DNB Markets - Verisec: Freja eID momentum building up...
… as Covid-19 is forcing organisations to work remotely, resulting in a spike in demand for secure digital processes. Still, we are concerned about delayed sales cycles for its legacy security products, hence we have cut our 2020–2022e sales forecasts by ~10%, which cuts our fair value to SEK80–120 (100–140).
Potential Covid-19 implications should work both ways for Verisec in our view. On the negative side, the business model is dependent on volumes, which should come down in a worsening economic climate, while sales cycles are likely to be delayed. Still, we believe that demand for its digital identities and encryption products should be less cyclical, as we note that Verisec sales grew throughout the financial crisis in 2009. More interestingly, Covid-19 has resulted in a spike in customers for Freja eID, with relying parties reaching 177 this week (250% YOY growth), as employees working from home (both in the public and private sectors) have driven a need for secure digital processes (log-in, signing, and approval). We believe the rapid relying parties growth stems mainly from the recently announced partnership with Microsoft, which demands little configuration in order to go live.
2020–2022 sales forecasts down 10% to reflect slower decision-making processes amongst customers in this uncertain market environment. The rate of Freja eID adoption among relying parties has exceeded our forecasts, and could continue to do so in 2020, given the unsaturated demand to digitalise processes with organisations increasingly working remotely, not being able to physically meet owing to the Covid-19 outbreak. For Freja eID, we expect 271 relying parties and 140,000 users by end-2020, driving sales of SEK12m. Still, with a cash position of SEK10m (excluding a SEK22m unutilised credit facility), and with an annual FCF burn rate of cSEK25m–30m in 2016–2019, the margin for error is slim, but in our base case we assume Verisec is adequately capitalised as long as Freja eID attracts a user base in 2020.
Fair value cut to SEK80–120/share (100–140), but we see an attractive investment opportunity, trading at a 2021e EV/sales of 1.8x (a 50% discount to its historical average), and below the SEK78/share where insiders bought in late 2019. We consider evidence of Freja eID’s growing user base to mark a change in sentiment in the stock, as we expect it to be the main driver of group 25% sales CAGR until 2022e.