2015 has been somewhat of a breakthrough in the market for Heliospectra. Important orders were taken and the company managed to more than quadrupled the turnover from SEK 3.1 million to SEK 13.7 million (340%). Heliospectra’s products are used in three different customer segments: greenhouse farming (e.g. Spisa), research facilities (e.g. NASA) and cannabis farming (e.g. Pinkhouse). Here are some examples of Heliospectra’s customers:
Below you can see an installation at Spisa, one of Europe’s biggest greenhouse farmers and partner to Heliospectra since day 1. So far, has more than 200 of Heliospectra fixtures installed, which can be compared to Spisa’s total need for 30,000 fixtures.
According to independent market analyses, all the markets Heliospectra operates in are growing rapidly. The market for medical cannabis in the USA is one of the fastest growing industries in North America. To date, Canada and 23 US states have legalised the growing of cannabis for medical purposes and a further four states will vote on this in 2016. Globally, there has been legalisation in Israel, Uruguay and parts of Australia and discussions are ongoing in many other countries. According to a report by USA Today and Arcview from 2013, the market for medical cannabis in the USA is expected to reach USD 10,3bn by 2015, up from USD 2,34bn in 2014 and implying a CAGR of 63%:
According to MarketsandMarkets, the market for LED lights for cultivation is growing at 26% per year, from USD 589 million to USD 1,940 million from 2015 to 2020. The traditional greenhouse market is still the largest but at the same time, the markets for vertical and indoor growing are expanding quicker and, put together, will be as large as the greenhouse market. Heliospectra has been highlighted as one of the most interesting companies on the market with the right type of products.
Heliospectra’s fixtures are advanced and save a great deal of energy compared with conventional fixtures and they are also able to sense how the lit plants are growing and can adapt the light accordingly. The energy saving aspect is a very important selling point, not the least for the cannabis industry. Research has shown that legal marijuana growing uses 1,63% of the total electricity consumption in the State of Washington:
Heliospectra’s LX60 system is primarily sold to traditional growers of vegetables and flowers, as well as growers or medical cannabis. LX60 accounted for the largest share of turnover in 2015 and the company has increased production to meet the demand. The largest single order so far was worth SEK 5.7 million and was for a grower of medical cannabis in Las Vegas. As Heliospectra focuses on larger industrial volume clients, it is important to have direct contact in parallel with the distribution and sales channels that the company is establishing. An important aspect of the sales process is having satisfied customers acting as references for new, potential customers so that growers can talk to other growers. Overall, this seems to be a successful strategy and 2016 has started promising. So far, Heliospectra has received two larger orders from cannabis growers in North America and a third one by an algae farm in Norway. The latter is somewhat of a new customer segment for Heliospectra and could potential become a fourth leg to stand on.
Having taken important reference orders in all its customer segments, the primary focus of the company now is sales and all the surrounding activities which drive the sales process. The company has therefore made important recruitments such as Caroline Nordahl Wells as Vice President of Sales and Marketing for Heliospectra’s North American operations. At the same time, Heliospectra continues its innovative product development. Heliospectra has market-leading products and is committed to develop these further. The company’s competence is mainly within product development and software development which is why all hardware manufacturing is done by subcontractors. The basis of the success is close co-operation with both customers and suppliers. Most of the time, product development is done in close cooperation with customers, which limits the R&D costs for Heliospectra.
Heliospectra is still in an early stage of commercialisation but momentum seems very positive. So far in 2016, the company has taken larger orders amounting to SEK 4,25m. On top, the company has received research grants and various smaller orders, which we are eager learn more about in the upcoming Q1 2016 report (released on April 29th). It is very hard to assess when Heliospectra will become profitable. The company is pushing towards more and more software/cloud-sales which is a higher-margin business as the hardware business. So far, its sales have been mostly initial hardware/solution-based installations, which many times were reference projects, i.e. sold at a lower price than “regular”. So at this point, it is difficult to estimate what a “steady-state” margin will look like for Heliospectra. It takes only 5 large orders similar to the Pinkhouse order in 2015, to double Heliospectra’s net turnover compared with 2015 levels. Given the strong growth in the cannabis market, this seems not unreasonable at all. On top, one could expect orders from the traditional greenhouse segment, as well as from the other segments research and the recent algae order. Assuming revenue growth of 150% for 2016, would lead to FY 2016 net turnover of some SEK 34m. Given the high uncertainly at this point in time, we want to do as many sanity checks as possible. For example, if we assume an average order size of SEK 3m, it would take 11,4 orders to reach the net turnover of SEK 34m. In our view, this seems aggressive but quite possible. Given Heliospectra’s cost structure, we do not believe that a net turnover of SEK 34m would be enough to show positive EBIT.
In order for this to happen, we would have to assume a further 105% increase in net turnover in 2017 to a level of some SEK 70m. 70m at an assumed average order size of SEK 3m, would imply a required amount of 23,4 orders in 2017. At this level, Heliospectra could be able to become break-even at an EBIT level, if the company manages to bring its gross margin up to a 50% level. But once again, the level of uncertainty is rather high, both on the revenue growth assumptions and the margin assumption since the mix between hardware- and software/service-sales going forward is difficult to predict.
Following the utilization of subscription warrants in October 2015, Heliospectra received SEK 22,5m and its balance sheet is solid with a net cash position of some SEK of 6m at the end of 2015. At a current share price of SEK 10,7, Heliospectra is valued at market of SEK 199m and an enterprise value (EV) of SEK 193m. Looking at the scenario outlined above, the current share price would imply an EV/Sales multiple of 5x for 2016 and 2,5x for 2017. If the business was to develop as suggested in our scenario, the share price could easily double. A continuous stream of orders is obviously necessary but Heliospectra seems to be well positioned to deliver on this expectation. Compared with many other listed development companies, Heliospectra has a solid ownership structure with the three largest shareholders Weland, Industrifonden and Midroc owning almost 60% of the outstanding capital. In total, we believe the freefloat is only around 30%.