Modulight Q2'24: Top line needs a boost

This report is a summary translation of the report “Yläriville tarvitaan kirittäjää” published on 8/18/2024 at 7:35 pm EEST.

Modulight's Q2 revenue declined year-on-year and missed our forecasts. However, operating loss was lower than expected. The company had expanded its project pipeline to 30 and continued to roll out its pay-per-treatment (PPT) pricing model during the period. The model is not generating significant revenue at this time. We are lowering our forecasts for the current year but leaving our forecasts for the coming years largely unchanged for the time being due to the lack of visibility. Assessing the profit turnaround at this stage is highly challenging. We reiterate our Reduce recommendation and target price of EUR 0.9. 

Continued focus on advancing pay-per-treatment model in second quarter

Modulight's Q2 revenue amounted to 0.97 MEUR, down year-on-year (Q2'23: 1.11 MEUR) and missing our forecasts (1.30 MEUR). The decrease was impacted by the transition to a pay-per-treatment (PPT) model and delayed prototype deliveries. For the first time, the company reported six-figure revenue for the PPT model, i.e., sales of at least EUR 100,000. The revenue flow from the model is therefore still small. Other highlights of the report included an increase in the number of projects by two to 30 and a tender win for a flow cytometer. The company needs revenue growth to offset high fixed costs.

Turnaround needs top-line growth

The operating result was -2.05 MEUR, flat year-on-year (-2.10 MEUR) and above our expectations (-2.53 MEUR). The difference to our forecast is mainly due to exceptionally low material costs in Q2. Otherwise, the cost structure was in line with our expectations. Cash flow from operating and investing activities was -1.4 MEUR. Cash flow was positively impacted by a MEUR 1.0 reduction in working capital. As far as working capital is concerned, we do not expect similar items in the future. Net cash at the end of the period was 15.0 MEUR and cash and cash equivalents 20.6 MEUR (Q2'23: 32.7 MEUR). The company's cash position remains strong, but with the downward trend, financing risks are increasing.

We raise our earnings forecast for the current year

Our revenue forecast for the current year is revised to 5.0 MEUR (was 6.0 MEUR). For the time being, we are leaving our forecasts for 2025-2026 unchanged. Our forecasts are based on projects reported by the company that are close to commercialization but whose potential is difficult to assess from the outside. We therefore await further information on these projects to support our forecasts. Our EBIT forecast for the current year improves as a result of cost adjustments. For future years, the revisions are minor for now.

Valuation would require visibility on growth rate and timing of turnaround

The stock is very difficult to value due to the uncertainty of earnings and cash flow turnaround. The valuation relies heavily on future projections, which carry an exceptionally high degree of forecasting risk. EV/S multiples are 7.5x-5.2x for 2024-2025 and continue to be above those of the peers. The DCF model suggests that the stock is roughly correctly priced. If Modulight catches up with its rapid growth, the stock does not seem overpriced. However, growth challenges, losses and low visibility mean that the risk/reward remains modest.