Key Financials (NO 2019 2020 2021E 2022E 2023E Revenues 2 2 4 65 446 Revenue growth 21% 139% 1378% 588% EBITDA -96 -60 -71 -51 35 EBIT -96 -62 -73 -52 34 EBIT Margin (%) -6328% -3370% -1672% -80% 8% Net Income -96 -62 -74 -47 34 EV/Revenue 434,3 368,0 184,0 13,2 1,8 EV/EBITDA neg neg neg neg 23,7 EV/EBIT neg neg neg neg 23,9 Research Update Equity Research 2 November 2021 KEY STATS Ticker ZWIPE Market Merkur Mkt Share Price (NOK) 27 Market Cap (NOKm) 1000 Net Debt (NOKm) -180 Free Float (%) 75% Avg. daily volume ('000) 25 BEAR BASE BULL 6 32 46 The Four Pillars of Value Redeye raises the valuation of Zwipe driven by increased confidence in mass market adoption turning into higher sales estimates. We think Zwipe is well positioned with a strong financial position. Larger commercial orders will be a catalyst for the share price. Increasing the pie Zwipe continue to show their strong deal making capabilities by reaching new agreements every month. Between today and our last longer update on the 17 th of July they have announced that they are under evaluation with a Global Tier 1 Smartcard Manufacturer, they received two commercial orders from Beautiful Cards Corporation and Inkript, and they also announced pilots with MEPS, Reltime, Credit Lebanaise and a Global Tier-1 Bank. And that was just part of the announcements, we will leave a brief comment on all in this update. Stable financial situation Having secured funding from Erik Selin, Zwipe should be fully funded through commercial launches. We updated our forecast after the Q2 report as we saw a delay in the take-off and the cash injection creates a cushion. We increase the financial rating from a 1 to a 2 considering this. Raised confidence in the long-term story While the disruptions caused by the lack of electronic components hurts in the near term, we think the sky is about to become clearer. We think there is a very high probability that Zwipe Pay One will receive the necessary certifications and that leaves us with the pilots. Zwipe announced three pilots in the third quarter and one after the period and we expect more to come and are also eager to find out the results from the current ones. This should lead to investors getting more confident in the long-term story of a biometric card in everybody’s pocket with Zwipe gaining a large share of the market. Due to increased sales estimates in the long term we raise our base case valuation from NOK 27 to NOK 32. Zwipe Sector: Biometrics REDEYE RATING 4 3 2 ZWIPE VERSUS OMXSPI 0 5 10 15 20 25 30 35 40 27-okt 25-jan 25-apr 24-jul 22-okt OMXSPI Zwipe Financials People Business FAIR VALUE RANGE
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Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]
Key Financials (NOKm) 2019 2020 2021E 2022E 2023E
Revenues 2 2 4 65 446
Revenue growth 21% 139% 1378% 588%
EBITDA -96 -60 -71 -51 35
EBIT -96 -62 -73 -52 34
EBIT Margin (%) -6328% -3370% -1672% -80% 8%
Net Income -96 -62 -74 -47 34
EV/Revenue 434,3 368,0 184,0 13,2 1,8
EV/EBITDA neg neg neg neg 23,7
EV/EBIT neg neg neg neg 23,9
Research Update
Equity Research 2 November 2021
KEY STATS
Ticker ZWIPE Market Merkur Mkt
Share Price (NOK) 27 Market Cap (NOKm) 1000 Net Debt (NOKm) -180 Free Float (%) 75%
Avg. daily volume ('000) 25
BEAR BASE BULL
6
32
46
The Four Pillars of Value Redeye raises the valuation of Zwipe driven by increased confidence in
mass market adoption turning into higher sales estimates. We think
Zwipe is well positioned with a strong financial position. Larger
commercial orders will be a catalyst for the share price.
Increasing the pie
Zwipe continue to show their strong deal making capabilities by reaching new
agreements every month. Between today and our last longer update on the 17th
of July they have announced that they are under evaluation with a Global Tier 1
Smartcard Manufacturer, they received two commercial orders from Beautiful
Cards Corporation and Inkript, and they also announced pilots with MEPS,
Reltime, Credit Lebanaise and a Global Tier-1 Bank. And that was just part of the
announcements, we will leave a brief comment on all in this update.
Stable financial situation
Having secured funding from Erik Selin, Zwipe should be fully funded through
commercial launches. We updated our forecast after the Q2 report as we saw a
delay in the take-off and the cash injection creates a cushion. We increase the
financial rating from a 1 to a 2 considering this.
Raised confidence in the long-term story
While the disruptions caused by the lack of electronic components hurts in the
near term, we think the sky is about to become clearer. We think there is a very
high probability that Zwipe Pay One will receive the necessary certifications and
that leaves us with the pilots. Zwipe announced three pilots in the third quarter
and one after the period and we expect more to come and are also eager to find
out the results from the current ones. This should lead to investors getting more
confident in the long-term story of a biometric card in everybody’s pocket with
Zwipe gaining a large share of the market. Due to increased sales estimates in
the long term we raise our base case valuation from NOK 27 to NOK 32.
Zwipe Sector: Biometrics
REDEYE RATING
4
32
ZWIPE VERSUS OMXSPI
0
5
10
15
20
25
30
35
40
27-okt 25-jan 25-apr 24-jul 22-okt
OMXSPI Zwipe
Financials
People
Business
FAIR VALUE RANGE
REDEYE Equity Research Zwipe 02 11 2021
2
The Four Pillars of Value Let's start with an update to our investment thesis of Zwipe. In our latest longer update in July, we focused on four
pillars:
• Mass-market adoption
• Probability for mass-market adoption versus a niche market
• Size of the market
• Market share
• Technology leadership
• Go-to-market execution
• Competition
• Time to end of life
• For how many years do we think the market for biometric cards to exist
• Margins
• Operating margins at scale
We have summarized our estimates in the model below:
Source: Redeye Research
We will get back to these pillars in our longer updates for investors to grasp how we view and monitor the situation
and make it easy for investors to benchmark these factors against our view. Let's dig deeper!
Market
As we have discussed in previous updates the market for payment cards is around 4 billion units per year and
growing. The growth mainly stems from cash losing ground to payment cards as well as mobile payments.
McKinsey recently released their global payments report in which they state that the pandemic accelerated the
declines in cash usage and adoption of electronic and e-commerce transaction methods which they think will
continue. “Cash payments declined by 16 percent globally in 2020, performing in line with the projections we made last
fall for most large countries (Brazil 26 percent decline, United States 24 percent decline, United Kingdom 8 percent
decline).” In Australia, the adoption of digital wallet usage surged 90 percent from March 2020 to March 2021 at
which 40% of all contactless volume came from digital wallets. The increase in e-commerce volumes is a threat to
biometric payments as the technology is not needed when authenticating a payment online.
Commercial progress Zwipe continues to show its strong deal-making capabilities by reaching new agreements continuously. Between
today and our last longer update on 17 July, they received two commercial orders from Beautiful Cards Corporation
(BCC) and Inkript (3 September). The order from BCC is substantial, with USD 1.9m or around 190 to 380 thousand
cards depending on the price point, which was not disclosed (we estimate it to be between 5-10 USD per card as it’s
only technology deliveries and not the whole card). The order will deliver in 2022 with an option of 2023 if the
market takes off slower than expected. BCC produces 20 million EMV payment cards today, so it's still a minor
share at less than one percent of the yearly production.
The order from Inkript, a digital security provider in the Middle East and Africa region, is small at USD 318 000,
where they are aiming for pilots from late 2021 and commercial rollouts from 2022. Inkript is a large player in the
region, supplying around 100 million smart cards per year. We think the order size is somewhere in the range of 15-
30 thousand cards with the same price points as discussed above. We believe there will be a mix of large and small
orders in the future, considering Zwipe's broad strategy and that the market is not at scale yet. Inkript placed a
minor order in 2020 to evaluate Zwipe Pay ONE. On 16 August, Zwipe announced a pilot with key decision-makers in
the same region through MEPS.
Pilot with Global Tier 1-Bank
Zwipe announced a pilot with MEPS, a Global Tier-1 Bank (which we commented on earlier) and Reltime. After the
quarter Zwipe also announced a pilot with Credit Libanais.
The news about Zwipe entering a pilot with one of the largest banks in Europe was a testament to its potential with
its product. They will partner with the bank to pilot a few hundred cardholders in three European countries in Q1
2022, with a potential commercial launch in the middle of 2022. The largest European banks measured in the
number of customers are Banco Santander with 148 million, BBVA with 80.7 million, Credit Agricole with 52 million,
HSBC with 40 million, and ING Group with 39 million. It's unlikely to be Credit Agricole as they recently mentioned
that they are launching commercially after having already completed the pilot stage. Still, the range is between 39 to
148 million.
We still have no news of which bank it is, but that will become clear in Q1 2022 at the latest as we think the bank will
announce the pilot by then.
Partnership with Global Tier 1-Smartcard Manufacturer
There are three Tier-1 card manufacturers: Idemia, Thales, and G+D, where Zwipe already partners with Idemia on
the technology side. This leaves Thales and G+D as potential customers in the recent press release. Our research
shows that Thales sells around 900 million payment cards yearly while G+D sells over 500 million. We don't want to
speculate too much around the identity, but we know that Thales was a former partner who decided to go separate
ways, while G+D is a current partner with Zwipe on wearables.
While the ASP will likely be lower with this potential partnership (as it will likely not include all components as is
expected to be custom with the smaller card manufacturers), it offers a significant opportunity for Zwipe to reach a
significant scale. It will probably take until around year-end before we get to know the current evaluation results,
which will include considerable testing and verification. Still, we see this as yet another confirmation that Zwipe has
a highly competitive product. It took us by surprise as we thought the Tier -1 players were too big for Zwipe.
We still don't know who the partner is but expect news on this shortly. Zwipe's CEO mentioned during the quarterly
webcast that he hopes for news during the fourth quarter. We believe it may be a significant positive trigger for the
stock, while there is undoubtedly downside potential if the parties decide to go separate ways.
REDEYE Equity Research Zwipe 02 11 2021
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Financial estimates On 30 August, Zwipe announced that Erik Selin had invested NOK 104m through a private placement. The 4 million
shares were registered on 30 September, and Selin did not get a discount on the deal at NOK 26.1, which is fair and
good for shareholders. Through the deal, he will own around 11% of Zwipe, making him the second-largest
shareholder. Our view of Selin is that he is a seasoned investor with a fantastic record as a capital allocator through
the real estate company Balder. That he finds the risk/reward situation promising in Zwipe is undoubtedly a good
sign.
Zwipe receives a cash injection which may well be enough to fund the Company until profitability. The Company
sees itself as funded through 2022 and beyond: "Zwipe is funded through commercial launches in 2022 and beyond
based on the current business plan and market assumptions". Zwipe was by no means in a rush to secure funding
as they had ample liquidity for at least a year. However, as we have mentioned in this update, we expect a delay in
the market take-off. Therefore, it's good that Zwipe has thought ahead and reduced the risk of having to secure
financing in a potentially weaker general market.
We have included the last installment of payments to Idemia in our figures of NOK 10m in the 2021 figures and
have also decided to reduce the sales estimates for 2022 as we think the market take off is a bit slower than we
earlier expected. Our 2023 figures are else largely unchanged where the private placement led to an increase in the
share count which weighs on the EPS for the year.
Forecast adjustments
(NOKm) 2021 2022 2023
Sales Old 4 118 446
New 4 65 446
% change -2% -45% 0%
EBIT Old -65 -28 44
New -73 -52 34
% change -12% 87% -23%
Profit before tax Old -65 -28 44
New -73 -52 34
% change -12% 87% -23%
Earnings per share (NOK) Old -1,76 -0,85 1,32
New -1,98 -1,42 0,91
% change -12% 66% -31%
Source: Redeye Research
REDEYE Equity Research Zwipe 02 11 2021
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Investment Case Opportunistic with Great Value Proposition
In 2019 Zwipe partnered with the world's second largest card manufacturer, Idemia – a clear indication of its
competitiveness. This improves the ability to manufacture biometric smart cards (" BSCs") cost-efficiently, in turn,
imperative to the success of BSCs. Zwipe has consistently built on its position by partnering up with many actors in
the payments ecosystem while larger actors (such as the larger card manufacturers) have moved slowly. Zwipe has
nothing to protect while large card manufacturers have their cash cows in the existing EMV payment cards and are
ripe for disruption.
Strong IP and a market moving in the right direction
Through the partnership with Idemia, Zwipe targets a reduction of card costs by over 50%, implying potential cost
leadership. We view Idemia and Zwipe's IP as strong cards up Zwipe's sleeve. Zwipe has been granted wide patent
protection for how terminals identify a biometric card, a prerequisite for processing biometric contactless
payments. In an emerging market, technology in and of itself is not sufficient. We see continuous signs for a market
take-off. We believe, however, the cheaper card stemming from the Idemia/Zwipe solution can facilitate
commercial volumes from 2022. Contactless BSCs combine state-of-the-art security and the highest convenience,
i.e. there is no need for a cap (using PIN codes), meaning faster retail checkout. This should render more
transactions and revenue for the issuing banks. Thus, BSCs are simply too good not to happen.
Roadblocks on the way
One of the challenges for Zwipe and the market as a whole is further delay in take-off. There are other solutions
than cards, such as mobile phones with strong authentication solutions through biometrics or face recognition. A
larger share of the younger population is using their mobile phones as the primary way to pay. Another challenge is
around the actual user-friendliness of biometric cards. With the current technology, it takes up to a second to finish
a transaction which is not much. However, the authentication using a biometric card may not always be smooth.
There is risk for the shoppers having to re-authenticate several times before finishing a transaction, thereby
increasing friction. This leads to our view of a 75% probability for mass-market adoption.
Commercial orders to drive the stock
Commercial orders can drive the stock towards our base case of NOK 32. Our bear case is based on failed market
traction and a fire sale of the IP at NOK 6 per share. In our bull case, we see a significant upside to NOK 46 based on
higher BSC penetration. The wide fair value range illustrates the uncertainty of Zwipe's market.
REDEYE Equity Research Zwipe 02 11 2021
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Valuation
Bear Case 6 NOK Base Case 32 NOK Bull Case 46 NOK In our bear case we see the market scaling at a very slow pace - too slow for Zwipe to cover its costs. In this scenario, we believe larger players like NXP can survive as they have more economic muscles behind them and can wait for the market to really take-off. Zwipe does not have strong institutional ownership and another rights issue could prove hard, especially if the stock market in general is experiencing a significant downturn. Also, it is yet uncertain how the large change in the organization and new collaboration with Idemia will pan out. We, therefore, assume that Zwipe will not be able to continue in its current shape and instead tries to monetize its strong IP portfolio, especially its wait time extension patent, and possibly also in post-placement, outside Europe. As Zwipe has spent around NOK 300m this far, we believe a reasonable value of the IP is half of these investments. This corresponds to NOK ~150m that Zwipe could possibly receive in a fire sale of its strong IP portfolio. Moreover, we assume there is value of at least NOK 50m in e.g. the expertise and knowhow, meaning a bear case of NOK 6 per share.
Our valuation scenarios are based on years 2021-2035 and the payment cards. All scenarios use a required rate of return of 12% and a terminal growth of -10%. We expect the market share for biometric payment cards will reach 15% of total cards in 2026 equaling around 840 million cards growing to 2.2 billion in 2030. We handicap this by setting our probability for mass market adoption to 75%. As for Zwipe's market share, we expect it to begin at 13%, average 10% during the period and drop to 9% by 2030. All in all, this implies volumes for Zwipe reaching ~150 million in 2030, following a ~50% CAGR between 2022 and 2030. We expect the ASP to start at about USD 7 (including sensors), dropping to ASP 2, averaging USD 2 over the whole period, since the higher volumes are delivered in the end of the period, when ASP is lower. Our ASP and volume assumptions above means a sales CAGR of ~40% and payment BSC sales reaching about NOK 1.2 bn in 2030. We expect the gross margin to start at slightly above 30% (incl lower margins for sensors) and then we assume it will come down to ~20% due to competitive dynamics. We assume the average gross margin over the whole period will be 21%. We expect OPEX to grow by CAGR 7%, averaging about 8% of sales from 2026. The following leads to EBIT margins of on average 12% over the period. We assume a long-term EBIT margin of 7%.
The differing parameter in our optimistic scenario, compared to base case, is that we increase the probability for mass market adoption from 75% to 100% and adjust Zwipe's volumes accordingly. With a BSC market penetration of 30% of all payment cards sold globally, instead of 15% as in the base case, we derive a fair value of NOK 46. The discrepancy from our base case shows the innate potential for Zwipe if biometric cards can gain a larger market share. We assume similar cost levels as in base case. Consequently, we assume average EBIT margins of 12%. Our long-term EBIT margin is 7%
REDEYE Equity Research Zwipe 02 11 2021
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Catalysts Pilots
The most important catalyst during the next 12 months, in our view, is card pilots, from existing and new
partnerships.
IMPACT Downside Upside Time Frame
Significance Likelihood Significance Likelihood Minor Unlikely Major Highly likely Mid
Increased hygiene focus
The Coronavirus has highlighted the critical hygiene aspects of contactless biometric cards as people are becoming
reluctant to touch the terminals. We see a chance that this could prove to be a game-changer for Zwipe in the long
term.
IMPACT Downside Upside Time Frame
Significance Likelihood Significance Likelihood Minor Possible Major Possible Long
Large commercial order for Zwipe Pay ONE
Pilots are one thing, but commercial orders from the Idemia collaboration will prove a substantial value in Zwipe's
offering. The first commercial orders have arrived, which have led to a valuation at our base case, and we are
awaiting news for further substantial orders.
IMPACT Downside Upside Time Frame
Significance Likelihood Significance Likelihood Major Unlikely Major Possible Mid term
Proven breakthrough in production costs
The costs are expected to come down with scale in production. The goal is to get the total card costs down to USD
5 per card, which we think will likely happen in the next couple of years driven by high volumes.
IMPACT Downside Upside Time Frame
Significance Likelihood Significance Likelihood Major Unlikely Major Possible Long
REDEYE Equity Research Zwipe 02 11 2021
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Summary Redeye Rating The rating consists of three valuation keys, each constituting an overall assessment of several factors that are
rated on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.
Rating changes in the report People upgraded from 3 to 4. Financials upgraded from 1 to 2.
People: 4
We arrive at an average people rating (4/5) where the most positive aspect is the skill set and experience in the management team
and board, following recent additions. A large part of the management team has now been in place for a period of 3+ years and
they have shown their capabilities in attracting several key employees with long experiences in the sector. While the CEO has
increased his ownership considerably we would like to see an even higher ownership stake. Regarding capital allocation skills it's
too early to judge as partnerships have not turned into sales at this stage and more time is needed to know if the capital ha s been
employed in the best possible way. We think the company could be even more upfront on communicating near-term challenges.
Business: 3
Biometric payment cards have been considered around the corner for several years, yet the market does not exist today. However,
we expect it to quickly emerge as soon as costs come down to adequate levels, given the strong advantages of biometric
payment cards. Considering the 4 billion payment cards that are shipped each year, even a moderate penetration implies
significant growth opportunities. Zwipe's business model is scalable when volumes ramp. The expertise of Zwipe is also valida ted
by partnerships with large players like e.g., Idemia, which compensates for its tiny size (pre-revenue etc.). The payment industry is
slow moving, which creates a barrier to entry, but it is hard to identify how sustainable the competitive advantages are at this early
point in time. However, competition is positive in this stage, as it will help starting the market.
Financials: 2
Following raising NOK 104m in a recent directed share issue, Zwipe has a strong financial position. We therefore raise our
financial rating from a 1 to a 2 in this update. Zwipe is, however, still essentially pre-revenue and therefore unprofitable, which
weighs on the financials rating, but the scalable business model means Zwipe can quickly scale when sales ramp up and
consequently reach break-even.
REDEYE Equity Research Zwipe 02 11 2021
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2020 2021 E 2022E 2023E D C F Valuation Metrics S um F C F (N O Km)IN C O ME S T AT E ME N T Initial Period (2021–2023) -30
Revenues 2 4 65 446 Momentum Period (2024–2030) 700
Cost of Revenues 5 2 42 323 Stable Period (2031–) 339
Gross Profit -3 2 23 124 Firm Value 1010
Operating Expenses 57 73 74 89 Net Debt -180
EBITDA -60 -71 -51 35 Equity Value 1190
Depreciation & Amortization 2 3 1 0 Fair Value per Share 32,17
EBIT -62 -73 -52 34
Net Financial Items 0 0 5 0 2020 2021 E 2022E 2023EEBT -62 -74 -47 34 C APIT AL S T RU C T U REIncome Tax Expenses 0 0 0 0 Equity Ratio 0,9 1,0 1,0 1,0
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