Betolar H1'24: Sales efforts must be prioritized

This report is a summary translation of the report “Myyntityö prioriteettilistan kärkeen” published on 8/28/2024 at 7.26 am EEST.

Betolar's H1 report was disappointing as revenue and order intake fell short of our expectations. Based on the report, we have lowered our revenue forecasts for the coming years, but the forecast changes on the earnings lines remained moderate. We expect the financing needs to materialize at the beginning of 2026, which is why it would be important for the commercialization of Betolar to take a significant step forward next year, so that the financing terms would not become unreasonable for the current owners. A commercial breakthrough would, in our view, provide a handsome return on the stock at current levels, but we do not believe it would be enough to compensate for the already high level of risk, heightened by the financial risk. Following the price increase, our valuation methods give a very stretched picture of the stock's valuation. Thus, we reiterate our EUR 1.00 target price but lower our recommendation to Sell 
(was Reduce).

Reported numbers showed little evidence of commercialization progress

Betolar's H1 revenue increased to 0.3 MEUR from the low level of the comparison period, falling short of our forecast of 0.5 MEUR. The number of new orders was also below our expectations, with 0.1 MEUR of new orders recorded for Q2, in addition to those already known after Q1. Due to savings measures, losses were reduced in H1 and EBITDA was in line with our expectations at -3.7 MEUR. After a negative EBITDA and investments of 0.7 MEUR, cash amounted to
10 MEUR. Thus, the financial situation remains unchanged, and with debt financing and the support of Business Finland, we estimate that the current financing will be sufficient to implement the strategy through 2025.

We lowered our revenue forecasts for the next few years, but there was little change in earnings lines

Betolar has developed a technology to solve the problem of carbon dioxide emissions from cement production and to reduce the amount of industrial side streams that end up as waste. Although the logic of the solution is quite clear, the company has so far failed to make a commercial breakthrough with its technology. Commercial efforts are now focused on research projects for operators in the mining and metals industries and industrial side-stream producers, while R&D projects on concrete elements for construction continue. A new strategic move is to focus research entirely on research projects commissioned by customers, whereas previously much of the research was aimed at developing Betolar's own technology. We see this as a logical development, as Betolar can deepen its understanding of customer needs, while customers finance a large part of the research. By slowing down the cash burn rate, Betolar can "buy" some important extra time, as the commercialization of the technology should take a step forward before the financing needs materialize. We predict that the company will find a profitable commercial angle for its technology, based on the mining research projects published in H1'24. Following the H1 report, we trimmed our revenue forecasts for the next few years by 0.6-2.4 MEUR, which led to minor estimate cuts at the earnings level, reflecting lowered growth investments.

Commercialization uncertainties and funding needs keep risk/reward unfavorable

The 2024 and 2025 EV/S valuation ratios based on our forecasts for Betolar are 14x and 7x, which we consider high, considering the high risk related to commercializing Betolar’s innovations and the dilution risk associated with the impending financing needs. The value of the DCF model based on our long-term forecasts is at our target price. Given our valuation methodology and the company's stage of development, we believe the risk/reward is clearly skewed to the downside. Therefore, we advise investors to stay on the sidelines to see if the company can shift to a new gear in commercialization with a strategic review, cost cutting and a new CEO.