Betolar Q3'24: Long road to commercial breakthrough

Translation: Original published in Finnish on 11/4/2024 at 8:10 am EET.

Betolar's Q3 report was underwhelming, with new orders remaining at a low level, indicating that the commercialization phase is still at an early stage. Thanks to the company's extensive cost-saving measures and the strengthened financial position following the share issue, the company now has breathing room to implement its strategy and advance its commercialization. Following the report, we lowered our revenue forecasts for the next few years. Given the improved risk/reward ratio after the share price decline, we raise our recommendation to Reduce, reiterating our target price of EUR 1. 

Low new orders signal slow quarters ahead

Betolar's revenue increased in Q3, but remained at a low level, well below our forecast. Q3 losses decreased significantly (EBITDA Q2'24 -1.0 MEUR vs Q3'23 -2.6 MEUR) from the comparison period, reflecting the company's extensive cost-saving measures. The loss was lower than expected, despite the lower-than-projected revenue, but this was largely explained by a higher-than-expected grant payment in the review period. Betolar's order intake was at the same level as in the first half of the year but lower than in the comparison period and thus below our expectations. This is not an encouraging development in terms of near-term growth expectations. At the end of the quarter, cash and cash equivalents were roughly in line with our expectations at just under 11 MEUR. Including undrawn grants and loans, the company estimates the amount of available funds to be just under 16 MEUR.

Our expectations for commercialization postponed

The company is looking for commercial breakthroughs in research and development projects aimed at operators in the mining industry and producers of large industrial side streams. In both categories, Betolar has succeeded in gaining high-profile customer references (e.g. Metso and Outokumpu), but we estimate that the project sizes have so far remained modest, which is reflected in low revenue. With tightening legislation and other requirements related to the green transition, we believe that Betolar's technology should have clear commercial potential in these customer segments. With the savings and the share issue in Q3, we estimate that the company's funding is secured for a good two years. This will give the company some breathing room for its commercialization efforts and a fresh start from fiscal year 2025 onwards with the organization and management team streamlined and reorganized as part of the change negotiations. We trimmed our revenue forecasts for the current year and the coming years by 36-13%, as new orders fell well short of our expectations. In our view, Betolar remains firmly in the ''productization phase'', where the company's technology is being developed into a commercially viable form. 

Early stage of business keeps risk level high

The 2024 and 2025 EV/S valuation ratios based on our forecasts for Betolar are 17x and 7x, which we consider high, considering the high risk level related to commercializing Betolar’s innovations. The value of the DCF model based on our long-term forecasts is at our target price. At a market value of 21 MEUR, even a business performance significantly below the company's financial targets would be enough to make the expected return attractive. However, given the modest commercial track record, we are not willing to rely on this potential. Given our valuation methodology and the company's stage of development, we believe the risk/reward is skewed to the downside. As a result, we recommend that investors watch the company's growth efforts from the sidelines for the time being.