TagMaster - Amazon S3...2019/10/31 · Hikob was projected to reach sales of €1m in 2018 and...

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Update

Equity Research 1 November 2019

KEY STATS

Ticker TAGMb.ST Market First North

Share Price (SEK) 0.8 Market Cap (MSEK) 275 Net Debt 19E (MSEK) -8 Free Float 74 %

Avg. daily volume (‘000) 222

BEAR BASE BULL 0.8

1.6

2.5

KEY FINANCIALS (SEKm)

2017 2018 2019E 2020E 2021E 2022E Net sales 195 196 263 373 414 465 EBITDA 21 13 12 34 48 58 EBIT 14 1 -19 -7 7 20 EPS (adj.)

2017 2018 2019E 2020E 2021E 2022E EPS (adj.) 0.1 0.1 0.0 0.1 0.1 0.1 EV/Sales 1.6 1.1 1.0 0.7 0.6 0.4 EV/EBITDA 14.8 16.8 22.6 7.9 4.9 3.5 EV/EBIT 22.3 276.1 -13.8 -36.3 31.0 10.2 P/E 20.0 68.8 -11.1 -28.4 187.3 26.5

ANALYSTS

Eddie Palmgren [email protected] Viktor Westman [email protected]

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OMXS 30

TagMaster

Margin of Safety With its credible leadership, TagMaster is an emerging quality case. The company is an

increasingly effective consolidator in its fragmented high-growth markets - offering attractive

exposure to the megatrends around Smart Cities. Our valuation provides upside potential

and multiple catalysts are in prospect to improve the investor sentiment.

Sales acceleration expected

Q3’19 confirms TagMaster’s solid cost control and that it is on track with the integration of

Sensys Networks. Excluding the large acquisition, we approximate the organic sales

growth in the group to a meager 3% y/y. As a result, we lower our average sales estimates

by 7% for 2019-2021 and estimate 11% organic sales CAGR 2019-2023. Our expectations

are justified by TagMaster’s position as a smaller company in markets characterized by

structural annual growth of 8%-15%. Our outlook is also based on the company’s innovative

solutions, well-established sales channels, and attractive global cross-selling opportunities.

Favorable profitability prospects

In our view, profitability is the key takeaway from Q3’19. Adjusted for one-time costs related

to the acquisition, TagMaster reports a strong EBITDA margin of 10%. Rail Solutions (20%

of revenues) had volumes somewhat over expectations in Q3’19. As Rail usually has higher

profitability but lumpy sales, we are cautious when raising our expectations. We increase

our EBITDA margin estimates to 4% (3%) for 2019 and to 9% (8%) in 2020. For 2021, we still

expect the company to reach its financial target of 12% EBITDA margin. Scalability is the

key to our optimistic view regarding the profitability improvements; TagMaster is an asset

light technology provider about to leverage its R&D investments and slim organization.

Attractive margin of safety

Our estimate revisions offset each other and our DCF-based base case remains at SEK 1.6.

At our IFRS-adjusted forecast, TagMaster trades at 8x EV/EBIT 2020E and 5x for 2021E –

compared to 23x and 15x for the average peer. We believe the low valuation and

substantial discount is related to 1) K3 accounting (massive goodwill amortizations)

covering the underlying profitability, 2) TagMaster’s history of lumpy growth, creating

uncertainty among investors regarding the organic growth prospects, 3) Selling pressure

from guarantors following the large rights issue. Based on our favorable sales and

profitability outlook, coupled with the potential IFRS-adoption catalyst, we argue that the

TagMaster stock currently offers investors an attractive margin of safety.

TagMaster Sector: Information Technology

REDEYE RATING

TAGMb.ST VERSUS OMXS30

FAIR VALUE RANGE

Finan

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Peop

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Busin

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REDEYE Equity Research TagMaster 1 November 2019

2

Reassuring development in Q3’19 Profitability stands out as the highlight of the Q3’19 report. We were worried that additional

costs related to the acquisition and streamlining of the organization would eliminate the

result in the quarter. Instead, TagMaster’s EBITA margin of 5.2% surpassed our expectations

of 0.5%, while the gross margin was in line with our estimates at about 65%. Adjusted for one-

time costs related to the acquisition, TagMaster reports an EBITDA margin of 10.4%. We

conclude that TagMaster continues its solid cost control and that the integration of Sensys

Networks seems to progress very well; derisking our investment case.

Net sales of SEK 82.4m was 5% below our expectations, equally related to Sensys Networks

and the rest of the TagMaster group. Subtracting the SEK 35.7m that Sensys Networks

contributed with, in the third quarter, the former TagMaster group had sales of SEK 46.7m vs.

to SEK 43.8m in Q3’18. This would mean an organic growth of 7%. However, Hikob was

acquired on August 31st, 2018, and only contributed with sales for one month in Q3’18. Hikob

was projected to reach sales of €1m in 2018 and adjusting for this acquisition, we estimate

the organic growth in TagMaster to about 3% y/y in Q3’19. We have a lot higher growth

expectations on a smaller company in markets characterized by structural growth of 8%-15%.

Many Swedish export companies have reported a very strong currency tailwind during 2019.

TagMaster has global exposure but is not reporting any specific numbers. We expect the

effect to be positive but neglectable on a group level. The reason is that the company has

local operations in France, the UK and the US and is selling in the same currencies.

TagMaster had a tax expense of SEK -2.2m in Q3’19, which “mainly consists of a revaluation

of previously reported tax receivables based on development expenditures in accordance with

French tax regulations”. In other words, the expense is not affecting the cash flow. TagMaster

operates in several countries and has acquired a handful of innovative technology firms. The

tax situation is complicated as rules in France and the UK may entitle tax refunds for R&D

expenses. Since 2015, TagMaster had positive net tax incomes of SEK 1.7-3.7m per year,

with the largest amount received in Q4. Due to changed tax rules in France, TagMaster now

does not expect this to occur in 2019. In our financial estimates, we expected the favorable

tax conditions to continue for the next three years. Although the conditions could change

again, we have revised our estimates, which has a minor negative impact on our valuation.

Outcome vs Estimate

2018 2019 2019

SEKm Q3 Q3A Q3E

Group

Net sales 43.8 82.4 86.7

EBITDA 3.2 4.3 0.4

EBITA 3.0 3.9 0.2

Net sales growth -3% 88% 98%

EBITDA margin 7% 5% 1%

EBITA margin 7% 5% 0%

Source: Redeye Research


3

Estimate changes 2019-2021 TagMaster’s current top priority is to increase revenues to get leverage on its efficient cost

structure. Sensys Networks is indeed contributing to this strategy. It has a strong partner

network, high gross margins and has proved its ability to sell its offering globally. We view the

prospects for organic growth up to 15% as promising - revealing the scalability in Sensys’

business model. The rest of the TagMaster group also has attractive structural growth

prospects; driven by megatrends such as urbanization and environmental regulations, market

research project several years of double-digit growth rates in the company’s niches.

Based on the outlook, we expect the TagMaster group to deliver an organic growth of 9% in

2020 and an organic CAGR of 11% for 2019-2023. The profitability in Q3’19 was encouraging

and we have raised our EBITDA margin estimates to 4% (3%) for 2019 and to 9% (8%) in

2020. Our lower revenue forecast decreases the EBITDA estimate in 2021, although we still

expect the company to reach its financial target of a 12% margin. The outcome in the Q3’19

report validates the group’s cost control capabilities and that it is on track with the integration

of Sensys Networks. However, we lack the financial history of Sensys, while TagMaster does

not report sales or earnings per segment, which increases the uncertainty in our estimates.

Lower Q4’19 estimates A common investor question concerns the seasonality in corporate earnings. 2014-2017, the

fourth quarter was TagMaster’s strongest quarter. This could be related to government

spending, while acquisitions and major train projects also explain the pattern. Sales in Q3’19

was below our expectations while Rail Solutions in Q3’19 reported volumes “somewhat over

expectations”. Sensys Networks’ business is related to installations in the ground, which in

parts of the USA and Europe is difficult due to the weather. Due to these factors, we are

cautious to put too high expectations on Q4’19 and have lowered our revenue estimates.

Despite the promising profitability in Q3’19, we prefer to be conservative in our forecast for

Q4’19. Rail Solutions might have helped to raise the margin in Q3 and there might still be

effects from the acquisition that will hold back earnings. Our EBITDA margin estimate is 4%.

TagMaster - Estimate changes

Revenues 2019E 2020E 2021E

Old 282 394 449

New 263 373 414

% change -7% -5% -8%

EBITDA

Old 7 32 54

margin 3% 8% 12%

New 12 34 48

margin 4% 9% 12%

% change 65% 7% -12%


Next Quarter Estimates

2018 2019

SEKm Q4 Q4E

Group

Net sales 44.1 83.9

EBITDA 0.9 3.3

EBITA 0.6 2.9

Net sales growth -23% 90%

EBITDA margin 2% 4%

EBITA margin 1% 4%



4

Detailed financial projections EBITDA and EBITA are the best earnings measures to describe the group’s cash generation.

Due to K3 accounting, EBIT is disturbed by the high goodwill amortizations from acquisitions

and the purchase of Sensys Networks accelerates annual goodwill amortizations. We

estimate that TagMaster’s goodwill amortizations will rise to SEK 23 (8) million in 2019, and

reach SEK 38m in 2020. As a result, we believe EBIT turns negative this year and next year.

To comprehend the earnings power, we remind investors to monitor EBITA and cash flow.

IFRS-adjusted estimates To demonstrate the underlying profitability in TagMaster, we project the impact on the

income statement if TagMaster was to use IFRS accounting principles. We estimate that

IFRS-adjusted base case EBIT would exceed reported numbers by SEK 29m for 2019.

As highlighted above, we project the reported EBIT margin to be negative in 2019 and 2020,

while the IFRS-adjusted EBIT margin would be about 4% and 10%, respectively. This is due to:

No goodwill amortizations. TagMaster currently amortizes goodwill over 5-10 years with K3

accounting principles. With IFRS accounting, the company would instead test its goodwill

position yearly. If assets have decreased in value, write-downs are justified. TagMaster has

paid low acquisition prices and turned the businesses around. We, therefore, view impairment

charges as unlikely if the company was to use IFRS. As IFRS would cease the goodwill

amortizations, TagMaster would show far higher EBIT and taxes.

Lower personnel and external costs. In a relatively mature company like TagMaster, we

assume that most R&D costs in the company are related to improvements of existing

products and solutions. Accordingly, we estimate that a third of the company’s R&D costs

derives from new developments with values that would be recognized as capitalized

development expenses in IFRS. Product development is a major expenditure and constituted

28% of TagMaster’s personnel and other external costs in 2018 (27% in 2017).

TagMaster: Redeye Financial forecasts - Base case

SEKm 2018 Q1'19 Q2'19 Q3'19 Q4'19E 2020E 2021E 2022E

Net sales 196 44 53 82 84 373 414 465

EBITDA 13 4 0 4 3 34 48 58

Depr. Tangibles -1 0 0 0 0 -1 -1 -1

EBITA 12 4 0 4 3 33 47 57

Amort. Intangibles -11 -3 -5 -11 -11 -40 -39 -38

EBIT 1 1 -5 -7 -8 -7 7 20

Tax 3 0 1 -2 0 0 -1 -4

Net Earnings 3 1 -3 -13 -9 -10 5 15

EPS (SEK) 0.02 0.00 -0.02 -0.04 -0.02 -0.03 0.01 0.04

Sales growth Y/Y 0% -23% 5% 88% 90% 42% 11% 12%

EBITDA margin 7% 10% 0% 5% 4% 9% 12% 13%

EBITA margin 6% 9% -1% 5% 4% 9% 11% 12%

EBIT margin 0% 2% -10% -8% -10% -2% 2% 4%


TagMaster: IFRS-adjusted Financials and Estimates

SEKm 2017 2018 2019E 2020E 2021E 2022E

Revenue 195 196 263 373 414 465

EBIT 15 1 -19 -7 7 20

IFRS-Adj. EBIT* 27 17 10 38 53 65

∆ EBIT 13 16 29 46 46 45

EBIT-margin 7% 0% -7% -2% 2% 4%

IFRS-Adj. EBIT margin 14% 9% 4% 10% 13% 14%

Source: Redeye Research | * Redeye estimate of IFRS adjusted EBIT


5

Valuation remains attractive Our estimate revisions do not cause any changes in our DCF valuation and base case

remains at SEK 1.6 per share, excluding future acquisitions. We reiterate our bear case SEK

0.8 and bull case of SEK 2.5 per share. At our IFRS-adjusted estimates, TagMaster trades at

8x EV/EBIT 2020E and 5x for 2021E – compared to 23x and 15x for the average peer. At the

same time, TagMaster has among the highest EBIT margins. The peer valuation supports our

conclusion that TagMaster is very attractively valued at the current share price level.

Base Case SEK 1.6 We believe better operational efficiency and benefits of scale will increase TagMaster’s

profitability. Over time, it also justifies a higher valuation of the company. In our base case, we

anticipate an organic growth at a CAGR of 11% 2019-2023, based on the structural growth

trend of ITS/Smart Cities and TagMaster’s increasing market share. We view Traffic

Management as the key driver for growth, driven by the need for qualitative vehicle detection

and traffic data. As a result, Traffic Solutions’ share of revenues increases to 90% (80% today)

due to its higher CAGR than Rail Solutions. We forecast that TagMaster improves its EBITDA

margins and reaches its profitability target of 12% by 2021. Our WACC is 11%.

Bear Case SEK 0.8 In our bear case, we anticipate slower growth and lower margins for the Traffic Solutions

segment. In this scenario, TagMaster struggles to create synergies between its brands and

grow market share. The company’s broad technology portfolio also makes it difficult to

differentiate products amid fierce competition. Dependence on system integrators, a large

share of hardware, and lack of recurring revenue cause further vulnerability. We project that

the company’s focus on advanced solutions defends it from severe commoditization and

low-cost producers. Our WACC is 11%.

Bull

TagMaster: Base case

Assumptions 2019-21 2022-27 DCF-value

CAGR Sales 25% 10% WACC 11%

EBITA margin (avg) 8% 15% Net present value FCF 208

ROIC (avg) -8% 38% Net present value of Terminal 386

Terminal EV 594

Terminal growth FCF 2% Net cash -16

Terminal EBIT margin 14% Value assos. companies 0

Exit EV/EBIT multiple 9x Value minorities 0

DCF-value 578

Estimated Fair value 1.6

Current share price 0.75

Potential/Risk 111%


TagMaster: Bear case





Terminal EV 310




DCF-value 295



Potential/Risk 8%



6

Case SEK 2.5 In our bull case, we project that TagMaster accelerates its global expansion in Traffic

Solutions. The company wins larger orders and successfully raises its profitability through

the benefits of scale, synergies, cross-selling, and new innovations. A higher share of

software sales also supports the margins, with EBITDA exceeding the current financial target

of 12% from 2020. Our WACC is 11%.

IFRS-adjusted multiples Goodwill amortizations do not affect cash flow but reduce EBIT and Net Earnings. As a result,

common investor ratios are far higher for TagMaster than for companies using IFRS. With

the massive goodwill amortizations from the Sensys Networks acquisition, the effect

becomes even more evident. We argue that TagMaster is very attractively valued at our IFRS-

adjusted multiples, indicating EV/EBIT and a P/E ratio of 8x for 2020E. We want to highlight

that this is our best-effort and that it is difficult to estimate the exact effect of IFRS. A metric

not affected by accounting standards is EV/Sales, which at < 1 also indicates a low valuation.

Adoption of IFRS would improve earnings visibility and comparability, especially following the

new IFRS 16 principle. IFRS is an international standard and TagMaster might want to use its

share as a currency in future acquisitions. These are strong arguments for the firm to adopt

IFRS, which we view highly probable in the next two years. Quarterly reporting of segments,

regions and applications would also strengthen investors’ insight into TagMaster.

TagMaster: Bull case





Terminal EV 940




DCF-value 924



Potential/Risk 237%


TagMaster: IFRS-adjusted Multiples

SEKm 31-Oct-2019 2019E 2020E 2021E 2022E

EV 289

Share price 0.75

EV/EBIT Neg. Neg. 38.8 15

EV/Adj. EBIT* 29.2 7.5 5.4 4.5

P/E Neg. Neg. 59.4 Neg.

P/Adj. E* 36.1 7.6 5.2 4.6

EV/Sales 1.1 0.8 0.7 0.6

Source: Redeye Research | * IFRS-adjusted estimate


7

Peer valuation Our far from perfect peer group is trading at slightly multiples compared to our latest update

from June 19, 2019. The largest change is in EV/EBIT that now has an average of 23x (18x)

for 2019E and 15x (13x) for 2020E. The multiples of the Norwegian company Q-Free has

continued to appreciate and now trades at EV/EBIT 46 (28) for 2019E. Image Sensing

Systems is a US company of smaller size than TagMaster, that is interesting to compare it

with. Unfortunately, it is lacking analyst coverage and estimates at this point.

TagMaster continues to trade at a discount to listed competitors, on our IFRS-adjusted base

case estimates. The EV/EBITDA and EV/EBIT multiples are the most notable differences, as

TagMaster trades at 8x EV/EBIT for our 2020 estimates, compared to 15x for the peer group.

We project TagMaster’s EBIT margins to increase and be at the higher end of the average

and median, reflecting its niche position as a specialized technology provider. The peer

valuation supports our conclusion that TagMaster currently is very attractively valued.

Most of the company’s rivals are not publicly traded. The selected peers that are listed, are substantially larger

than TagMaster and operates in various markets and application areas. As a result, the comparison should be

viewed as an indication of valuation multiples in the sector and as a complement our DCF model.

Enterprise Value

Company (SEKm) 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E

Conduent 28,974 0.6 0.7 0.7 18 6 6 -12 11 10 -5 6 7

Cubic Corporation 26,109 2.5 1.8 1.7 43 18 14 126 32 24 2 6 7

Jenoptik 17,257 2.0 1.9 1.8 14 12 11 18 17 16 11 11 11

Kapsch TrafficCom 4,861 0.7 0.6 0.6 9 8 8 12 10 12 6 6 5

Nedap 3,750 1.9 1.8 1.7 14 13 12 19 19 16 10 10 10

Q-Free 933 1.0 0.9 0.8 12 10 6 37 46 14 3 2 6

Image Sensing Systems 210 1.7 9 13 13

Average 11,728 1.5 1.3 1.2 17 11 10 30 23 15 6 7 8

Median 4,861 1.7 1.4 1.3 14 11 10 18 18 15 6 6 7

TagMaster 289 1.5 1.1 0.8 24 25 9 -2354 -15 -40 0 -7 -2

At base case 594 3.0 2.3 1.6 50 50 18 -4829 -31 -81

TagMaster IFRS-Adj. 13 10 5 17 29 8 9 4 10

At base case IFRS-Adj. 26 20 11 35 60 15

Source: Redeye Research, Bloomberg | Data as of October 31, 2019.

EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) EBIT margin (%)


8

Investment Case Misunderstood earnings power

Accounting principles and exceptional acquisition costs blur TagMaster's underlying rise in profitability. IFRS adoption

is probable in the next two years and would strengthen investors’ understanding and, in turn, the valuation. Perception

is also likely to improve with more stable growth, as the Traffic Solutions segment now represents > 80% of sales.

TagMaster’s gross margin improved from 54% to 63% between 2014 and 2018. It has also taken about SEK 25m in

restructuring costs to trim acquisitions. Additionally, the accounting principle K3 requires TagMaster to amortize

goodwill over 5-10 years. The company is R&D intense but capitalizes development investments over the income

statement. IFRS-adoption would significantly improve earnings visibility and comparability. We estimate a reported

EBIT margin of -2% in 2020, while we forecast an IFRS-adjusted EBIT margin to 10%. IFRS is an international

standard and TagMaster could use its share as a currency in future acquisitions. These are strong arguments to

adopt IFRS, which we view highly probable by 2020 or 2021.

Investors’ perception of TagMaster should also improve as Traffic Solutions now has become its core business and

will constitute > 80% of sales in 2020 (64% in 2018). Historically, the profitable but project-based rail division has

caused considerable variations, which we believe have created uncertainty among investors. As acquisitions and

higher organic growth make the Traffic segment an ever-larger part of revenues, more stable growth should

eliminate the “unpredictability discount”.

Promising M&A strategy

Value-adding acquisitions and disciplined strategic execution should propel TagMaster’s growth. Consolidation is

enabling it to build a more substantial position in its fragmented markets, which offer both attractive opportunities

and significant structural growth.

After initially focusing on turnaround targets, TagMaster is now able to acquire larger and better companies. The

group operates in fragmented markets underpinned by structural forces, which offers attractive opportunities for

consolidation and organic growth. Acquisition prices are higher for larger and better companies, but an increasing

market share, benefits of scale, and additional cross-selling should lift TagMaster’s profitability and valuation.

Credible leadership

There are risks with M&A, but we argue that investors are overlooking the firm’s deep acquisition expertise. The

strategic roadmap is driven by board members from successful M&A organizations like Securitas and ASSA ABLOY.

TagMaster also has a solid ownership structure with long holding periods. These factors should prove positive for

shareholders.

Since 2012, the current Board and CEO has put a clear strategy in place and executed it. Rolf Norberg, Chair of the

Board, has played a vital role in laying out the company’s roadmap. He and fellow board member Magnus Jonsson

have credible backgrounds from successful Swedish M&A companies. The keys to those organizations’ value-

adding acquisitions were freedom with responsibility, keeping the right people, and monthly financial follow-ups. In

our view, TagMaster’s leadership demonstrates a cost-conscious mindset, transparent communication and genuine

long-term commitment. This has taken the firm to a promising position in its niche and supports our conviction

going forward.


9

Key Catalysts

IFRS-adoption

Investors’ perception of TagMaster is likely to improve if the group changes its accounting approach from K3 to

IFRS. With the goodwill from Sensys Networks, we now view IFRS-adoption highly probable by 2020 or 2021.

Goodwill and R&D costs would then have less impact on the income statement, resulting in significantly higher

reported profitability. Cash flow is unaffected, but valuation multiples would be remarkably more attractive.

Improving fundamental performance

TagMaster is consolidating its acquisitions and the outlook is promising for gradually enhanced growth and

profitability. This should improve market perception and the valuation.

Substantial order flow

Several large orders would strengthen investors’ confidence in TagMaster’s organic growth. Potential boosts are

large-scale rollouts in Sensys Networks, ANPR systems or Rail Solutions.

Value-adding acquisitions

M&A should not surprise investors, as TagMaster’s acquisition-driven growth strategy is clearly communicated.

Even so, it proves the strategy. In a longer perspective, we argue that investors underestimate TagMaster’s ability to

buy and integrate value-adding firms.

Counter Thesis

Below we consider the most relevant risks and uncertainties in the case.

Integrating acquisitions

Takeovers are an essential component of TagMaster’s growth. Although the company’s acquisitions have been

successful over the past years, it remains challenging to realize synergies, restructure organizations and combine

cultures. Accordingly, failure to integrate acquisitions, overpaying or underperforming targets could hurt TagMaster.

However, we believe the company’s acquisition skills and long-term perspective limit the downside risk.

Margins under pressure

The firm’s ambition is to address the upper market segment, but competition is still tough in the Traffic unit.

Barriers to entering are relatively low, which increases the need for innovation and puts pressure on margins.

Commoditization, new technologies or low-cost producers could hurt TagMaster’s business. It also depends on

system integrators, has a large hardware exposure and low recurring revenues. We still believe R&D abilities, reliable

brands, and high-quality solutions will keep its offering competitive and attractive for clients.

Struggling to differentiate

Diversification is recommended, to a certain extent. TagMaster works in two business segments and several

application areas. It has a broad portfolio of technologies, products and solutions. The company is also adding

brands, technologies and businesses through acquisitions. Too broad an offering could make TagMaster more

complex and, in turn, less attractive for investors. It could also be difficult to differentiate the company amid fierce

competition, although we have confidence in management’s ability to optimize assets.

Additional capital needs

Despite its positive cash flow, TagMaster’s acquisition-driven growth requires external funding. In 2015, 2017, and

2019 it has issued new shares to buy companies. As a result, uncertainty over dilution will potentially affect the

stock. On the other hand, TagMaster is profitable, has a relatively low debt and a solid ownership structure that may

ensure additional capital needs.


10

Summary Redeye Rating The rating consists of three valuation keys, each constituting an overall assessment of several factors that are rated

on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.

No rating changes in this report

People: 4

TagMaster receives a high score for its leadership. Since the Board and CEO took charge of the distressed company

in 2012, they have put a clear strategy in place and executed it. In our view, TagMaster's management team is

characterized by a cost-conscious mindset, transparent communication, and a genuine long-term focus. There is a

high average tenure among the Management team and the Board, and we find remuneration levels moderate. In

addition, the CEO has notable industry experience and demonstrates a good understanding of the company's

markets and competitors. TagMaster’s ownership structure is solid with two institutions represented among the top

five shareholders. Most of the other major owners are active in or have been part of the board. We view the genuine

interest and long holding periods as encouraging. The CEO and Board have interests aligned with other

shareholders, while we would prefer that the rest of the management team gets more skin in the game.

Business: 3

TagMaster generates gross margins above 60% and has well established and validated sales and distribution

channels. We identify competitive advantages in the form of brand and superior technology. However, we are

uncertain whether these will prove durable in the long-term. The tough competitive situation and negligible recurring

revenues also reduce the score. Since TagMaster is a smaller company, it has plenty of room to grow even if the

market is not significantly underdeveloped.

Financials: 2

TagMaster has proved profitable in the past six years, although margins have been relatively low. On the other hand,

the company has taken restructuring costs and scaled up volumes with acquisitions. We believe TagMaster will

continue to improve its profitability, which would justify positive rating adjustments.


11

PROFITABILITY 2017 2018 2019E 2020E 2021E ROE 23% 3% -15% -5% 1% ROCE 18% 1% -10% -3% 3% ROIC 39% 5% -23% -4% 2% EBITDA margin 11% 7% 4% 9% 12% EBIT margin 7% 0% -7% -2% 2% Net margin 9% 2% -9% -3% 0%

Please comment on the changes in Rating factors……

INCOME STATEMENT 2017 2018 2019E 2020E 2021E Net sales 195 196 263 373 414 Total operating costs -174 -183 -252 -339 -366 EBITDA 21 13 12 34 48 Depreciation -1 -1 -1 -1 -1 Amortization -7 -2 -6 -3 -2 Impairment charges 0 -9 -23 -38 -38 EBIT 14 1 -19 -7 7 Share in profits 0 0 0 0 0 Net financial items 0 0 -4 -2 -2 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 14 0 -23 -10 6 Tax 3 3 -2 0 -4 Net earnings 17 3 -25 -10 1

BALANCE SHEET 2017 2018 2019E 2020E 2021E Assets Current assets Cash in banks 23 23 63 47 71 Receivables 60 45 53 75 83 Inventories 40 37 53 75 83 Other current assets 0 0 0 0 0 Current assets 123 105 168 196 236 Fixed assets Tangible assets 1 3 3 3 3 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 Goodwill 48 48 170 133 95 Cap. exp. for dev. 0 0 0 0 0 O intangible rights 5 4 5 5 5 O non-current assets 2 0 0 0 0 Total fixed assets 57 54 178 141 104 Deferred tax assets 7 7 11 11 11 Total (assets) 187 167 358 348 351 Liabilities Current liabilities Short-term debt 2 2 15 0 0 Accounts payable 19 13 21 37 50 O current liabilities 35 27 43 43 43 Current liabilities 56 42 79 81 93 Long-term debt 6 4 40 39 28 O long-term liabilities 11 10 16 16 16 Convertibles 0 0 0 0 0 Total Liabilities 73 55 136 135 137 Deferred tax liab 1 0 0 0 0 Provisions 17 7 9 9 9 Shareholders' equity 97 105 214 204 205 Minority interest (BS) 0 0 0 0 0 Minority & equity 97 105 214 204 205 Total liab & SE 187 167 358 348 351

FREE CASH FLOW 2017 2018 2019E 2020E 2021E Net sales 195 196 263 373 414 Total operating costs -174 -183 -252 -339 -366 Depreciations total -7 -12 -31 -41 -40 EBIT 14 1 -19 -7 7 Taxes on EBIT 3 0 4 0 -1 NOPLAT 17 4 -20 -7 3 Depreciation 7 12 31 41 40 Gross cash flow 24 16 11 34 43 Change in WC -27 3 1 -28 -4 Gross CAPEX -29 -10 -155 -3 -3 Free cash flow -32 9 -143 3 36 CAPITAL STRUCTURE 2017 2018 2019E 2020E 2021E Equity ratio 52% 63% 60% 59% 59% Debt/equity ratio 8% 5% 26% 19% 13% Net debt -16 -18 -8 -9 -43 Capital employed 81 88 206 195 162 Capital turnover rate 1.0 1.2 0.7 1.1 1.2 GROWTH 2017 2018 2019E 2020E 2021E Sales growth 71% 0% 35% 42% 11% EPS growth (adj) 229% -80% -504% -61% -115%

DATA PER SHARE 2017 2018 2019E 2020E 2021E EPS 0.08 0.02 -0.07 -0.03 0.00 EPS adj 0.08 0.06 0.00 0.08 0.11 Dividend 0.00 0.00 0.00 0.00 0.00 Net debt -0.08 -0.09 -0.02 -0.02 -0.12 Total shares 201.39 201.39 366.19 366.19 366.19 VALUATION 2017 2018 2019E 2020E 2021E EV 316.6 214.0 266.5 266.1 231.4 P/E 20.0 68.8 -11.1 -28.4 187.3 P/E diluted 20.0 68.8 -11.1 -28.4 187.3 P/Sales 1.7 1.2 1.0 0.7 0.7 EV/Sales 1.6 1.1 1.0 0.7 0.6 EV/EBITDA 14.8 16.8 22.6 7.9 4.9 EV/EBIT 22.3 276.1 -13.8 -36.3 31.0 P/BV 3.4 2.2 1.3 1.3 1.3

SHARE INFORMATION Reuters code TAGMb.ST List First North Share price 0.8 Total shares, million 366.2 Market Cap, MSEK 274.6 MANAGEMENT & BOARD CEO Jonas Svensson CFO Margaretha Narström IR Chairman Rolf Norberg FINANCIAL INFORMATION ANALYSTS Redeye AB Eddie Palmgren Mäster Samuelsgatan 42, 10tr [email protected] 111 57 Stockholm Viktor Westman [email protected]

SHARE PERFORMANCE GROWTH/YEAR 16/18E 1 month 2.7 % Net sales 16.2 % 3 month -6.3 % Operating profit adj 12 month -40.0 % EPS, just Since start of the year -34.8 % Equity 48.6 %

SHAREHOLDER STRUCTURE % CAPITAL VOTES Gert Sviberg med bolag 13.7 % 13.7 % Tomas Brunberg inklusive bolag 13.4 % 13.4 % Alto Invest SA 10.6 % 10.6 % LMK-bolagen & Stiftelse 7.6 % 7.6 % Didrik Hamilton 6.8 % 6.8 % Nordnet Pensionsförsäkring 3.6 % 3.6 % Avanza Pension 3.5 % 3.5 % Ribbskottet 3.0 % 3.0 % Mikael Aronowitsch 2.7 % 2.7 % Jan Westlund 2.6 % 2.6 %

DCF VALUATION WACC (%) 11.0 % Assumptions 2017-2023 (%) Average sales growth 16.0 % EBIT margin 4.3 %


12

Redeye Rating and Background Definitions Company Quality

Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These

are the building blocks that enable a company to deliver sustained operational outperformance and attractive long-

term earnings growth.

Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely

accepted and tested investment criteria and used by demonstrably successful investors and investment firms. Each

sub-category may also include a complementary check that provides additional information to assist with

investment decision-making.

If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for

each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that

ranges from 0 to 5 rounded up to the nearest whole number.

The overall score for each category is then used to generate the size of the bar in the Company Quality graphic.

People

At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business

is a significant part of understanding the long-term drive of the company. It all comes down to doing business with

people you trust, or at least avoiding dealing with people of questionable character.

The People rating is based on quantitative scores in seven categories: Passion, Execution, Capital Allocation,

Communication, Compensation, Ownership, and Board.

Business

If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage

customers, create value and consistently deliver that value at a profit, you won’t succeed as an investor. Knowing

the business model inside out will provide you some level of certainty and reduce the risk when you buy a stock.

The Business rating is based on quantitative scores grouped into five sub-categories: Business Scalability, Market

Structure, Value Proposition, Economic Moat, and Operational Risks.

Financials

Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the

financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial

performance and valuation. However, you only need a few to determine whether a company is financially strong or

weak.

The Financial rating is based on quantitative scores that are grouped into five separate categories: Earnings Power,

Profit Margin, Growth Rate, Financial Health, and Earnings Quality.


13

Redeye Equity Research team

Management Björn Fahlén

[email protected]

Håkan Östling

[email protected]

Technology Team Jonas Amnesten

[email protected]

Henrik Alveskog

[email protected]

Dennis Berggren

[email protected]

Havan Hanna

[email protected]

Kristoffer Lindström

[email protected]

Fredrik Nilsson

[email protected]

Tomas Otterbeck

[email protected]

Eddie Palmgren

[email protected]

Oskar Vilhelmsson

[email protected]

Viktor Westman

[email protected]

Linus Sigurdsson (Trainee)

[email protected]

Editorial Eddie Palmgren

[email protected]

Mark Siöstedt

[email protected]

Johan Kårestedt (Trainee)

[email protected]

Life Science Team Anders Hedlund

[email protected]

Arvid Necander

[email protected]

Erik Nordström

[email protected]

Klas Palin

[email protected]

Jakob Svensson

[email protected]

Ludvig Svensson

[email protected]

Oskar Bergman

[email protected]


14

Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization). Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis. Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies:

• For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, from the date Redeye publishes its analysis plus one trading day after this date..

• An analyst may not engage in corporate finance transactions without the express approval of management, and may not receive any remuneration directly linked to such transactions.

• Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.

Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument. Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making. Redeye Rating (2019-11-15)

Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.

Rating People Business Financials

5p 11 9 1 3p - 4p 75 60 28 0p - 2p 10 27 67 Company N 96 96 96

CONFLICT OF INTERESTS

Eddie Palmgren owns shares in the company: No Viktor Westman owns shares in the company: No Redeye performs/have performed services for the Company and receives/have

received compensation from the Company in connection with this.

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