Zutec - Still early in its journey, near-term volatility pressuring shares

Adjusting the business model towards SaaS to SMEs from large contracts means higher costs, while a large contract in Qatar ending has weighed on sales. We expect the investment case in Zutec to materialise later in the future, although near-term volatility is a risk factor as current sales still hinge on large contracts.

• Continued pressure from Qatar contract ending. Similar to Q1, sales fell 28% y/y in Q2 toSEK4.3m, due to the large contract in Qatar ending (45% of 2017/18 revenues). This contract could be extended, but there was no news in this report. The operating loss was SEK8.4m in Q2, and at end-Q2, the net cash position was SEK28m. Excluding the Qatar contract, sales grew 5%in H1 2018/19 (year-end June). The CEO is positive and the pipeline of new contracts is strong.

• Investments in sales and marketing. Zutec is investing in sales and marketing in order tobe able to scale up volumes in the new Software-as-a-Service (SaaS) product. Althoughoperating costs were higher than we expected in the quarter, the investment in marketing isin line with the company’s communications at the time of the IPO. The company raisedSEK50m, of which c.SEK35m was to be used for this purpose. Recent new hires in salesand investments is likely to result in new contracts in the foreseeable future, we believe.

• Weak report, but case is still intact. The investment case in Zutec is the scaling of SaaSvolumes to SMEs (small-to-medium enterprises), adding to its current business of largecontracts. Zutec continues to invest in this SaaS solution. Zutec is exposed to the growingmarket of digitalising the construction sector, and the software has clear value-addedqualities, such as efficiency, cost control and data collection.

• Still early on, risk is high. The main risk is that Zutec is still early on in its journey. Key toits success will be if it can prove successful in building an organisation as well as scalingvolumes over time. The majority of the business as it is today is dependent on largecontracts that can add volatility to sales when they end.

• Estimate changes. Following the large sales decline, we adjust our sales estimate 27%downward for 2018/19, and by 8-10% for the next two years.

• Valuation. Our valuation range is SEK26-33/share (previously SEK27-33/share). At 3.3x2018/19E EV/sales versus 6.2x EV/sales 2019E for the Nordic software sector, the currentvaluation looks attractive to us, given long-term high growth and opportunities for high profitmargins. However, a discount to peers is warranted given the high risk, in our view.

For further information, please contact:

Brendan O’Riordan CEO of Zutec Holding AB;

brendan.oriordan@zutec.com +353 86 8568971

About Zutec Holding AB

Zutec develops and markets cloud-based software solutions, primarily directed to companies within the building and construction industry. The Company’s products help clients to increase their productivity and cost efficiency. Zutec provides solutions within project management, data and document collaboration tools, data enriched 3D-models, defect management, project handover and the operations and maintenance of buildings.

To find out more please visit www.zutec.com