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Litium: Scalability shines through, strong outlook - Introduce

Q3’20 EBIT of SEK -4m, +27.3% vs. ABGSCe
Litium reported Q3’20 ARR of SEK 49m, -1.2% vs. ABGSCe, growing 28.2% y-o-y, which is in line with Litium’s financial target of 20-40%. Net sales were SEK 12m, -4.7% vs. ABGSCe, of which 98.4% of net sales were recurring. Operational costs were SEK 15m, 9.4% below our estimate of SEK 17m, growing approximately 2% y-o-y, which marks a further slowdown in opex growth. Combining the strong ARR growth of ~28% vs. the opex growth of ~2% highlights the scalability of Litium’s business model, and takes the company one step closer to profitability. Reported EBIT was SEK -4m, +27.3% vs. ABGSCe, for a margin of -29.7%.

Seasonally strong Q4 could produce positive EBITDA
Coupling the trend of relatively flat opex but strong ARR growth mentioned above with the upcoming seasonally strong Q4, driven by events like Black Friday and Christmas shopping, we would expect to see positive EBITDA in the upcoming quarter. We forecast Q4’20e ARR of SEK 54m, +35% y-o-y, when we think the variable part of Litium’s revenues (its technology partner add-ons such as Klarna) will offer a strong contribution due to the increased activity in Q4. We conservatively factor in y-o-y opex growth of 7.3% (higher than recent quarters), but we still reach a positive EBITDA of SEK 2m.

Fair value range up to SEK 14-35, EV/sales 5-3x ‘20e-‘22e
Following our estimate changes, our DCF scenario indicates a fair value range of SEK 14-35 (10-25) per share. The increased fair value range reflects our estimate changes, Litium proving its scalability and moving closer to profitability on an EBIT level and further diversifying its revenue base through geographical expansion and new customer intake. We also think that long-term demand for Litium’s product will have increased following COVID-19. Additionally, by discounting our ’22 estimates by a WACC of 11.8% and applying the applicable peer group median multiples (with a 10% discount), we find a multiple-based fair value range of SEK 25-30 per share (16-27).
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