in Additive manufacturing

#Arcam: Benefitting from industrial revolution

ArcamLogo

Short name: ARCM
ISIN code: SE0001104209
E-mail: info@arcam.com

Listed in Sweden, Arcam provides a cost-efficient Additive Manufacturing solution for production of metal components. The technology offers freedom in design combined with excellent material properties and high productivity. The company was founded in 1997 and is listed on NASDAQ OMX Stockholm, Sweden.
Arcam is an innovative partner for manufacturing in the orthopedic implant and aerospace industries, where we deliver customer value through our competence and solution orientation.

P&LIn 2012, Arcam recorded revenues of around SEK 140m, up 30% y-o-y and a net profit of SEK 15m. The company managed to report an EBIT margin of 10% and an EPS of SEK 4,04. During 2012, the company secured contracts with several strategically important customers within the aerospace industry. Amongst others, Arcam entered a supply contract with a leading player within the aerospace industry in what is so far the company’s biggest single deal. The long-term cooperation with Avio, which started in 2007, has according to Arcam, the potential to turn into a volume production of airplane engine details. During 2012, Avio ordered additional six systems for the volume production of turbine blades. Arcam leaves 2012 with a strong order book and has recorded 6 additional system orders so far in 2013.

Accumulated system orders, 2002 – 2012:

Numberofsoldssystems

P&L development:

Arcamdevelopment

History

Arcam AB was founded in 1997. Already in 1993, an application was filed for a patent describing the principle of melting electrically conductive powder, layer by layer, with an electric beam, for manufacturing three-dimensional bodies. The initial development work was made in collaboration with Chalmers University of Technology in Gothenburg. In 1997 Arcam AB was founded and the company continued the development on its own, with the objective to further develop and commercialize the fundamental idea behind the patent. 2002 became a turning point in the history of Arcam. With two units installed at clients, the technology was finally ready for commercialization. The first production model, the EBM S12, was launched at EuroMold in Frankfurt at the end of 2002. Arcam today has installations throughout the world, predominantly used in aerospace and implant applications. The EBM technology is patent-protected worldwide.

The recent months have been very busy for Arcam. Not only did the company record many new orders but on February 22nd 2013, Arcam also announced a strategic alliance with DiSanto Technology to offer EBM-designed and -manufactured medical implants. The partnership combines leading Additive Manufacturing technology with full-service product application development and contract manufacturing services. The parties will offer customers, including industry-leading orthopedic and spinal implant companies, comprehensive product application development and manufacturing of EBM-based implants and other components. By offering the combined capabilities of both organizations to each of their existing and new customers, the strategic alliance shall serve to accelerate market adoption and penetration of commercially manufactured, finished EBM-based implants and components. As part of the strategic alliance agreement, Arcam will support the expansion, equipping and operation of DTI’s manufacturing capability of finished parts made with Arcam’s EBM technology.

This partnership with DTI is an important strategic step for Arcam. Our EBM technology has been used for manufacturing of implants in Europe since 2007, and in the US since 2010. To date some 30 000 orthopedic implants manufactured with EBM technology have been implanted worldwide. Arcam has many customers that have purchased EBM systems to develop and manufacture EBM-based product applications. Through this alliance with DTI, we will now also be able to offer existing and new customers contract manufacturing capabilities and help them commercialize new product applications. This will in turn give our customers the opportunity to more quickly and more efficiently develop products and get them to the market”, says Magnus René, CEO of Arcam.

Also during Q1 2013, Arcam launched a new EBM system designed specifically for industrial production of orthopedic implants, called Arcam Q10. Arcam Q10, is developed in close collaboration with leading implant manufacturers. The system is designed to meet the implant industry’s need for ease-of-use, productivity, accuracy and quality assurance.

Company targets:

ArcamprinterArcam aims to reach revenues of at least SEK 200m by 2015 with an EBIT margin of at least 10%. The company also aims for positive cash flow and an equity/assets ratio of more than 50%.

The company aims to improve the productivity of its EBM technology in order to open up for additional applications within its prioritized markets, as well as creating a broader user base by winning new customers. Mid-term goals include an improved market position within Additive Manufacturing and to reach a state where Arcam’s technology is used for volume production also within the aerospace industry. Long-term, Arcam aims to identify new customer segments where it’s systems’ technical capabilities can be utilized, e.g. within space flight, offshore-industry and other advanced manufacturing.

 Current revenue split:

Revenuesplit

Share price and valuation:

Arcamshareprice

Following several new orders and a general increasing hype around additive manufacturing, Arcam’s share price had a tremendous run over recent months and is currently trading at around SEK 205 (implying a market cap of SEK 770m). We find it difficult to value companies within the additive manufacturing space with traditional valuation methods. US companies such as Stratasys, 3-D Systems and The ExOne company are trading at high multiples (as does Arcam). People investing in this sector should do so not for the sake of valuation but rather for the potential that this disruptive technology can offer going forward. Given the enormous potential, it is almost impossible to estimate what earnings will look like in say 12 or 24-months ahead. Therefore, any comments regarding PE-ratios etc are worthless at this point in our view.

At current levels, Arcam is valued at P/sales of around 5.5x (12-months trailing). This compares to the corresponding levels for Statasys of 13x, 3-D Systems of 8x and ExOne of 15x. According to this metric, Arcam is by far the cheapest of the four 3-D printing companies. Obviously, the most important factor is the growth rate at which these companies can be expected to grow their revenues. We see no reason why Arcam should lag its US peers given the positive order momentum of recent months.

We believe newsflow around Arcam and additive manufacturing will remain positive going forward which in turn should drive share prices higher. A recent example is US company ExOne whose shares jumped 9.5% to a new closing high on Thursday last week after the company reported its first-ever profitable quarter, and issued a bullish update on 2013. On the conference call with analysts early Thursday, Chief Operating Officer David Burns sounded upbeat about the 3D printing sector’s outlook. “The recent technological advances of our 3D printing machines create persuasive economics for our industrial customers, who have demonstrated a growing interest in applying 3D printing in their manufacturing processes. We believe we are a driver of the rate of adoption of 3D printing for industrial applications as well as a benefactor of the growing relevance of this technology in manufacturing,” he added. That is certainly good news for Arcam as well.

We think Arcam is an interesting to follow during 2013 and onwards. As US president Obama put it in his State of the Union address in early 2013: “…the 3D printing that has the potential to revolutionize the way we make almost everything”.
Nordic Investor

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