Modulight Q3'24: No clear signs of growth yet

Translation: Original published in Finnish on 10/21/2024 at 8:07 pm EEST.

Modulight's Q3 report showed no clear signs of a return to growth and revenue landed below expectations. Earnings and cash flow were roughly in line with our forecasts due to lower-than-expected costs. We are lowering our growth and cost forecasts for the coming years, while the business turnaround is still to come. We reiterate our Reduce recommendation and target price of EUR 0.9. 

Revenue was below our estimate

Modulight's Q3 revenue amounted to 0.64 MEUR, showing growth from the weak comparison period (Q3'23: 0.46 MEUR). However, revenue was well below our (1.30 MEUR) and consensus (1.4 MEUR) expectations and low compared to the previous quarters. As in Q2, revenue was negatively impacted by the transition to a pay-per-treatment (PPT) model and delayed prototype deliveries. The number of projects, a key indicator for the company, remained at the previous quarter's level of 30. Modulight said its order book has increased as projects progress and these are expected to generate revenue in 2025. At this time, there were no concrete figures available on the development of the recurring revenue generated by the PPT model, which would make it easier to assess future developments.

Profit and cash flow in line with expectations - personnel costs lower than expected

The operating result of -2.11 MEUR improved significantly year-on-year (-3.07 MEUR) and was slightly below our (-1.93 MEUR) and the consensus (-1.8 MEUR) forecasts. The year-on-year improvement is explained by the exceptionally low sales margin in the comparison period and lower operating expenses. The latter is related to the completion of the investment program and lower-than-expected headcount. Cash flow from operating and investing activities was -1.49 MEUR. Cash flow was positively affected by the decrease in working capital (+0.52 MEUR). Net cash at the end of the period amounted to 13.5 MEUR (Q3'23: 21.3 MEUR) and cash and cash equivalents to 18.5 MEUR (Q3’23: 28.3 MEUR). The company's cash position remains strong, but financing risks are increasing due to the declining trend and delayed growth.

Forced to cut forecasts again

Modulight’s Q1-Q3’24 revenue of 2.66 MEUR has fallen below the comparison period (3.01 MEUR). In fact, 2024 could be the fourth consecutive year of declining business for the company. We have lowered our revenue forecasts for the next few years due to delayed growth. We continue to expect growth to resume and accelerate in the coming years, but with significant uncertainty and low visibility. With lower growth prospects and lower-than-expected headcount, we are also lowering our cost forecasts, which will mitigate the impact of lower revenue on earnings.

Current valuation would require return to clear growth path

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 8x-5x 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.