financial forecast

The results presented by the Company in the third quarter of the financial year 2022/23 (January - March 2023) turned out to be higher than our forecasts, especially due to better margins. At the same time, the Ambra Group once again managed to show a double-digit increase in revenues, which this time clearly exceeded the dynamics observed in the first half of the year (+22.0% y/ y).   The increase in sales was possible thanks to the earlier date of Easter (they fell on the second weekend in April - a week earlier than a year ago, which increased sales in March), regularly introduced increases in product prices and the low base from last year. Ambra positively surprised us, especially with an increase in the percentage gross margin on sales by 1.3 p.p. y/y, to 35.6% (we expected flat dynamics), and consequently also the level of operating profit (PLN 6.9 million vs. PLN 4.6 million) and net profit (PLN 2.6 million vs. PLN 1.7 million).     However, we believe that the following quarters may prove to be a greater challenge for the Group, especially when we take into account the high costs of purchasing raw materials, fuels and energy, or the deterioration of consumer sentiment caused by, among others, decline in real household income. Better-than-expected results in Q3 prompt us to raise our current forecasts. We believe that at the end of the current financial year, the Group's sales revenues will total PLN 882.3 million (13.8% y/y), EBIT will increase to PLN 95.4 million (10.9% y/y), and the net result will amount to PLN 55.8 million (7.7% y/y).       Assuming our estimated net profit in the financial year 2022/23, the Company is currently listed with a P/E ratio of 11.4. We are raising the valuation per share of Ambra from PLN 32.1 to PLN 33.6 compared to the last forecast, and we are reiterating our 'buy' recommendation. The change in the valuation of the Company was positively influenced in particular by a slight increase in our expectations as to its future results after a good third quarter, as well as a further increase in the level of ratios of companies from the comparative group.          

The results presented by the Company in the third quarter of the financial year 2022/23 (January - March 2023) turned out to be higher than our forecasts, especially due to better margins. At the same time, the Ambra Group once again managed to show a double-digit increase in revenues, which this time clearly exceeded the dynamics observed in the first half of the year (+22.0% y/ y).   The increase in sales was possible thanks to the earlier date of Easter (they fell on the second weekend in April - a week earlier than a year ago, which increased sales in March), regularly introduced increases in product prices and the low base from last year. Ambra positively surprised us, especially with an increase in the percentage gross margin on sales by 1.3 p.p. y/y, to 35.6% (we expected flat dynamics), and consequently also the level of operating profit (PLN 6.9 million vs. PLN 4.6 million) and net profit (PLN 2.6 million vs. PLN 1.7 million).     However, we believe that the following quarters may prove to be a greater challenge for the Group, especially when we take into account the high costs of purchasing raw materials, fuels and energy, or the deterioration of consumer sentiment caused by, among others, decline in real household income. Better-than-expected results in Q3 prompt us to raise our current forecasts. We believe that at the end of the current financial year, the Group's sales revenues will total PLN 882.3 million (13.8% y/y), EBIT will increase to PLN 95.4 million (10.9% y/y), and the net result will amount to PLN 55.8 million (7.7% y/y).       Assuming our estimated net profit in the financial year 2022/23, the Company is currently listed with a P/E ratio of 11.4. We are raising the valuation per share of Ambra from PLN 32.1 to PLN 33.6 compared to the last forecast, and we are reiterating our 'buy' recommendation. The change in the valuation of the Company was positively influenced in particular by a slight increase in our expectations as to its future results after a good third quarter, as well as a further increase in the level of ratios of companies from the comparative group.          

After over 7 months without new contracts DataWalk informed that it signed three new agreements for a delivery of its analytical platform: (i) with Northern California Regional Intelligence Center, (ii) with selected units of Polish public administration, and (i) with Ally Financial (American bank) which is a contract extension actually. All 3 contracts will probably be settled in 2Q23, albeit this may not be enough to show a yoy improvement of revenues (2Q22 demanding base with 7 new contracts signed) and we forecast an 11% yoy decline of revenues in 2Q23.   On the other hand, during last conferences and in 1Q23 financial report the Company admitted that it managed to overcome most of the obstacles that hindered its growth last year. In particular, the Company’s engineers implemented the majority of drawn-out contracts signed in 2020 or 2021 which means that they will be able to handle the implementation of new pilot (pre-sales) and full (post-sales) projects. Additionally, the Company has already 4 fully trained system architects which should also expedite the implementations of the subsequent projects. This coupled with the sales funnel growth should translate into increasing dynamics of new contracts acquisition and implementation starting already from 2H23. Thus, we keep our revenue growth forecasts for 2023/ 2024/ 2025 at c. 20%/ 50%/ 70% implying that 2H23 revenues should grow c. 60% at least which we deem attainable given the relatively low base.   It is worth noting that the market sentiment for the growth companies operating in the field of data analysis has improved considerably in recent months thanks to the investors’ positive approach to AI issues and lower inflation expectations (and lower cost of money).   Since May when we issued DataWalk our last report, the Company’s peers median of EV/Sales multiples for 2023-25 has grown by 70% on average, which with the financial forecasts kept intact affects our 12M EFV assessment that rises by 67% to PLN 122 (from PLN 73) per share implying a c. 90% upside.   We would like also to indicate that DataWalk’s share price has not been the beneficiary of the above mentioned sentiment improvement yet. Given positive news from the Company, including an increase of engineering capacity, dynamic sales funnel growth, and new contracts signed we expect to see rising volumes and value of contracts in the near future and return of the Company’s sales to strong growths starting from 3Q23. Besides, we also assume that along with the inflow of news about new contracts DataWalk will experience the beneficial impact of the investors’ sentiment improvement for growth companies and the valuation gap will recede. Thats why we upgrade our recommendations: LT fundamental to Buy (from Hold) and ST relative to Overweight (from Neutral).   Financial forecast We keep our revenue growth forecasts for 2023/ 2024/ 2025 at c. 20%/ 50%/ 70% implying that 2H23 revenues should grow c. 60% at least which we deem attainable given the relatively low base. We also assume that DataWalk is able to deliver a revenue growth expected for 2024 with the current employment level, however in the subsequent years a dynamic increase in employment should follow to support further growth, therefore, we raise our costs estimates (and thus forecast higher ND) in 2023.   Dynamic growth of sales funnel value In 1Q23 financial report the Company informed that as of the day it was issued (May 18, 2023) the total value of sales funnel stood at US$ 41 million (up 11%/ 60% qoq/ yoy), which is the record high. We would like to note that a high level of the sales funnel may be to some extent related to current low revenues (as the Company is not completing the contracts that would have left the sales funnel otherwise). However, such a high dynamic of a sales funnel growth cannot be explained solely by this negative factor. In our view, a sales funnel growth confirms high interest in DataWalk’s product and also brings hope for a revenue growth in 2H23 (at the moment we assume it at c. 60% yoy after a slight decline in 1H23).   Valuation and recommendation Since May when we issued our last report, the Company’s peers median of EV/Sales multiples for 2023-25 has fallen by 70% on average, which with the financial forecasts kept intact affects our 12M EFV assessment that rises by 67% to PLN 122 (from PLN 73) per share implying a c. 90% upside. Given recent positive news from the Company, including an increase of engineering capacity, dynamic sales funnel growth, and new contracts signed we expect to see rising volumes and value of contracts in the near future and return of the Company’s sales to strong growths starting from 3Q23.   Besides, we also assume that along with the inflow of news about new contracts DataWalk will experience the beneficial impact of the investors’ sentiment improvement for growth companies and the valuation gap will recede. Thats why we upgrade our recommendations: LT fundamental to Buy (from Hold) and ST relative to Overweight (from Neutral).        

The previous trading week was filled with important events and reports. When looking at the range and movements of both instruments, one might wonder: why was it so subdued? It was reasonable to expect stronger movements and market reactions. To briefly recap, key reports from the United States turned out weaker than market expectations. Even the stronger ones left a peculiar impression. GDP grew by 2.1% in the second quarter, not the expected 2.4%. The ADP report showed fewer new jobs than expected. Nonfarm Payrolls reported more jobs, but the previous month's figure was revised downward. The ISM Manufacturing Index increased but remained below the 50.0 mark. The unemployment rate rose to 3.8%, which few had anticipated.     Based on all these reports, one might have assumed that it was time to build a corrective upward wave, but on Thursday and Friday, the market raised demand for the US dollar, so both instruments ended the week near their recent lows. So what can we expect this week?   On Monday, the most interesting event will be European Central Bank President Christine Lagarde's speech. On Tuesday, another speech by Lagarde, as well as Services PMIs of the European Union, Germany, and the United Kingdom. We can also expect speeches by other members of the ECB Governing Council. I advise you to monitor the information related to Lagarde's speeches. If she softens her stance, it can have a negative impact on the euro's positions. Wednesday will begin with a report on retail trade in the EU and end with the US ISM Services PMI. We can consider the ISM report as the main item of the week, although the ISM Manufacturing PMI that was released on Friday did not stir much market reaction. It is likely that the index will remain above the 52.7 mark, which is unlikely to trigger a market reaction. On Thursday, you should pay attention to the final estimate of GDP in the second quarter for the European Union. If it comes in below 0.3% quarter-on-quarter, the market may reduce demand for the euro. The US will release its weekly report on initial jobless claims. On Friday, Germany will publish its inflation report for August, and that's about it. There are hardly any important events and reports this week. Based on the conducted analysis, I came to the conclusion that the upward wave pattern is complete. I still believe that targets in the 1.0500-1.0600 range are feasible, and I recommend selling the instrument with these targets in mind. I will continue to sell the instrument with targets located near the levels of 1.0637 and 1.0483. A successful attempt to break through the 1.0788 level will indicate the market's readiness to sell further, and then we can expect the aforementioned targets, which I have been talking about for several weeks and months.     The wave pattern of the GBP/USD pair suggests a decline within the downtrend. There is a risk of completing the current downward wave if it is d, and not wave 1. In this case, the construction of wave 5 might begin from the current marks. But in my opinion, we are currently witnessing the construction of the first wave of a new segment. Therefore, the most that we can expect from this is the construction of wave "2" or "b". I still recommend selling with targets located near the level of 1.2442, which corresponds to 100.0% according to Fibonacci  

Employment The group employs over 900 people, of which about 80% are men. The number of employees in the last financial year increased by nearly 7% y/y, in the previous 3 years it remained at the level of approximately 850 employees. At the end of 2022/23, manual workers accounted for approximately 55% of the workforce, every fifth employee was employed in sales.     Strategy 2020-2023 The Company’s current covers the years 2020-2023, it was published in 2020 after the outbreak of the Covid-19 pandemic. The key elements/objectives of the strategy include: ■ Continuation of the current business model (design, production and sale of fire protection systems) ■ Maintaining the position of the leader in passive fire protection in Poland, while striving to gain and strengthen the position in the markets of Central and Eastern Europe, Scandinavia, Benelux, and England (the goal is a 60% share of foreign markets in revenues). ■ ROE at 13% per annum. ■ Współczynnik ROE na poziomie 13% w skali roku. ■ Stable dividend policy assuming a dividend payment of 30% of the consolidated net profit. ■ Net debt (excluding IFRS 16) below 3x EBITDA.     In our opinion, the strategy was not particularly ambitious, taking into account the results generated by the Company before its announcement. ROE in the 2019/20 financial year was almost 16%, and the net debt to EBITDA ratio was below 1.3x. These indicators improved further in the following years. The dividend payout ratio is also above the level assumed in the strategy (56% for the 2022/23 financial year). However, the Company did not increase the share of exports in revenues, but this is also due to the dynamic growth of domestic revenues.  

  Thanks to an increasingly lower share of costs of sales and SG&A costs in sales, in the financial year 2022/23 the EBITDA margin increased to 13.9%, and the EBIT margin reached a doubledigit value. In 2023/24 and 2024/25, we assume a decline of EBITDA margin to 11.9% and 10.5%, respectively, and we expect a slight improvement thereafter. In our opinion, Mercor is able to achieve a long-term EBITDA margin of 13.1%.     We assume that the Company will continue paying dividends. The dividend of PLN 1.51 per share will be paid on September 20, 2023, and at the current share price gives a dividend yield of 6.0%. In our forecast, we assume a dividend payout ratio of 50% of previous year’s consolidated net profit.   We assume that in the next two years the level of capital expenditures will be similar to those in 2021/22 and 2022/23, i.e. approximately PLN 12-14mn annually. After that, we assume a gradual increase of CAPEX to its target level of 4.0% of sales revenue.     At the end of 2022/23, the net debt to EBITDA ratio was 0.77x. Taking into account our assumptions, we forecast a gradual decline in net debt despite a fairly high level of dividend payout. We assume that at the end of 2026/27 net debt will be negative (net cash). In our opinion, the Company is in a very good financial condition, which enables it to increase the dividend payout ratio, increase its investment program or carry out acquisitions.

CAD: Macklem turns dovish The Canadian dollar is lagging other pro-cyclical currencies at the start of this week after Bank of Canada Governor Tiff Macklem said in a TV interview yesterday that he expects rates to be cut next year. This is a surprise statement by Macklem, who only two weeks ago reiterated the hawkish bias in the BoC policy statement. Offering a timeline for rate cuts appears inconsistent with the BoC's claim that it “remains prepared to raise the policy rate further if needed” and likely validates the market’s pricing for 100bp of easing next year – despite Macklem’s caveats on the disinflation progress. Despite our view of a dollar decline and outperformance of pro-cyclical currencies next year, we expect the Canadian dollar to underperform other commodity currencies as the BoC cuts rates aggressively (we estimate 150bp in 2024) on a grim economic outlook and as the loonie suffers from its correlation with US economic data.