Allgon - Redeye

COMPANY ANALYSIS 12 June 2016
Summary
Allgon
(ALLG.ST)
List:
Market Cap:
Industry:
CEO:
Chairman:
Allgon, not at all gone

Former stock market darling Allgon has resurfaced after
antenna manufacturer Smarteq in January this year
completed an acquisition of Åkerströms, a specialist in
industrial remote control, and readopted the Allgon name
Allgon intends to build a strong group of companies in
wireless communication, and we see an interesting
opportunity to join a growth journey with more acquisitions
planned
This year Allgon will focus mainly on further streamlining its
antenna business and integrating Åkerströms. We expect the
growth journey to begin for real in 2017



Nasdaq OMX First North
196 MSEK
Telecommunication Equipment
Johan Hårdén
Sven von Holst
OMXS 30
18
16
14
12
10
8
6
4
2
0
09-Jun
We anticipate 2016 sales of SEK 140m and a positive
operating profit of nearly SEK 4m. For 2017 we expect sales
to reach SEK 173m and that Allgon will report EBIT of SEK
14m. Our valuation range is from SEK 10 to SEK 29 and our
base case scenario envisages a fair value of SEK 19 per share,
a 73 percent upside from the current share price of SEK 11.
07-Sep
Allgon
06-Dec
05-Mar
03-Jun
Redeye Rating (0 – 10 points)
Management
Ownership
8.0 points
8.0 points
Profit outlook
Profitability
6.0 points
3.0 points
Financial strength
5.0 points
Key Financials
Revenue, MSEK
Growth
EBITDA
2015
115
2016E
140
2017E
173
2018E
200
58%
34%
21%
24%
16%
9
EBITDA margin
11%
EBIT
6
EBIT margin
Pre-tax earnings
Net earnings
Net margin
2014
22
19%
9
10
7%
4
22
13%
14
30
15%
21
7%
8%
3%
8%
10%
5
5
9
9
3
3
13
13
20
20
6%
2014
Dividend/Share
EPS adj.
P/E adj.
EV/S
EV/EBITDA
2014
86
2015
0.00
0.01
12.7
0.7
6.7
2015
8%
2016E
0.00
0.02
10.3
0.6
3.0
2016E
2%
2017E
0.00
0.17
66.1
1.3
18.3
2017E
7%
2018E
11.0
17.9
196
-16
Free float (%)
Daily turnover (’000)
39%
16
10%
2018E
0.00
0.72
15.2
0.9
7.6
Share information
Share price (SEK)
Number of shares (m)
Market Cap (MSEK)
Net debt (MSEK)
0.22
1.12
9.8
0.7
4.8
Analysts:
Joel Westerström
joel.westerstrom@redeye.se
Kristoffer Lindström
kristoffer.lindstrom@redeye.se
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: info@redeye.se
Allgon
Redeye Rating: Background and definitions
The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or
operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 –
Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted
differently according to how important they are deemed to be. Each key factor is allocated a number of points
based on its rating. The assessment of each valuation key is based on the total number of points for these
individual factors. The rating scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of
the bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to
manage the company in the best interests of the shareholders. A good board and management can make a
mediocre business concept profitable, while a poor board and management can even lead a strong company into
crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 –
Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner
commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with
a dispersed ownership structure without a clear controlling shareholder have historically performed worse than
the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner
commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.
Profit Outlook
Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit
growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does
not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to
assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 –
Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to
generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company
has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on
total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating
profit margin or EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term.
The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no
benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength
is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 –
Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary
events.
Company analysis
2
Allgon
Contents
Investment thesis ............................................................................................................................ 4
The market has not noticed the new Allgon................................................................................ 4
A growing market for wireless solutions ..................................................................................... 4
Opportunity to join a growth journey from the start .................................................................. 4
Plenty of challenges… .................................................................................................................. 4
… and opportunities .................................................................................................................... 5
Attractive time to invest and several catalysts ............................................................................ 5
About Allgon ................................................................................................................................... 6
Brief history ................................................................................................................................. 6
Allgon today................................................................................................................................. 7
Shareholders................................................................................................................................ 7
Company management ............................................................................................................... 8
Board ........................................................................................................................................... 9
Business model and strategy.......................................................................................................... 11
Sales of products and services .................................................................................................... 11
Growth journey with more acquisitions along the way............................................................. 16
Synergies from purchasing and shared processes .................................................................... 18
Market ........................................................................................................................................... 20
Smarteq has the right competencies for demanding customers ............................................... 20
Smart machines need smart antennas ...................................................................................... 22
Continued focus on niche segments with high demands .......................................................... 26
Åkerströms customers becoming wireless ................................................................................ 27
Quality and safety to export ...................................................................................................... 28
Financial estimates ....................................................................................................................... 30
Sales momentum 2017 after a middling 2016........................................................................... 30
Rising profitability from 2017 ....................................................................................................31
Focus on improved cash flows .................................................................................................. 32
Detailed estimates ..................................................................................................................... 34
Valuation ....................................................................................................................................... 35
Valuation range in three scenarios ............................................................................................ 35
Future acquisitions are not explicitly included ......................................................................... 37
Summary Redeye Rating .............................................................................................................. 38
Rating changes in the report ..................................................................................................... 38
Bolaganalys
3
Allgon
Investment thesis
Allgon was a favorite stock for many retail investors in the late nineties.
After numerous parts of the business were sold, what remained of Allgon on
the Swedish stock exchange conducted relatively inconspicuous activities
under the Smarteq brand. Success with its major customer Volvo AB turned
to disappointment when Volvo chose to walk away from Smarteq’s
antennas. The Allgon name is back, but now as a group of companies
offering a broader portfolio of wireless communication solutions for
industry and with a plan to grow aggressively.
The market has not noticed the new Allgon
Allgon’s ongoing transformation became evident when it announced the
acquisition of Åkerströms, but the market has once again forgotten the
company in recent months. The Allgon share is down 23 percent in the last
month despite good news from the company on several order wins. We
believe the market’s perception will change as the group starts to deliver on
its objectives and intensifies its focus on market communications.
A growing market for wireless solutions
The market for wireless industrial solutions is predicted to grow strongly,
and Allgon is well positioned to benefit from this expansion. Interesting
areas include smart metering, infrastructure for electric cars, and the
ongoing digitalization of industry, with more and more machines and
processes being connected.
There are also good opportunities for Allgon to strengthen its international
presence. Chinese industry, in particular, is increasingly starting to move
toward greater automation and more intense consideration of health and
safety, where the Allgon group’s solutions are well positioned. In May 2015
Allgon acquired the aftermarket business of antenna manufacturer
Kathrein, which, in addition to a number of products, gave Allgon access to
a strong distribution network with great potential to also sell products other
than those included in the acquisition of the aftermarket business.
Opportunity to join a growth journey from the start
Allgon’s aim is to grow both organically and through acquisitions, and we
see good opportunities for value-creating acquisitions as well as organic
growth. Allgon is at an early stage of its growth journey, this gives investors
an opportunity to take a position with a high potential upside, although
associated with rather high risk.
Plenty of challenges…
Of course there are plenty of challenges, and it takes hard work to
successfully integrate acquisitions and to realize synergies. Allgon currently
wants to acquire primarily companies with sales in the order of SEK 30-50
million. Minor acquisitions can often demand as much time and resources
Company analysis
4
Allgon
as larger ones, and given Allgon’s small organization it will have to be
careful in choosing what acquisitions to make.
… and opportunities
Despite the challenges we see great opportunities for Allgon going forward.
The company has a healthy outlook on how to work with acquisitions. The
idea is to acquire companies that can benefit from the shared resources of
the Allgon group in supply chain excellence as well as and in marketing,
sales and distribution, while allowing them to retain a high degree of
autonomy.
We also see great opportunities for the existing companies to grow and
improve their profitability. Not least, we believe the ongoing efforts to scale
up international sales for both the antenna business and Åkerströms will
lead to strong revenue growth. We believe Allgon’s intensified focus on
marketing, and the measures being implemented to enhance profitability,
will improve both earnings and sales from 2017 and forward.
Attractive time to invest and several catalysts
The share is currently overlooked by the bulk of investors. We believe the
market will discover Allgon in future, leading to a revaluation, and there are
plenty of short-term and medium-term catalysts that could trigger this
revaluation.

Switch to main list of Stockholm stock exchange

Additional contracts for smart meter antennas

Successful launch of new product portfolio by Åkerströms

Accretive acquisitions
Our positive view is further strengthened by the high subscription rate,
some 99 percent, in the recent option exercise. In total, a little over one
million shares were subscribes for at an exercise price of SEK 11. Allgon’s
management and board increased their shareholding and several new
investors took the opportunity to invest.
Our fair value per share ranges from SEK 10 in our bear case to SEK 29 in
our bull case. In our base case scenario we have a fair value of SEK 19 per
share, giving an upside of about 73 percent compared with the current price
of SEK 11.
Company analysis
5
Allgon
About Allgon
Since it was founded in 1946, Allgon has undergone several
transformations. We begin by briefly describing the company’s history,
from the late 1990s until the acquisition of Åkerströms. We then continue
by looking at where Allgon is today and, more importantly, where the
Allgon group is heading.
Allgon is back
Brief history
Many of us recognize the name Allgon from the late nineties, when mobile
telephony made its big breakthrough. Allgon supplied antennas for mobile
phones, and by the end of the nineties its annual production was around
one hundred million units.
Smarteq acquires Allgon
Application
90-tal
2000
2002
Allgon is a major supplier
of mobile phone antennas
with sales of over 100
million units per year
The Allgon brand is no
longer in use
2005
The mobile phone antenna division of
Allgon is sold to an American
company and the remaining divisions
are merged with LGP Telecom
Smarteq acquires Kathrein’s
European aftermarket business
2015
2016
Smarteq acquires
Åkerströms and the
new group readopts
the Allgon name
Figure 1: Allgon’s history in brief
A few years later, Smarteq bought up a part of Allgon called Allgon
Application. Smarteq, which had grown rapidly by developing peripheral
products such as mobile phone holders for use in vehicles, needed to find
new products as demand for handset peripherals declined.
The same year Smarteq also bought antenna company Carant and, after
having completely shut down its production of mobile phone holders, it
bought an additional antenna company, Svenska Antennspecialisten, in
2005. Smarteq was now specialized in antennas, particularly for the
automotive segment and a major contract with Volvo Trucks accounted for
a large proportion of its sales.
In 2014, Volvo announced that from the end of 2015 it would stop buying
Smarteq’s specially developed antenna system. Smarteq needed new
customers, and in May 2015 it acquired the European aftermarket
operations of the major antenna company Kathrein, including a product
portfolio of niche antennas, annual sales of around SEK 15 million and,
most importantly, access to a strong distribution network.
Smarteq’s management had for some time been hatching the idea of
building a strong group in wireless products and solutions, and in
Company analysis
6
Allgon
November 2015 it announced an acquisition of Åkerströms, which was
formally approved in early 2016. The group of companies simultaneously
readopted the name Allgon.
Allgon today
Allgon is back, now as a group of companies specializing in wireless
communication and with lofty growth ambitions. CEO Johan Hårdén
envisages building a group of around fifteen companies with a combined
turnover of a billion SEK.
Allgon
Åkerströms
Smarteq
Wireless
Allgon Asia
Figure 2: Group structure (simplified)
Allgon has a total of about 80 employees, with 50 at Åkerströms and 15 at
each of Smarteq and Allgon Asia. Allgon is headquartered in Kista, north of
Stockholm. Its subsidiary Åkerströms has production in Björbo, Sweden,
and in Tienjin, China. The group also has a sales office in the Netherlands.
Shareholders
The shareholder structure of Allgon was altered through the acquisition of
Åkerströms, which was funded through an offset issue (newly issued shares
in Smarteq were used to pay for Åkerströms). Smarteq simultaneously
changed its name to Allgon. Following the deal, the old shareholders of
Smarteq owned around 52 percent of Allgon, and the owners of the
company that owned Åkerströms, Åkerströms Intressenter, held around 48
percent of the stock.
The most recent ownership data is presented below, the new shares from
the options exercise has not yet been registered.
Position
Allgon has strong
principal owners who
contribute expertise and
networking
1
2
3
4
5
6
7
8
9
10
Name
Verdane Capital VI
Tibia Konsult AB
Verdane Capital VI B
Svenska Handelsbanken SA
Bo Lengholt & bolag
TAMT AB
Jan Robert Pärsson
Lombard Intl. Insurance SA
Yngve Andersson
KMH Viken AB
Others
Total
Shares
Capital and votes
5,535,602
32.7%
2,610,128
15.4%
1,845,201
10.9%
1,683,047
9.9%
540,000
3.2%
463,316
2.7%
441,000
2.6%
420,000
2.5%
340,000
2.0%
333,149
2.0%
2,706,844
16.0%
16,918,287
100.0%
Figure 3: Allgon’s ownership structure as per 31 May, 2016
Company analysis
7
Allgon
Private equity firm
Verdane became a major
shareholder with the
acquisition of Åkerströms
The majority shareholder in Åkerströms Intressenter was private equity
firm Verdane, which owned 87 percent of Åkerströms through two of its
funds.
Verdane and the former major owner of Smarteq, Tibia Konsult, form a
stable shareholder base in Allgon. Tibia and Verdane bring both expertise
and stability. Verdane also has capital to provide if necessary, but the
problem is this capital is expensive – the interest payable to Verdane would
be around 10-15 percent since Verdane’s funds have a high required return
from their investors and are not focused on providing debt financing.
We are upbeat about Allgon’s ownership. The fact that Verdane was willing
to do the deal indicates confidence in the new group’s potential – the
transaction would certainly have been preceded by thorough due diligence
reviews of the financial, operational and strategic challenges and
opportunities of both Smarteq and Åkerströms.
Several people in Allgon’s
management and board
own shares in the
company
We also see it as positive that several of the people in management have
relatively large stakes in Allgon. CEO Johan Hårdén owns some 50
thousand shares and Tommy Larsson as well as Sven von Holst expressed
an intent to invest in connection to the options exercise, though we do not
know how many shares they subscribed for.
Company management
Johan Hårdén has been
CEO since 2011
CFO Sten Hildemar has
extensive experience of
listed companies
Christian Olsson, CEO
Allgon Asia, is an Allgon
veteran
The Allgon group is led by CEO Johan Hårdén, who has worked in the
group since 2011 and became CEO of Smarteq Wireless in 2012. Hårdén
was previously CEO of Smartsign, where he worked from 2006 until 2010.
Prior to that, Johan worked with insurance at Moderna Försäkringar, in the
forest products industry and served with the UN. Johan Hårdén has a law
degree from the University of Stockholm, from where he graduated in 2003.
CFO Sten Hildemar took office in early 2014. However, he is no newcomer
in the group and was formerly CFO at Smarteq AB between 2000 and 2003.
Hildemar has extensive experience of listed companies, and has also held
several senior positions outside Allgon, including CFO at Sagax AB,
Storheden Holding and Medcore AB. Sten was most recently at Arlandastad
Holding AB.
Christian Olsson, is an Allgon veteran. He is CEO of Allgon Asia, which is
the global operations unit for the group as well as the sales and local
customer support unit in Asia. Christian holds an M Sc from the Institute of
Technology at Linköping University. He wrote his master thesis at Allgon in
the late 1990s and joined the company upon graduation. When Allgon was
bought up Christian followed and pursued an international career. During
his time away from Allgon, Christian worked mainly in operations at a
global level and lived for six of these years in China. Before returning to
Company analysis
8
Allgon
Allgon in 2011, Christian was Director, Global Procurement & Sourcing at
Laird Technologies, based in China.
Another key figure in the Allgon group is Tommy Larsson, CEO of
Åkerströms. Tommy took office earlier this year, and found time for a great
number of achievements before this, including working as a timber grader,
riding a motorcycle from Sweden to Sudan, and giving more than 1,500
lectures. Tommy worked most recently at window manufacturer Mockfjärds
Fönster, where he was President and CEO between 2008 and 2015.
The new CEO at
Åkerströms, Tommy
Larsson, previously
helped the growth journey
at Mockfjärds Fönster
As CEO at Mockfjärds Fönster, Tommy was very much involved in taking
the company from sales of some SEK 250 million to sales of almost SEK
600 million. Mockfjärds was bought by Danish investment company VKR
Holding, and Tommy says that his role became more administrative, which
is not what he likes best. When Johan Hårdén approached him about the
job as CEO at Åkerströms, the opportunity to develop and be challenged
were attractive reasons to accept.
The most recently announced addition to Allgon’s top management is
Yasemin Heper Mårtensson. She will join Allgon as CEO of subsidiary
Smarteq Wireless August 29, 2016. Yasemin has over 20 years of experience
from the automotive industry as well as the telecom industry where she has
had an international career. Yasemin holds an M Sc in Mechanical
Engineering from the Royal Institute of Technology in Stockholm.
We believe Allgon has
talented management
We believe Allgon’s management has the talent necessary to succeed with
growing the company both organically and through acquisitions in the
future. Something we value particularly highly is the management’s
modesty ahead of this task, and the clear communication to the market. We
do not feel the company tries to smooth over any negative aspects, but says
without much ado how the land lies. This is not only important from an
investor perspective but, perhaps even more importantly, in connection
with future acquisition proposals to smaller companies.
Board
Allgon’s annual general meeting on May 4, 2016 made a number of changes
to the company’s board in addition to the changes adopted at January’s
extraordinary general meeting when the acquisition of Åkerströms was
approved.
Chairman Sven von Holst
took office this year and
we see him as a very wellsuited person to lead the
work of Allgon group’s
board
Sven von Holst was elected as the new chairman of Allgon. Sven has had a
long career in the paper and pulp industry, with a number of senior
positions at what is now StoraEnso. He has worked in areas such as
communications at corporate level, organizational issues and sales. He is
fundamentally an economist and has now retired from operational work.
However, he remains active in many other contexts, most recently working
Company analysis
9
Allgon
with the World Ski Championships in Falun, and is also on the board of
Vasaloppet and Swedbank in Falun.
The other new addition to Allgon’s board at the AGM last week was Ingalill
Östman. Ingalill holds an M Sc from Luleå University of Technology and
has had a long career, firstly at ABB and then at SKF. During her 22 years at
ABB, Ingalill initially worked with technology and then moved on to roles in
marketing, sales and communication. At SKF she was on the group
management team, and was responsible for the group's global
communications. Ingalill has been running her own business for a year and
a half, and was involved with taking Attendo to the stock market. Ingalill is
also chairman of the Alfie Atkins (Alfons Åberg) Cultural Centre and sits on
the board of Länsförsäkringar in Gothenburg and Bohuslän.
Allgon’s former chairman, Christer Palm, who has served on the board since
2009, is now leaving the board entirely, but was careful to point out that he
is optimistic about the company’s future opportunities and intends to keep
his 1.9 million shares. Patrik Bluhme, who has been on Allgon’s board since
2014, also leaves.
In addition to the chairman Sven von Holst and the newly elected director
Ingalill Östman, Allgon’s board of directors consists of Claes Beckman,
Anders Björkman, Per Nordlander and Göran Strandberg.
Claes Beckman, born 1962 and elected to the board in 2014, is a professor
in antenna systems at the Royal Institute of Technology and director of the
institute’s wireless communications research center, Wireless@KTH.
Anders Björkman, elected to the board in 2015, is CEO of OnePhone
Holding AB and BT OnePhone Ltd, and chairman of LevUpp AB. Björkman
previously worked for many years at Kinnevik, including as CEO of Tele2
and CEO of Netcom Consultants.
Allgon has managed to
recruit real heavyweights
to its board, and we
cannot help but be a little
impressed
Per Nordlander and Göran Strandberg were both elected to Allgon’s board
in 2016 and represent Verdane, the former main shareholder of
Åkerströms. They are both partners at Verdane Capital Advisors and also
hold a number of other directorships.
We believe Allgon has a talented board with good expertise in the areas
where we expect Allgon to need board support, not least experience in
acquisitions. The board also has a strong network that will be able to help
Allgon going forward.
Company analysis
10
Allgon
Business model and strategy
The companies in the Allgon group develop products and systems for
wireless applications for a variety of industries that place tough demands on
their solutions. The Allgon companies have both in-house and outsourced
manufacturing. Sales are made directly and through distributors,
depending on product segment, geography and level of customization.
Allgon group seeks to help
its customers enhance the
efficiency of their business
using wireless systems
and products
Allgon’s objective is to bring together expertise in wireless systems and
products within the same corporate group to offer its customers solutions
that enhance the efficiency of their business.
Sales of products and services
From having previously been more a supplier of subsystems/components,
Allgon now wants to add more value by creating an augmented overall
offering with more focus on selling solutions including hardware, software,
customization and service to customers in niche segments that have high
demands on functionality and robustness. We like Allgon’s new strategy.
Fighting with the major international players in the high volume markets,
where price is the main factor in a purchase decision, is doomed to fail for a
small company like Allgon. In the niche segment the Allgon group is
targeting, we see good growth opportunities and the ability to offer
differentiated products at higher margins.
Financial risk
business criticality/differentiator
Leverage
Exploit purchasing power –
competitive tenders amongst
several suppliers
Strategic
Develop a limited number of key
suppliers
Non-critical
Use a few high-volume suppliers to
minimize transaction costs –
simplify and automate
Bottleneck
Ensure supply and seek alternative
suppliers to minimize dependence
Low
Allgon is striving to
become a strategic
partner for customers
that require robust and
reliable wireless systems
able to withstand
demanding environments.
High
We can illustrate Allgon’s goals by looking at a Kraljic matrix describing
various strategies for buying goods and products based on how business
critical/profitability affecting the products/services are, as well as the
complexity of the supply chain/complexity of the supply.
Low
Supply risk
complexity of supply chain/ complexity of delivery
Figure 4: Kraljic matrix, source: Redeye
Company analysis
11
High
Allgon
In the matrix, we have illustrated Allgon’s objective by showing the shift in
the relationship with its customers the group is striving to achieve. We
believe we can see that Allgon is on track to become precisely the strategic
supplier it wants to be. This creates lock-in effects and allows for better
margins. One example is the recently announced development project for
Allgon’s antenna business, together with Atlas Copco.
Antenna business – antenna systems for harsh environments
Allgon’s antenna business is conducted within the subsidiary Smarteq
Wireless. The product and service portfolio consists of antenna systems and
services related to the integration and optimization of antenna systems. The
solutions are especially suited to harsh environments that require a high
level of robustness and longevity, and the antennas are often used for
outdoor applications. Allgon is a niche player in the global antenna market,
and sells to customers in around 40 countries. The antennas are sold both
directly to customers and through a large network of distributors. The
distributor network was strengthened last year through the acquisition of
Kathrein’s European aftermarket business, bringing 15 distributors
specialized in antennas. Allgon recently also signed up a Chinese
distributor, Nanjing Shunmei Science and Technology, which sees great
potential in selling Allgon’s antennas to demanding customers in the
Chinese market. Other important distributors include leading companies
such as Malux, Seamcon, Selectic, Deltronic, EAD, Brightstar, Carant NO,
Ingram, Mobile World Communications and Avnet Intermix.
Many of Allgon’s antennas have the highest IP rating, which means they
have been subjected to extensive testing and have very high reliability, even
in harsh conditions.
The business concept of
Allgon’s antenna
operations is to sell and
develop antenna systems
for increased availability,
efficiency and security in
a wireless world
Allgon’s antenna business has internal resources for product development,
purchasing and sales. The manufacture of the antenna systems takes place
mainly at the company's suppliers in Europe and Asia. Sales are made
through multiple channels, including project sales and through distributors.
As mentioned, Allgon gained access to a very strong European distribution
network with the acquisition of Kathrein’s aftermarket business, and we see
great potential to increase sales of antenna types other than those included
in the acquisition.
For projects sales the company develops customer-specific solutions with a
large element of service and advice, including how the antennas should be
installed, simulation and measurement. Allgon has its own 2D
measurement chamber for its antenna business, and collaborates closely
with companies providing measurement in 3D chambers. The
compensation model for services varies, and this can sometimes be invoiced
to the client.
Company analysis
12
Allgon
Expertise in system integration and design are important components of
the customer offering. Allgon cannot compete on price with the low-cost
Chinese brands, and therefore focuses on more demanding customer
segments, such as M2M and automotive. Project sales that also include
development are common, particularly in automotive.
We believe the strategy of focusing on demanding applications is wise.
Trying to fight with volume producers of cheap antennas would be doomed
to failure, given the small size of Allgon’s antenna business compared to
Asian players. The challenge is being able to charge for the added value and
expertise customers receive, and conducting marketing and sales to niche
markets in an effective manner.
Smarteq Wireless – Antenna product families
Unit cost (SEK)
(illustrative)
1 500
LPCA
Alldisc
1 000
Smartdisc
LPx
100
Functionality:
LTE
LTE+GPS
LTE+GPS+WiF i
LTE+GPS+WiF i+TETRA
Figure 5: Allgon’s antenna business product portfolio, overview
Allgon’s antenna business
has a broad product
portfolio
Allgon’s antenna families are shown above. The antenna business has a
large product portfolio with a wide range of antennas, and the figure above
shows only a few examples of the antennas. Prices range from under a
hundred SEK for less advanced antennas to a few thousand SEK or more for
antennas with higher functionality.
Smarteq’s former major customer, Volvo, took a lot of R&D resources,
which led to other development being pushed aside. The idea was originally
to develop a standardized antenna system for Volvo to be used for its trucks.
What instead happened was that there was an awful lot of extra
development that Smarteq was unable to fully charge for, despite the
introduction of a change request order (CRO) model. All the changes made
the developed platform very good, but also expensive – so expensive that
Volvo in 2014 made a decision to replace Allgon’s antenna system with a
standardized but less advanced antenna system available commercially off
the shelf (COTS).
Company analysis
13
Allgon
The project for Volvo brought many good things with it including, for
example, Smarteq’s ownership of the rights to the platform and
improvement in the skills to develop advanced solutions and operate
complex projects. At the same time, the project partly meant that other
markets were neglected. The hope now is to be able to utilize the
competencies and experience acquired during the Volvo project in offering
other customers help in complex projects demanding customized solutions.
Being able to charge for custom solutions, while not becoming too
dependent on individual customers, is what we see as important for
Smarteq. Work is ongoing to get Smarteq’s antennas into more sales
channels, and the products are being developed with a modular design so
that design elements and components can be reused in order to offer a
better price whilst still meeting customer demands.
Åkerströms – Robust radio remote control solutions
For over 50 years Åkerströms has provided industry with products for radio
remote control of industrial cranes, mobile applications, doors and
locomotives.
Åkerströms’ product portfolio
Sesam
Mobile
applications
Industrial
applications
Remotus
Figure 6: Åkerströms’ product portfolio
The product portfolio consists of the more advanced Remotus product
family and the Sesam product family. The two product families have
multiple platforms. In our opinion, the number of platforms sold, and old
platforms that Åkerströms supports with spares, is on the large side and
adds complexity that in turn drives cost. However, Åkerströms is working to
reduce the number of platforms, which we view as positive.
Company analysis
14
Allgon
The Åkerströms product
portfolio contains two
product families – the
more advanced Remotus
and the less complex
Sesam
The platforms for industrial applications within Remotus are called Jupiter
and Mercury. Jupiter is the standard platform for demanding applications
and Mercury is a platform tailored for each customer. The Remotus
platform for mobile applications is called T-Rx. Åkerströms has also
developed a cloud service to help customers manage different radio
frequencies, which can be challenging in large facilities and in
environments where there is a lot of communication on different
frequencies – it is important not to disrupt critical communications.
The less complex product family, Sesam, has the platforms Sesam 800 for
industrial applications, Sesam 800 Mobile, Sesam 800 Configurable and
Sesam 6000 for mobile applications.
Åkerströms develops, produces, markets and services systems, and has a
large installed base, particularly in Scandinavia, combined with a wellknown brand. The systems are sold both through direct sales and through a
large network of distributors. The distributors also provide local service and
support. Customers are offered service contracts which, together with spare
parts and accessories sales, and additions to existing systems, generate
regular revenue from existing installations.
Åkerströms has a large
installed base – over
20,000 systems with
industrial customers
The strong Åkerströms brand and the large number of installations are
important strengths. The weakness of the customer offering is that
Åkerströms has in recent years lagged behind somewhat when it comes to
integrating new technologies into its products. Tommy Larsson says that
although the company is a bit isolated in Björbo, Åkerströms has
historically managed well, but that in recent years it has not been good at
integrating context analysis.
Somewhat simplified, we might say that Åkerströms has had the T in
Internet of Things, but not the I – the company has the systems that need to
be connected, but has been a little late in adapting its products to the
digitalization taking place in industry.
Future product families will be more technologically advanced, and an
upgraded product platform in the Remotus product family (Jupiter ERA)
will soon be released to market. The new platform will replace a large
number of existing products and provides Åkerströms customers with new
opportunities in the digitalization of processes.
The new Åkerströms platform appears to be in demand. The company has
been discussing the platform with its customers for some time, and several
have chosen to delay their orders until the new product line is available.
This may seem a strange strategy as it has led to lower sales of the current
product generation, but a number of customers may otherwise have chosen
Company analysis
15
Allgon
to switch to a system from an Åkerströms competitor. There have been
some delays in the development of the new ERA platform, but the system is
currently being tested by several customers and in September 2016 the plan
is to have the platform completely finished and ready to sell to customers.
The CEO of Åkerströms explains that the company has previously produced
a large number of customized solutions, but has not always been able to
properly charge for the extra costs of adaptation. With the new ERA
platform it should be possible to have more modularization, allowing
greater potential for customer-specific adaptations within the platform.
Åkerströms has also developed a new stage-gate process whereby customer
requirements beyond the scope of the company’s platforms are evaluated,
based on whether they are something that can also be sold to other
customers. If the additional development of the system can be sold to more
customers, the costs are absorbed as development expenses and distributed
between a number of customers. If, instead, the adaptation is only suitable
for one individual customer, it is treated as a project-specific cost and
invoiced to that customer. A promising example was the recent
announcement of a breakthrough order for a customer specific solution to
the German market. Åkerströms’ radio remote system has been adapted to
function as a highly reliable safety system that allows workers to send an
alarm from a small wireless device and receive immediate feedback in the
form of a buzz when the alarm is received and help is on the way.
Åkerströms’ see great potential in selling the solutions to other customers
and we share the company’s positive view.
Åkerströms is working to
introduce better processes
that we believe could
contribute to greater
profitability
Many small companies end up in exactly the situation that Åkerströms
sometimes finds itself in, with customized solutions being developed that
ultimately become unprofitable. We therefore see it as positive that the
company is getting to grips with these issues, and we expect this to lead to
improved margins. In a somewhat longer perspective, there should be good
opportunities to further develop the aftermarket business and thus benefit
from the large number of installed systems. The company itself talks about
adding more software to optimize customer processes, which could provide
ongoing subscription revenue with very good margins. A first step has been
taken with the cloud-based service for managing frequencies, and we hope
to see more in the future.
Growth journey with more acquisitions along the way
Allgon plans to grow organically, but also has a stated ambition to make
further acquisitions. Right now, a lot of resources are being dedicated to the
successful integration of Åkerströms, and also to laying the foundation for
being able to conduct more acquisitions, including through the introduction
of common processes, but also by learning from the acquisition of
Åkerströms.
Company analysis
16
Allgon
Allgon wants to grow
both organically and
through acquisitions
The plan is to build a group of companies in wireless communication for
industrial applications. Allgon’s assessment is that there are many
interesting companies, not least outside the urban regions, that would
benefit greatly from being part of Allgon rather than standing entirely
alone.
Allgon is currently looking primarily at companies with sales in the range
SEK 30-50 million. The company mainly envisages larger acquisitions (SEK
100 million+) at a later stage, although nothing is completely set in stone.
CEO Johan Hårdén’s aim is to have a high acquisition rate, and within a few
years build up a group consisting of 10-15 companies with total sales of over
SEK one billion. This is an ambitious goal and, if successful, there is the
potential to create great value for Allgon’s shareholders. Unlisted
companies are generally traded at a significant discount compared to listed
companies, and the same applies to small companies versus large
companies. Below is an illustrative description of how acquired companies
can contribute to increased shareholder value.
Acquisition price
Operational
synergies
Commercial
synergies
Multiple
expansion
Value in Allgon
group
Figure 7: Creating value through acquisitions, illustrative, source: Redeye
Small companies with products and services that complement Allgon’s
offering, but that find it difficult to reach a global market and keep up with
digitalization, are typical of the companies that would well suit Allgon’s
acquisition strategy. Allgon also wants the companies’ existing owners to
remain shareholders in Allgon and to understand the potential to create
value by being part of a larger and stronger group. Above all, Allgon wants
to buy companies that are profitable, but that have the potential to improve.
Turnaround companies often require a lot of resources to get on track, but
are not ruled out completely. However, pure start-ups are not typically
something that Allgon is interested in acquiring, however not completely
ruled out.
The intention is for acquisitions to be made using the company’s external
M&A advisor, Livingstone Partners, working closely alongside Allgon’s
management. Much of the work to investigate synergies on the process and
purchasing sides will also be conducted by Allgon Asia. We can almost
regard Allgon Asia as an internal consultant in this context.
Company analysis
17
Allgon
Allgon’s acquisition strategy is fundamentally wise, and also sensible from
an industrial point of view. There are, however, always challenges in
integrating acquired companies – not least in cultural terms. Allgon has
been clear that acquired companies will retain their autonomy while
benefitting from the group’s distribution network and shared functions. The
strategy of soft integration of acquired companies, as opposed to hard
integration, is similar to that of Indutrade, who has been a veritable
acquisition machine and has created much value for its shareholders.
Synergies from purchasing and shared processes
Allgon’s group management is clear that acquired companies should not be
forced into processes and practices that do not fit their business – the idea
is instead to work with what it calls soft integration of acquired companies,
with the companies retaining a high degree of autonomy.
The acquired companies operate as independent businesses, but are able to
benefit from the resources of the Allgon group in supply chain/operational
processes and in marketing/sales.
The idea is for Allgon Asia, in addition to managing sales in the Chinese
market, to act as a kind of internal consulting firm within Allgon that can
help with interim resources and project support for other group companies.
Allgon Asia will also take care of sourcing in Asia for group companies,
something the company itself believes can create significant synergy gains,
and we are inclined to agree, although we want to see results before we are
completely convinced. Allgon Asia’s role in the supply chain within the
Allgon group is illustrated below.
Group company
Product
development and
marketing
Allgon Asia provides support
Procurement
Transportation
Group company
Sales
Delivery
Figure 8: Allgon Asia’s role in the Allgon group supply chain
Another area where the Allgon group is expected to offer great support to
acquired companies is in skills supply at both management level and in
specialist roles.
Allgon Asia supports
other companies in the
Allgon group in areas
such as operational and
strategic purchasing,
logistics, interim
resources and shared
processes
Åkerströms’ CEO Tommy Larsson is a good example of how Allgon can
work with skills supply for acquired companies. Tommy was in Allgon’s
network and was attracted by the idea of the Allgon group.
Tommy says himself that he prefers a growth focus and is happy that things
can be a little chaotic – he likes the challenge of building something new
rather than just administrating.
Company analysis
18
Allgon
“I get along very well with owner directives and yet the freedom to build we have a focus for the companies to act and be successful where they are.
The frameworks are owner directives and the companies act, etc.”
Tommy mentions the next-generation roadmap for Åkerströms, with the
products becoming more technologically advanced and with the Allgon
group’s expertise in sourcing in Asia being very useful. We believe that
Allgon will be an attractive acquirer, especially for smaller companies active
in wireless communication that are finding it difficult to expand further on
their own. Allgon will be able to bring great value in these circumstances, by
providing operational support and getting the companies’ products into the
international market.
Company analysis
19
Allgon
Market
As mentioned earlier, the Allgon group focuses on wireless
communications, particularly for industry. We often hear terms like
Internet of Things (IoT) without really understanding what they mean. If
we are talking about industrial IoT, this is about connecting industrial
processes and machines. These might be sensors providing process status
information in real time, vehicles sending location data to a fleet
management system, and any one of an almost infinite number of
applications.
What all applications have in common is the need to send data in the form
of signals, and this is where Allgon comes in. The need for wireless
communication solutions is constantly expanding and does not look set to
diminish. On the contrary, the need is likely to accelerate. It costs a lot to
route cables, whether fiber or copper, and sometimes it is not practical to
route cables for modern technology, such as with automotive applications.
Allgon divides its operations into two segments, antennas and industrial
radio remote control. The antenna segment is represented by Smarteq
Wireless and the industrial remote control segment by Åkerströms.
Smarteq has the right competencies for demanding
customers
Allgon previously talked about three business areas for its antenna
operations: automotive, machine to machine (M2M) and consumer.
Consumer has now been structured under M2M following weak growth.
Customers of the antenna business include leading companies in both
automotive and M2M, as illustrated below.
Automotive
Allgon’s antenna operations/Smarteq Wireless – example customers
M2M
To connect our things we
need data transmission
solutions – Allgon can
arrange this
Figure 9: Examples of antenna business customers
Company analysis
20
Allgon
The loss of Volvo Trucks
as a customer was a hard
blow to Allgon’s antenna
business
Automotive was
previously the most
important segment,
accounting for around 70
percent of sales by the
antenna business. This
year the relationship
between M2M and
automotive is expected to
be almost the reverse, and
M2M will instead account
for around 65 percent of
antenna business sales
For over 40 years, Allgon has been what is known as a Tier 1 supplier to the
automotive industry. Being a Tier 1 supplier means delivering subsystems
directly to vehicle manufacturers, which requires high levels of working
procedures, products and certifications. Allgon’s main customer has in
recent years been Volvo Trucks, but this contract was terminated at the
start of December 2015. Losing Volvo as a customer was naturally a hard
blow to Allgon. The platform, specially developed for Volvo, had become
technically advanced following a large number of change orders. The
problem was that all the changes made by Volvo had also driven up the cost
of the platform, and Volvo chose to cut costs by moving to standardized
antenna solutions, known as commercially off the shelf (COTS). These
solutions are not customized and can be bought directly from the supplier
off the shelf.
Allgon still retains the rights, but has entirely written off the value of the
intellectual property since the platform is so customized for Volvo that it is
not expected to be used for other customers. However, what has come out
of the Volvo collaboration, in addition to substantial sales and a valuable
reference customer, are the skills to manage complex customer-specific
projects.
In its 2015 annual report, Allgon defines automotive as including all
automotive customers, such as cars, trucks and buses, as well as
construction machinery, trams and trains. In 2015, sales of antennas in
automotive accounted for SEK 88 million of Allgon’s sales of some SEK 116
million, while M2M and consumer accounted for SEK 28 million. This year,
automotive antennas are expected to reach sales of somewhere around SEK
20 million. M2M, which now also includes consumer, is expected to account
for around SEK 35 million of the antenna segment’s sales in 2016.
2015
2016
Automotive
M2M (incl.
consumer)
24%
76%
Figure 10: Sales distribution for antenna business, 2015 and 2016E
Company analysis
21
Allgon
Scania and Bentley are
the most important
automotive customers for
the antenna business
As the trend in the car and truck industries moves toward more
standardized solutions, it is mainly in the premium car segment and in
vehicles for tough environments that Allgon sees its automotive antenna
customers in future. In 2015, Allgon conducted two antenna projects for
luxury car manufacturer Bentley, and serial production has this year started
on the developed antennas. In May, 2016, Allgon announced an additional
order for development of a LTE antenna for Bentley, the new antenna will
go into serial production in 2018. Allgon writes in its annual report for 2015
that Bentley and Scania are its most important customers in automotive
antennas. However, Allgon is working actively to broaden its customer base
and, in addition to these two, has a number of other customers and is in
discussions with several more. This includes Allgon’s hope to win contracts
with a truck manufacturer in China.
Allgon’s antennas are well suited to a number of interesting types of vehicle,
in addition to trucks and cars. The company is developing a new application
for buses, which have somewhat special requirements, and there are
currently fairly few antennas suited to buses. More advanced antennas that
improve signal speed become necessary as it is increasingly expected that
buses should have good internet connection. As an example, Allgon’s
antennas are currently fitted to the buses running between Norrtälje and
Stockholm. Buses are a good application since each vehicle often requires
several of Allgon’s antennas. Allgon is also working through Kathrein’s
dealership network to access bus manufacturers in Poland.
Forestry machinery is another attractive area for Allgon. These antennas
include alarm transmissions, and must withstand very harsh environments
with high reliability. The market is partly for newly manufactured forestry
machinery, and partly a requirement to upgrade old machinery with new
antennas. Although the volumes are not huge, it is still an important market
with several thousand machines manufactured each year.
Smart machines need smart antennas
M2M is an important and growing segment for Allgon’s antenna business,
and a new employee has been recruited to further accelerate development.
There is a lot of talk about everything becoming connected. A few years ago,
Ericsson predicted that there would be 50 billion connected things by 2020.
Huawei later doubled that figure, and Intel recently said it was expecting
200 billion connected things by 2020. Linking everything to the internet
requires connections, and routing cables is often expensive.
The majority of M2M antenna sales, around SEK 32-33 million in 2016, are
expected to be for products that allow communication between different
machines, such as electricity meters and charging stations for electric cars.
Sales of products designed to improve transfer rates for individual
consumers’ wireless internet connections, in what was previously called
Company analysis
22
Allgon
consumer, are expected to account for only SEK 2-3 million in 2016, and
are not a high priority going forward.
Automated meter reading,
also known as smart
metering, is an important
area for Allgon’s antenna
business, and is
structured under M2M –
this mainly includes smart
antennas for electricity
meters
The most important area within M2M is automated meter reading (AMR).
This is often referred to as smart metering, and is mainly about reading
electricity meters. Antennas for electricity meters need be of high quality, be
able to remain in place for a long time, and need the right classification.
Replacing failed electricity meters is costly since it is necessary to send
service personnel to the installations, and there has to be coordination with
the owner/tenant of the property/facility where the meter is located.
Meters are typically replaced simultaneously throughout a network area,
and a large number of meters are scheduled for upgrade in Europe; 34
million according to Allgon’s estimate.
Allgon is well established in the Nordics for electricity meters, and works
closely with the meter manufacturers. The first of the Nordic countries to
use AMR was Sweden, and the country has nearly 5.5 million meters that
need upgrading to 4G, and each one needs a new antenna. Allgon has
developed new antennas for AMR, and expects significant volumes in the
current year. Norway faces a major rollout, and Allgon is expecting
significant volumes as the company's partners have been awarded large
contracts.
There are a few competitors in the Nordic countries, and even more if we
look at the entire European market. However, Allgon’s good references and
expertise in electricity meters mean the company can hold its own against
the competition, especially with an updated product portfolio through the
launch of new antennas in the Alldisk series. These antennas can handle
more frequency bands, thus ensuring future functionality of the meter
installation. The new products are designed for 4G radio, and seven
products were launched during Utility Week in Vienna, Austria.
Outside the Nordic region Allgon is a third-party supplier of antennas for
metering, and Austria in particular is considered a promising market.
Germany is a potentially huge market with a great need for smart meters.
The problem with Germany, however, is that utility legislation is
complicated, particularly surrounding ownership of electricity grid
companies. Germany is therefore currently on hold, but once the rollout of
AMR gets started Germany will be a very attractive market. Outside Europe,
Allgon has a number of leads for potential business, including in the
Caribbean. Until the situation becomes more advanced in Germany and the
Caribbean, these markets should be regarded more as a potential upside in
a positive scenario. Closest at hand are the rollout in Norway and meter
replacement in Sweden.
Company analysis
23
Allgon
The M2M market is growing rapidly, particularly in smart metering, with
gas meters, water meters and other types of meter likely to be replaced with
smart meters in the same way as electricity meters.
Things (millions)
500
450
400
350
300
250
200
150
100
50
0
2015
2016
2017
2018
Figure 11: Number of connected utilities-related things in IoT for smart
cities, 2015-2018
The market for utilities-related things in the IoT segment called smart
cities, including smart electricity meters and smart infrastructure, is
expected to see annual growth in the number of devices averaging over 20
percent over the next few years.
Another important M2M area in which Allgon has a strong position is
charging stations for electric cars. Charging stations need antennas to
connect them for payments and station status monitoring, for monitoring
how much the station is used and for checking if it is available. One of
Allgon’s collaborations is with newly listed Garo, which is one of the leading
Nordic manufacturers of charging stations.
Charging stations for
electric cars need
antennas, and Allgon is
well positioned to benefit
from this rapid growth
The number of charging stations that will be installed is highly dependent
on how the commercialization of rechargeable vehicles develops. Growth in
the number of rechargeable vehicles is, in turn, dependent on several
factors, not least political decisions to reduce the use of fossil fuels.
Norway is well advanced and is, for example, an important market for
luxury car manufacturer Tesla. In Norway, about 20 percent of newly
registered vehicles were rechargeable in 2015, compared to around 3
percent in 2012. Sweden is a little behind Norway, but the market is
growing rapidly. In 2015, the number of registrations of rechargeable
vehicles rose by 71 percent in Sweden, and this year growth is expected to
amount to nearly 90 percent, which would mean around 15,000 new
registrations of rechargeable vehicles.
Company analysis
24
Allgon
There are currently around 7,000 charging stations for electric cars in
Norway and 1,800 in Sweden. The new EU directive that standardizes the
design of charging stations will enter into force this year and is expected to
accelerate the deployment of charging stations in the EU.
Thousands
80
20%
Rechargeable vehicles
70
18%
Percentage of new vehicle registrations
60
16%
14%
50
12%
40
10%
30
8%
6%
20
4%
10
2%
0
0%
2012
2013
2014
2015
2016
2017
2018
Figure 12: Rechargeable vehicles and rechargeable vehicles as a
percentage of newly registered vehicles, Sweden, 2012-2018, Source:
Garo
The Swedish market for rechargeable vehicles is expected to expand sharply
in the coming years, requiring a large number of charging stations – an
interesting opportunity for Allgon and its partner Garo.
Furthermore, we expect more segments for Allgon’s antennas to be added
now that the company is better able to focus on new customers following
the end of the Volvo project, which took a lot of resources. One example is
in solutions for building automation and security, where Verisure (formerly
Securitas Direkt) is a customer of Allgon.
To get a handle on the growth and the size of the market, we can look at
projections for the number of M2M connections worldwide. The number of
connections is expected to show a compounded annual growth rate (CAGR)
of nearly 40 percent between 2014 and 2020, reaching over three billion in
2020.
The number of connected
things needing antennas
is expected to grow
rapidly
Connections (billions)
4
3
2
1
0
2014
2015
2016
2017
2018
2019
2020
Figure 13: Global M2M connections 2014-2020, Source: Redeye Research
Company analysis
25
Allgon
Antenna systems that were formerly in the separate consumer business area
are those for private individuals requiring a better connection, for example,
at their holiday home, in their caravan or when travelling by train/car.
These products are sold primarily through distributor Brightstar, but Allgon
has also some direct customers like Mediamarkt, NetonNet and Kjell &
Company. Allgon is launching an updated version in order to bring down
the price and achieve a better margin. Despite the new product launch, it is
clear these products are not a focus for Allgon, and nor do we believe they
should be.
Continued focus on niche segments with high
demands
The antenna market consists of high-volume segments with relatively
similar products, low margins and tough competition, and of niche markets
with higher demands.
With its expertise in robust customized solutions, and offering its customers
services in testing and system integration, Allgon has a business model that
is best suited to these niche markets. Allgon cannot compete on price with
the biggest players in the industry, which produce long runs with large
economies of scale and are also able to absorb major investment in tooling
costs.
Allgon’s strategy is to address demanding customers in areas where it is
able to charge more for robust, high-quality – ruggedized – products. Part
of the strategy is to focus on smaller customers to avoid becoming too
dependent on any individual customer, as was the case with Volvo Trucks.
Allgon’s main antenna
competitors are 2J
Antennas, Hirschman,
Huber+Suhner,
Panorama and Procom in
Denmark
We believe Allgon’s marketing strategy is the right way to go. The
company’s ability to differentiate itself, as we see it, lies in developing
solutions for segments not serviced by the major market players, and also
by leveraging the value of its certifications and expertise. Allgon is also
targeting customers for whom the antenna system is most often only a
small part of the total product cost, but still an important component.
Factors other than price are often most important for this type of customer,
particularly as a malfunctioning antenna can cost many times more than
the antenna itself.
Allgon’s competitors in the antenna market are mainly 2J Antennas,
Hirschman, Huber+Suhner, Panorama and Procom in Denmark.
2J Antennas manufactures antennas for automotive, M2M, base stations
and marine applications. The company has production facilities in Slovakia
and a development center in Portsmouth, UK. The company has nearly 100
employees, and its customers include Opel, Lada, Audi, Safran and T
Mobile.
Company analysis
26
Allgon
Hirschman is a German company with over a billion in sales. The company
focuses on automotive and M2M, and has about a thousand employees.
Hirschman has been owned since 2012 by US group VOXX International.
Swiss company Huber+Suhner has between 3,500 and 4,000 employees,
and supplies systems and solutions for energy and data transmission. The
company has sales of around CHF 700 million.
Panorama Antennas is a medium-sized supplier of antennas, based in the
UK. Panorama has between 100 and 200 employees, and sells antennas for
the consumer electronics market, automotive and M2M.
Danish Procom is a subsidiary of Amphenol Corporation, a major player in
communications equipment. Procom sells antennas for the defense
industry, cable companies, infrastructure and a variety of other industries.
Åkerströms customers becoming wireless
Åkerströms has a strong position as a supplier of radio remote control
systems for industry. Its installed base of systems is over 20,000, and
servicing and parts account for a significant proportion of its sales, around
25 percent in 2015. Now that its customers are facing the challenges and
opportunities of increasingly connected industry, Åkerströms has developed
products to help them in this transition.
Åkerströms has built up a
close and trusting
relationship with its
customers over the years
Åkerströms already has an understanding of customer needs and the
products that are in demand. More importantly, Åkerströms has
relationships with its customers and is well known in the industry. In recent
years, Åkerströms has fallen a little behind in terms of digitalization, but
with its new product lines it is well-equipped to readdress customer needs
for increased efficiency and operational reliability. In addition, the company
is now able to help its customers take the next step in the industrial internet
of things, with planned functionality that allows connection of Åkerströms’
systems to customers’ business systems.
There are competitors in the market. In Sweden these are mainly privately
owned Gothenburg-based Tele Radio, with sales of a few hundred million
SEK per year, and Scanreco. There are also some major international
players in the market. Its competitors have gained a lead on Åkerströms in
terms of new technical solutions in their products, including system
solutions that use integrated cameras and tablets. Tele Radio has also had
better prices than Åkerströms, and given that this competitor has been
more at the leading edge with its products, Åkerströms has lost market
share in recent years.
Although Åkerströms has lost some ground to its competitors, there is great
value in both the Åkerströms brand and the large installed base.
Company analysis
27
Allgon
Åkerströms has an established and ongoing relationship with a large
number of customers from its aftermarket business, and its goal is now to
help its customers upgrade to the new ERA platform.
Below are examples of customers distributed across the two product
families, Remotus and Sesam. Locomote for controlling locomotives/trains
is a sub-group within Remotus.
Remotus
Sesam
Locomote
Figure 14: Examples of customers, Åkerströms
It is currently relatively easy for customers to change system supplier. The
new platform that integrates Åkerströms’ system with the customer’s ERP
and/or MRP system creates a closer relationship with the customer, which
means that the propensity to change system provider is expected to decline.
Developing solutions that make customers less likely to switch providers is
important for Åkerströms, especially considering that 85-90 percent of
system sales are to repeat customers, as upgrades to existing systems,
replacements of legacy systems or new installations.
“It is a great strength to
have relationships with
people at customer
companies. We sell
systems with proven
reliability from a large
number of installations
and many years of
successful operations.
Customers trust our
systems, and we are now
adding the new
technology.” CEO,
Åkerströms
Åkerströms has the relationships and the installations, but has not yet
connected the digital. In this context, the CEO of Åkerströms says that the
products are already fitted to the cranes and can extract the data –
customers can obtain data about weights, timings for various operations,
operating statistics and a whole host of other data. This is popularly called
big data, and the idea is to help customers to become more efficient, have
better control and greater safety.
Quality and safety to export
With an updated product portfolio, Åkerströms has also begun to focus
more on increasing sales abroad. Sweden is currently the most important
market for Åkerströms and, together with other countries in the Baltic
Company analysis
28
Allgon
region, accounts for around 80 percent of sales. The aim now is to grow in
both existing geographical markets and new markets, with China and
Germany believed to offer good growth opportunities for Åkerströms.
Germany, in particular, is an attractive market because it is a large economy
with heavy industry and a requirement for Åkerströms systems. In China,
health and safety issues are rising up the agenda as the country’s economy
develops. China's industry is also in need of increased efficiency in order to
maintain its competitiveness as wages rise.
The Chinese market has
great potential for
Åkerströms
Åkerströms’ Chinese distributor is seeing a high level of interest in
Åkerströms’ solutions for industrial remote control, particularly the new
Remotus platform. One example that fairly well describes the problem in
China's industry is the number of small inefficient steel mills that
mushroomed around 2008. There are about a thousand steel mills in China,
and many of them have a low degree of automation and the working
environment is poor. There is great potential here for Åkerströms to sell
Swedish quality and safety while helping Chinese industry to become more
competitive.
CEO Tommy Larsson says the company already sells a lot abroad, and
explains that the company has a star seller who travels around the world
generating new business. A real fixer who solves problems and makes
things happen. It is valuable to have that kind of person to kick-start sales
abroad, while Tommy realizes the need to better institutionalize business
skills and sales.
Previously Åkerströms’ organization has been very product focused and
there is a now need to increase the market focus. An important piece of the
puzzle is to work closely with Åkerströms’ existing and new distributors and
grow with them. Our impression is that Åkerströms’ strategy is working
well, and a new distributor was recently announced in the Czech Republic.
Company analysis
29
Allgon
Financial estimates
In this part of the report we present our financial estimates for Allgon.
Given the acquisition of Åkerströms and the fact the company is included in
Allgon’s consolidated accounts for the first time in the first-quarter 2016
report, there are no relevant comparative figures from previous years.
Allgon has two operating segments in its reporting, antennas and industrial
remote control. The operating segments correspond to the subsidiaries
Smarteq Wireless (antennas) and Åkerströms (industrial remote control).
Sales momentum 2017 after a middling 2016
For 2016, we expect Allgon to achieve sales of nearly SEK 140 million, or
net sales growth of 21 percent compared to 2015. In reality, however, this
means sales contraction if we compare the antenna business between years,
as in the table below.
Net sales per segment 2015-2021 E
2015
Net sales - antennas
Change from previous year
2016 E
115.2
Net sales - radio remote control
Change from previous year
Net sales
Change from previous year
115.2
2017 E
2018 E
2019 E
2020 E
2021 E
CAGR 16-21
53.8
-53.2%
67.0
24.4%
78.0
16.4%
86.0
10.3%
94.6
10.0%
103.1
9.0%
13.9%
85.8
106.0
23.6%
122.0
15.1%
138.0
13.1%
151.8
10.0%
165.5
9.0%
14.0%
139.6
21.2%
173.0
23.9%
200.0
15.6%
224.0
12.0%
246.4
10.0%
268.6
9.0%
14.0%
Figure 15: Estimated net sales, 2016-2021
In the first quarter of 2016, sales for the antenna business fell by 55 percent
compared to the previous year, ending up at SEK 13 million. Since Volvo
accounted for 65 percent of sales in 2015, Allgon has managed to offset at
least some of the loss of Volvo sales. The turnover that came with the
acquisition of Kathrein’s aftermarket business helps in mitigating the
effects from the lost Volvo contract.
As the Volvo business was being phased out, a great deal of resources went
into ensuring a good phase-out. We see this as a good investment of
resources, and Allgon entered 2016 with a strong balance sheet and a record
year behind it. The strong dollar gave an additional boost to the 2015 result
since the antennas for Volvo were both bought and sold to Volvo in USD.
The downside of the energy invested into ending the Volvo contract is that
there was not particularly much focus on addressing customers and
distributors at the end of 2015, and in early 2016 a lot of effort was put into
completing the acquisition of Åkerströms.
Within the antenna business, it has recently been possible to put more time
and resources into marketing, and this has paid off. On March 17, an order
was announced for smart meter antennas for the Norwegian market with a
Company analysis
30
Allgon
total value of SEK 3 million. Additional orders, distribution agreements and
development projects were announced in April, including orders for
antennas for charging stations for electric cars and a development project
for Atlas Copco. The strong trend continued in May with an order from
Bentley for the development of a new LTE antenna and an additional order
for smart meter antennas to the Norwegian market. The orders are valued
at SEK 1 million each.
As new orders, customers and distributors arrive, sales to existing antenna
customers are ticking along well, aside from Volvo of course. However, we
do not expect to see sales for the antenna business gain real momentum
until the end of this year, as deliveries of antennas for the Norwegian smart
electricity meters take off. For full-year 2016 we expect a sales drop in the
antenna business of 53 percent. In 2017 we expect sales to grow by 24
percent. From 2017, we expect continued high growth, with annual sales of
antennas again reaching over SEK 100 million by 2021.
As to sales in the industrial remote control business area made up by
subsidiary Åkerströms, we expect the company’s increased marketing focus
and updated product portfolio to be well received in the market in the
coming years. The underlying market is growing, and we are confident in
Åkerströms’ strategy of working closely with its distributors to increase
sales outside the Nordic region.
We believe Åkerströms will achieve sales of almost SEK 86 million this year,
before breaking the 100 million barrier in 2017 with sales of SEK 106
million. By 2021, we believe Åkerströms will manage to achieve annual
sales of some SEK 165 million.
Overall, we expect the Allgon group to increase its sales by 21 percent this
year, thanks to the acquisition of Åkerströms. We expect organic growth to
gain real momentum in 2017, with a sales increase of 24 percent. Between
2016 and 2021 we predict Allgon will achieve organic annual sales growth
averaging 14 percent.
Rising profitability from 2017
Both the antenna business and the industrial remote control operations
should be able to show much stronger profitability than we saw in the
recently reported first quarter.
In 2015, Allgon had an EBITDA margin of nearly 19 percent and, even
though there were favorable conditions in terms of currency and the final
deliveries to Volvo Trucks worked well, this demonstrates the scalability of
the antenna business. We believe Allgon’s margins have reached their low
point and will rise going forward as more profitable niche segments come to
make up a large proportion of sales, while personnel costs and other
external costs will not rise as quickly as sales. In the short term, we believe
Company analysis
31
Allgon
that margins for the antenna business will also be positively impacted by a
better customer mix, with M2M typically having slightly higher margins
than automotive.
We also anticipate that the ongoing initiatives to improve the supply chain
in the Allgon group will have a positive effect on margins going forward. We
see particular potential in changing the arrangement of Åkerströms’ own
production in China, which has had high costs historically. There should be
good potential for improvement here, even if this work will take time.
Pricing is another area we believe will contribute to improved profitability,
especially in the industrial remote control segment. As mentioned earlier,
Åkerströms has begun efforts to get better at charging for customer-specific
development. Not charging for expensive development resources is a sure
way to depress profitability in development-intensive companies.
Åkerströms’ CEO also says he would rather add value than to go down on
price – we see good potential to offer customers added value through the
functionality that comes with the new ERA platform, rather than through
underpriced customizations.
Åkerströms should be able to achieve a contribution margin in excess of 6070 percent on many of its products, and achieve an EBITDA margin well
above 20 percent. Åkerströms’ competitor Tele Radio, for example, had an
EBITDA margin of 20 percent, according to its 2014 annual report.
Below are our estimates for the Allgon group’s EBITDA margin divided into
the two operating segments the company reports. Costs that are not
allocated to either of the two operating segments comprise corporate costs.
EBIT and EBITDA 2016-2021 E
2016 E
2017 E
2018 E
2019 E
2020 E
2021 E
CAGR 16-21
Net sales - antennas
Net sales - radio remote control
Net sales
53.8
85.8
139.6
67.0
106.0
173.0
78.0
122.0
200.0
86.0
138.0
224.0
94.6
151.8
246.4
103.1
165.5
268.6
13.9%
14.0%
14.0%
EBITDA antennas
EBITDA margin antennas
3.6
6.8%
8.9
13.3%
13.0
16.7%
16.0
18.6%
18.0
19.0%
21.0
20.4%
41.9%
10.5
12.3%
17.8
16.8%
23.3
19.1%
29.8
21.6%
35.2
23.2%
39.4
23.8%
30.3%
-4.3
-5.0
-6.0
-7.5
-8.5
-9.0
15.9%
9.9
7.1%
21.7
12.5%
30.3
15.2%
38.3
17.1%
44.7
18.1%
51.4
19.2%
39.1%
-6.3
-8.0
-9.5
-9.2
-9.5
-10.5
10.7%
3.6
2.6%
13.7
7.9%
20.8
10.4%
29.1
13.0%
35.2
14.3%
41.0
15.3%
62.9%
EBITDA radio remote control
EBITDA margin radio remote control
Cost not allocated - corporate costs
EBITDA
EBITDA margin
Depreciation and amortization
EBIT
EBIT margin
Figure 16: Estimates of EBIT and EBITDA, 2016-2021
Focus on improved cash flows
The acquisition of Åkerströms changed the structure of Allgon’s balance
sheet. In the table below we have compiled an overview of how the
Company analysis
32
Allgon
acquisition of Åkerströms has affected Allgon’s balance sheet. We have also
added our estimates for the three remaining quarters of 2016 and how we
expect the group's balance sheet to look at the end of 2016.
Balance sheet before and after acquisition of Åkerströms and estimated balance sheet by the end of 2016
Smarteq
31/12 2015
Acquisition
12/1 2016
Group PF
31/12 2015
Change
Q1
Group
31/3 2016
Change
Q2-Q4 E
Group
31/12 2016
Assets
Goodwill
Trademarks
Other intangible assets
Intangible assets
0.0
0.0
10.5
10.5
48.5
5.0
10.0
63.5
48.5
5.0
20.5
73.9
-0.9
-0.9
48.5
5.0
19.6
73.0
0.0
1.2
1.2
2.3
2.4
4.7
2.3
3.6
5.9
0.0
-0.1
-0.1
2.3
3.5
5.8
Investments
Deferred tax assets
Fixed assets
0.0
0.0
11.7
0.0
8.5
76.6
0.0
8.5
88.3
-1.0
0.0
8.5
87.3
Current assets
Inventory
Receivables
Cash and cash equivalents
Total current assets
10.0
11.0
25.5
46.5
17.0
11.5
10.4
38.8
27.0
22.5
35.8
85.4
-1.1
1.8
-18.9
-18.3
Total assets
58.2
115.5
173.7
44.1
284.8
0.1
-299.2
29.8
40.5
31.9
0.0
0.0
72.4
84.6
316.8
0.1
-299.2
102.2
0.0
2.3
0.0
0.0
0.0
26.1
58.2
0.8
0.0
9.2
10.9
3.4
18.7
115.5
0.8
2.3
9.2
10.9
3.4
44.8
173.7
Buildings
Machinery and installations
Tangible assets
-0.8
-0.8
48.5
5.0
18.8
72.2
0.0
2.2
3.6
5.8
-0.8
0.0
8.5
86.5
25.9
24.3
17.2
67.4
-2.2
-1.2
22.8
19.5
23.7
23.1
40.0
86.8
-19.3
154.7
18.7
173.3
5.1
6.6
0.0
-2.5
-2.6
84.6
316.8
0.0
-301.7
99.7
5.5
17.2
89.7
323.4
0.0
-296.2
116.8
1.5
18.7
0.8
2.3
10.2
4.9
3.4
34.9
173.3
Shareholder's equity and liabilities
Share capital
Other contributed capital
Asset revaluation reserve
Retained earnings
Total equity
Provisions
Other long term liabilities
Revolving credit facility
Short term interest bearing liabilities
Deferred tax liabilities
Non interest bearing current liabilities
Total shareholder's equity and liabilities
0.9
-6.0
-11.7
-19.3
0.8
2.3
10.2
4.9
3.4
33.5
154.7
Figure 17: Allgon’s balance sheet before and after the acquisition of Åkerströms, and estimated
balance sheet for 31 December, 2016
Åkerströms was acquired through an offset issue in which the owners of
Åkerströms Intressenter received a purchase price of SEK 73.2 million, of
which SEK 0.3 million was paid in cash and the remainder, SEK 72.9
million, was settled through a non-cash issue of 405 million shares at a
price of SEK 0.18, corresponding to 8.1 million shares at a price of SEK 9
after the reverse split.
At the acquisition, net assets of almost SEK 25 million were identified in
Åkerströms, the remainder of the purchase price, a little over SEK 48
million was recorded as goodwill in the balance sheet. Åkerströms had a
cash balance of about SEK 11 million, which was included in the acquisition
as seen in the table above.
In the first quarter, Allgon reported a negative cash flow of just over SEK 8
million, and at the end of Q1 the company had a little more than SEK 17
million in cash and cash equivalents. The negative cash flow in the first
quarter was due to Allgon managing to obtain favorable payment terms at
the end of the Volvo contract. Allgon was quickly paid by Volvo while
having relatively long credit terms with its suppliers. This means the money
Company analysis
33
Allgon
from Volvo arrived before the end of 2015, while suppliers were largely not
paid until Q1 2016.
Allgon received over SEK 10 million in cash from the acquisition of
Åkerströms. Some of this, SEK 6 million, was used to pay off debts that also
came with the acquisition. For the remainder of 2016 we expect that Allgon
will further strengthen its cash position to have cash and equivalents of SEK
40 million by the end of 2016.
We expect relatively modest investment needs in both the antenna business
and industrial remote control, totaling SEK 4.5 million in 2016, of which
SEK 0.4 million in Q1. We also expect relatively modest investment going
forward, of SEK 8-15 million annually.
For 2016, our estimates assume that the approximately 50 million
outstanding options will be fully exercised in May. Each option allows the
holder to subscribe for one new share in Allgon at a price of SEK 11 per
share. This will provide a cash injection of almost SEK 12 million.
As to tax, Allgon has cumulative losses of some SEK 300 million. The
company states that loss carry-forwards for tax purposes from the antenna
operations are almost SEK 200 million and an additional SEK 40 million
from Åkerströms. Our base case scenario therefore assumes Allgon will
start to pay tax in 2023.
Detailed estimates
Below are our quarterly estimates for 2016 and full-year estimates for 20162018.
Quarterly (Q2-Q4 2016) and annual (2016-2018) estimates
Q1 2016
Net sales - antennas
Net sales - radio remote control
Net sales
Q2 2016
Q3 2016
Q4 2016
2016 E
2017 E
2018 E
12.8
19.8
32.6
13.0
21.0
34.0
13.5
22.0
35.5
14.5
23.0
37.5
53.8
85.8
139.6
67.0
106.0
173.0
78.0
122.0
200.0
EBITDA antennas
EBITDA margin antennas
EBITDA radio remote control
EBITDA margin radio remote control
Cost not allocated - corporate costs
EBITDA
EBITDA margin
-0.2
-1.2%
0.3
1.4%
-1.0
-0.9
-2.7%
0.9
6.9%
2.4
11.2%
-1.1
2.2
6.3%
1.3
9.6%
3.8
17.0%
-1.1
4.0
11.1%
1.6
11.0%
4.2
18.0%
-1.1
4.7
12.4%
3.6
6.8%
10.5
12.3%
-4.3
9.9
7.1%
8.9
13.3%
17.8
16.8%
-5.0
21.7
12.5%
13.0
16.7%
23.3
19.1%
-6.0
30.3
15.2%
Depreciation and amortization
EBIT
EBIT margin
-1.5
-2.4
-7.3%
-1.6
0.6
1.6%
-1.6
2.4
6.6%
-1.6
3.1
8.1%
-6.3
3.6
2.6%
-8.0
13.7
7.9%
-9.5
20.8
10.4%
Net financial items
Profit before tax
-0.1
-2.5
-0.2
0.4
-0.2
2.2
-0.2
2.9
-0.6
3.0
-0.8
12.9
-0.8
20.0
Tax
Profit for the period
0.0
-2.5
0.0
0.4
0.0
2.2
0.0
2.9
0.0
3.0
0.0
12.9
0.0
20.0
-0.003
845.9
0.022
17.9
0.123
17.9
0.162
17.9
0.166
17.9
0.719
17.9
1.115
17.9
EPS
Number of shares (millions)
Figure 18: Quarterly and annual estimates, 2016-2018
Company analysis
34
Allgon
Valuation
In our valuation of Allgon we have used the discounted cash flow (DCF)
method to arrive at our valuation range.
Basic assumptions
We use a required return of 12.2 percent for discounting cash flows during
the explicit forecast period until 2025, and the terminal value in the
following years. For the terminal value, we assume annual growth of 3.0
percent, a tax rate of 22 percent and the same EBIT margin as during 2024,
which in our base case scenario is a little less than 16 percent.
The relatively high required return of 12.2 percent is the result of our
Redeye rating, which we use instead of calculating the weighted average
cost of capital (WACC) using the capital asset pricing model (CAPM).
In all scenarios, we have assumed annual sales growth of 3.0 percent after
our forecast period, which extends until 2025. We have also in all scenarios
assumed that Allgon will not pay tax until all the loss carry-forwards for tax
purposes of nearly SEK 200 million are exhausted.
Valuation range in three scenarios
In our valuation, we look at three scenarios: a base case, a more pessimistic
bear case, and a more positive bull case. The bear case and bull case
scenarios represent the lower and upper end of our valuation range,
respectively.
Base case scenario – profitable growth journey
The fair value estimate in
our base case scenario is
SEK 19 per share
Our base case scenario uses the financial estimates presented in the
previous section. We envisage annual sales growing by slightly over 11
percent on average during our forecast period 2016-2025. During the same
period, we expect a weighted average EBIT margin of 14 percent.
Allgon: valuation assumptions in base case
Assumptions
CAGR Sales
EBIT margin (weighted avg.)
ROIC (average)
ROE (average)
2016-25
11.4%
14.2%
40.4%
15.2%
DCF valuation
WACC
NPV of FCF
NPV of terminal value
EV
Terminal
Terminal FCF growth rate
EBIT margin (terminal)
EV/SALES exit multiple
EV/EBIT exit multiple
3.0%
17.1%
1.4x
7x
Net cash
Adjustment for dividend
DCF value
Fair value per share
Current share price
Potential/Risk
Figure 19: Valuation assumptions in base case scenario
Company analysis
35
12.2%
163
162
0
324
16
0
340
19.0
11.0
73%
Allgon
Bear case scenario – slowing growth and single-digit operating
margin
In our bear case scenario, we expect a lower growth rate than in our base
case scenario.
Allgon: valuation assumptions in bear case
Assumptions
CAGR Sales
EBIT margin (weighted avg.)
ROIC (average)
ROE (average)
2016-25
8.9%
8.0%
17.9%
9.9%
DCF valuation
WACC
NPV of FCF
NPV of terminal value
EV
Terminal
Terminal FCF growth rate
EBIT margin (terminal)
EV/SALES exit multiple
EV/EBIT exit multiple
3.0%
9.3%
0.8x
6x
Net cash
Adjustment for dividend
DCF value
Fair value per share
Current share price
Potential/Risk
12.2%
94
68
0
162
16
0
177
9.9
11.0
-10%
Figure 20: Valuation assumptions for bear case scenario
The fair value estimate in
our bear case scenario is
SEK 10 per share
Since Allgon’s business is scalable, lower sales also make it more difficult to
raise profitability. We therefore assume an EBIT margin of a weighted
average of 8 percent for 2016-2025 in our bear case scenario.
The fair value estimate in our bear case scenario is SEK 10 per share, which
is 10 percent lower than the current share price of SEK 11.
Bull case scenario – Strong growth and full leverage from
synergies
In our more optimistic bull case scenario, we assume slightly stronger sales
growth and that Allgon obtains good leverage from shared synergies.
Allgon: valuation assumptions in bull case
Assumptions
CAGR Sales
EBIT margin (weighted avg.)
ROIC (average)
ROE (average)
2016-25
13.2%
19.6%
63.6%
18.9%
DCF valuation
WACC
NPV of FCF
NPV of terminal value
EV
Terminal
Terminal FCF growth rate
EBIT margin (terminal)
EV/SALES exit multiple
EV/EBIT exit multiple
3.0%
23.3%
2.0x
8x
Net cash
Adjustment for dividend
DCF value
Fair value per share
Current share price
Potential/Risk
12.2%
238
261
0
499
16
0
514
28.7
11.0
162%
Figure 21: Valuation assumptions for bull case scenario
The fair value estimate in
our bull case scenario is
SEK 29 per share
In our bull case scenario, we assume an EBIT margin of close to 20 percent
as a weighted average over our forecast period, and sales growth averaging
an annual 13 percent until 2025. The fair value estimate in our bull case
scenario is SEK 29, an upside of over 160 percent from the current price of
SEK 11.
Company analysis
36
Allgon
Future acquisitions are not explicitly included
In our valuation, we have not anticipated the effect of future acquisitions. If
Allgon manages to complete several successful acquisitions in line with the
CEO’s goal to build a corporate group of around fifteen companies with
combined sales in excess of SEK 1 billion, the upside in our valuation could
be significant. However, we have chosen to not currently assume this, and
we first want to see Allgon successfully integrate Åkerströms and make at
least one additional acquisition. Conversely, bad acquisitions could require
substantial resources from the organization and negatively affect the value
of Allgon. To some extent this is included in our pessimistic scenario.
Company analysis
37
Allgon
Summary Redeye Rating
The rating consists of five valuation keys, each constituting an overall
assessment of several factors that are rated on a scale of 0 to 2 points. The
maximum score for a valuation key is 10 points.
Rating changes in the report
No rating changes have been made from our previous report.
Management 8.0p
Allgon has competent management, led by CEO Johan Hårdén. Allgon's
management has both the experience and expertise we consider
necessary to lead the Allgon group going forward. We especially value the
management's sincerity in communication and its ability to handle
adversity, such as the loss of a major customer, Volvo AB.
Ownership 8.0p
Allgon has strong owners in Verdane and Tibia Konsult. The owners
contribute with networks and are also able to provide capital if necessary
- though with a relatively high required return. For a company of Allgon's
size, the ownership structure is solid. Our view is further strengthened by
the shareholding of Allgon's top management and board.
Profit outlook 6.0p
The Allgon group's underlying markets have good growth, and the
company has effective distribution channels. We see good opportunities
for the company to show increasing sales and improved profitability for
several years to come, given its scalable business model. Furthermore, as
Allgon is focusing on niche segments, we believe that price pressure from
competition will not be nearly as intense as in larger segments where
scale is paramount to remain competitive.
Profitability 3.0p
The companies in Allgon group have traditionally had varying
profitability over time, but the comparison against historical data is not
entirely relevant in this case. We see potential for Allgon to raise its
profitability rating significantly going forward, however, we want to see
Allgon deliver before we raise our profitability rating.
Financial strength 5.0p
Allgon has a relatively strong balance sheet and financially strong
principal owners. If there are acquisitions, it could well be that the
company conducts rights issues. We typically lower our financial strength
rating when we expect the company to conduct new rights issues in order
to finance operations. In the case of Allgon, we do not lower our financial
strength rating even though new rights issues are likely since a) we
expect any acquisitions to be value-creating even though existing
shareholders would be diluted, and b) it would likely be offset issues
where new shares are printed to pay for the acquisition (as opposed to
new capital being raised from existing shareholders).
Company analysis
38
Allgon
Income statement
Net sales
Total operating costs
EBITDA
2014
86
-77
9
2015
115
-93
22
2016E
140
-130
10
2017E
173
-151
22
2018E
200
-170
30
Depreciation
Amortization
Impairment charges
EBIT
-1
-3
0
6
-3
-10
0
9
-2
-5
0
4
-2
-6
0
14
-2
-8
0
21
Share in profits
Net financial items
Exchange rate dif.
Pre-tax profit
0
-1
0
5
0
0
0
9
0
-1
0
3
0
-1
0
13
0
-1
0
20
0
5
0
9
0
3
0
13
0
20
2014
2015
2016E
2017E
2018E
4
8
18
3
33
25
8
10
3
47
40
20
24
3
87
42
22
26
3
92
57
23
24
3
107
1
0
0
0
0
12
0
14
0
1
0
0
0
0
10
0
12
0
6
0
0
48
5
19
0
78
8
5
0
0
48
5
19
0
78
8
6
0
0
48
5
20
0
79
8
46
58
173
179
195
Tax
Net earnings
Balance
Assets
Current assets
Cash in banks
Receivables
Inventories
Other current assets
Current assets
Fixed assets
Tangible assets
Associated comp.
Investments
Goodwill
Cap. exp. for dev.
O intangible rights
O non-current assets
Total fixed assets
Deferred tax assets
Total (assets)
Liabilities
Current liabilities
Short-term debt
Accounts payable
O current liabilities
Current liabilities
Long-term debt
O long-term liabilities
Convertibles
Total Liabilities
Deferred tax liab
Provisions
Shareholders' equity
Minority interest (BS)
Minority & equity
0
26
0
26
0
0
0
26
0
0
21
0
21
0
26
0
26
0
2
0
28
0
0
30
0
30
15
35
0
50
0
2
0
52
3
1
117
0
117
10
35
0
45
0
0
0
45
3
1
130
0
130
5
36
0
41
0
0
0
41
3
1
150
0
150
Total liab & SE
46
58
173
179
195
2014
86
-77
-3
6
0
6
3
9
-3
-17
2015
115
-93
-13
9
0
9
13
22
8
-11
2016E
140
-130
-6
4
0
4
6
10
-11
23
2017E
173
-157
-8
14
0
14
8
22
-4
-10
2018E
200
-170
-10
21
0
21
10
30
2
-11
-11
20
22
8
21
Capital structure
Equity ratio
Debt/equity ratio
Net debt
Capital employed
Capital turnover rate
2014
45%
0%
-4
17
1.9
2015
51%
0%
-25
4
2.0
2016E
67%
13%
-25
92
0.8
2017E
73%
8%
-32
98
1.0
2018E
77%
3%
-52
98
1.0
Growth
Sales growth
EPS growth (adj)
2014
58%
2015
34%
72%
2016E
21%
-84%
2017E
24%
334%
2018E
16%
55%
Free cash flow
Net sales
Total operating costs
Depreciations total
EBIT
Taxes on EBIT
NOPLAT
Depreciation
Gross cash flow
Change in WC
Gross CAPEX
Free cash flow
DCF valuation
WACC (%)
12.2%
Assumptions 2016-2022 (%)
Average sales growth
13.0%
EBIT margin (w avg)
12.4%
Profitability
ROE
ROCE
ROIC
EBITDA margin
EBIT margin
Net margin
Data per share
EPS
EPS adj
Dividend
Net debt
Total shares
Valuation
EV
P/E
P/E diluted
P/Sales
EV/Sales
EV/EBITDA
EV/EBIT
P/BV
Cash flow, MSEK
NPV FCF (2016-2018)
NPV FCF (2019-2025)
NPV FCF (2026-)
Non-operating assets
Interest-bearing debt
Fair value estimate MSEK
43
120
162
36
-20
340
Fair value e. per share, SEK
Share price, SEK
19.0
11.0
2014
0%
56%
0%
11%
7%
6%
2015
35%
37%
55%
19%
8%
8%
2016E
4%
4%
83%
7%
3%
2%
2017E
10%
10%
15%
13%
8%
7%
2018E
14%
14%
21%
15%
10%
10%
2014
0.01
0.01
0.00
-0.01
440.75
2015
0.02
0.02
0.00
-0.06
440.75
2016E
0.17
0.17
0.00
-1.39
17.93
2017E
0.72
0.72
0.00
-1.78
17.93
2018E
1.12
1.12
0.22
-2.91
17.93
2014
62.2
12.7
12.7
0.8
0.7
6.7
10.7
3.2
2015
67.1
10.3
10.3
0.8
0.6
3.0
7.2
3.1
2016E
180.7
66.1
66.1
1.4
1.3
18.3
50.6
1.7
2017E
164.3
15.2
15.2
1.1
0.9
7.6
12.0
1.5
2018E
144.2
9.8
9.8
1.0
0.7
4.8
6.9
1.3
Share performance
1 month
3 month
12 month
Since start of the year
Shareholder structure %
Verdane Capital VI
Tibia Konsult AB
Verdane Capital VI B
Svenska Handelsbanken SA
Bo Lengholt & bolag
TAMT AB
Jan Robert Pärsson
Lombard Intl. Insurance SA
Yngve Andersson
KMH Viken AB
Share information
Reuters code
List
Share price
Total shares, million
Market Cap, MSEK
-22.9%
-0.5%
12.3%
5.3 %
Growth/year
Net sales
Operating profit adj
EPS, just
Equity
Capital
32.0%
15.1%
10.7%
9.7%
3.1%
2.7%
2.6%
2.4%
2.0%
1.9%
14/16e
27.4%
-21.8%
-47.1%
137.0%
Votes
32.0%
15.1%
10.7%
9.7%
3.1%
2.7%
2.6%
2.4%
2.0%
1.9%
Nasdaq OMX First North
11.0
17.9
196.4
Management & board
CEO
CFO
IR
Chairman
Sven von Holst
Financial information
Q2 report
Q3 report
August 30, 2016
November 11, 2016
Analysts
Joel Westerström
joel.westerstrom@redeye.se
Kristoffer Lindström
kristoffer.lindstrom@redeye.se
Company analysis
39
Johan Hårdén
Sten Hildemar
Redeye AB
Mäster Samuelsgatan 42, 10tr
111 57 Stockholm
Allgon
Revenue & Growth (%)
EBIT (adjusted) & Margin (%)
250
200
150
100
50
70,0%
25
15,0%
60,0%
20
10,0%
50,0%
15
5,0%
40,0%
10
0,0%
30,0%
5
-5,0%
20,0%
0
-5
10,0%
0
0,0%
2013
2014
2015
2016E
Net sales
2017E
2018E
2014
2015
2016E
2017E
2018E
-15,0%
-10
-20,0%
-15
-25,0%
Net sales growth
EBIT adj
Earnings per share
EBIT margin
Equity & debt-equity ratio (%)
1,2
1,2
1
1
0,8
0,8
0,6
0,6
0,4
0,4
0,2
0,2
0
0
2013
-10,0%
2013
2014
2015
EPS, unadjusted
2016E
2017E
0,9
0,8
0,7
0,6
0,5
0,4
0,3
0,2
0,1
0
2018E
14,0%
12,0%
10,0%
8,0%
6,0%
4,0%
2,0%
0,0%
-2,0%
2013
2014
EPS, adjusted
2015
Equity ratio
2016E
2017E
2018E
Debt-equity ratio
Sales division
Geographical areas
Conflict of interests
Company description
X. Joel Westerström owns shares in the company: Yes
X. Kristoffer Lindström owns shares in the company : No
The Allgon group is a Swedish group of companies offering wireless
products and systems adapted for harsh and demanding
environments. Allgon is focusing on global niche markets where
customers place high demands on robust solutions. Allgon today
comprises Smarteq Wireless, Åkerströms and Allgon Asia.
Redeye performs/have performed services for the Company and
receives/have received compensation from the Company in connection
with this.
Company analysis
40
Allgon
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Redeye Rating (2016-06-12)
Rating
7,5p - 10,0p
3,5p - 7,0p
0,0p - 3,0p
Company N
Management
Ownership
42
69
5
116
42
61
13
116
Profit
outlook
19
91
6
116
Profitability
7
35
74
116
Financial
Strength
17
44
55
116
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Company analysis
41