DNB Markets - Verisec: Freja eID - worth the wait
Quarterly volatility in the legacy business remains high, and while 2019 sales growth of 31% was a clear step forward, Q4 disappointed. With recent impressive ‘relying parties’ announcements, we expect Verisec’s Freja eID offering to become better reflected in the share price. We have lowered our fair value to SEK100–140 (110–150), but this still suggests an attractive investment opportunity in our view.
Q4 takeaways. Q4 sales growth of 1% YOY was below our 24% expectation, with sales of SEK20m (18% below our estimate) as we had underestimated the quarterly lumpiness of the sales cycles in its legacy business. The top line was flat YOY with a 9% YOY increase in opex, resulting in a -47% EBIT margin (we forecast -29%). At end-Q4, its cash position was SEK10m (with a SEK22m unutilised credit facility); and with an annual FCF burn rate of cSEK25m–30m in 2016–2019, our base case assumes Verisec is adequately capitalised as long as Freja eID attracts a user base in 2020. For Freja eID, we believe Verisec has signed ~140 relying parties, in line with our target, of which around a third are offering Freja eID as an identification method, suggesting it is on track to reach 250+ by end-2020 (versus BankID at 600+).
Freja eID news flow has been impressive of late, but two announcements worth highlighting are: 1) the partnership with Microsoft to provide secure login to Microsoft’s public sector cloud service Office 365 (foremost for municipalities), which validates the Freja eID technology; and 2) being chosen as the exclusive eID for users of Studentkortet and the STUK app with ~600,000 active members, which highlights its ambition to build a user base where BankID is not as strong (target audience aged 13–25), providing a solid platform for user base growth in 2020.
Fair value lowered to SEK100–140/share (110–150), suggesting we see an attractive investment opportunity trading at a 2020e EV/Sales of 3.2x (30% discount to its historical average). We consider Freja eID’s user base growth a potential swing factor on its valuation, as we forecast a 30% sales CAGR until 2022e. Still, the discount to peers and its own historical average will likely remain until management starts disclosing Freja eID sales or provides proof-points of user updates in 2020.
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