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Windar Photonics — Update 13 June 2016

Windar Photonics — Update 13 June 2016

Windar Photonics

Analyst avatar placeholder

Written by

Windar Photonics

Chinese contract win points to future growth

FY15 results

Alternative energy

13 June 2016

Price

115p

Market cap

£45m

€1.28/£

Net cash (€m) at end December 2015,
excluding €1.2m raised through subscription in June 2016, long-term deposits and Growth Fund loan

0.6

Shares in issue

39.1m

Free float

38%

Code

WPHO

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.2

58.6

(23.3)

Rel (local)

2.6

56.1

(15.2)

52-week high/low

150p

72.5p

Business description

Windar Photonics is a UK-registered, Copenhagen-based developer and manufacturer of an innovative low-cost light detection and ranging (LIDAR) system. Approaching wind direction and speed is measured ahead of a wind turbine, allowing appropriate yaw alignment, increasing efficiency.

Next events

AGM

30 June 2016

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Windar Photonics is a research client of Edison Investment Research Limited

Windar’s FY15 results were in line with our forecasts, but lower than the expectations at the time of the IPO in March 2015 because of issues with the distributor in China, which is a key market. These issues appear to have been resolved and we expect renewed activity in China to lead to a ramp-up in sales, beginning in H216. The subscription and factoring arrangement announced in May 2016 remove the funding gap identified in our previous note.

Year end

Revenue (€m)

EBITDA
(€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

12/14

1.0

(1.5)

(2.0)

(0.05)

0.0

N/A

12/15

0.9

(2.8)

(3.3)

(0.08)

0.0

N/A

12/16e

6.4

0.1

(0.5)

(0.01)

0.0

N/A

12/17e

27.1

10.2

9.5

0.24

0.0

6.1

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY15 performance in line with revised estimates

FY15 revenues (€0.95m) were slightly below FY14 (€1.04m), but in line with our estimates. FY15 sales were broadly evenly distributed between North America, Europe and Asia, with a significant increase in activity in the European and North American markets. The distributor in China failed to achieve the required sales levels and has been given termination notice. Importantly, Windar received its first volume order to retrofit a wind park. This order, worth c US$0.9m, is from a US utility and is scheduled for delivery in FY16. EBITDA losses widened, reflecting increased sales and engineering activity and were in line with our estimates (€2.8m).

Chinese contract win points to FY16 sales ramp-up

In April 2016, Windar announced an order for 15 WindEYE LIDAR units for wind turbines in China. This indicates that the decision to sell direct in China is working, underpinning our estimates, which assume a ramp-up in sales from mid-2016 onwards. The Chinese contract award also illustrates how the group is expanding its portfolio in response to OEM requirements, strengthening this route to market. We make minor changes to our estimates to reflect the subscription and factoring facility arrangement in May.

Valuation: Contract news to drive price upwards

Our valuation analysis is based on a DCF, reflecting a series of potential outcomes related to market penetration and consequent volume benefits. The share price has rallied from a low of 72.5p in early March, when the market cap (c £28m) was substantially below the lower bound of our indicative value range. The announcement of the subscription and factoring arrangement has eased investor concerns about the funding gap, while the announcement of the Chinese order has demonstrated that the new approach to winning sales in China is making progress. Receipt of further volume orders, especially from China, should give confidence that the ramp-up in sales modelled in our estimates is feasible, and act as a catalyst towards our mid-case fair value of £58.5m (was £57m) or 150p/share.

Market development

The primary reason why FY15 performance was substantially lower than anticipated by management at the time of the IPO in March 2015 was the inability of the Chinese distributor to convert interest from wind park operators and wind turbine manufacturers into sizeable orders. Despite being the largest market by far (see our March 2016 note for details), revenues from China were only slightly higher than those from either Europe or North America and were substantially lower than those generated from China in FY14. In January this year, management gave the Chinese distributor termination notice. Windar now has four employees in China and intends to gradually build up this number. The order for 15 WindEYE LIDAR units announced in April indicates that this direct approach to the market is succeeding.

Windar is also making good progress in North America and Europe. During FY15 it received its first volume order. This was worth c US$0.9m, for delivery during FY16, and is from a US utility to retrofit a windpark. So far in FY16, Windar has received LIDAR orders from two large-scale utilities in North America with an aggregate installed capacity of more than 3,500MW. Both orders are already installed in North America.

Product development  

An important effect of this increasing customer engagement is a greater understanding of customer requirements. This has resulted in several new product introductions in recent months, as well as some significant improvements to the original WindEYE system that make it easier to install and less expensive and complex to manufacture. The product introductions include:

■

4-beam WindVision system that can measure wind shear. This improves pitch alignment, thus reducing the wear on turbine components, increasing their potential life and reducing maintenance costs.

■

Turbine control system for direct retrofit to certain turbine models. Compared to the previous retrofit solution, WindTIMIZER, which only offered turbine yaw optimisation, the new system also supports blade load optimisation.

■

Wake detection feature for load optimisation of wind turbine standing in the wake of other turbines. This has been added to both standalone and retrofit products.

Financial performance

FY15 revenues were slightly lower than FY14, but in line with our estimates (€0.95m). EBITDA losses widened, reflecting increased sales and engineering activity, and were in line with our estimates (€2.8m). Administrative costs included warrant expenses of €365k, which we include with the €223k costs associated with admission to AIM in exceptional items.

Net cash (excluding long-term deposits and the Growth Fund loan, which is not currently interest-bearing) reduced from €5.5m at end FY14 to €0.6m at end FY15. Inventory grew by €0.5m and trade receivables by €0.3m, while trade payables fell by €0.7m. Investment in intangible assets rose by 87% year-on-year to €0.6m as a result of the higher levels of product development discussed earlier. Investment in tangible assets was unusually high (€0.2m vs €0.02m FY14) because of the investment in a larger facility in Copenhagen.

Our March 2016 note identified a €1.3m funding gap, which we modelled as financed by debt, noting that this could be addressed by deploying factoring instead. The funding gap was resolved in May through the combination of a subscription for 885,502 shares at 110p/share raising €1.2m and a factoring facility. The initial facility is for up to €0.4m, with an understanding to increase later in FY16 up to €1.5m as sales ramp up.

The news in April 2016 of the Chinese contract award gives us confidence in our estimates, which assume a substantial ramp-up in sales from mid-2016 onwards. Penetration of the Chinese market is key to achieving this growth. We therefore leave our estimates broadly unchanged, making minor modifications to reflect the possibility of factoring some of the sales. These affect the profitability metrics shown in Exhibit 1, but do not affect the revenue estimates. While the details of the factoring arrangement have not been disclosed, we assume fees are levied at an average rate of 4.5% of revenues factored. We also assume that the arrangement is only used in FY16 and FY17, as our model shows that cash levels in FY18 are sufficient not to require factoring.

Exhibit 1: Changes to estimates

EPS* (€)

PBT* (€m)

EBITDA (€m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2015

(0.08)

(0.08)**

N/A

(3.0)

(3.3)**

-10.0

(2.8)

(2.8)**

N/A

2016e

(0.01)

(0.01)

N/A

(0.4)

(0.5)

-25.0

0.1

0.1

N/A

2017e

0.25

0.24

-4.0

9.6

9.5

-1.0

10.4

10.2

-1.9

2018e

0.59

0.58

-1.7

29.1

29.1

N/A

30.0

30.0

N/A

Source: Edison Investment Research. Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Actual. EPS estimates have been adjusted to reflect the shares issued as a result of the subscription in May 2016.

Valuation

We continue to use a DCF valuation out to 2025 based on a range of possible scenarios as our preferred valuation methodology. The base/medium case assumes the revenue development shown in our estimates. The low case models a more conservative level of sales based on small market share gains. The high case models an accelerated market penetration. (See our March 2016 note for more details.) We have updated our valuation to reflect the additional costs associated with factoring and the cash raised from the subscription in May. This gives a minor uplift to our indicative valuation: from £34.8m to £35.9m (92p/share) for the low case; from £56.5m to £58.5m (150p/share) for the base/medium case; and from £107.0m to £109.0m (279p/share) for the high case.

Exhibit 2: Edison DCF valuation (£m) using a range of forecast scenarios

Low case

Base/medium case

High case

Discount rate

Discount rate

Discount rate

30.0%

40.0%

50.0%

30.0%

40.0%

50.0%

30.0%

40.0%

50.0%

Term growth

0.0%

35.7

35.7

35.7

0.0%

84.5

58.1

42.2

0.0%

161.8

108.4

76.9

1.0%

35.8

35.8

35.8

1.0%

84.9

58.3

42.3

1.0%

162.4

108.7

77.0

2.0%

35.9

35.9

35.9

2.0%

85.3

58.5

42.4

2.0%

163.0

109.0

77.2

3.0%

36.1

36.1

36.1

3.0%

85.8

58.7

42.5

3.0%

163.6

109.3

77.3

4.0%

36.2

36.2

36.2

4.0%

86.2

58.9

42.6

4.0%

164.3

109.6

77.5

Source: Edison Investment Research

The share price has rallied from a low of 72.5p in early March, when the market cap (c £28m) was substantially below the lower bound of our indicative value range. The announcement of the subscription and factoring arrangement has eased investor concerns about the funding gap, while the announcement of the Chinese order for 15 WindEYE units has demonstrated that the new approach to winning sales in China is working. Receipt of further volume orders, especially from China, should give confidence that the ramp-up in sales modelled in our estimates is feasible, and act as a catalyst towards our mid-case fair value of £58.5m (150p/share).

Exhibit 3: Financial summary

€000s

2013

2014

2015

2016e

2017e

2018e

Year-end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

74

1,039

946

6,436

27,110

62,596

Cost of Sales

(44)

(678)

(679)

(3,325)

(13,008)

(27,459)

Gross Profit

30

361

267

3,110

14,102

35,137

EBITDA

 

 

(1,044)

(1,514)

(2,821)

105

10,202

29,962

Operating Profit (before amort. and except.)

(1,358)

(1,841)

(3,217)

(385)

9,562

29,212

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

0

(669)

(588)

0

0

0

Other

0

0

0

0

0

0

Operating Profit

(1,358)

(2,510)

(3,805)

(385)

9,562

29,212

Net Interest

(94)

(175)

(100)

(100)

(100)

(110)

Profit Before Tax (norm)

 

 

(1,451)

(2,015)

(3,318)

(485)

9,462

29,102

Profit Before Tax (FRS 3)

 

 

(1,451)

(2,684)

(3,906)

(485)

9,462

29,102

Tax

118

70

121

0

0

(6,402)

Profit After Tax (norm)

(1,333)

(1,945)

(3,197)

(485)

9,462

22,699

Profit After Tax (FRS 3)

(1,333)

(2,614)

(3,785)

(485)

9,462

22,699

Average Number of Shares Outstanding (m)

38.2*

38.2*

38.2*

38.7

39.1

39.1

EPS - normalised (€)

 

 

(0.03)

(0.05)

(0.08)

(0.01)

0.24

0.58

EPS - normalised fully diluted (€)

 

 

(0.03)

(0.05)

(0.08)

(0.01)

0.24

0.58

EPS - (IFRS) (€)

 

 

(0.03)

(0.07)

(0.10)

(0.01)

0.24

0.58

Dividend per share (€)

0.0

0.0

0.0

0.0

0.0

0.3

Gross Margin (%)

40.3

34.7

28.3

48.3

52.0

56.1

EBITDA Margin (%)

N/A

N/A

N/A

1.6

37.6

47.9

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

35.3

46.7

BALANCE SHEET

Fixed Assets

 

 

1,285

1,195

1,363

1,373

1,733

2,283

Intangible Assets

1,257

1,148

1,120

1,150

1,400

1,800

Tangible Assets

17

32

144

124

234

384

Investments

11

15

98

98

98

98

Current Assets

 

 

640

6,656

2,632

3,638

13,040

35,939

Stocks

147

248

770

1,370

2,320

3,270

Debtors

239

845

1,072

1,822

2,922

7,422

Cash

249

5,549

594

249

7,601

25,050

Other

5

14

197

197

197

197

Current Liabilities

 

 

(320)

(1,034)

(488)

(788)

(1,088)

(1,838)

Creditors

(320)

(1,034)

(483)

(783)

(1,083)

(1,833)

Short-term borrowings

0

0

(4)

(4)

(4)

(4)

Long-Term Liabilities

 

 

(1,436)

(717)

(827)

(827)

(827)

(827)

Long-term borrowings

0

0

(25)

(25)

(25)

(25)

Other long-term liabilities

(1,436)

(717)

(801)

(801)

(801)

(801)

Net Assets

 

 

170

6,100

2,681

3,396

12,858

35,557

CASH FLOW

Operating Cash Flow

 

 

(1,095)

(2,142)

(4,923)

(945)

8,452

25,262

Net Interest

(1)

(175)

(14)

(100)

(100)

(110)

Tax

95

118

70

0

0

(6,402)

Investment in intangible & tangible assets

(8)

(230)

(484)

(500)

(1,000)

(1,300)

Acquisitions/disposals

(55)

0

0

0

0

0

Financing

0

7,071

0

1,200

0

0

Dividends

0

0

0

0

0

0

Net Cash Flow

(1,064)

4,643

(5,351)

(345)

7,352

17,449

Opening net debt/(cash)

 

 

(508)

(249)

(5,549)

(564)

(219)

(7,571)

HP finance leases initiated

0

0

0

0

0

0

Other

805

657

367

0

0

0

Closing net debt/(cash)

 

 

(249)

(5,549)

(564)

(219)

(7,571)

(25,021)

Source: Company accounts, Edison Investment Research. Note: *Based on number at admission to AIM.

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