Translation: Original published in Finnish on 07/01/2025 at 07:30 am EEST

Modulight is a technology company focused on the design and manufacture of lasers and optics with a strategic focus on medical and biomedical applications. The company aims to return to a path of profitable growth after difficult years following its listing. Recent reports have shown preliminary signs of improvement, although the turnaround involves significant uncertainty. Our valuation based on revenue-based multiples and cash flows suggests the stock is moderately undervalued. We reiterate our Accumulate recommendation and target price of EUR 1.5.

A technology company in the pharmaceutical and biomedical R&D and early commercialization phase

Since 2014, Modulight has strategically focused on medicine and biomedicine - in particular cancer and eye diseases. Its strengths include flexibility in design and production, a high level of manufacturing expertise and the integration of products with cloud services. Cloud services enable SaaS-style pay-per-treatment pricing and various support services. The company seeks close development partnerships with its clients, ranging from large global corporations to early-stage unlisted companies. Modulight's revenues depend on the progress of long and uncertain projects that, if successful, could lead to the commercialization of the company's lasers, for example as part of a new patient treatment. The company’s revenue and earnings deteriorated strongly after the listing in 2021. Recent reports have shown initial signs of improvement.

We expect good growth and profitability in the long term

Visibility on the content and progress of Modulight's projects is limited, reflecting a high forecast risk. Our revenue forecast (2025e: 8.0 MEUR) is based, in the short term, on the announced order backlog growth, new device installations generating PPT revenue, and an order related to quantum computing. For next year and beyond, visibility at this stage is still quite limited, and forecasts rely on highly uncertain assumptions. Achieving strong growth in the long term requires breakthroughs in new patient treatments and/or significant successes in the company's other focus areas.

The earnings turnaround is not yet quite around the corner

Despite the growth forecasts, the operating result continues to be in the red in our forecasts in the coming years (2025e: -5.8 MEUR). Earnings are depressed by the company's heavy cost structure compared to revenue and increasing depreciation due to the recent investment in a production plant. We expect a turn in EBITDA and cash flows in 2027 and a turn in earnings at the EBIT level one year later. Investments and losses have consumed the company’s cash assets (net cash Q1’25: 10.6 MEUR) and we consider an additional financing round possible in the coming years. The company can, however, manage with its current financing, should the business turnaround progress favorably.

Opportunity for those willing to risk

The stock's valuation is very imprecise due to the uncertainty of earnings and cash flow turnaround. The valuation relies heavily on future projections, which carry a high degree of forecasting risk. Our fair value range, based on various methods, is EUR 0.6-3.7. EV/S multiples are 6.4x-5.1x for 2025-2026, which we find cautiously attractive due to the substantial growth potential. The DCF model suggests a moderate upside for the stock. We emphasize that a sufficient expected return on the stock requires a continuation of good performance, which is difficult to assess at this stage. The investment involves high risk, which can be realized if the budding growth slows down or is interrupted.