Published April 29th, 2015:
Under the brand Axkid, the Swedish company Axon Kids develops, manufactures and sells child safety seats. Axkid’s safety seats are developed in accordance with the Scandinavian philosophy that rear-facing seats are safer. The benefits of rear-facing safety seats are well-documented and the industry shares the notion that children should travel in a rear-facing position.
Founded in 2009, Axon Kids is still a rather young company but the people behind have substantial experience in the area. Both founders have worked earlier with child safety seats in various firms.
Having previously focused on the European market, Axon Kids announced in January 2015, that it has entered a co-operation with a distributor in China. The Chinese company had revenues of RMB 96m (ca SEK 135m at current exchange rates) in 2014 and will as of 2015 focus exclusively on Axon Kids’ products.
The distributor is covering the whole of China, which implies that Axon Kids will reach out to more than 450 stores in China. Together with its partners, Axon Kids is estimating that it will reach revenues of at least SEK 13m in China in 2015. For 2016 and 2017, the company expects to double revenues in each year, i.e. by 2017 Chinese revenues are expected to be at least SEK 52m. The first effects of this co-operation are expected to become visible in Q3 2015.
During 2014, Axon Kids put a lot of effort in penetrating the Chinese market, participating in a large traffic safety conference in Beijing and another large exhibition in Shanghai. The company has identified China as an interesting opportunity, given recently introduced legislation that demands the use of safety seats for children up until the age of four.
In 2014, Axon Kids recorded revenues of SEK 22.6m (+9% y-o-y) and a net loss of SEK 2.7m. At the end of 2014, the company had a net debt position of SEK 8.9m. Via a new share issue, Axon Kids recently received a SEK 5m (after cost) cash injection in order to finance the ongoing expansion, both in China but also in its home markets. A few weeks ago, the company participated at an exhibition in Hamburg, where management noted an increased interest for the rear-facing concept. Germany has so far been a “front-facing market” and given its size, it is very interesting for Axon Kids. In Hamburg, Axon Kids worked together with a newly established company called “die Kindersitzprofis” which focuses on rear-facing seats and currently has 12 stores. Axon Kid’s products will be an important part of their offering, according to the company. The exhibition in Hamburg, will be followed by similar events in Essen, Munich, Berlin and Stuttgart.
At the time of writing, Axon Kids has a market cap of just below SEK 70m, implying and enterprise value of around SEK 74m. We believe that given the positive momentum Axon Kids is enjoying in various markets (e.g. Germany but also Sweden where it has recently entered a co-operation with national supermarket chain ICA), it is not unreasonable to assume revenue growth of around 10% for its “traditional” business for 2015. In combination with the revenues of SEK 13m from China, as guided by the company, this would imply 2015 revenues of SEK 38m. Using a further 10% growth rate for Europe and the company’s guidance for China for 2016, this would imply 2016 revenues of SEK 53.4m. By then, we would also expect the company to have become profitable given the increase in volumes and consequently improved fixed cost absorption.
In our opinion, a 2016 EV/Sales ratio of 1.4x for a rapidly growing company active in a market that is benefitting from legislative changes seems very attractive. As an interesting exercise, applying the current enterprise value of Axon Kids on the revenues generated by the China distribution partner in 2014, we would get an EV/Sales of 0.5x and we see little reason why those numbers should not be reached at some point. Furthermore, we would not be surprised if our estimates in general were proven to be too5conservative. We expect positive news flow around its China cooperation and new contracts in e.g. Germany to boost share price development going forward.