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Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]
Update
Equity Research 7 April 2020
KEY STATS
Ticker ZWIPE:SS Market Merkur Mkt, First North
Share Price (NOK) 3.7 Market Cap (MNOK) 97 Net Debt 20E (MNOK) -95 Free Float 75 %
Avg. daily volume (‘000) 1
BEAR BASE BULL 2.0
9.0
25.0
KEY FINANCIALS (NOKm)
2018 2019 2020E 2021E 2022E 2023E Net sales 2 2 2 8 63 211 EBITDA -60 -96 -60 -56 -36 25 EBIT -68 -96 -62 -61 -41 20 EPS (adj.)
2018 2019 2020E 2021E 2022E 2023E EPS (adj.) -7.6 -6.0 -2.4 -2.4 -1.6 0.8 EV/Sales 17.2 40.4 0.8 9.2 2.4 0.8 EV/EBITDA -0.7 -0.6 0.0 -1.3 -4.1 6.7 EV/EBIT -0.6 -0.6 0.0 -1.2 -3.7 8.4 P/E -0.7 -0.9 -1.6 -1.6 -2.4 4.8
ANALYSTS
Viktor Westman [email protected]
3 31
Strength of Biometric Contactless Illuminated Redeye reiterates its valuation of Zwipe, having contemplated the strong recent news
flow and eventual pros and cons of Corona. We believe the stock’s sentiment has
improved significantly as risks have been decreased.
Corona catalyzed hygiene focus is a possible game changer for BSCs
Zwipe has a strong traction, as indicated by the number of dialogues with the 50 largest card
players having gone from 29 to 40+, whereof 8 in the top-10. It is not a Corona effect, although
longer term, Zwipe expects hygiene to be an important driver and possibly a game changer.
Spending caps have been raised on contactless payments globally, to reduce the frequency of
consumers touching terminal pin pads. Mastercard has e.g. raised limits in 29 countries. A
majority of the Germans now pay contactless, compared to 35% pre-Corona. Also, a new US
survey found that 30% of consumers had used contactless payment methods for the first time
and 70% of these people said it would continue to use them.
Fraud cost payback time no longer than two months for a premium card
This trend shift strengthens the push to eliminate PIN codes altogether and replace them with
more secure BSCs. More contactless cards (i.e. dual interface cards) equal more fraud,
especially with lost and stolen cards, meaning users’ peace of mind is challenged. Our BSC
fraud payback calculation implies a payback time for a premium card of no longer than 2
months. In conclusion, there are major fraud cost savings for banks in issuing BSCs. To us,
BSC adoption will clearly trail the contactless card trajectory (from 1% adoption to 83% in UK
during 2008-2018), as soon as costs are low enough. For contactless cards, this happened in
tandem with the price premium over contact-based cards going from 5x to 2x, as price drops
accelerated the penetration and vice versa.
Improved stock sentiment & reduced risks
We acknowledge the traction and recent data points mentioned above, which have decreased
the risk significantly, but for now we keep our valuation. Shares bottomed at NOK/SEK 2.3 in
mid-March as Management purchased 350 000 shares in total. Adding the easing in selling of
guarantors, this could be enough for the stock to make a decent jump from the current
bombed-out levels on the news of pilots. The new MDP partnership, in our view, opens the door
for potential pilots in H2’20.
Zwipe Sector: Biometrics
REDEYE RATING
FAIR VALUE RANGE
Financials
People
Business
REDEYE Equity Research Zwipe 7 April 2020
2
Strength of Biometric Contactless Illuminated Zwipe has recently experienced strong traction in the interest from potential customers. In
company presentations last month, it mentioned dialogues with 29 of the 50 largest card
manufacturers. This figure has now grown significantly to 40+. Out of the 40+ card players, 8
are on top-10. Even though card users have become reluctant to touch the terminals due to
virus fear, this traction is not a Corona effect, but rather it reflects a general increase in card
manufacturers' interest for BSCs. However, in a longer perspective, we think the hygiene
aspect will be an important driver for biometric contactless cards (please note that when we
say contactless, we mean dual interface cards that can be used with chip and PIN as well).
Zwipe’s CEO, André Løvestam, believes the hygiene aspect may potentially completely
change the game. We agree, although we think it is a bit too early to declare it a game
changer as we do not know the effect on the banks’ willingness to pay.
Either way, the fact that people have recently become more cautious and concerned about
hygiene has already had profound effects. The hygiene focus has increased the credit card
usage ratio significantly relative to cash, even in cash-oriented societies like Germany and
Turkey. In Germany, the majority of payments are now made contactless, compared to 35%
before the coronavirus, according to the German Credit Agency. A survey in the US two
weeks ago, by RTi Research, found that 30% of consumers had used contactless payment
methods for the first time, and of these people, 70% indicated they would continue to use this
technology. We therefore believe many people will continue to use contactless cards instead
of cash, now that they have tried it out and experienced how convenient it was.
Raised contactless limits across the world Limits (caps) on contactless transactions have been raised all over the world due to the
Coronavirus. Mastercard on March 25 announced that it offers contact limit raises in 29
countries. Here are a few examples: UK GBP 45 (30), Canada CAD 250 (100), Netherlands
EUR 100 (50), Australia AUD 200 (100), and Norway NOK 500 (400). Other similar actions
include e.g. Ireland, Estonia, Greece, Poland, Saudi Arabia, Egypt, Poland, Turkey, Ireland and
Estonia. In some countries, like Greece and Netherlands, the raised limits are just temporary,
while in some others (e.g. Ireland, Estonia and Poland) they are permanent.
Contactless is the very foundation of the Zwipe case (secure convenience). We see both a
risk and an opportunity in the raised limits. In our view, the substitute of a conventional
contactless card for USD 2 is the toughest competition, as it is becoming an increasingly
attractive and arguably good enough solution with the higher limits. One crucial aspect,
however, is that even though limits are raised, a PIN is always required after a cumulative
value limit (e.g. NOK 1 500 in Norway), or a certain number of transactions; usually 5. Unless
schemes would be willing to remove or alter these conditions (counters) as well, it seems
that BSCs are an absolute requirement for true contactless. We also think there is a
possibility that people could get used to the convenience from fewer constraints, i.e. it is
more annoying to tap the PIN every tenth time than every fifth time, and so on.
Moreover, the more contactless, the more phishing and skimming, meaning users’ peace of
mind is being challenged. Zwipe ´therefore believes the willingness to pay for a BSC of ~50%,
(according to several studies from e.g., schemes and Fingerprint Cards) could increase due
to the hygiene factor and higher limits. In our view, it is clear that some people will be willing
to pay for the hygiene safety of a BSC.
dsfdsf REDEYE Equity Research Zwipe 7 April 2020
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Aside of conventional contactless cards, we see a risk that the Coronavirus could drive
demand for existing, cost-efficient solutions that have not yet taken off, like mobile payments.
However, mobile payments still have several challenges (see further below or our initiating
coverage report).
Limited Corona downside Zwipe says it has so far not been negatively impacted by Corona, except for a weakened
Norwegian Krone, which could increase its NOK costs in the short term. Obviously, there is no
current card sales to be affected, so the question is more if business talks and negotiations
could be prolonged, and for how long. If there is a more severe recession, Zwipe does not rule
out that it would be hit to some degree, like every other company. However, we have already
added a margin of safety for eventual delays, meaning we see no need to make any estimate
revisions. Thus, we believe any negative, direct Corona effects are rather small. However, if
the uncertainty in the financial markets remains it could indirectly prove to be a challenge as
we have assumed Zwipe needs another offering before profitability. On a positive note, there
is no imminent need for new capital. We expect Zwipe to have cash for over one year.
Zwipe’s employees work with full efficiency from home. Projects are fully ongoing and
proceeding according to plan. Zwipe says: “We are a lean global team committed to our
targets and, as we have done before, we are adapting quickly and effectively to the changing
environment we operate in.” We believe Idemia is unaffected by the French quarantines as
payment cards are seen as critical infrastructure. Component supply and logistics could in
theory slow down the chip development, but as we understand Zwipe, have not seen such
effects so far.
We think the attention of the banks might be directed elsewhere in the short run though, as
we can imagine they will not focus much on educating and supporting users in completely
new technologies in the current macro environment. However, the question of whether a card
is a sound investment or not should not be affected by bad debt etc. (see our fraud payback
calculation below). Overall, banks have postponed some projects but so far not in biometrics,
as far as we know. For instance, while the bank participating in the G&D wearable program
has delayed other projects, it has instead, according to Zwipe, extended the wearable pilot.
The fraud cost payback time on premium cards are less than 2 months We believe there is a strong case for combating fraud with BSCs (biometric smart cards),
which we have summarized in our payback calculations in the table below. Using current
fraud cost data (0.7% fraud of the total transaction volumes), we assume the required
payback sum for a bank to issue a BSC sums up to transactions with a total value of USD
~3500. We believe the payback period for this sum is no more than 2 months for a premium
card, as we will discuss below.
Fraud payback calculation
BSC price (incl. Zwipe Pay ONE) $10
Dual-interface contactless card $2
Cost premium for a BSC $8
Fraud of total transaction value (%) 0.7%
Point of sales fraud of total fraud (%) 33%
Payback formula ($10-$2) / (0.007*0.33)
= ~$3500
Average monthly premium card spend $1700+
Payback period 2 months
Source: Zwipe, Redeye Research & various industry sources
dsfdsf REDEYE Equity Research Zwipe 7 April 2020
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The data around the average turnover for a credit card differs, but for Visa and Mastercard it
is around USD 250-350 per month, while American Express spend is significantly higher at
USD +900. However, there are several other factors to consider, one of them being the
differences between retail and corporate cards. The average US retail credit balance is USD
1 900 - 2 000, although including all kind of cards it is several times larger (USD ~6 600).
Assuming that the revolving utilization percentage (the credit being used) is similar in these
groups, we think an average card is likely used 3-4 times more than a retail card, in terms of
transaction volume. Moreover, in the US, a person has on average three cards and, as we
previously have mentioned, there are large differences in how much people use their
respective card. The average Visa and Mastercard spending on a top-of-wallet card are USD
850 and USD 650 a month, and for American Express it is USD 1 700. Premium cards are
likely closer to the AMEX average, if not higher. We therefore estimate the average monthly
premium card spend to at least USD 1 700, meaning a payback period of only two months. In
conclusion, there are significant savings for banks in issuing BSCs.
The BSC adoption will trail the contactless roll-out The message from banks and people in the card industry is that when BSC prices become
low enough in relation to today’s EMV card, it will start the same kind of transition that took
place when contactless began replacing contact-based cards during 2008-2018. We have
therefore, in the graph below, tried to plot the price drop in contactless against the
contactless penetration in UK. Please note that we do not have the exact card price data,
meaning this is just a conceptual graph. We are only looking to display the approximate
movement, the key message being that lower costs and higher volume go hand in hand. We
have reasonable knowledge of the end and the beginning, but not the exact course year by
year.
In other words, in our view, the direction is clear and the transition is just a matter of time,
although the timing is highly uncertain. We also do not know if it will play out in the same
fashion, in terms of aggressiveness. As indicated in the graph above, the contactless
adoption in UK started when the price premium over contact-based was about 5x and then it
reached 83% in tandem with price premiums dropping to 2x. In other words, it was a mutual
effect where price reductions drove penetration (trough innovation) and penetration drove
price reductions (via higher volumes and economies of scale).
One advantage that might speed up things this time around is that there is no need for costly
The price drop & adoption correlation: Card prices (USD) & adoption rate (%)
Source: Redeye Research, various industry sources
0%
25%
50%
75%
100%
1
5
25
2013 2019 2025
Contactless card price BSC price Contactless adoption UK (%) BSC adoption (%)
BSC 3X premium over contactless
2X premium over contact-based
dsfdsf REDEYE Equity Research Zwipe 7 April 2020
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infrastructure replacements, or any new hardware at all for that matter. Nevertheless, we
have assumed a slower adoption uptick in the mid-term as we think the BSC premium needs
to be lower than 3x over contactless to reach double digit percentages in penetration ratio.
However, it should be able to start at 5x, which is equal to USD ~10. The BSC leap is smaller
as we are moving from contactless most of the time to contactless all of the time, as
opposed to from zero to contactless in 4 out of 5 transactions during 2008-2018. Remember,
a PIN must be entered when you reach a certain cumulative value (e.g. NOK 1500) or a
certain number of contactless transactions (e.g. every 5 transactions). Thus, we do not think
conventional contactless cards will ever become true contactless, so the eventual risk lies
more in them being considered good enough.
Exciting partnership with MDP We are optimistic around the recent partnership with Masria Digital Payments (MDP) and
positively surprised that MDP wants to use the platform of the old solution as a way to
educate the market while it is awaiting the coming Zwipe Pay ONE. We therefore now think
that pilots can happen during H2. It should be noted that this is a change of heart from our
initiating coverage report, where we did not see any short-term catalysts.
MDP is not only a perfect match for Zwipe in terms of innovative force and tech focus. It is
also one of the largest local Middle Eastern card manufacturers, and arguably the most
successful. We can only detect one larger player (FutureCard). However, MDP is growing
significantly faster. The 17m payment cards shipped in 2018 means a strong CAGR of 12%
from 2012. It has a capacity of 55m EMV cards, i.e. there is substantial room for further
growth.
MDP is the largest player in its Egyptian home market. 17m cards might not sound so much
compared to the ~100m Egypt population, but one should note that cards are usually
renewed every 3-4 years. Thus, we believe MDP controls the majority of the Egypt market. It
e.g., has Egypt’s largest bank CIB as customer. There are also ambitious expansion plans in
the 35 countries it currently addresses in Africa and the Middle East. One notable example is
Nigeria where it has local presence and has delivered to several players, e.g.,1.8m cards to
Ecobank that has 23m customers in total. MDP also has offices in Kenya and UAE. In total,
MDP lists 41 partners on its website (see the image below).
The potential is a lot larger than 17m cards, judging from these current partnerships. Out of
the largest Middle Eastern banks, we e.g., note that MDP has partnerships with Emirates NDB,
National Bank of Kuwait, National Commercial Bank and Qatar National Bank. These four
together have around 40m customers.
Masria's partner network
Source: Masria
dsfdsf REDEYE Equity Research Zwipe 7 April 2020
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All card progress is good Idex and its partner Feitian have recently announced that they have received the industry’s
first certification for a China UnionPay dual-interface biometric payment card. Given the
immatureness of the market, any leap forward at this stage is positive, according to Zwipe,
and will result in incoming calls for the company. Thus, certification for other card
manufacturers or pilots from competitors are examples of industry events that are triggers
for Zwipe as well.
The same should apply to news around the only competing single chip solution, from
Infineon, which is due in 2023. In comparison, Zwipe targets roll-out during 2021 and pilots in
2020. Zwipe also mentioned that there is a secret sauce in the Zwipe/Idemia chip that would
allow them to be market leaders also in the long term.
Wearables is becoming hotter In our initiating coverage report, we did not touch so much on the wearables opportunity as
most focus has been directed to the big payment potential. However, we now see an
increased chance of G&D starting several pilots for wearables payments using Zwipe’s
technology, as indicated above, although we believe a product is still far from the market.
Below are some of the most common payment wearables with associating products. There
is a large variety, including rings, smartwatches, and bracelet.
We believe the main advantages for biometric wearables are the same as for cards, i.e. faster
and more convenient payments. As an example, for Samsung Pay, the user still needs a PIN
to pay. We think there are some similarities to biometric mobile payment solutions that so far
have had limited traction. One hurdle is that too few stores accept these kinds of payments.
Furthermore, they require a change in customer behavior, while paying with a card is 100%
natural and intuitive. We expect the same challenges to impede the wearables payment
market.
The market for wearables has grown rapidly recently, driven by smartwatches, in particular
Apple Watch. CCS Insight estimates that the market almost doubles until 2023 (see the graph
below).
Brand Type of device
MyKronoz Bracelet
Jawbone Bracelet
Fitbit Bracelet
Apple watch Smart watch
Amazfit Smart watch
Samsung smart watch Smart watch
Infineon ring Digital ring
Token ring Digital ring
Kerv ring Digital ring
Source: Redeye Research
Type of wearable payment device
dsfdsf REDEYE Equity Research Zwipe 7 April 2020
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However, the expected 2023 volumes, exceeding 150m million units, are still minor compared
to the card market of 4 bn cards. Nevertheless, we see a potential for wearables to grow
faster and have higher volumes than cards, at least in the mid-term, since the wearables are
relatively expensive, meaning manufacturers could have a different view on adequate pricing
for adding biometrics. In other words, the cost hurdle that has prevented the payment cards
from taking off is not present in wearables. Moreover, Zwipe has not seen any competition in
wearables. To conclude, we therefore think it has the potential to establish a first-mover
position and quickly win a significant market share.
Wearable Device Shipments Worldwide
Source: CCS insight 2019
0
50
100
150
200
250
300
2016 2017 2018 2019e 2020e 2021e 2022e 2023e
Millio
n u
nits
dsfdsf REDEYE Equity Research Zwipe 7 April 2020
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Financial estimates We had not expected Zwipe to include half of the Idemia one-time cost of NOK 38m in 2019,
meaning we adjust our 2020 cost estimates accordingly (see the table below). H2’19 also
included restructuring costs and redundancy provisions of in total NOK 7.6m and some dual
listing costs. Another one-off that was included in the 2019 operating loss of NOK -96m was
an inventory write-down of NOK 3m.
Our short-term sales assumptions for payment cards are the same as before (see the table
below).
Following the mentioned adjustments, we expect an OPEX of SEK 62m, in line with the
guidance of NOK 5m per month.
It should be noted that no significant wearables sales are currently included, as can be seen
in the table of our detailed earnings estimates below.
Forecast adjustments
(NOKm) 2020 2021 2022 2023
Sales Old 2 8 63 211
New 2 8 63 211
% change 0% 0% 0% 0%
EBIT Old -80 -62 -41 20
New -62 -61 -41 20
% change 29% 1% 0% 0%
Profit before tax Old -81 -62 -41 20
New -62 -61 -41 20
% change 30% 1% 0% 0%
Earnings per share (NOK) Old -3.18 -2.42 -1.59 0.79
New -2.42 -2.41 -1.59 0.79
% change 31% 1% 0% 0%
Source: Redeye Research
Assumptions for Zwipe payment card sales
2021 2022 2023
Zwipe's share of total market (%) 19% 23% 24%
Zwipe cards (mil) 0.1 2.0 7.5
whereof:
Cards from Gemalto and G&D (mil.) 0.0 0.2 0.8
Zwipe's share (%) 0% 5% 7%
Cards from existing partners, excl. Idemia (mil.) 0.1 0.9 3.1
Zwipe's share (%) 80% 80% 80%
Cards from other manufacturers (mil.) 0.0 1.0 3.5
Zwipe's share (%) 30% 40% 40%
ASP Gemalto and G&D (USD) 2.0 2.0 2.0
ASP others (USD) 3.0 3.0 3.0
ASP blended (USD) 3.0 2.9 2.9
Zwipe payment card sales (NOKm) 3 55 201
Source: Redeye Research
dsfdsf REDEYE Equity Research Zwipe 7 April 2020
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Cash was 90m at the end of 2019, including the money from the offering (but seemingly excl.
transaction cost). If our current estimates are somewhat accurate, we see a need for another
offering in 2021.
Earnings estimates (NOKm)
2020 2021 2022 2023
Total sales (NOKm) 2 8 63 211
whereof payment cards 0 3 55 201
whereof other cards (non-payment) 0 0 0 0
whereof other 2 5 8 10
Gross margin 45% 40% 40% 45%
OPEX -60.7 -64.7 -66 -75
Operating profit/loss -62 -61 -41 20
EPS (NOK) -2.42 -2.41 -1.59 0.79
Source: Redeye Research
REDEYE Equity Research Zwipe 7 April 2020
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Investment Case Benefits from strong IP & game-changing deal with Idemia
Advantages of biometrics too great for the market not to take off
Initiate with a base case of NOK 9 - however, no short-term catalysts
Benefits from strong IP & game-changing deal with Idemia
Zwipe has recently partnered with the world’s second largest card manufacturer, Idemia – a clear indication of its
competitiveness. This improves the ability to manufacture biometric smart cards (”BSCs”) cost efficiently, in turn
imperative to the success of BSCs. The partnership targets a reduction of card costs by over 50%, implying potential
cost leadership. We view Idemia and Zwipe’s IP as strong cards up Zwipe’s sleeve. Zwipe has been granted wide
patent protection for how terminals identify a biometric card, a prerequisite for processing biometric contactless
payments.
Advantages of biometrics too great for the market not to take off
BSCs have been "just around the corner" for many years, but nothing has materialized as of yet. We believe,
however, the cheaper card stemming from the Idemia/Zwipe solution can facilitate commercial volumes from
2022. Contactless BSCs combine state of the art security and the highest convenience, i.e. there is no need for a
cap (using PIN codes), meaning faster retail checkout. This should render more transactions and revenue for the
issuing banks. Thus, BSCs are simply too good not to happen. However, we are cautious about market projections
claiming a +50% penetration, as banks seem reluctant to pay a high premium compared to the price of a standard
contactless card of USD 2-4. We expect the initial relevant market to be limited to 20% of the 4 bn payment cards
shipped a year, and based primarily on premium cards that account for the highest transaction volumes.
Base case of NOK 9
As the stock is oversold, we expect an uptick towards our base case of NOK 9. Our bear case is based on failed
market traction and a fire sale of the IP at NOK 2 per share. In bull case, we see a major upside to NOK, 25 based on
higher BSC penetration. The wide fair value range illustrates the uncertainty of Zwipe's market. In the short run, we
believe MDP pilots can drive the stock.
REDEYE Equity Research Zwipe 7 April 2020
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Valuation
Bear Case 2.0 NOK Base Case 9.0 NOK Bull Case 25.0 NOK In our bear case we see the market scaling at a very slow pace - too slow for Zwipe to cover its costs. In this scenario, we believe larger players like NXP can survive as they have more economic muscles behind them and can wait for the market to really take-off. Zwipe does not have strong institutional ownership and another rights issue could prove hard, especially if the stock market in general is experiencing a significant downturn. Also, it is yet uncertain how the large change in the organization and new collaboration with Idemia will pan out. We, therefore, assume that Zwipe will not be able to continue in its current shape and instead tries to monetize its strong IP portfolio, especially its wait time extension patent, and possibly also in post-placement, outside Europe. As Zwipe has spent around NOK 300m this far, we believe a reasonable value of the IP is 15% of these investments. This corresponds to NOK 45m, or around NOK 2 per share, which Zwipe possibly could receive in a fire sale of its strong IP portfolio.
Our valuation scenarios are based on years 2021-2030 and the payment cards. All scenarios use a required rate of return of 14% and a terminal growth of 2%. We estimate a relevant payment card market of 20% of the total annual shipments, growing by CAGR 3% from ~800 million cards to 1.1 billion cards. We expect the biometric smart card (BSC) penetration to ramp to 20%, corresponding to a 94% CAGR and ~220m BSCs in 2030, equal to a BSC penetration of 4%. As for Zwipe's market shares, we expect them to begin at 19%, average 19% during the period and drop to 15% by 2020. We expect existing partners to account for 37% of the volumes, but only 15% from Gemalto and G&D (equal to an average 8% share of these customers). This means about 50% of the volumes come from other players. For the sake of simplicity we expect the card players to maintain their respective market shares of today. All in all, this implies volumes for Zwipe reaching 33 million in 2030, following a 89% CAGR. We expect the ASP to start at about USD 3, dropping to ASP 2, averaging 2.2 over the whole period, since the higher volumes are delivered in the end of the period, when ASP is lower. Our ASP and volume assumptions above means a sales CAGR of 78% and payment BSC sales reaching NOK 600m in 2030. On top of that we expect other sales (access cards, wearables etc.) to be about NOK 100m in 2030, but these kind of revenues are a minor part over the whole period, as our case, as mentioned above, is based on the payment cards. We expect the gross margin to start at around 45%, which we believe is around the semiconductor industry average, and then we assume it will come down to 30%, also not uncommon for the industry. We assume the average gross margin over the whole period will be 37%. This is equal to a gross profit erosion by CAGR 8%. We expect by OPEX to grow by CAGR 7% reaching a steady state of 17% of sales in 2026. The
Our only different parameter in our optimistic scenario, compared to base case, is that we increase the market penetration and adjust Zwipe’s volumes accordingly. With a BSC market penetration of 12 % of all payment cards sold globally, instead of 4 % as in the base case, we derive a fair value of NOK 25. The large discrepancy from our base case shows the massive innate potential for Zwipe if biometric cards can gain a larger market share. The three times higher BSC penetration results in a sales growth of CAGR 96% during 2020-2030, meaning sales growing to about NOK 1.9 billion. We believe this equals volumes of around 100 million BSCs. We model a 6 percentage points lower gross margin on average, compared to our base case, as we assume a larger roll-out requires a more aggressive cost decline than our base case, which we assume will negatively affect gross margins. However, we assume a 6 percentage points lower OPEX, on average, can offset the lower gross margin. Consequently, we assume the same EBIT margins as in our base case, i.e. an average 15% during 2020-2030. Our long-term EBIT margin is 10%.
REDEYE Equity Research Zwipe 7 April 2020
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following leads to EBIT margins of on average 15% over the period. We assume a long-term EBIT margin of 10%.
REDEYE Equity Research Zwipe 7 April 2020
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Catalysts Pilots
The most important catalyst during the next 12 months, in our view, is card pilots, from existing and new
partnerships. We also see potential wearables pilots.
IMPACT Downside Upside Time Frame
Significance Likelihood Significance Likelihood Minor Unlikely Major Highly likely Mid
Proven breakthrough in production costs
The partnership with Idemia did not positively impact the share price. Investors may not feel sure about costs
actually coming all the way down to 10 dollars. A verified cost progress could change the sentiment. We believe
there could be a cost breakthrough in 2020.
IMPACT Downside Upside Time Frame
Significance Likelihood Significance Likelihood Moderate Unlikely Major Possible Mid
Increased hygiene focus
The important hygiene aspects of contactless biometric cards have been highlighted to a large extent by the
Coronavirus as people are becoming reluctant to touch the terminals. We see a chance that this could prove to be a
game changer for Zwipe in the long term.
IMPACT Downside Upside Time Frame
Significance Likelihood Significance Likelihood Minor Possible Major Possible Long
First commercial order for the Idemia/Zwipe-solution.
Pilots are one thing, but a commercial order from the Idemia collaboration will prove that there is a substantial value
in Zwipe´s offering. We think this happens in H2 21, at the earliest.
IMPACT Downside Upside Time Frame
Significance Likelihood Significance Likelihood Minor Unlikely Major Highly likely Long
REDEYE Equity Research Zwipe 7 April 2020
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Summary Redeye Rating The rating consists of three valuation keys, each constituting an overall assessment of several factors that are rated
on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.
People: 3
We arrive at an average people rating (3/5) where the most positive aspect is the skill set and experience in the board and
management team, following recent additions. The short history as a listed company and minor insider shareholdings weigh on
the downside, although there are incentives from stock options. There is not much historical data when it comes to capital
allocation skills and communication. According to our rating model, compensation is reasonable.
Business: 3
Biometric smart cards have been considered around the corner for several years, yet the market does not exist today. However, we
expect it to quickly emerge as soon as costs come down to adequate levels, given the strong advantages of biometric payment
cards. Considering the 4 billion payment cards that are shipped each year, even a moderate penetration implies significant growth
opportunities. Zwipe's business model is scalable when volumes ramp. The expertise of Zwipe is also validated by partnerships
with large players like e.g., Idemia, which compensates for its tiny size (pre-revenue etc.). The payment industry is slow moving,
which creates a barrier to entry, but it is hard to identify how sustainable the competitive advantages are at this early point in time.
However, competition is positive in this stage, as it will help starting the market.
Financials: 1
Zwipe raised NOK 58m in December 2019 and has a solid cash position for now, but we assume there will be a need for another
financing round before break-even. Zwipe is essentially pre-revenue and unprofitable, which weighs on the financials rating, but the
scalable business model means Zwipe can quickly scale when sales ramp up, and consequently reach break even.
REDEYE Equity Research Zwipe 7 April 2020
15
PROFITABILITY 2018 2019 2020E 2021E 2022E ROE 0% 0% -73% -105% 0% ROCE -444% -265% -73% -104% -120% ROIC 634% 508% -108% 1029% -913% EBITDA margin -2647% -6329% -2719% -704% -57% EBIT margin -3000% -6329% -2810% -767% -64% Net margin -3136% -6329% -2811% -765% -64%
Please comment on the changes in Rating factors……
INCOME STATEMENT 2018 2019 2020E 2021E 2022E Net sales 2 2 2 8 63 Total operating costs -63 -98 -62 -65 -99 EBITDA -60 -96 -60 -56 -36 Depreciation -1 0 -1 -1 -1 Amortization -7 0 -1 -4 -4 Impairment charges 0 0 0 0 0 EBIT -68 -96 -62 -61 -41 Share in profits 0 0 0 0 0 Net financial items -4 0 0 0 0 Exchange rate dif. 0 0 0 0 0 Pre-tax profit -72 -96 -62 -61 -41 Tax 1 0 0 0 0 Net earnings -71 -96 -62 -61 -41
BALANCE SHEET 2018 2019 2020E 2021E 2022E Assets Current assets Cash in banks 11 23 96 23 0 Receivables 7 74 6 10 44 Inventories 2 3 3 8 32 Other current assets 0 0 0 0 0 Current assets 20 101 105 42 76 Fixed assets Tangible assets 2 3 2 3 5 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 Goodwill 0 0 0 0 0 Cap. exp. for dev. 0 0 0 0 0 O intangible rights 6 7 9 8 10 O non-current assets 1 0 0 0 0 Total fixed assets 10 10 11 12 15 Deferred tax assets 0 0 0 0 0 Total (assets) 29 111 116 53 90 Liabilities Current liabilities Short-term debt 0 0 0 0 53 Accounts payable 37 30 26 26 51 O current liabilities 0 0 0 0 0 Current liabilities 37 30 26 26 103 Long-term debt 0 0 1 0 0 O long-term liabilities 0 0 0 0 0 Convertibles 0 0 0 0 0 Total Liabilities 38 30 27 26 103 Deferred tax liab 0 0 0 0 0 Provisions 0 0 0 0 0 Shareholders' equity -8 80 89 28 -13 Minority interest (BS) 0 0 0 0 0 Minority & equity -8 80 89 28 -13 Total liab & SE 29 111 116 53 90
FREE CASH FLOW 2018 2019 2020E 2021E 2022E Net sales 2 2 2 8 63 Total operating costs -63 -98 -62 -65 -99 Depreciations total -8 0 -2 -5 -5 EBIT -68 -96 -62 -61 -41 Taxes on EBIT 1 0 0 0 0 NOPLAT -68 -96 -62 -61 -41 Depreciation 8 0 2 5 5 Gross cash flow -60 -96 -60 -56 -36 Change in WC 7 -75 64 -10 -33 Gross CAPEX -6 -1 -3 -6 -8 Free cash flow -59 -172 1 -72 -76 CAPITAL STRUCTURE 2018 2019 2020E 2021E 2022E Equity ratio -27% 73% 76% 52% -14% Debt/equity ratio 0% 0% 1% 0% -409% Net debt -11 -23 -95 -23 53 Capital employed -19 57 -6 4 40 Capital turnover rate 0.1 0.0 0.0 0.2 0.7 GROWTH 2018 2019 2020E 2021E 2022E Sales growth 112% -33% 45% 265% 688% EPS growth (adj) 7% -21% -60% -1% -34%
DATA PER SHARE 2018 2019 2020E 2021E 2022E EPS -7.57 -6.02 -2.42 -2.41 -1.59 EPS adj -7.57 -6.02 -2.42 -2.41 -1.59 Dividend 0.00 0.00 0.00 0.00 0.00 Net debt -1.15 -1.46 -3.72 -0.91 2.07 Total shares 9.43 15.95 25.53 25.53 25.53 VALUATION 2018 2019 2020E 2021E 2022E EV 39.2 61.3 1.8 73.7 149.7 P/E -0.7 -0.9 -1.6 -1.6 -2.4 P/E diluted -0.7 -0.9 -1.6 -1.6 -2.4 P/Sales 21.9 55.7 44.0 12.1 1.5 EV/Sales 17.2 40.4 0.8 9.2 2.4 EV/EBITDA -0.7 -0.6 0.0 -1.3 -4.1 EV/EBIT -0.6 -0.6 0.0 -1.2 -3.7 P/BV -6.2 1.1 1.1 3.5 -7.5
SHARE INFORMATION Reuters code ZWIPE:SS List Merkur Mkt, First North Share price 3.7 Total shares, million 25.5 Market Cap, MNOK 96.9 MANAGEMENT & BOARD CEO Andre Løvestam CFO Lars Kristian Solheim IR Chairman Jörgen Lantto ANALYSTS Redeye AB Viktor Westman Mäster Samuelsgatan 42, 10tr [email protected] 111 57 Stockholm
SHARE PERFORMANCE GROWTH/YEAR 18/20E 1 month -9.9 % Net sales -1.7 % 3 month -34.6 % Operating profit adj -4.9 % 12 month -75.4 % EPS, just -43.4 % Since start of the year -30.9 % Equity n/a
SHAREHOLDER STRUCTURE % CAPITAL VOTES Mediuminvest 9.7 % 9.7 % Coeli Wealth Management 9.1 % 9.1 % Lars F. Windfeldt 5.3 % 5.3 % Avanza Pension 4.0 % 4.0 % Photon Future LTF 3.6 % 3.6 % Nordnet Pension 3.0 % 3.0 % Jens Miöen 2.2 % 2.2 % Concito AS (Pål Evind Vegard) 2.1 % 2.1 % Jörgen Lantto 2.1 % 2.1 % Danica Pensionsförsäkring 1.9 % 1.9 %
DCF VALUATION CASH FLOW, MNOK WACC (%) 14.0 % NPV FCF (2020-2021) -109 NPV FCF (2022-2028) 203 NPV FCF (2029-) 121 Non-operating assets 23 Interest-bearing debt 0 Fair value estimate MNOK 238 Assumptions 2020-2026 (%) Average sales growth 155.7 % Fair value e. per share, NOK 9 EBIT margin -510.1 % Share price, NOK 3.7
REDEYE Equity Research Zwipe 7 April 2020
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Redeye Rating and Background Definitions Company Quality
Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These
are the building blocks that enable a company to deliver sustained operational outperformance and attractive long-
term earnings growth.
Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely
accepted and tested investment criteria and used by demonstrably successful investors and investment firms. Each
sub-category may also include a complementary check that provides additional information to assist with
investment decision-making.
If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for
each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that
ranges from 0 to 5 rounded up to the nearest whole number. The overall score for each category is then used to
generate the size of the bar in the Company Quality graphic.
People
At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business
is a significant part of understanding the long-term drive of the company. It all comes down to doing business with
people you trust, or at least avoiding dealing with people of questionable character.
The People rating is based on quantitative scores in seven categories:
• Passion, Execution, Capital Allocation, Communication, Compensation, Ownership, and Board.
Business
If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage
customers, create value and consistently deliver that value at a profit, you won’t succeed as an investor. Knowing
the business model inside out will provide you some level of certainty and reduce the risk when you buy a stock.
The Business rating is based on quantitative scores grouped into five sub-categories:
• Business Scalability, Market Structure, Value Proposition, Economic Moat, and Operational Risks.
Financials
Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the
financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial
performance and valuation. However, you only need a few to determine whether a company is financially strong or
weak.
The Financial rating is based on quantitative scores that are grouped into five separate categories:
• Earnings Power, Profit Margin, Growth Rate, Financial Health, and Earnings Quality.
REDEYE Equity Research Zwipe 7 April 2020
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Redeye Equity Research team
Management Björn Fahlén
Håkan Östling
Technology Team Jonas Amnesten
Henrik Alveskog
Havan Hanna
Kristoffer Lindström
Erika Madebrink
Fredrik Nilsson
Tomas Otterbeck
Eddie Palmgren
Magnus Skog
Oskar Vilhelmsson
Viktor Westman
Linus Sigurdsson (Trainee)
Editorial Eddie Palmgren
Mark Siöstedt
John Hintze
Johan Kårestedt (Trainee)
Life Science Team Gergana Almquist
Oscar Bergman
Anders Hedlund
Arvid Necander
Erik Nordström
Klas Palin
Jakob Svensson
Ludvig Svensson
REDEYE Equity Research Zwipe 7 April 2020
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Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization). Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis. Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies:
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Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument. Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making. Redeye Rating (2020-04-07)
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Rating People Business Financials
5p 12 11 3 3p - 4p 98 74 31 0p - 2p 8 33 84 Company N 118 118 118
CONFLICT OF INTERESTS
Westman owns shares in the company : No Redeye performs/have performed services for the Company and receives/have
received compensation from the Company in connection with this.
