Nano Dimension — Update 12 September 2016

Nano Dimension Ltd is a pre-commercial stage company focused on the research and development of advanced 3D printed electronics. The flagship product is the DragonFly 2020 3D printer for rapid in-house prototyping of multilayer PCBs and antennas. Unlike competitive systems, it is able to output complex multi-layer PCBs with the relatively fine conductive tracks required for commercial applications because the system uses proprietary nanotechnology-based conductive and dielectric inks. The DragonFly system is targeted at the prototyping segment of the PCB market. We estimate that the total available market could grow to be worth US$836m by 2025, equivalent to 8.7k print systems. In the longer term, we expect more than half of revenues to be derived from sales of replacement ink for use with print systems, effectively forming a source of recurring revenues. Nano Dimension also intends to supply its conductive and dielectric inks to other fields in the printed electronics market and has recently demonstrated the capability to print human cells and tissue.

Nano Dimension is a development stage business, with a potentially disruptive technology moving into commercialisation. Consequently there are significant risks, uncertainties and potential. With the technology still unproven, successful completion of the beta-test phase (estimated mid 2017) is the critical near-term milestone. There is also significant uncertainty on commercial factors such as the level of market demand and pricing. We set out the key technological, commercial and financials milestones we believe the company needs to deliver to achieve our estimates in Exhibit 5. We believe that Nano Dimension will need to raise at least US$11m by end 2016. Edison policy is to model this as funded through debt, though other options are possible.

While still forecasting a rapid revenue ramp, our estimates are substantially below the consensus forecasts of other analysts covering Nano Dimension. We model sales of three DragonFly printers at the end of FY16 and 39 during FY17. By FY18 we estimate the printers will be shipping in volume (200 units), generating US$35.7m revenues and US$14.1m operating profit. This roll-out timetable assumes that the beta-site product trials complete successfully, with very little modifications to either the printer or the inks required. Our estimates exclude sales of ink for applications that do not also require a DragonFly printer and any revenues from complementary markets such as printing biological tissues.

In common with most development-stage businesses, the range of potential valuations for Nano Dimension is extremely wide. The company has potential to grow into a valuation many times the current market capitalisation, yet if the beta-test programmes with customers do not transition into commercial orders then the company is unlikely to generate an economic return. While acknowledging this range of outcomes, we propose an indicative share price of NIS9.93/ordinary share (US$12.86/ADS). This is based on our DCF calculation in which sales ramp-up to 400 units/year (12% of the estimated available market) by 2025. It excludes any contribution from earlier stage developments such as human tissue printing, or sales of inks for other applications. Noting that the current share price appears to factor in delays in commercialising the technology and in reaching meaningful sales volumes, we expect share price appreciation towards our indicative value if Nano Dimension hits major technical and commercial milestones over the next year.

Nano Dimension is developing and commercialising solutions for advanced 3D printed electronics systems for a number of commercial applications. Its initial focus is on additive manufacturing of prototype printed circuit boards (PCBs) and antennas. The company’s solutions can substantially shorten the time required for designers to manufacture prototypes, thus reducing time to market, and enhancing IP security. Other applications such as low-volume manufacture of PCBs, 3D printing of structural electronics and even printing of human cells and tissue are being targeted further out. The company also intends to sell its conductive ink as a standalone product for applications such as touch-screen displays, sensors, OLEDs (organic LEDs), RFID (radio-frequency identification) tags and PV (photo-voltaic) cells. Nano Dimension intends to derive revenues from sales of printers and inks, thus generating recurring revenues.

Nano Dimension’s solutions embrace a combination of proprietary nano-technology conductive and dielectric inks, hardware and software. In Q215 the company unveiled the alpha version of an innovative 3D printer, the DragonFly 2020, for professional multilayer PCBs and antennas. Nano Dimension expects to make the first sales of the printer in Q416, followed by full commercial introduction in 2017. The technology used for 3D PCB printing and the complementary activities are protected by a growing portfolio of three licensed patent families, 13 patent applications and two approved patents.

Founded in July 2012 by Amit Dror, Sharon Fima, Simon Fried, and Dagi Ben-Noon, Nano Dimension listed on the Tel Aviv Stock Exchange in August 2014, following a reverse merger with a shell company, and then on NASDAQ in March 2016. The company is based in Ness-Ziona near Tel Aviv. Ness-Ziona is home to a cluster of 3D print companies, providing a good local recruitment pool. The company currently employs over 70 full- and part-time staff. It has received a total of c NIS73m (US$19m) funding to date. In November 2015 it completed a financing round with a total capital raise of c NIS51m (US$13m) (at NIS5.50/ordinary share or US$7.12/ADS).

Nano Dimension is initially focusing on solutions for PCB prototyping that give electronics designers a fast, secure alternative to outsourced prototype production. Its solutions combine technologies from three key disciplines: nano-particle inks, 3D printing hardware and computer-aided design (CAD) software.

The key enabler behind the DragonFly system is a suite of nano-technology inks, which form both the conductive and the insulating regions of a printed circuit board.

The conductive inks contain a dispersion of silver nano-particles. The inks are formulated so that they are sufficiently conductive to produce track widths that are as narrow as those produced using conventional lithographic processes, and exhibit uniform conductivity and good adhesion so that the tracks do not wear off during use. (Management states that these are the highest conductivity inks currently available.) The proprietary dielectric ink, which forms the insulating regions in circuit boards, is a modified epoxy. It is formulated so it can be extruded through DragonFly’s fine print heads. Once deposited and cured it has similar electrical, thermal and mechanical properties to the FR4 material typically used as a substrate in rigid circuit boards.

Nano Dimension’s ability to create exceptionally conductive inks depends on a process for extracting 10-100nm particles of pure silver from widely available silver compounds. Nano Dimension licenses this IP from the Hebrew University of Jerusalem on an exclusive basis. Under the terms of this licence, which will remain in effect until at least April 2029, Nano Dimension will be required to pay royalties of around 3% on sales of conductive ink. The process is protected by three patents/patent applications. In addition Nano Dimension has submitted its own patent applications for the dielectric ink and a next-generation, ultra-conductive ink.

Nano Dimension’s DragonFly printer makes multi-layered PCBs by printing the conductive and dielectric inks onto a sacrificial substrate. Importantly, the two inkjet print heads have hundreds of small nozzles that allow for exact pico-litre deposition of nanotech inks, contributing to the ability to achieve fine dimension conductive traces. Each pass of the print head deposits a 2 micron layer of material at the exact locations specified by the CAD software. The inks are heated to remove surplus solvent and then cured using strong IR/UV (infra-red/ultra-violet) light sources prior to the deposition of the next layer. The maximum size of circuit that may currently be deposited is 200x200x3mm. This does not cover all PCB applications, though management intends future generations of DragonFly printers to be able to output larger dimension boards. A large, complex, 10-layer board will potentially take several hours to print. Nano Dimension has submitted several patent applications covering its own printing technology, although the printer itself is built out of standard components.

The company’s proprietary software package “Switch” processes the output from different brands of CAD software used by electronic designers. Switch converts this output, which describes the topology of each layer of the circuit, into instructions for controlling the movement of the DragonFly printer heads and deposition of the inks. The user interface enables designers to adjust numerous parameters including layer thickness, conductor width, layer order, punching and rotation options as well as the shape or object outline. Nano Dimension has submitted a patent application covering algorithms used in the software that result in substantial savings in inks and time. Nano Dimension completed the development of the initial version of the Switch software package in July 2016.

PCBs are an overlooked but vital and near ubiquitous part of electronic devices. In the simplest form, a single-sided PCB, a design of conductive tracks is created on a non-conductive board by using chemical etches to remove unwanted copper. Components are then attached on the surface of the board so that the conductive tracks connect them up. The substrate provides a mechanical support for both conductive tracks and components.

As tracks on a single-layer board cannot cross each other, more complex designs are typically double sided, while for the most complex circuits a multi-layer PCB is required. This consists of multiple layers (up to 30) of chemically etched insulating substrates with conductive tracks on both sides. The substrate layers are sandwiched together with insulating material separating each layer. The connective tracks loop around each other, passing from layer to layer through regions referred to as vias.

The majority of electronics manufacturers outsource PCB prototyping. During the design phase of a new electronics device, engineers define the topology of the PCB and simulate its performance using CAD software, then send that design information to a third party, which will manufacture a small number of PCBs using exactly the same process as that used for volume production. This is a highly specialist process requiring significant capital investment and manufacturing know-how. Photolithography is used to pattern the electrical traces on each layer of substrate, with around 15 different steps required to pattern each layer. Further processing steps drill the holes for the vias, copper plate them to make them conductive, align the individual layers so that the traces track correctly from one layer to another and press the layers together at high temperature.

Although outsourcing is much more capital efficient, it does add a delay to the process (anywhere between one day to three weeks depending on the location of the supplier and urgency), especially when one takes into account that the design phase can involve several iterations. This delay can clearly be costly, but it can also result in sub-optimal designs as the number of design iterations is often curtailed to reduce cost and the length of the design cycle. In certain verticals (eg security, cutting-edge technology) there is also a potential IP risk inherent in outsourcing prototype production to a third party. We note that the customers who have pre-ordered DragonFly printers are typically engaged in the defence industry or in Silicon Valley. In both sectors, security of IP is vital.

As using 3D printing techniques for PCB prototyping is a disruptive technology, there are no statistics relating directly to market size. In June 2016 industry commentators Research and Markets noted that the global PCB market reached nearly US$61.5bn in 2015 and predicted an increase to US$63.5bn in 2016 with a CAGR of 3.1% from 2016 to 2021. In February 2016 industry analysts Stratistics MRC predicted that the global PCB design software market (which is more closely aligned to the requirement for prototyping) would grow with a CAGR of 5.3% between 2015 and 2022. They noted that one of the key drivers for market growth is the requirement to reduce the design phase for inventive electronic devices. This indicates that the level of PCB design activity globally continues to grow and consequently that demand for PCB prototyping is rising. If we assume that the PCB market continues to grow at a 3.1% CAGR between 2021 and 2025, it will reach US$83.6bn by 2025. Demand is being driven by the need to introduce new electronic products quickly, especially in the consumer electronics, medical devices and automotive sectors. Noting that global average expenditure on R&D is 2.4-5% of GDP, we assume that 5% of the global PCB market value is PCB prototyping. If 20% of this prototyping activity is brought in-house, this represents a total available market of US$836m, equivalent to 8.7k PCB printer systems annually if the price erosion profile adopted in our valuation is used.

As an alternative point of reference, the current market leader for dedicated PCB prototyping equipment (which is not based on 3D printing) is German-headquartered LPKF Laser & Electronics AG. In 2015, LPKF’s electronic development equipment division, which is predominantly PCB prototyping equipment, generated revenues of €25.5m (€25.1m in 2014). We estimate that this represents sales of several hundred prototyping units annually. Nano Dimension’s solution, once commercialised, will potentially be substantially easier to use than LPKF’s equipment, since it requires one rather than multiple steps, and therefore is likely in our view to attract more users.

With regards to the total number of potential sales annually, Nano Dimension estimates that there are around one million users of PCB design software globally, all of whom need access to PCB prototyping services. It also cites around 1,800 PCB-related service providers and around 500 academic departments engaged in electronics design in the US alone. While smaller teams of designers will probably continue to outsource prototyping to third parties, larger teams spending US$100k or more per annum on prototyping constitute a key target segment for Nano Dimension. For these teams, purchasing a DragonFly system for US$150k gives a short payback period. Another key target segment is companies offering prototype services. Many of these prototyping bureaux located in North America, Europe and Israel may have had their own processing equipment historically, but now act only as intermediaries between designers and print shops in the Far East. Possessing a DragonFly would enable them to capture the full value of a prototyping order.

Nano Dimension has already received over 2,500 enquiries for the DragonFly. Around 300 of these contacts participated in a survey, giving some indication not of the total available market but of likely actual interest in DragonFly in the medium term. This is helpful for assessing potential uptake given that the market does not exist yet, so there is no data regarding its size. Most of the participants were based in North America. Responses were from a mix of company sizes, with slightly more than one quarter working for companies with more than 500 workers. Nano Dimension is focusing initially on those businesses spending US$100k or more annually on prototyping services, as these will benefit from the shortest payback time (around two years). If we assume that the survey is a representative sample of PCB designers, then an estimated 160,000 of the million designers globally will be in teams that spend more than US$100k each year on prototyping. If we assume that these engineers are based in teams with an average of 12 engineers each, this represents a market opportunity of 13.3k PCB prototyping systems. Adding the 1,800 US based service providers and 500 academic establishments noted above gives a total available market of 15.6k PCB printing systems. This estimate excludes service providers and academic establishments outside the US.

Our analysis of the competitive environment indicates that there are currently only two other companies that offer 3D printers intended for PCB prototyping. These two, BotFactory and Voltera, are not able to manufacture multi-layer boards because they do not have the ability to print the insulating material that separates the conductive traces in different layers. Also, since neither BotFactory nor Voltera use inks with as high a level of conductivity, they cannot produce circuits with very fine traces. As neither can be used to manufacture complex boards, they command a lower price point than the DragonFly, which is the first 3D printing system to reach IPC (formerly Institute of Printed Circuits, now Association Connecting Electronics Industries) standards for PCBs. Nano Dimension is thus able to target a more sophisticated user base.

The other 3D printers listed in Exhibit 4 are intended for structural electronics applications (see below), not PCB prototyping, and lay down multiple layers of filaments, not inks. Even if these printers are combined with software for converting PCB designs to 3D print instruction, and a conductive filament for depositing electrical tracks, the relatively poor conductivity of the filament means that the minimum trace width is, in our opinion, insufficiently fine for the finished board to be of use to anyone other than hobbyists. The use of specially formulated conductive inks distinguishes the DragonFly from conventional 3D printers that have been adapted to use conductive pastes. These can only produce single-layer circuits with fairly thick traces, which appear to be only suitable for hobbyists. None of the printers listed appear to be shipping in volumes exceeding several dozen annually.

Until the application of 3D print technology to PCB prototyping, design teams wanting to manufacture prototypes in-house would use dedicated milling equipment to process individual layers forming a PCB. Older technology (LPKF, MITS, T-Tech) uses mechanical cutting tools to scrape away the unwanted copper from each layer. Newer technology (LPKF) uses lasers to remove the unwanted copper. Laser-based equipment gives a higher resolution but is much more expensive. Importantly, additional equipment is needed to plate the vias, cut the circuit to size, and to align and press the individual layers to make a multi-layer circuit. This adds complexity to the prototyping process. Some of these steps involve dangerous chemicals and are not appropriate for a design environment.

The advantages of Nano Dimension’s system compared with PCB milling are:

The next 12-15 months mark a crucial phase of execution for Nano Dimension as it moves from a development phase to commercialisation. We highlight the key milestones we believe the company needs to reach over this period to both deliver on our estimates and validate the company’s technology, as well as its pricing strategy and business model.

The inks are currently manufactured in-house. Since the formulation of the inks is a key differentiator, Nano Dimension intends to keep ink manufacture in-house. So far, Nano Dimension has not needed large volumes of ink. It is working with an expert on scaling up processes to be ready for increased demand later in 2016 when the first printers are delivered to beta site customers. Substantial capital investment, we estimate US$1.5m, will be required to expand ink production capacity to meet demand from H117.This is part of our estimated US$11m funding gap.

In January 2016, Nano Dimension announced that it had an agreement with Flextronics to manufacture the DragonFly. This means that there is no limitation on production volumes or risk in scaling up to commercial volumes. (This scaling-up process does involve significant risk. We note the possibly terminal challenges faced by a potential rival, the start-up Cartesian Co, which attempted to build printers in-house and experienced severe problems with suppliers.)

Nano Dimension is addressing the market through a combination of direct sales and distribution agreements. As noted above, Nano Dimension has already built up a contact list of over 2,500 prospects. In March 2016 it signed an agreement to collaborate with FATHOM to distribute the DragonFly in Silicon Valley and the greater West Coast area. FATHOM (70+ employees) is an advanced manufacturer, distributor and service provider with expertise in 3D printing.

The alpha version of the 3D printer was demonstrated in April 2015 to a limited number of potential customers and key industry leaders in order to receive preliminary feedback. In July 2015, Nano Dimension began collaboration with several Fortune 250 and Israeli companies, including Israel Aerospace Industries, taking PCB design files from these potential customers and running them through a beta version of the printer at Nano Dimension’s site. A beta version was shown at the Printing Electronics USA tradeshow in November 2015 and at CES in January 2016. Interest levels appear high. Of the 2,500 plus potential customers registered so far, more than 30 customers at Tier 1 electronics companies have signed NDAs and want to be involved in the beta test programme. Nano Dimension has already received pre-sales orders for a small number of printers.

Nano Dimension is currently trialling a beta version of the system in-house with real design data from 15 potential customers. In August 2016 it passed a major milestone, with the delivery of the first DragonFly printer for a beta-site evaluation. In Q416 and Q117 it intends to deliver several more beta systems to customers so that they can try out the system at their own sites. Nano Dimension may receive its first revenues from product sales at this point. The participants in the beta test programme include three Fortune 250 electronics companies and two Israeli defence companies, all of which are very keen to protect their IP. Feedback from the beta phase will be used to specify minor modifications to the systems, resulting in the final commercial version, which is scheduled for a soft launch in H117.

Nano Dimension is also developing its 3D print platform for other applications. This potentially opens up a large addressable market, but the projects are still at a very early stage. Nano Dimension has filed patents to protect relevant IP in these new fields, which demonstrates material progress and commitment to commercially exploiting each sector. However, it is unlikely that significant R&D effort will be dedicated to launching an alpha stage demonstration of technology for any of these complementary applications until the DragonFly is shipping in volume. Any potential revenues derived from these applications is treated as upside to our estimates and valuation.

Nano Dimension is able to control the shape, size and dispersion of the silver nano-particles to create inks for a variety of substrates and printing profiles. It intends to offer the conductive ink as a standalone product for applications such as touch-screen displays, sensors, OLEDs, antennae, RFID tags and PV cells. Management is also exploring the potential of dielectric ink as a standalone product for use in structural electronics applications.

In May 2016 Nano Dimension announced a successful proof of concept by 3D printing stem cells in collaboration with Accellta Ltd. Accellta has developed proprietary technologies for the production of high-quality stem cells, progenitors and differentiation that complement Nano Dimension’s technique for printing a suspension of stem cells. The technology has value for pre-clinical drug discovery and testing, cosmetics safety testing, toxicology assays, tissue printing and “organs on chips”. This is already an active market. For example, Organovo is already producing liver models for pharmaceutical testing and is partnering with L’Oréal to produce 3D-printed skin for cosmetics safety testing. Nano Dimension’s adapted printer could potentially make large volumes of tissues and organs more quickly than using other techniques. Accellta and Nano Dimension have stated that they do not intend to invest significant capital directly to expand this activity, but would consider forming a new entity to capitalise on it. In June 2016 Nano Dimension filed a patent application for the 3D printing of human tissues and organs by using stem cells and inkjet technology.

In the longer term, the DragonFly may be adopted for batch volume production by using multiple print heads to accelerate production. This would eliminate the use of the hazardous chemicals used in the photolithography steps. It would also reduce waste because some PCB production techniques start with a complete layer of copper, which is selectively etched to leave the connective traces. Although this copper may be recovered, this requires an energy-consuming additional processing step. Since silver is substantially more expensive than copper, electronics designers will need to use copper-based conductive ink for volume applications. In November 2015 Nano Dimension filed a patent application for proprietary copper nanoparticle ink with improved oxidation resistance, paving the way for commercial inks suitable for volume manufacture.

Historically the design of electronic devices has been constrained by having to accommodate a PCB. 3D printing removes this restraint, as the electronic components and interconnect are no longer confined to the surface of a 2D substrate but can be embedded anywhere within the structure or on the surface of an object. This freedom is particularly important for IoT (internet of things) applications, where everyday objects such as prosthetics, spectacles and coffee mugs are turned into smart devices through the addition of electronic sensing, processing and communication chips. Nano Dimension has patented a technique for sintering a printed metal conductor within a 3D printed polymer to create 3D objects containing conductive traces. Further work would need to be done on ink formulation, and software would need to be developed prior to commercialisation, but this is a market sector that management intends to address in the longer term.

Nano Dimension’s management has a combination of entrepreneurial acumen and experience of 3D technology. Co-founder and CEO Amit Dror is a serial entrepreneur with a background in project, account and sales management across a range of sectors. Co-founder and Chief Business Officer Simon Fried has a background in marketing and sales strategy, management, business development and fund-raising. Co-founder and Chief Technology Officer Sharon Fima is a print technology development expert whose experience encompasses inkjet technology, 3D printer production and nano-silver ink development. Past positions include advanced research and development management at HP Indigo and XJet Ltd. Co-founder and Chief Operating Officer Dagi Ben-Noon is a mechanical engineer whose areas of expertise include plastics, medical devices, communication systems and print technology. He has extensive experience with supervising product maturity from the development stage through to mass production.

Chairman Itschak Shrem has more than 40 years of experience in financial markets and venture capital. Non-executive Director Ofir Baharav has held several senior roles at companies in the 3D printing industry, including VP of product portfolio for Stratasys and CEO of XJet.

Until the current beta testing programme is complete, there is no certainty that the technology will be accepted as providing prototypes of equivalent performance to those manufactured using photolithographic techniques, particularly with regards to compatibility with assembly techniques or life-time reliability. Moreover, while the DragonFly is theoretically capable of printing board with up to 100 layers, so far the most complex board created has only contained four layers. There is also significant risk regarding timing of completion of the beta-testing phase, which is a prerequisite to commercial introduction.

As Nano Dimension offers a disruptive technology, there is by definition limited data regarding potential market size, so there is significant risk surrounding our assessment of market demand.

There is no guarantee that company will be able to scale up the ink manufacturing process so that these can be produced economically in volume, though the company has engaged an expert to assist with this process.

Until the DragonFly is made available to a wider market, there is no certainty that the proposed pricing assumed in our financial model and indicative valuation will be appropriate.

In March 2015, XJet (developers of 3D metal printing system) filed a lawsuit alleging that one or more of Nano Dimension’s personnel previously employed by XJet misappropriated trade secrets and proprietary technology relating to inkjet printing and 3D printing. XJet is seeking NIS20m (US$5m) in damages and an injunction on the use of such trade secrets and proprietary technology.

Operating losses widened by 25% year-on-year during H116 to US$3.3m as Nano Dimension moved closer to the commercialisation phase. The number of employees engaged in R&D rose from nine in March 2015 to 46 in March 2016 and 57 in June 2016. General and administrative expenses almost quadrupled to US$2.4m. This was the result of an increase in administrative staff from two in March 2015 to nine in March 2016 and an increase in the cost of investor relations, accounting and legal services and options expenses.

While we are forecasting a significant revenue ramp, we are taking a more conservative view than other analysts covering the company. Our estimates are therefore substantially below consensus.

Noting that companies in its initial target segment are paying US$100+ each year on prototyping services, management intends to charge US$150k for the DragonFly, though the first units sold to beta-site customers will be less. This price includes installation fees and starter quantities of ink. Management also estimates that established users will purchase US$40k of additional ink annually. This gives a payback period of around two years. Alternatively, since high-tech companies typically write off equipment after four years, purchasing a DragonFly system approximately halves prototyping costs for these companies.

We note that this pricing strategy has not been tested yet, adding an important level of uncertainty to our forecasts. The business model may also vary from the one described above. For example management may opt to lease printers to PCB service providers, as this type of customer will be using the printer 24/7 and thus will need relatively large quantities of high-margin ink (not in our model). Our estimates exclude sales of ink for applications that do not also require a DragonFly printer, and any revenues from complementary markets such as building-up biological tissues.

Our estimates are predicated on Nano Dimension achieving the major milestones set out in Exhibit 5. Critically, these assume that the beta-testing programme does not uncover problems with the DragonFly system or the PCBs it produces that cannot be sorted out within the relatively short timeframe we have allocated. We note that the outcome of the beta-test programme is not binary, like a drug development programme. Nano Dimension will be able to make successive modifications to the DragonFly printer and ink formulations until customers are satisfied with the outcome. The uncertainty is regarding how long this phase will take. It is possible that Nano Dimension will be able to make sales of the conductive inks for other applications during the beta-phase programme. These sales are excluded from our estimates.

Our estimates also assume that Nano Dimension is able to convert the existing enquiry pipeline into a strong position in the PCB prototyping market. We note that Nano Dimension is already in discussion with potential purchasers, so will be able to move swiftly to close sales once the beta-test phase has successfully completed. On the basis that Nano Dimension will obtain revenues from sales of three printers for beta-site use during Q416 (probably at a discounted rate), our model shows FY16 revenues of US$0.2m, generating a US$5.6m operating loss. There is a risk that these revenues may slip into early FY17. Our model shows a modest number (39) of printers (plus ink) being sold in FY17, the first units at a discount price, generating US$6.5m revenues. It is likely that the majority of these sales will be made towards the year-end once sufficient commercial grade DragonFly systems have been manufactured. The FY17 forecast operating loss is US$4.0m, reflecting a 10% rise in SG&A costs and the onset of amortisation charges (US$1.1m) on capitalised IP. By FY18 the printers are shipping in volume (200 units), generating US$35.7m revenues and US$14.1m operating profit.

As discussed, the printer pricing is based on a total cost of ownership basis, rather than a cost-plus basis, giving a high gross margin. Management also intends to realise high margins (c 70%) from ink sales. As the equipment is being purchased by “early adopters” during our forecast period, price erosion has not set in. The company has a low cost base as it is outsourcing printer manufacture. This results in relatively high margins during FY18 (63% gross margin, 40% operating margin). Other companies offering very specialist electronic equipment, SRT Marine and Teradyne, have gross margins of 51% and 53%, respectively, so achieving the target margins for the inks is crucial. Following company guidance, our model capitalises 75% of R&D costs in FY16, 60% in FY17 and 50% in FY18. This capitalised R&D is amortised over a seven-year period. We model a tax rate of 16% rather than the standard Israeli rate of 25% to reflect the potential for receipt of R&D tax credits.

Cash reduced by US$2.9m during H116 (US$1.8m during Q216) to US$5.8m at end June 2016. The balance sheet is debt free. Receivables (excluding restricted deposits) grew by US$0.2m. Trade and other payables increased by US$0.6m. The value of tangible assets increased by US$0.3m to US$1.4m, and of intangible assets by US$2.9m to US$5.8m.

Management expects that customers will pay a significant proportion of the US$150k/unit as a deposit, reducing working capital requirements. In addition, production of the DragonFly printer, which will be a standard non-customised model, will be outsourced, reducing inventory requirements. We model a US$0.1m increase in working capital for FY16, rising to US$1.0m in FY18 as sales ramp up.

At this level of cash burn, we estimate that management has sufficient cash to last until the first sales of the 3D printer are made at the end of FY16. However, additional capital will be required to support mass production of products. We model a requirement of US$11.0m. Edison policy is to model this as funded through debt, though other options are possible. This covers the loss-making period during FY17 while sales ramp up, US$1.5m capital expenditure on expanding the ink production facility to support the volumes required, capitalised R&D (US$4.5m in FY16, reducing to US$3.4m in FY18) and working capital requirements.

In common with most development stage businesses, the range of potential valuations for Nano Dimension is extremely wide. If the company executes well across multiple applications then it has potential to grow into a valuation many times the current market capitalisation. Equally, if the beta-test programmes with customers do not transition into commercial orders then the company is unlikely to ever generate an economic return. While mindful of this range of outcomes, we present a DCF calculation for valuation purposes. This adopts the roll-out assumed in our estimates for the first three years, then ramps up revenues through to FY25 as shown in Exhibit 6.

Importantly, this sales progression is predicated on Nano Dimension achieving the milestones detailed in Exhibit 5 in a timely fashion. Our analysis excludes the earlier stage development initiatives such as low-volume PCB manufacture, structural electronics and human tissue printing or sales of ink for applications that do not also require a DragonFly printer. We will revisit our assumptions for these initiatives when further commercial progress has been made.

DCF assumptions for PCB prototyping sector

Running our financial model assuming a discount rate of 13% to reflect the relatively early stage nature of this technology and a terminal growth rate of 2% gives an indicative share price of NIS9.93/ordinary share (US$12.86/ADS). The current price of NIS5.11/ordinary share (US$6.62/ADS) is substantially below this. In our opinion this reflects investor concerns on whether Nano Dimension will have a fully commercial 3D printing system by mid-2017 and how long it will take to win meaningful sales volumes after that. Our reverse DCF indicates that the current share price implies a much more conservative roll-out, reaching only 276 units/year in 2025 (US$66m revenues, US$18m EBITDA) and a cumulative total of 1.5k units, c 60% of our forecast of 2.4k.

If Nano Dimension achieves the major milestones we have set out, investors will gain confidence that the sales ramp-up presented in our estimates and valuation is achievable. As each milestone is reached, which our schedule assumes will take 12-15 months, we expect the share price to move closer to our indicative value. The current share price appears to already factor in some delays, but a severely protracted beta-test phase may cause the share price to decline. Conversely, news of major breakthroughs in other application areas may have a positive impact.

Given the early stage nature of Nano Dimension we do not think that relative peer rating valuation techniques are appropriate. Nevertheless, we note the relatively high prospective EV/sales ratios enjoyed by established 3D print companies. If Nano Dimension delivers to our estimates, its growth profile should justify a premium to this range. A 3x EV/sales multiple on FY18, the year in which we forecast profitability, would imply a US$107m enterprise value vs US$46m at present.