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COMPANY ANALYSIS 14 November 2017
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected]
Key Financials
List: Nasdaq First North Market Cap: 20 MEUR Industry: Telecommunication Services CEO: Erik Strömstedt Chairman: Magnus Sparrholm
8.0 points 9.0 points 4.5 points 2.0 points 4.0 points
Share information
Share price (SEK/EUR) 41.3/4.2
Number of shares (m) 4.7
Market Cap (MEUR) 20
Net debt (MEUR) 3
Free float (%)
52 %
Daily turnover (’000) 1
Analysts:
Anton Wester [email protected]
Dennis Berggren [email protected]
Growth story continues • Talkpool is a profitable Telecommunication Network
Service provider that has major contracts with
Huawei, Digicel and Telenor. With the latest
acquisition of LCC Pakistan, Talkpool will be able to
rapidly increase both revenue and margins.
• In 2014, Talkpool started to include the Internet of
Thing in its offering. We believe that the Company is
well positioned in the ongoing industrial
transformation to “Industry 4.0”.
• Our belief is, thanks to the acquisition of LCC,
Talkpool will be able to generate an EBITDA of EUR
1.6m in 2018. We initiate coverage with a base case
valuation of SEK 38 per share. Our reasonably
pessimistic and optimistic scenario implies a value of
SEK 26 and SEK 49 respectively.
0
10
20
30
40
50
60
14-Nov 12-Feb 13-May 11-Aug 09-Nov
OMXS 30 TalkPool
Management Ownership Profit outlook Profitability Financial strength
Summary
Talkpool (TALKP.ST)
Redeye Rating (0 – 10 points)
2015 2016 2017E 2018E 2019E
Revenue, MEUR 10 12 16 27 29
Growth 17% 12% 37% 69% 7%
EBITDA 1 0 0 2 2 EBITDA margin 5% -3% 1% 6% 6%
EBIT 1 0 0 1 1 EBIT margin 5% -4% 0% 5% 5%
Pre-tax earnings 0 -1 -1 1 1 Net earnings 0 -1 -1 1 1 Net margin 2% -6% -5% 3% 3%
2015 2016 2017E 2018E 2019E
P/E adj. NA -15.5 -24.5 24.8 22.3 EV/S NA 1.0 1.4 0.8 0.8 EV/EBITDA NA -31.3 205.6 14.1 12.5
2015 2016 2017E 2018E 2019E
Dividend/Share NA 0.00 0.00 0.00 0.00 EPS adj. NA -0.22 -0.15 0.15 0.17
TalkPool
Company analysis 2
Redeye Rating: Background and definitions
The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or
operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 –
Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted
differently according to how important they are deemed to be. Each key factor is allocated a number of points
based on its rating. The assessment of each valuation key is based on the total number of points for these
individual factors. The rating scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of
the bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to
manage the company in the best interests of the shareholders. A good board and management can make a
mediocre business concept profitable, while a poor board and management can even lead a strong company into
crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 –
Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner
commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with
a dispersed ownership structure without a clear controlling shareholder have historically performed worse than
the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner
commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.
Profit Outlook
Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit
growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does
not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to
assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 –
Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to
generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company
has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on
total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating
profit margin or EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term.
The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no
benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength
is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 –
Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary
events.
TalkPool
Company analysis 3
Table of Contents
Table of Contents ......................................................................................... 3
Investment thesis ......................................................................................... 4
Investment Case ....................................................................................... 4
Valuation range and catalysts ...................................................................... 5
Bear points ............................................................................................... 5
Company description .................................................................................... 7
History ..................................................................................................... 7
Today ....................................................................................................... 7
Product & offering ....................................................................................... 11
Profitable telecom network services ........................................................... 11
Internet of Things – The new growth area ................................................... 14
Business model and strategy........................................................................ 17
Business model ....................................................................................... 17
Growth strategy ...................................................................................... 18
Market ...................................................................................................... 23
Telecom Network Services ........................................................................ 23
Market for the Internet of Things ............................................................... 26
Opportunities for Talkpool ......................................................................... 30
Financial forecasts ...................................................................................... 31
Sales estimates ....................................................................................... 31
Cost estimates ........................................................................................ 34
Margin estimates ..................................................................................... 34
Balance sheet .......................................................................................... 35
Conclusion .............................................................................................. 36
Valuation ................................................................................................... 37
Discounted Cash Flow .............................................................................. 37
Peer valuation ......................................................................................... 40
Conclusion .............................................................................................. 41
Appendix ................................................................................................... 42
Management & board ............................................................................... 42
IoT technologies ...................................................................................... 43
Summary Redeye Rating ............................................................................. 45
TalkPool
Company analysis 4
Investment thesis
Talkpool AG is a provider of telecom network services (TNS) and IoT-
solutions that offers high-quality services to global telecom vendors and
operators. The Company is mainly focused on developing countries.
Talkpool is listed on Stockholm Stock Exchange (First North) since 2016.
Investment Case
• The profitable core business, Telecom Network Services, is paving the way
• The fast-growing IoT will spark both margins and revenue
• The market underestimates the acquisitions and especially LCC
Profitable core business paving the way
Talkpool has been active in Telecom Network Services (TNS) since early
2000 and now has an established global presence. This business area has
historically provided very stable income, with recurring revenue at 40-50%
of sales from Operation and Maintenance. Talkpool has an impressive client
portfolio, consisting of the most prominent operators and vendors, like
Huawei and Telenor. Lately, the Company has showed strong growth
potential in TNS with the award of two major turnkey contracts with Digicel
(USD 7m annually) and Deutsche Telecom (potential of reaching EUR 5m
annually) In addition, the global framework agreement with Digicel is going
to increase Talkpool’s sales substantially. The stable revenue from TNS has
enabled Talkpool to finance its next big business area, Internet of Things
(IoT).
The exponential growth of IoT
According to Ericsson, the entire IoT-market is expected to grow by 21%
CAGR by 2022, from 16 bn to 29 bn devices. The total market value of IoT
in which Talkpool is active is estimated at EUR 4.2bn by 2022. Currently,
including the acquisition of LCC Pakistan, Talkpool has IoT-sales of EUR
1m. We believe that Talkpool will use its product portfolio to launch its IoT-
products in the Middle East while using LCC IoT-solutions in areas like
Haiti. We also think the Swedish IoT-market may be ready for a nationwide
implementation, as plenty of telecommunication companies are actively
building up IoT-networks. Our belief sales of IoT will contribute with an
EBIT margin of 20% over the long term.
TalkPool
Company analysis 5
Value creation through M&As
Talkpool acquired Camouflage in 2016 and Technetix in early 2017. Since
Talkpool acquired these companies, they have shown impressive revenue
and profit growth. In Q2 17 Camouflage increased its profit more than six-
fold and doubled income, while Technetix doubled its profit. The latest
acquisition of LCC Pakistan will double revenue and improve the overall
margins, as LCC had revenues of EUR 9.9m and an EBITDA margin of 15%
(EUR 1.5m) in 2016. Now, thanks to the acquisition of LCC, Talkpool will be
exposed to the fastest-growing TNS-market. We assume that Talkpool will
continue to cherry-pick its acquisitions in niche areas where price pressure
is not as intense as in TNS and acquire companies with better margins than
Talkpool.
Valuation range and catalysts
The valuation range of Talkpool consists of three scenarios Base, Bear and
Bull. The price target ranges from 26 to 49 with base case of SEK 38 per
share. The Bull-case implies that some of the following catalyst will occur:
first large-scale IoT-implementation, new big turnkey agreements and
successful integration of LCC and further acquisitions. Talkpool’s share has
increased from SEK of 22 to 40 in the last three months, an increase of
nearly 80% which this analysis confirms is the development. The valuation
does not reflect any further M&A activity.
Bear points
• Price pressure from operators
Talkpool’s current client portfolio consists of two customers that
account for 50% of revenue. If one of them decided to choose
another TNS-provider, there would be huge negative impact on
Talkpool’s business. Talkpool has felt price drop, which we believe
average 2-4% annually. We thus believe that it is highly possible
that price pressure will continue. This will make it a challenge for
Talkpool to achieve its financial target of an EBIT margin of 8% in
the TNS-segment.
Talkpool: Fair value range
Source: Redeye Research
Last price 41
20 25 30 35 40 45 50 55Bear-case: 26 Base-case: 38 Bull-case: 49
TalkPool
Company analysis 6
• Slow ramp-up in IoT
As we see it, the IoT-market is ramping up, in line with Ericsson’s
Mobility Report. However, the development of the IoT-market has
taken longer than the market initially thought. Talkpool also stated
in its latest interim report, Q2 2017, that the IoT-market is not
developing as they had expected. At present, most IoT-solutions are
highly customised which is a threshold for continued rapid growth.
IoT-market growth will suffer if the market does not adopt a
technology standard.
• Less developed countries equal more risk
Talkpool has exposure to more than 20 countries, many of which
are in regions of poor political and legal stability. This is
particularly true since Talkpool acquired the Pakistan company
LCC, exposing itself to a more volatile market. Quarterly results
going forward could be more volatile due to market instability.
• Impairments are part of the business
We believe 60% of Talkpool’s revenue comes from implementation,
a market segment notorious for impairment losses. If the Company
does not comply with requirements set out in contractual terms and
conditions could result in impairments and higher costs related to
the project. This might result in heavy losses and impact the
development of Talkpool. However, Talkpool has historically not
been required to take major impairments.
TalkPool
Company analysis 7
Company description
History
Talkpool was founded in the early 2000’s by Magnus Sparrholm, the
current chairman of the board. From the outset, Talkpool has been an
independent specialist that builds, maintains and improves telecom
network services (TNS) worldwide. TNS has historically been Talkpool AG’s
core business, but with a 26% stake in the IoT-company Talkpool Sweden
AB, it has in recent years implemented Internet of Things (IoT) as a new
business segment. In 2004, Talkpool won its first contract with Ericsson to
introduce GSM technology in Latin America and the Caribbean, currently
one of Talkpool’s main markets. Since then, the Company has continued to
sign TNS deals with major vendors and operators, mostly in developing
countries.
Today
Talkpool was publicly listed on Nasdaq First North on 24 May 2016. The
initial price set in the IPO was SEK 22 per share, which gave Talkpool a pre-
money market capitalisation of SEK 48.4m and raised SEK 12.5m before
transaction costs. The Company is currently operating in various markets
including Europe, Africa, the Caribbean, the Middle East and Latin
America. The total number of employees is approximately 1,350, including
the acquisition of LCC Pakistan in late 2017. Talkpool’s head office is in
Chur, Switzerland, but most of their revenue is generated in developing
markets.
Talkpool: Sales per region
Source: Talkpool, Redeye Research
38%
26%
20%
16%
Middle East
Americas
Europé
Africa
IPO price of SEK 22 per
share
TalkPool
Company analysis 8
In 2016 and 2017, Talkpool acquired two Benelux companies, Camouflage
and Technetix, which increased its presence in the European market.
Talkpool recently executed a successful share issue of SEK 38m related to
the acquisition of LCC Pakistan from Tech Mahindra. The total
consideration paid for LCC Pakistan was USD 5.2m.
Business areas & business model in brief
Talkpool’s two business areas are TNS and IoT. TNS generally involves
implementation and operation & maintenance (O&M) of
telecommunications networks for operators and vendors. Within O&M,
framework agreements with customers are often long-term, usually about
three years, with automatic extensions at the end of the contract. The
framework agreements generate recurring revenue, at a historical rate of
40% of total revenue.
The second business area is IoT, where Talkpool’s main focus is on the Low-
Power Wide-Area Network (LPWAN) market. LPWAN is an energy
efficient, low data rate IoT-solution that interacts with devices that do not
need to continuously send or receive data, such as machine-to-machine
(M2M) communications.
Strategy in brief
Talkpool’s strategy is to have a global presence supported by local hubs that
provide local knowledge and expertise. Through cherry-picked acquisitions,
a Global Partnership Platform and continued development of IoT-solutions,
Talkpool will be able to reach niche areas and thus generate higher margins
than the general TNS-market. Acquisitions with local partnerships are an
important part of Talkpool’s strategy, because this will improve risk-sharing
and encourage entrepreneurship throughout the Company.
Strategy
Going Internet of Things
The aim is to use the cash generated by the TNS business area to develop
in-house solutions and skills in the area of Internet of Things. Talkpool
builds solutions like applications, connectivity modules and end-to-end
solutions. Talkpool will be focusing on customised software solutions to
align perfectly with the customer’s requirements.
1. Expand existing network services
activities in profitable niches
2. Use the cash to develop in-house solutions for the
Internet of Things
3. Assist customers to convert from
selling a product to selling a service
TalkPool
Company analysis 9
This could involve anything from owning the network, where the customer
pays for data use, to selling package deals with IoT as a service. Talkpool
will aim to reach its financial targets with these focus areas in mind.
Financial targets
Talkpool’s target is annual revenue of EUR 40m with an EBIT margin of 8-
12% by 2021. The target will be achieved through a combination of organic
and acquired growth.
Management & board of directors
The management and board consist of individuals with extensive
experience in the TNS-market. Erik Strömstedt has been the group CEO
since 2005. Prior to joining Talkpool, he was a director of Global Services at
Ericsson. Strömstedt holds 8.8% of the shares, showing his dedication in
the Company. Magnus Sparrholm, founder and chairman of the board of
Talkpool, is the largest shareholder. Five out of nine executives and
directors own a stake in the Company. Our conclusion is that Talkpool
seems to have a dedicated and experienced management in place to reach
the Company’s objectives.
Talkpool’s board consists of five directors. Magnus Sparrholm has been the
chairman since 2004. The other directors are Dr Beate Rickert, Stefan
Lindgren, Constatinus Schreuder and Wolfgang Essig. Combined, they have
vast experience with tech companies and hold relevant academic degrees.
Considering the size of the company, we believe the board has the skills and
experience required to guide Talkpool towards its financial targets.
Board of directors Joined Ownership
Magnus Sparrholm 2004 970000
Dr. Beate Rickert 2015 60000
Stefan Lindgren 2015 53243
Constantinus Schreuder 2016 owns 30 % of Camouflage
Wolfgang Essig 2014 0
Source: Talkpool, Redeye Research
Financial target is
revenue of EUR 40m and
EBIT-margin of 8-12%
TalkPool
Company analysis 10
Ownership
We have rated Talkpool’s ownership structure a 9 (read more in the Redeye
Rating section), largely because the Company is managed by individuals
with a financial stake in its success. As mentioned, founder and director
Magnus Sparrholm controls 33% of equity. Ludwig Fresenius, a private
investor, recently bought shares worth around SEK 11m from Sparrholm
and Strömstedt, making him the second-largest owner. The third largest
shareholder is CEO Erik Strömstedt, who holds 8.8% of equity. At present,
Talkpool has no institutional investors, which lowered the ownership
rating, but this is not unusual for a company of this size.
Owners Shares Capital and Votes
Magnus Sparrholm 970000 32,42%
Erik Strömstedt 262545 8,77%
Avanza Pension 165393 5,53%
Nordnet Pensionsförsäkring AB 105281 3,52%
Stig Sparrholm 72100 2,41%
KPR Capital GmbH 60000 2,01%
IT Talks Sweden AB (Stefan Lindgren) 51181 1,71%
Carl Rietz 47500 1,59%
Comperte AB 44644 1,49%
Handelsbanken Liv 39646 1,32%
Other 1173932 39,23%
2992222 100,00%
Source: Talkpool, Redeye Research
A strong ownership as the
founder Magnus owns 32
% of the shares
TalkPool
Company analysis 11
Product & offering
Profitable telecom network services
Talkpool’s core business is delivering Telecommunication Network Service,
which can be divided into three main areas: Network Implementation,
Operations & Maintenance and Consulting. We are going to highlight two
areas, Network Implementation and Operations & Maintenance, because
consulting is included within the other areas.
Implementation services
The biggest segment within TNS is Implementation Service, which accounts
for 60% of revenue within TNS. The Company’s core skills within
Implementation Service are as follows: planning, implementation and
maintenance of mobile and fixed telecom networks, including fibre. The
implementation service offering is extensive, covering the full range from
engineering, network planning, site acquisition and installation to
integration and deployment. All offerings can be customised to fit an
individual customer’s needs, but most of the time Talkpool aims to be the
turnkey provider, because they wants to become a key partner to the vendor
or operator.
The work process consists of building up the necessary infrastructure, like
dimensioning and preparation of the desired area, transporting all
equipment required, installing the radio base station, connecting the radio
base with antenna cables and connecting it to a power source. After
everything is set up, they first have to test the equipment and then finally
connect it to the existing mobile network. Typical implementation projects
range from a dozen sites to a couple of hundred. After the implementation
process is finished, Talkpool generally also handles aftermarket service for
these radio stations (O&M).
Operations & maintenance
The second sub-segment within TNS is Operations and Maintenance
(O&M), which generates 40% of Talkpool’s revenue within TNS. The
Company’s service portfolio within O&M consists of field maintenance,
repair of passive equipment, surveillance and performance improvement in
mobile and fixed networks. O&M provides stable revenue and relatively
predictable profits and can thus be considered Talkpool’s most stable
business. The Company’s O&M offering is to ensure optimal network
operation that is more efficient than it would have been if the operators had
done it themselves, thereby adding value for both the operators and
Talkpool.
O&M creates recurring
revenue
TalkPool
Company analysis 12
Talkpool’s method for maximising efficiency is to maintain a team of
certified engineers, with a preventive maintenance schedule for the entire
radio station, who know when every part needs to be replaced or cleaned,
thus ensuring access to the right equipment if a fault occurs. The teams are
constantly on the road, maintaining and upgrading the stations, making
sure the quality of the network is up to standard. This assures network
stability while maintaining acceptable service quality. Except for preventive
and corrective maintenance of the networks, Talkpool also offers a full
network operations centre (NOC). NOC covers network management and
ongoing network improvements. This solution is a package deal that allows
operators to focus on their core business while Talkpool takes care of
maintaining and improving the network.
The O&M framework agreements are very attractive for service companies
like Talkpool, partly due to the nature of the agreements. Contracts are
often long-term, between two and three years, and automatically extend for
another two to three years unless the agreement is cancelled. O&M
agreements generate recurring revenue, normally on a monthly basis, at
relatively low risk, giving the contracted company financial stability and a
partnership-like relationship between the contracted service company and
the operator. This partnership between operator and service provider is
reflected in Talkpool’s current customer base. Many customers, including
Ericsson and Digicel, have been working with Talkpool for a long time,
which indicates that the Company is delivering value to operators. We
estimate Talkpool’s gross margin in the TNS-segment at around 20%.
TNS customers
Talkpool is targeting top-tier companies that have outsourced much of their
operations and maintenance to local service providers. Historically, Digicel
has been the largest client, accounting for more than 50% of total sales in
2016. However, since the acquisition of LCC, the Company now have
improved its customer portfolio where Digicel accounts for only 18% of
revenue, making it Talkpool’s third-largest customer. Furthermore,
Talkpool was awarded an O&M contract with Digicel for service of their
entire network in Haiti. The five-year contract will generate revenue of USD
7m annually which indicates that Digicel will continue to be an important
client.
Talkpool continues to
improve their client
portfolio
TalkPool
Company analysis 13
As of today, including LCC Pakistan, Talkpool’s two biggest customers in
terms of sales are Telenor (26%) and Huawei (24%), covering 50% of total
revenue. Only a few years into the contract, Talkpool recently won Huawei’s
Outstanding Quality Award. Talkpool was also upgraded to a Grade A
partner in Mauritius and has become Huawei’s preferred network service
partner worldwide. Accordingly, we believe that Huawei’s share of sales will
increase going forward.
Clients
Source: Talkpool, Redeye Research
The TNS sales process
The sales process within TNS is generally about sending tender and hope
for the best. However, lately Talkpool have thanks to their strong brand
received more privately held quotation from operators. Talkpool often
focuses on smaller, standardised framework agreements, corresponding to
implementation, expansion or upgrades, which tend to have better margins
than larger contracts. Once an implementation project has been awarded to
Talkpool, it appoints a project manager who then starts to assemble a
dedicated team specific to that project. The team consists of Talkpool’s
international certified technicians, contracted technicians and local
workforce.
The business process has made Talkpool flexible and cost-effective while
delivering a good quality standard. This has proven to be the optimal mix of
involvement in various projects and aligns with what CEO Strömstedt said:
“We aim to deliver Swedish expertise at African prices”. Project
implementation is often priced per site and can be billed upon acceptance
by the client.
O&M and network implementation projects can be performed together to
create synergies, but each segment can accept request for quotations
separately.
TalkPool
Company analysis 14
Internet of Things – The new growth area
Focus area within IoT
Talkpool is one of the early pioneers working with IoT-solutions and has to
date deployed multiple Low Power Wide Area Networks (LPWAN) in
Europe, particularly with LoRa technology, in Stockholm, Gothenburg and
Malmö. The Company began implementing Sigfox solutions as early as
2014, making them quite experienced in the IoT-sector. On the strength of
its experience and expertise, Talkpool has created a strong brand in IoT-
implementation.
Talkpool is currently focused on LPWAN, making sure it can adapt to the
needs of private as well as global firms. But if needed, it can change its
connectivity modules to other IoT-technologies. Because Talkpool focuses
on the area of LPWAN, its main verticals are smart cities areas and
industry. However, as time goes by, we expect more markets to open. After
the acquisition of LCC Pakistan, Talkpool also holds a product portfolio of
IoT-devices with cellular technology.
IoT technologies
IoT can be divided into several different technologies, but for the sake of
this analysis we focused on the two IoT-technologies that Talkpool is
currently focusing on or that are expected to drive the development of IoT.
For further reading regarding technology, see the technology section in the
appendix. The five technology groups are:
• 5G and 4G – Mobile connection
• LTE-M – 4G mobile network LPWA
• NB-IoT – Combination of mobile (3GPP) and LPWAN
• Sigfox – Cheapest and lowest bitrate, LPWAN
• LoRa – Cheap and faster bitrate than Sigfox, LPWAN
• Mesh solutions – A combination of the solutions above
Experience in
implementation of IoT-
network
TalkPool
Company analysis 15
Technology spectrum
Source: Redeye Research
A problem within IoT is that there is currently no technology or platform
that offers a complete solution. LPWAN offer good battery life and range,
but is deficient in latency and has a low data cap. Wi-Fi offers high and
stable data connectivity, but falls down when it comes to range and battery
efficiency. Traditional mobile IoT is good in terms of range and data
volumes, but inadequate when it comes to battery life and the modules cost
more to produce.
Mobile IoT-solutions like 4G, 3G, LTE-M and NB-IoT all need to have a sim
card inserted in the module, which is why these technologies drain more
battery. The LPWAN technologies, Sigfox and LoRa, are not connected to a
mobile connection and thus do not require sim cards, which makes them
more energy efficient. These are criteria’s that customers need to consider
when choosing their IoT-solution.
Long Range Radio (LoRa) technology is mainly specialised to battery
operated devices because it does not require a sim card. Talkpool joined the
LoRa Alliance when it began working with Semtech. LoRa modules are
highly customisable and you can tell the module how much data it should
transmit every day and how often. The advantages of LoRa technology are
that the modules are very cheap at about two dollars each, very easy to
install and do not consume much energy. The weaknesses of LoRa are the
latency and low data speed, which is capped at 25 kbps. LoRa has coverage
throughout the biggest cities in Europe. In cooperation with Semtech and
Tele2, Talkpool has expanded the LoRa network in the Gothenburg and
Stockholm regions.
No IoT-technology that
offers a complete solution
TalkPool
Company analysis 16
Sigfox was the first major investment in creating a standard network just
for IoT-devices. It is very similar to LoRa technology, where the only
difference is that Sigfox is capped at 100 bps. Sigfox currently covers 45% of
Sweden, making it the largest IoT-network in the country. Talkpool was
involved in building the Sigfox network at first, but is currently not focused
on this IoT-network technology.
Talkpool’s IoT offering
Talkpool’s offering within IoT is comprehensive, and includes planning,
building the IoT-network, consulting related to designing and integrating
IoT-solutions and network O&M. Because the IoT-sector is fairly young,
most of Talkpool’s prior IoT-projects were based on Sigfox and LoRa
network implementation, consulting and planning aimed at various IoT-
projects. IoT-projects are still aimed mainly at demonstrating proof of
concept.
Solving problems by working closely with customers
Talkpool is working with many companies to modify their products so they
can be connected to the internet. Talkpool uses its in-house developed
module and implements it on exciting sensors to create an end-to-end
solution. An example of this is an IoT-project in which sensors are
measuring water flow to different apartments to thereafter transmit the
data to the customer or the Company. The Company can thus charge its
costumers based on water usage instead of dividing the total water bill
based on square meters.
With Talkpool’s connection module, it can not only measure the water flow,
it can publish the data on a website that everybody can access to show
people how much water they have used and what they need to pay for it.
This is just one example of an area in which Talkpool’s module outshines
existing solutions. In the future, Talkpool’s ambition is to run the IoT-
network and charge the customer a subscription fee or data consumption
fee.
Showing proof of concept
is still the most common
IoT-project
IoT-solution by Talkpool
Source: Talkpool
TalkPool
Company analysis 17
Business model and strategy
Business model
Talkpool’s business model can be divided into two categories: Telecom
Network Services and IoT-solutions. In TNS, business models include
operation and maintenance (O&M) of networks and network
implementation. The framework agreements within O&M usually last for 2-
3 years and are automatically extended unless cancelled. In O&M, Talkpool
are getting paid on a monthly basis while in implementation they receive
income as soon as the client have accepted the sites. Although the Company
does not have a well-diversified customer portfolio, it has historically had
40% recurring revenue. The TNS business area is thus creating long-term
financial stability for the Company.
Meeting with a new customer for implementation of an IoT-solution usually
involves four stages. The first is needs analysis and planning, usually lasting
for three months. The next step is production of a prototype and user
interface, which usually takes about three months. After the IoT-module
and the application are created, the module needs to be connected to the
network, a process that usually takes six to nine months. Thereafter, when
the module is up and running, the customer needs service to replace
sensors and maintenance of the network. From then on, software and
license revenues keep coming in.
IoT Process
Source: Talkpool, Redeye Research
Talkpool is currently operating in 20 countries. The geographic sales
breakdown can be ranked as follows, from biggest to smallest: Haiti,
Germany, Benelux, Spain, Mauritius, Tanzania, Uganda, Botswana, Mexico
and Kenya, not including the latest acquisition of LCC Pakistan. With the
latest contracts with Digicel and Deutsche Telecom in mind, Haiti and
Germany are likely to become Talkpool’s biggest markets.
Long sales process within
IoT is underestimated by
the market
TalkPool
Company analysis 18
At present, Talkpool is not reporting TNS and IoT separately in its financial
reports, but we assume that gross margin is higher for IoT than for TNS. We
believe 4-6% of Talkpool’s revenue comes from IoT, but with the latest
acquisition of LCC Pakistan, IoT’s share of sales will increase slightly to 7-
9%. Going forward, the Company needs to increase IoT as a share of sales in
order to meet its financial targets. We hope Talkpool will report IoT
separately as it generates a larger portion of sales.
Growth strategy
Talkpool’s aggressive financial target of EUR 40m in revenue with an EBIT
margin of 8-12% by 2021 is intended to be met through organic and
acquired growth.
We have seen three acquisitions since 2016, where the acquisition of the
Pakistan company LCC stands out the most. The acquisition of LCC
Pakistan will nearly double its revenue and improve its financial stance as
LCC Pakistan had EBIT of 962 thousand euro in 2016. We believe that
Talkpool, with new share issues, will continue their M&A activity in order to
reach their financial targets.
Growth model
Source: Talkpool, Redeye Research
Sales by country
In thousand Euros 2016 % Of revenue 2015 % Of revenue 2014 % Of revenue
Haiti (Talkpool AG) 6333 55% 5973 58% 4903 55%
Mauritius 1171 10% 0% 0%
Tanzania (TalkPool Tanzania) 1166 10% 1235 12% 67 1%
Uganda (TalkPool Uganda) 726 6% 1118 11% 725 8%
Germany (TalkPool AG) 1395 12% 884 9% 2102 24%
Kenya (TalkPool Kenya) 163 1% 590 6% 41 0%
The Netherlands/Belgium 97 1% 0% 0%
Botswana (TalkPool Botswana JV) 292 3% 314 3% 64 1%
Mexico (TalkPool Mexico) 90 1% 105 1% 371 4%
Other (TalkPool Zambia/Ethiopia/Sweden) 138 1% 134 1% 581 7%
11571 10353 8854
Source: TalkPool, Redeye Research
Like to see IoT sales
reported separately
TalkPool
Company analysis 19
The strategy is to have a global network supported by local hubs that
provide local knowledge and expertise. The focus on local skills, niche areas
and local joint ventures will improve growth and strengthen the margins.
Talkpool will continue their strong growth through cherry-picked
acquisitions, the Global Partnership Platform and reinvesting the money
generated from TNS in IoT.
Global Partnership Platform
Talkpool’s Global Partnership Platform can be divided into two groups,
Joint Ventures and Franchising. Talkpool’s role in building strong Joint
Ventures and Franchising businesses is through a combination of:
• Operational manuals regarding running a business efficiently
• Credibility with customers and suppliers based on performance
record and skills
• Synergies in terms of tools, HR, marketing, finance and contacts
In a joint venture, the local partner owns shares in Talkpool’s local
subsidiaries where Talkpool AG is the majority owner of more than 51% of
equity. Talkpool Mauritius, established in 2016 jointly with a local partner,
is an example of the Company’s joint venture strategy. Talkpool Mauritius
is the subsidiary that won Huawei’s Outstanding Quality Award, evidence of
the success of Talkpool’s experience and local expertise.
Local joint ventures are an important part of Talkpool’s growth strategy
because they improve risk-sharing and encourage entrepreneurship
throughout the company. They also reinforce Talkpool’s service offering in
current markets and when expanding into new areas. Talkpool also uses
their buy-out option of the subsidiary if it achieves good results and
generates recurring revenue of 50%.
Franchising
Talkpool’s franchise programme mostly involves regions that are not in
Talkpool’s focus areas. Under the franchise programme, the franchisee
owns 100% of the shares in their company, but is required to pay a fee
calculated as a share of revenue directly to Talkpool, usually 5-10% of
revenue. The local provider who are interested in becoming a franchisee
often wants to be a part of a serious brand with a good network of clients.
Joint venture will encourage
entrepreneurship
throughout the company
TalkPool
Company analysis 20
Value creation through acquisitions
In 2016 and early 2017, Talkpool acquired two companies, Technetix and
Camouflage. In June 21 2017, the Company announced that they were
about to acquire LCC Pakistan from Tech Mahindra.
Growth through joint ventures - Camouflage
In September 2016, Talkpool acquired 65% of the shares in Camouflage and
its partner Cejege bought 35%. Camouflage is a niche company in telecom
equipment camouflaging. As IoT and 5G will demand more densely build
network sites, the camouflaging market is expected to grow rapidly.
Camouflage was acquired for EUR 900,000, which corresponds to a P/E
multiple of 3.8 times 2015 earnings. In 2015, Camouflage, had revenue of
EUR 960,000 with an impressive net margin of 25%.
Furthermore, Camouflage doubled its revenue between Q1 2017 and Q2
2017 while profits more than six-fold. We believe the agreement with
Cellnex covering O&M at 720 sites was the main reason for this
improvement. The acquisition of Camouflage shows that Talkpool is able to
cherry-pick companies in a fiercely competitive market. Notably, Cejege is
managed by Stan Schroeder, who serves on Talkpool’s board of directors.
Given the tremendous growth in sales as in profit, acquired at a low P/E
multiple of 3.7, we find this acquisition as very compelling.
Acquisition of Technetix
In early 2017, Talkpool acquired the Belgian company Technetix NV for
EUR 750,000 from Technetix Group at a P/EBITDA multiple of 4 based on
2016 earnings. Because Technetix was part of the Technetix Group, it is
difficult to determine its actual net profit, which is why we used P/EBITDA
as the multiple. Technetix is a small repair shop niched in fibre technology,
with revenues around EUR 1.5 m and an EBITDA margin above 25%.
Technetix has performed better than Talkpool expected, mostly due to the
partnership with DHL. Furthermore, with the help of DHL, Technetix has
become the turnkey provider for repairing electronic equipment for the
European military. However, the total value of this contract is yet unknown.
Technetix, just as Camouflage, showed impressive profit growth in Q2,
where profit had more than doubled compared with Q1. Our view of the
acquisition of Technetix is that Technetix has delivered strong growth in
profit and will continue going forward, as the agreement with the European
military will continue to generate stable profit and growth.
Camouflage’s profits more
than six-fold in 2017
TalkPool
Company analysis 21
The acquisition of LCC will Talkpool spark margins
The acquisition of the Pakistan network services and IoT company LCC was
a complicated process, mostly due to Swiss and Swedish regulations. The
major Indian tech firm, Tech Mahindra, was forced to sell LCC Pakistan due
to the conflict between India and Pakistan, where Talkpool won the open
bidding even though it did not offer the highest bid.
An acquisition in Pakistan may seem highly risky, but Talkpool’s director,
Stan Schreuder, worked for LCC Pakistan between 2002 and 2015, and thus
had insight into the company and experience in the Middle Eastern market.
With the acquisition of LCC, Talkpool will nearly double its revenue and
will hold the pole position when it comes to TNS in the Middle East. LCC’s
offering can be summed up in three points:
• Network optimization and O&M services
• IoT-solutions for mobile network monitoring
• Security and surveillance solutions like Safe City.
In the split financial year of 2016, LCC had revenues of EUR 9.9m and an
EBITDA margin of 15%. Of its total revenue, EUR 1m is said to come from
the IoT-segment. The price of LCC amounts to USD 5.2m, making a
P/EBITDA multiple of 3. We think that synergies in the long run can be
made a by moving SG&A to the middle east where high educated workforce
are cheaper.
Talkpool will mainly focus on keeping margins high and selecting contracts
with care. The acquisition of LCC also aligns with Talkpool’s strategic
objective of acquiring companies within IoT, as 10-15% of LCC’s revenue
comes from IoT. Now Talkpool can add its IoT-solutions to the Middle
Eastern market. LCC will be consolidated with Talkpool’s accounts in
November. From there on, it is likely that financial performance may be
more volatile because the Middle East market is exposed to political
instability. Our view of the acquisition of LCC is that Talkpool will be able to
establish a stable organization in the middle east while improving margins
going forward. Therefore, our belief is that LCC is a good acquisition by
Talkpool. One challenge for Talkpool is how they will be able to organize a
company which employees 1000 people.
The acquisition of LCC
opens an entire new
market for Talkpool
TalkPool
Company analysis 22
Conclusion
Talkpool has been able to cherry-pick acquisitions at an attractive price,
and the acquired companies have shown impressive growth after being
acquired by Talkpool. For this reason, we believe further acquisitions are
ahead, especially in the area of IoT.
Secure long-term growth
The long-term aim is to use the cash generated by the TNS business area to
develop in-house solutions and skills in the area of IoT, where Talkpool will
build solutions like applications, connectivity modules and end-to-end
solutions. In the future, the Company wants to run IoT-networks where the
customer pays for a subscription or for a package deal that Talkpool calls
IoT as a Service. This would make it a software company focused on
customised software solutions specific to the customer. Talkpool will
endeavour to achieve its financial targets through these focus areas.
Our view of the strategy
We believe Talkpool is focusing on the right areas for sustained growth. The
Company’s Global Partnership Platform seems to be paying off as the
acquired companies are generating continued profits, and entrepreneurship
is encouraged throughout the company. Furthermore, we believe the
acquisition of LCC Pakistan will improve Talkpool’s cost structure as they
will be able to allocate administration costs to the middle east. Thereby,
contributing higher margins and the potential to reach new areas in which
to expand Talkpool’s presence. Our view of the investments in IoT is that
they will bear fruit when we see major nationwide implementations of IoT-
networks.
Income Statement, euro 000s
2015
Company Talkpool Technetix LCC Camouflage
Revenue 11571 1500 9875 960
EBITDA -364 375 1481 317
EBITDA margin (%) -3% 25% 15% 33%
EBIT -409 NA 895 240
EBIT margin (%) -4% NA 9% 25%
Source: Talkpool, Redeye Research
2016Strong margins within
the acquired companies
TalkPool
Company analysis 23
Market
Telecom Network Services
Talkpool is exposed to over 20 markets on four continents. The largest
regions are the Middle East, Latin America and Europe.
According the research firm MarketsAndMarkets1, the entire market for
telecom managed services is expected to grow from USD 12 bn in 2017 to 23
bn by 2022, which implies a CAGR of 14%. The growth of the TNS-market is
primarily driven by two factors: growth of data consumption and operators’
needs to outsource network maintenance operations.
Continued strong growth of data consumption
Growth of data consumption will lead to expansion of the new network
technologies and the need for a more densely built radio network, to
thereby providing better coverage and data speeds. Data consumption is
estimated to grow from 8.8 exabits in 2016 to 71 exabits in 2022. In
addition, mobile subscriptions are, according to Ericsson2, estimated to
grow from today’s 7.5 bn to 9 bn subscriptions by 2022, a CAGR of 5%. The
amount of consumed data in Central and Eastern Europe, the Middle East
and Africa (CEMA) during this period is expected to multiply 22 times.
1 MarketsAndMarkets -Telecom Managed Services Market 2017 2 Ericsson Mobility Report 2017
Market of TNS
Source: MarketsandMarkets, Redeye Research
0
5
10
15
20
25
30
(EU
Rm
)
The market of TNS is
forecasted to an
impressive growth of 14%
TalkPool
Company analysis 24
Increased outsourcing to TNS providers
The other structural factor, outsourcing, implies that operators are focusing
on improving operational efficiency by eliminating CAPEX heavy activity as
part of their business processes. The structural trends within TNS are that
vendors and operators are eager to find new ways to lower their cost
structure and as a result many operators and vendors have chosen to
outsource O&M to local service companies. CAPEX-intensive work has
therefore been outsourced to service companies.
In Western Europe, according to McKinsey3, average revenue per costumer
(ARPU) drops 4% annually and is expected to continue along this path.
These trends, as said, have forced telecom providers to make their cost
structures as lean as possible, which is why they are outsourcing telecom
network services to local service providers.
Exposed to the fastest-growing market
Thanks to Talkpool’s acquisition of LCC Pakistan, the Company is now
exposed to the fastest-growing market, CEMA. The market is expected to
multiply its use of data traffic by eleven times from now until 2022, a CAGR
of 65%. Considering that the data in the region will multiply by eleven
times, the network infrastructure must improve substantially. For this
reason, 3G is expected to go from 30% to 50% of the market, while 4G
technology is expected to grow from 5% to 30% by 2022. The CEMA-market
will thus require more network stations, which will increase both
implementation and O&M for TNS-providers like Talkpool. Our belief is
that these trends will secure sustained growth for Talkpool.
Price issues within TNS
The structural problem within TNS is that the big operators have huge
pricing power, and providers have difficulty establishing competitive
advantage, which makes it hard for TNS-providers to maintain good
margins. As said, ARPU has dropped by 4% and is anticipated to continue
this path going forward. The operators are therefore being forced to cut
CAPEX related activities to lower costs in areas like O&M. Furthermore,
TNS-providers have a hard time establishing competitive advantage
compared to other providers because they are offering homogeneous
services, which makes it all boil down to costs. For this reason, we believe
that TNS-market will continue to experience intense price pressure.
3 McKinsey – Telecommunications industry at cliff’s edge 2016
CAPEX-related activities
will be outsourced to local
service providers
Very homogenous service
makes it hard to increase
the price
TalkPool
Company analysis 25
Our view of competitors within TNS
Talkpool is active in over 20 countries, which makes it exposed to many
competitors, ranging from small local outfits providers to multinationals
firms. The TNS-market is gigantic and is for that reason flooded with
competing companies, making the landscape very tough. There are some
multinational corporates, like Eltel and Camusat, that dominate large areas
of TNS, but Talkpool’s biggest competitors are in-house services provided
by the operators themselves and small, local TNS-providers.
Eltel is probably the company most of us think of when it comes to TNS,
which is no surprise considering that Eltel had revenue of EUR 1,340m in
2016. The difference is that Eltel has only minor exposure to emerging
markets and only 50% of its revenue comes from the communications
segment, compared to 90% for Talkpool. When Eltel attempts to enter a
new market, it tries to increase sales as quickly as possible, usually by
accepting large framework agreements with little to no room for profits. By
accepting large agreements at cheap prices, Eltel is able to quickly establish
itself as a major, dominant player.
Tech Mahindra is an India-based IT consultancy firm founded in 2006.
The company employs more than 115,000 people and is mainly exposed to
the Americas and the European market. Communications generate 50% of
the company’s revenue, making it a direct competitor to Talkpool. Talkpool
could acquire LCC Pakistan from Tech Mahindra due to the conflict
between Pakistan and India. Tech Mahindra is also developing its own IoT-
solutions. As of today, Tech Mahindra are not currently active in the same
geographic areas as Talkpool.
Sirti is an Italy-based private company founded in 1921, mostly focused on
the European market. Sirti employs more than 4,000 people, with two-
thirds of its workforce outside of Italy. The company’s core business areas
are Telecommunications and Energy infrastructures.
Huawei is a Chinese telecommunications equipment giant. The company
employs more than 180,000 people and has annual revenue of USD 75 bn.
Huawei has delivered impressive growth lately, mostly due to its low prices.
It has established an efficient cost structure that has put price pressure on
the entire telecommunications market. When Huawei enters a new market,
prices tend to drop. Talkpool has recently established itself as a trusted
partner to Huawei, thus receiving more contracts from Huawei.
TalkPool
Company analysis 26
Camusat is a France-based company that Talkpool often competes with.
The company employs more than 2,500 people and operates in more than
40 countries. Camusat is one of the market leaders in telecoms
infrastructure implementation, making it a direct competitor to Talkpool.
We believe Talkpool is mainly confronting Camusat in the Africa region,
which currently generates 16% of Talkpool’s sales. Talkpool recently took
over the O&M contract for Digicel’s network in the North of Haiti from
Camusat who had been managing the network for many years.
Market for the Internet of Things
Talkpool currently mainly sells IoT-solutions in Sweden and the Middle
East. These tend to be smaller IoT-projects to show proof of concept, but as
the market grows the chance of a big roll-out increases. According to
Ericsson, the entire IoT-market is expected to grow at a CAGR of 21 % until
2022, from 16 bn to 29 bn devices. It is worth pointing out that these
estimations vary greatly, from 20 bn to 200 bn connected devices by 2022.
Accelerated growth in Sweden
Sweden and Europe have historically lagged behind the USA and Asia when
it comes to implementation of IoT. However, Sweden is now heavily
investing to become the country with the highest implementation rate of
IoT in both the public and industrial sectors. Consequently, Vinnova, the
Swedish government agency that administers state funding for research and
development, has part-financed IoT-projects involving Talkpool. There are
currently 17 active strategic innovation programs, worth a total of SEK 1,190
m and with Vinnova financing 50% of the investment. Now we believe that
companies and cities are on the edge of implementing IoT as part of their
structure.
Categories within IoT
The market for IoT can be divided into two different segments, with each
segment having sub-segments.
• Critical IoT
• Massive IoT
The technology behind Critical and Massive IoT depends on the IoT-module
and the commercial areas it prioritises. Critical IoT is for devices that need
to continuously stream data with low latency, like the upcoming
autonomous cars and live video surgery.
Sweden making its effort
to become the country
with the highest
implementation rate of
IoT
TalkPool
Company analysis 27
Massive IoT, however, is mostly about monitoring data sent from modules.
Most Massive IoT devices just need to send a signal once a day or a few
times a day. In this analysis we will mainly focus on Massive IoT since this
is the area prioritised by Talkpool. The market for massive IoT consists of
smart cities, utilities, transport & logistics, industrial and agriculture.
Source: Northstream - Massive IoT: different technologies
Smart cities
According to Northstream4, smart cities are predicted to power over 270 m
devices by 2023, with a total market value of USD 740 m.
Smart cities include connected parking spaces, and things like the
monitoring of water, light, and waste bins. The advantages of implementing
IoT within cities are huge; a parking lot that uses an IoT-solution reduces
pollution by 30%. An entire city that has implemented IoT-modules to its
lightning system will save energy as the lights dim when no activity is
detected and brighten when movement occurs. Green cities have become a
huge trend lately, putting pressure on authorities to reduce pollution.
Talkpool already has a presence in smart cities and has worked on many
such projects. Talkpool initially built LoRa networks in Stockholm,
Gothenburg and Malmo. With a LoRa network up and running, Talkpool is
now able to use its connectivity module to transfer data between devices
and servers. For example, the implementation of Talkpool’s IoT-solution in
Gothenburg means the city is able to monitor air and water quality thanks
to Talkpool’s connectivity modules, which regularly send data to be
gathered and uploaded to a website.
4 Northstream – Massive IoT: different technologies for different needs
Talkpool have already
implemented their IoT-
solutions within smart
cities
TalkPool
Company analysis 28
LoRa Technology
Source: LoRa Alliance
Utilities and buildings
The total number of IoT devices in utilities and buildings is predicted to be
1,350 m by 2023, with a total market value of USD 2.8 bn.
Utilities mainly use IoT-solutions for water, gas and electricity meters, and
the advantages are immense. By linking modules to existing sensors,
companies are able to regularly receive data, thereby controlling how much
gas is distributed and to whom. Talkpool has been working on a long-
distance heating project that allows the client to see who has received heat,
where temperatures are too low or whether a leak has occurred. This is not
only a convenient solution for the company, but also adds information
about the customer; with the IoT-solution implemented, the company can
now see each individual customer’s consumption and create dynamic
pricing models. For IoT-solutions to work for utilities, the modules need to
have long battery life, strong coverage capabilities and be able to withstand
moisture. Current IoT-technologies that fit with these criteria are
everything except uncapped cellular solutions.
IoT in buildings is a huge market, but we will primarily focus on the areas
that Talkpool currently addresses. Talkpool is working with Anticimex on
implementing its IoT-solution in moisture meters, allowing Anticimex to
monitor its entire customer base and detect areas that could be affected by
mole, offering a huge saving for Anticimex. Another area where IoT could
be highly useful is in safety solutions, such as surveillance and smoke
detectors. If a fire breaks out, an entire building would receive a signal that
sounds every smoke detector, saving both lives and money.
IoT will create a more
dynamic business model
for many companies
TalkPool
Company analysis 29
Industry
IoT-solutions for industry are expected to encompass 270 m connected
devices and a total market value of USD 630 m.
The next-generation industry, also known as Industry 4.0, will be hugely
impacted by the implementation of IoT in its infrastructure. There are
countless reasons why a company would want to implement IoT into its
infrastructure; the possibility to improve a production line by making
devices able to communicate, and gathering data or connecting from
another part of the world are huge competitive advantages. IoT-solutions
for industry are likely to become Talkpool’s focus area if it wants to provide
IoT as a service. IoT-solutions for industry will be highly adaptable, with a
focus to fully customise its service for the customer’s needs.
Our view of competitors within IoT
As the IoT-market is under development, with little or no standardised
technology, it is hard to point out specific competitors, while there are
plenty of companies working in the IoT-segment, both small enterprises
and blue chip corporations. IoT companies in Sweden include Indentive,
WSI, Seebo, TelliQ, Telia Company and Tele2. Identive focuses on creating
an application that connects IoT-devices, while WSI mostly provides
consulting for customised IoT-solutions, making WSI and Talkpool direct
competitors in Sweden. As of 2016, WSI had revenue of SEK 51.3 m, which
was much more than Talkpool’s estimated IoT-revenue of EUR 2 m,
including the acquisition of LCC.
It is now very important to have a local presence when delivering IoT-
solutions; Talkpool needs to work closely with its customers in order to
create an IoT-solution that could be integrated in a business structure.
LCC strengthens Talkpool’s competitive advantage
Talkpool’s latest acquisition of LCC Pakistan provides it with another IoT-
component in its product portfolio, and Talkpool’s ability to offer local
presence on the other side of the globe gives it a huge competitive
advantage. However, Talkpool in Sweden and Pakistan will offer similar
solutions and will compete with local IoT-companies in both markets, so to
stay competitive Talkpool will need to keep focused on product
development and work closely with its customers.
Industry will be the focus
area when Talkpool going
to provide IoT as a service
LCC have implemented
more than 3000 IoT-
modules for mobile
network management
TalkPool
Company analysis 30
Driven by large telecom operators
The growth of IoT is very much at the mercy of the big telecom operators.
IoT needs a common network technology that is both economical for the
operators and demanded in the market. There are plenty of big corporates
focusing on the growing IoT-market and, as mentioned earlier, Verizon and
other huge American companies are implementing IoT-networks.
Norwegian telecom operator Telenor has rolled out what it calls the biggest
implementation of NB-IoT, in Karlskrona. The argument was that there will
soon be no financial or technical threshold to connecting devices to the
internet, according to Andreas Kristensson, who is responsible for
innovation with business customers at Telenor. Meanwhile Swedish
operator Tele2 is debating an implementation of a nationwide LoRa
network. This all comes down to the “prisoner’s dilemma”, since the
company wants to implement an IoT-network while the operators struggles
to see economic value.
Opportunities for Talkpool
The acquisition of LCC Pakistan doubles Talkpool’s revenue, improves its
margin and opens up a whole new market. We believe the market greatly
underestimates Talkpool’s latest acquisition of LCC Pakistan as it will
improve the Company’s cost structure and expanding its existing IoT-
portfolio.
Talkpool has been awarded two big turn-key contracts, one in
implementation and one for O&M. Talkpool recently announced a
framework agreement with Digicel under which it will be the main O&M
provider globally, and the following day it announced it had been awarded
100% of Digicel’s network in Haiti, up from 66%. Going forward, we believe
that Talkpool will begin to conduct O&M activities in new countries
alongside Digicel, to later become the turnkey provider in that country.
Digicel is active in more than 30 countries, making the growth potential of
just this agreement great.
We assume that Talkpool is well positioned if a nationwide implementation
of IoT occurs, as they have been working closely with Tele2. Furthermore, it
is when the IoT-network has been rolled out when we see a serious increase
in investment towards IoT. For these reasons, we believe that the Company
is well positioned in the ongoing industrial transformation to “Industry 4.0”.
Interest towards IoT is
increasing fast
Great growth possibilities
in South America
TalkPool
Company analysis 31
Financial forecasts
Talkpool has historically been profitable, but in 2016 costs related to its IPO
and investments in IoT led the Company to negative margins. However, in
Q2 2017 Talkpool turned this trend with an impressive gross margin of 24%
and an EBITDA margin of 0.9%.
Since 2016, Talkpool has acquired three companies that will spark revenues
and margins going forward. Pro forma revenue in 2016 amounted to 21.4
EURm, compared to actual revenue of 11.6 EURm.
The financial target of 40 EURm with an EBIT margin of 8-12% in 2021 is
very ambitious, in our view, as it requires organic revenue growth of 17%
CAGR (including the acquisition of LCC Pakistan). We therefore believe
that Talkpool needs to continue with M&As to reach this target by 2021.
Furthermore, for Talkpool to reach an EBIT margin of 8-12% by 2021 the
IoT-segment needs to expand substantially as a proportion of sales as we
believe that TNS only have potential to reach EBIT margin of 8%.
Sales estimates
Telecommunication network service
In H1 2017, Talkpool increased its sales by 35% (EUR 6.9m), with 9% from
organic growth. Talkpool has recently been awarded two big turnkey
contracts that will substantially increase its sales in TNS. Our sales
estimates for TNS in the short and medium term are based on the turnkey
agreements and structural growth of 13% in the TNS-market, without
considering any new acquisitions. Our assumptions for 2018 are:
• Acquisition of LCC Pakistan will contribute to sales of EUR 9.9m
and EBITDA of EUR 1.5m.
• The big framework agreement with Deutsche Telekom have
potential to reach EUR 5m annually over the next 8 years.
• Turnkey provider for Digicel in Haiti will be worth USD 7m
annually over the next 5 years.
• O&M of 720 sites for Cellnex in Benelux will be worth EUR 1.5m
over the next 3.5 years.
• There will be a global framework agreement with Digicel covering
O&M services for all of Digicel’s 33 markets.
Big framework agreement
will spark revenue
TalkPool
Company analysis 32
Another assumption is that currencies remain unchanged. However, as
Talkpool are active in over 30 countries makes them exposed to fluctuations
in currencies. The fact that Talkpool has recently been awarded big turnkey
contracts makes us confident that it will be able to deliver strong organic
growth. We assume that the contract with Deutsche Telekom is in a ramp
up-phase. Thus, sales in Germany in Q2 2017 amounted to just EUR 401k.
Our assumption, going forward, is that Talkpool will reach sales of EUR 5m
in Germany in the next 2-3 years. There also is a possibility that Talkpool
will extend the contract with Deutsche Telekom as it currently only operates
in the eastern region of Germany.
Talkpool recently announced that it has become Digicel’s main provider of
O&M for the entire Haiti network, from 950 to 1,450 sites. The framework
agreement with Digicel is estimated to generate revenue of USD 7m
annually. Furthermore, the Company has been named Digicel’s main O&M
provider in all Digicel’s 33 markets. This offers huge growth potential as
Talkpool currently only works with Digicel in Haiti. Going forward, we
estimate that Talkpool will be able to provide O&M activities in countries
other than Haiti.
Internet of Things
Forecasts for the IoT-market give rise to significant uncertainty since the
expected growth has historically been delayed. Talkpool also commented on
this in its Q2 2017 report, showing the complexity of the IoT-market.
Talkpool does not currently disclose the proportion of its sales from IoT.
Our assumption is that, including the acquisition of LCC Pakistan, Talkpool
had IoT-revenues of EUR 0.8-1.2m pro forma in 2016. Talkpool has a track
record in implementation of IoT-networks and has in the past worked with
Tele2.
Sales by country
(EURt) 2014 2015 2016 2017E 2018E 2019E
Middle East 0 0 0 1650 10000 10500
Haiti (Talkpool AG) 4903 5973 6333 6540 7448 7597
Benelux 0 0 97 2230 2730 2770
Germany (TalkPool AG) 2102 884 1395 1594 2500 3500
Mauritius 0 0 1171 1112 1112 1001
Tanzania 67 1235 1166 1108 997 878
Other 1782 2261 1409 1986 1986 1867
Total Sales 8854 10353 11571 16220 26773 28112
Growth % 17% 12% 40% 65% 5%
Source: Talkpool, Redeye Research
Impressive growth in
many countries
TalkPool
Company analysis 33
We believe that the Scandinavian IoT-market is standing on the edge of a
nationwide implementation of IoT-networks. If Tele2 implements a
nationwide LoRa network it is likely that Talkpool will build it. The total
value of any such implementation is yet unknown.
We believe that Talkpool’s IoT-sales will increase in line with the Nordic
market, by 15-25% annually, implying that Talkpool will continue with
minor proofs of concept projects for industry. These estimates do not
include any major roll-outs.
Conclusion
With the assumptions regarding growth within TNS and IoT we believe that
Talkpool will increase sales substantially the following years ahead.
Talkpool: IoT-sales
Source: Redeye Research
1,00
1,20
1,40
1,64
0,00
0,20
0,40
0,60
0,80
1,00
1,20
1,40
1,60
1,80
(EU
Rm
)
Talkpool: Sales & Growth
Source: Redeye Research
0%
10%
20%
30%
40%
50%
60%
70%
0
5
10
15
20
25
30
35
2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Gro
wth
(%
)
Sa
les (
EU
Rm
)
Sales Growth (%)
The Nordic IoT-market is
estimated to grow 15-25%
TalkPool
Company analysis 34
Cost estimates
Lately, we have seen that Talkpool have been focusing on slimming its cost
structure. This was shown in Q2 2017, when the Company reduced its
OPEX by 6% compared with Q1 2017. Furthermore, as sales grow, we
expect that OPEX as a proportion of sales will decrease from 22% (2016) to
around 16% (2018). Our estimates assume that the acquisition of LCC does
not create any synergies. We believe that administrative expenses will be
flat in 2018. However, we predict that future savings could be made by
moving administrative costs to the Middle East.
Our estimates indicate that Talkpool will increase deprecation substantially
because of the acquisition of LCC, from today’s EUR 74k to EUR 321k in
2018. Interest expense is also expected to increase since parts of the
acquisitions were financed with debt. We believe that interest expense will
amount to EUR 20k annually.
We estimate that Talkpool currently invests EUR 200-300k annually in
IoT-product development. We assume that LCC invests approximately the
same, which contributes to a total cost of around EUR 500k annually. We
expect that investment in IoT will increase to EUR 800k in 2020.
In near term, Talkpool’s share issue is costing the Company a lot of money.
The estimated one-time cost of the share issue amounts to EUR 800k.
However, small amount of the cost will impact the income statement.
Margin estimates
Our estimates for 2017 and going forward, are that gross margin in TNS is
20% and in IoT 80%. Furthermore, we assume that Talkpool will improve
their overall gross margin to 22%, thanks to all of the acquired companies
show higher margins and increased sales of IoT. In Q2 2017 Talkpool
showed an impressive gross margin of 24%, which is higher than the
margin within TNS (20%) and the highest gross margin ever from the
Company. The explanation for the high margin was that acquired
companies Technetix and Camouflage showed strong growth and had 30%
gross margins. Going forward, our prediction is that Talkpool, thanks to the
acquisition of LCC Pakistan, will improve its margins substantially. In
addition, we believe that LCC will contribute EBITDA of EUR 1.5m (15%) in
2018.
In Q2 2017 Talkpool
showed the highest gross-
margin ever.
TalkPool
Company analysis 35
Talkpool’s financial target of achieving an 8-12% EBIT margin in 2021 is, in
our mind, too optimistic, and our forecast is a more conservative 6-7%.
Worth pointing out is that our forecast does not include any M&A activity.
Balance sheet
Talkpool has recently acquired a company the same size as itself, LCC,
which makes it hard to evaluate a precise balance sheet going forward. The
pro forma balance sheet for 2016 has a total value of EUR 14.7m. The cash
position after the acquisition of LCC totals EUR 2.4m, depending on
amortization of guarantors debt. The total long-term debt amounts to EUR
4.7m, giving an equity/assets ratio of 19%.
Investors should be aware of the negative cash flow and the current assets,
as they represented 50% of total revenue in the pro forma. We assume that
Talkpool will be able to deliver positive cash flow in Q1 2018 and going
forward. For these reasons, we believe that a future share issue, which are
not related to future acquisitions as.
Talkpool: Margins
Source: Redeye Research
-5%
0%
5%
10%
15%
20%
25%
2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Sa
les (
EU
Rm
)
Gross - Margin EBIT - Margin
Strong balance sheet with
low amount of debt
TalkPool
Company analysis 36
Conclusion
In summary, we believe that Talkpool will increase its sales substantially
while improving its margins. However, the lack of history for the latest LCC
acquisition makes it hard to evaluate future margins. We believe that
Talkpool stands on the edge of increased revenue and improving margins,
as evidenced in the last quarterly results. We believe that OPEX will
decrease as a share of sales in the years to come, which will also boost
margins. Furthermore, we expect that OPEX can be lowered in the long run
by shifting administration costs to the Middle East.
Going forward, we believe that Talkpool will be able to achieve an weighted
EBIT margin of 4% and revenue growth of 22% during the period of 2016-
2021.
OPEX as part of sales will
decrease as the sales
rapidly increases
Talkpool: Estimates
(SEKm) 2016 Q1'17 Q2'17 Q3'17E Q4'17E 2017E Q1'18E Q2'18E Q3'18E Q4'18E 2018E 2019E
Revenue 11.5 3.5 3.4 3.7 5.2 16.2 6.4 6.7 6.8 6.9 26.7 28.4
Gross Profit 2.1 0.67 0.84 0.74 1.04 3.3 1.41 1.47 1.50 1.51 5.89 6.24
EBITDA -0.36 -0.13 0.09 -0.04 0.07 -0.68 0.35 0.39 0.41 0.42 1.57 1.80
EBIT -0.41 -0.15 0.07 -0.05 0.01 -0.79 0.27 0.31 0.33 0.34 1.25 1.46
EPS (EUR) -0.23 -0.04 -0.03 -0.01 0.00 -0.26 0.02 0.03 0.04 0.06 0.15 0.19
Growth (%) 12.00% 41.0% 30.0% 30.0% 55.0% 40.0% 77.1% 91.2% 83.8% 38.5% 65.0% 6.0%
Gross Margin (%) 18.5% 19.4% 24.4% 20.0% 20.0% 20.8% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%
EBITDA Margin (%) -3.1% -3.8% 2.5% -1.0% 1.9% -4.2% 5.5% 5.7% 6.0% 6.16% 5.9% 6.34%
EBIT Margin (%) -3.5% -4.3% 2.0% -1.5% 0.3% -4.9% 4.2% 4.6% 4.8% 5.0% 4.7% 5.2%
Source: Talkpool, Redeye Research
TalkPool
Company analysis 37
Valuation
In our valuation of Talkpool, we have applied discounted cash flow (DCF) to
three scenarios: the base case (most likely), the bull case (optimistic) and
the bear case (pessimistic). A peer valuation is also included to complement
the DCF-valuations.
In all our scenarios, we use a required rate of return (WACC) of 12.2% based
on the Redeye Rating of the company’s qualities and an effective tax rate of
22%.
Discounted Cash Flow
Base case
All the numbers presented in this section are from the financial forecasts.
Our base case uses the following assumptions during the period 2017-2021:
• Acquisition of LCC Pakistan will contribute to sales of EUR 9.9m
and EBITDA of EUR 1.5m. Further M&A activity is not included.
• The big contract with Deutsche Telekom have potential to reach
EUR 5m annually over the next 8 years.
• Turnkey provider for Digicel in Haiti will be worth USD 7m
annually over the next 5 years.
• O&M of 720 sites for Cellnex in Benelux will be worth EUR 1.5m
over the next 3.5 years.
• There will be a global framework agreement with Digicel covering
O&M services for all of Digicel’s 33 markets.
• Going forward we believe that as sales of IoT increases the margins
will increase.
We predict that Talkpool will be able to grow its sales by 22% CAGR and its
gross profit by 28% CAGR in the period 2016-2021. This implies that the
big framework agreements start to make an impact on sales and margins.
In additional, we forecast that Talkpool will be able to grow by 5% annually
with a weighted EBIT margin of 5.5% during the period 2018-2021. This
implies a growth in the market of TNS of 13%, because of the trend towards
outsourcing and good cost control by Talkpool. The terminal growth rate
amounts to 2% and with an EBIT margin to almost 10%, because of
improved cost structure and IoT as part of sales increases.
TalkPool
Company analysis 38
The DCF value of Talkpool in our base case amounts to SEK 38 per share.
Bear case
Our bear case assumes that one or more of our negative scenarios will
materialise such as failed LCC integration, slow growth in IoT and the price
pressure within TNS. The greatest risk, in our view, is that price pressure
will continue since the services provided are homogeneous. We thus believe
it is possible that Talkpool will fail to reach its financial target.
In our bear case we assume that Talkpool achieves a lower weighted gross
margin of 20% in the period of 2018-2025, which implies a weighted EBIT
margin of 3.5%. The sales will also be lower, especially in the segment of
IoT. Here we estimate a total revenue growth of 4% CAGR, where IoT-sales
only increases with 10% CAGR. Our long term assumptions are a revenue
growth of 2% with an EBIT-margin of 7.4%.
Another assumption is that the acquisition of LCC fails to generate the
margins estimated in the base case. Talkpool therefore has trouble with the
integration of LCC, implying that there will be no cost structure synergies.
Our bear case assumptions results in a fair value of SEK 26 per share.
Bull case
Our bull case assumes that Talkpool will be able to generate better margins
as IoT grows as a share of sales, which improves margins substantially. This
scenario incorporates that a nationwide IoT-network is implemented and
Talkpool works with major industries on its IoT-solutions.
We assume that that Talkpool is awarded more framework agreements
within TNS going forward and that it takes market shares in Middle Eastern
regions other than Pakistan.
Base case DCF valuation Cash flow, MEUR
WACC (%) 12.2 % NPV FCF (2017-2019) 0
NPV FCF (2020-2026) 6
NPV FCF (2027-) 13
Non-operating assets 0
Interest-bearing debt -1
Fair value estimate MEUR 18
Assumptions 2017-2023 (%)
Average sales growth 14.1 % Fair value e. per share SEK/EUR 38 / 4.0
EBIT margin 4.8 % Current share price 41
Source: Redeye Research
Strong growth with better
margins will create
shareholder value
TalkPool
Company analysis 39
This leads to higher revenue growth and higher net income. We assume that
Talkpool achieves annual revenue growth of 7% in the period of 2018-2021
and 6% growth in the period of 2021-2025.
Another assumption is that Talkpool improves its margins in TNS as a
result of the acquisition of LCC. Now, thanks to the acquisition of LCC,
Talkpool can offer highly educated people at a lower cost, which we believe
will increase the gross margin. We also believe that further big framework
agreements will be awarded Talkpool and with improved cost control will
improve margins.
We predict that Talkpool will be able to achieve a weighted gross margin of
25% in the period of 2017-2025, which implies a weighted EBIT-margin of
9.6%. We expect that the terminal growth amounts to a 2% growth and a
EBIT-margin of 12%.
These estimates corresponds to a fair value of SEK 49 per share.
All scenarios
Valuation Scenarios: Estimates summary (EURm)
(EURm)
2018E 2021E 2025E 18-21E 18-24E
Net sales
Bear 25 28 32.6 3.7% 3.8%
Base 27 31 38.0 5.3% 5.1%
Bull 27 33 41.6 7.0% 6.5%
EBIT
Bear 0.4 0.8 2.4 31.4% 30.8%
Base 1.3 2.1 3.6 18.4% 16.6%
Bull 1.3 2.9 5.1 32.6% 22.2%
EBIT (%)
Bear 1.5% 3.0% 7.4%
Base 4.7% 6.6% 9.6%
Bull 4.7% 8.9% 12.2%
Source: Redeye Research
(EURm) CAGR (%)
TalkPool
Company analysis 40
Peer valuation
As Talkpool is active within an already well established sector, it is fairly
easy to find rather similar peers. To give a better picture of the sector we
have created two peer groups, one for high growth companies and one for
lower growth companies.
The table shows that valuation multiples vary significantly, making it
challenging to assign Talkpool a certain multiple. Talkpool has very high
sales growth, but a weaker EBITDA-margin than most of its peers.
However, Talkpool can be said to be undervalued in terms of most of the
multiples. Our base case of SEK 38 per share implies EV/sales 2018E of 0.8
and EV/EBITDA 2018E of 14.9. This means Talkpool is valued at a discount
on the EV/sales-multiple, but the higher EV/EBITDA-multiple than its
peers implies that the Company will need to live up to our assumptions of
further increasing revenue and margins. We judge that these multiples
support our base case valuation of Talkpool.
Peer Valuation Enterprise Value
(SEKm) 17E 18E 17E 18E 17E 18E 17E 18E 17E 18E
High Growth
Hexatronic 2621 2.2 1.7 15.2 12.7 28 23 50 16 12.9 13.4
Allgon 242 1.4 0.9 18.6 10.9 48 18 53 23 6.1 8.3
Waystream 72 0.9 0.7 5.9 5.0 -184 61 27 29 16.0 14.3
Average 978 2 1 13 10 38 34 43 23 12 12
Median 242 1 1 15 11 38 23 50 23 13 13
Low Growth
Eltel 6220 0.5 0.5 N.a 13.1 N.a. 22.6 -5.5 -8.0 -0.9 4,0
Tech Mahindra 42586 1.3 1.1 8.7 7.5 12.8 12.2 5.3 9.7 14.2 15,0
Nokia 220335 1,0 1,0 8.1 7.7 14.5 14.9 -3.0 -2.6 12.2 13.2
Ericsson 178554 0.9 0.9 11.3 10,0 88.2 31.8 -8.9 -4.1 7.8 9.2
Average 111924 0.93 0.88 9.4 9.6 38.5 20.4 5.3 9.7 11.4 10.4
Median 110570 0.95 0.95 8.7 8.9 14.5 18.8 5.3 9.7 12.2 11.2
Talkpool 229 1.4 0.8 -34.4 14.9 -16 27.7 40 65 0.0 5.9
Source: Bloomberg, Redeye Research
EV/Revenue (x) EV/EBITDA (x) P/E (x) Revenue Growth (%) EBITDA-margin (%)
TalkPool
Company analysis 41
Conclusion
Since the IPO, Talkpool’s stock have been a rollercoaster. The interest for
the share was huge and we judged that investors´ expectation was too high.
In Q1’16 and Q2’16 results were not in line with the investors´ expectations
which made the share price fall. Recently, we have seen the share price
bump 55% in 3 months as a result of two major framework agreements have
been awarded Talkpool and the pressure from the share issue regarding
LCC has been resolved. We believe that these factors going to effect the
share price going forward:
• Talkpool will, thanks to the acquisition of LCC, improve revenue
and margins.
• Talkpool stands on a more financial stable ground with the new
framework agreements.
• Going forward, IoT will spark margins.
For these reasons, we believe that Talkpool should be valued at SEK 38 per
share. Looking at the peer competition we see that Talkpool is valued under
its peers in most of the multiples, which is not strange considering the low
EBITDA-margin. However, we believe that Talkpool in the future will
increase margin and thereby worth a higher multiple.
Valuation Scenarios
Scenarios: Bear Base Bull
Fair Value 26 38 49
Source: Redeye Research
Talkpool’s share price
amounts to SEK 41.3
TalkPool
Company analysis 42
Appendix
Management and ownership is especially important when it comes to
investing in smaller growth companies as these firms tend to rely on
individuals compered to larger companies.
Management & board
CEO: Erik Strömstedt
Erik Strömstedt has been the group CEO since 2005. Prior to working at
Talkpool, Strömstedt has had management positions in ICT companies like
Ericsson and IBM. He holds a Master of Science in Industrial Engineering
and Management from Linköping Institute of Technology. Erik controls
262 545 of the shares in Talkpool.
Chairman of the board and founder: Magnus Sparrholm
Magnus Sparrholm, the founder of Talkpool (in 2000) has been with ever
since. Prior to working at Talkpool, he was the managing director of
Technical Consulting Group GmbH. He was also a Lieutenant reservist as
Captain of amphibious war ships at Marinens
Krigshögskola/Kustjägarskolan. Sparrholm holds a Master of Science in
Engineering Physics from Lund University with a master thesis in high
energy particle physics at CERN. Sparrholm owns 1 433 545 of the shares in
Talkpool.
CTO and board member: Stefan Lindgren
Stefan Lindgren is a member of the board and CTO of Talkpool. He is also
the Chairman of the board of IoT company within Talkpool AB Sweden,
where Talkpool AG owns 26% of Talkpool AB Sweden. Lindgren has several
years of experience in different management roles within Ericsson AB. He
holds a Master of Science in Engineering Physics from Uppsala University
(Sweden). Stefan holds 53 243 shares in Talkpool AG.
CFO: Hanna Rubensson
Hanna Rubensson have since 2016 worked on a consultant basis for
Talkpool. Prior to working at Talkpool, she was working at KPMG as an
auditor for many listed companies and as a CFO within finance. Rubensson
holds a Master degree in business and finance from Stockholm University.
TalkPool
Company analysis 43
Board member: Constantinus Schreuder
Constantinus Schreuder has been member of the board since 2016.
Schreuder was the Owner and Managing Director of Cejege BV, who is a
joint venture partner in the acquisition of Camouflage. Other relevant
experience is that Schreuder was the managing Director in LCC
International, the new big acquisition. Constantinus holds a Bachelors
degree from the Technical Business School in Eindhoven. He does not own
any shares in Talkpool. Nevertheless, he owns 35% of the shares in
Camouflage.
IoT technologies
5G and 4G technologies can handle the highest bandwidth, transfer data
continuously, and have very low latency and long range, but drain batteries
quickly. Furthermore, current uncapped 4G and 5G solutions come with
expensive subscriptions. Few operators and developers are currently
working on IoT-solutions in this field. We believe this solution will be the
standard for up and coming high-end products like autonomous cars.
Long Term Evolution for Machines (LTE-M) technology works on regular
4G cellular antennas, where a signal is transferred between the module and
the 4G antenna. The advantage of IoT-modules with LTE-M technology is
that they can enter a power saving mode that turns off most of the module
except the antenna. When the module turns back on, the antenna is already
connected to a 4G antenna, which makes the boot-up quicker and more
efficient. The data is also capped to 1 mbps, while the data received by the
module can be decoded quickly - all to minimise the drain on batteries and
air time. Thanks to the power saving mode, modules are predicted to last up
to 10 years with just two AA batteries. Another advantage is the range
capability of this technology as, in theory, it can be a huge 100 kilometres to
the nearest 4G antenna, making it a very convenient solution for existing
operators.
TalkPool
Company analysis 44
Coverage of LTE-M in USA
Source: Verizon
The LTE-M solution is being promoted by the big carriers since it does not
have high installation costs and the technology can be applied within the
existing 4G network. In 2017, carriers like Verizon and AT&T have
implemented the first nationwide adoption of LTE-Cat1, which is a huge
step for the entire IoT-market.
Narrowband IoT (NB-IoT) is similar to LTE-M. The main difference is that
NB-IoT operates in a specific spectrum of 3G that does not conflict with any
other signals. The technology behind the NB-IoT solution is comparable
with LTE-M. It locks the bandwidth at a low level, 20 kbps, which is less
than the LTE-M solution. However, it also provides good coverage,
especially in indoor environments like garages. The module is also said to
be able to run in power saving mode, which means it is energy efficient and
could last up to 10 years. It is therefore believed that the NB-IoT solution
will be implemented in products were less data input is needed. Orange
recently dropped out of its investment in NB-IoT as it believes the
ecosystem is immature and sees better options with LTE-M and LoRa
technologies.
Products that fit with NB-IoT or LTE-M technologies are devices that do not
need to continuously send or receive data. Applications like smart cities,
utilities, agriculture and localisation perfectly fit in this category. Another
important factor is that Talkpool is relative non-cyclical
TalkPool
Company analysis 45
Summary Redeye Rating
The rating consists of five valuation keys, each constituting an overall
assessment of several factors that are rated on a scale of 0 to 2 points. The
maximum score for a valuation key is 10 points.
Management 8.0p
CEO Erik Strömstedt has extensive experience from the telecommunications industry. Magnus Sparrholm, the founder of Talkpool, is still chairman of the board. Overall, this is an experienced management team with industrial knowledge. For higher score, we want to see IoT disclosed as part of sales.
Ownership 9.0p
We regard the ownership structure as very respectable. The management and board hold a large number of the total shares. The largest shareholder, Magnus Sparrholm, holds 33% of total shares. In the last share issue Mr Sparrholm subscribed for shares worth a total EUR 11m, showing his dedication as the largest shareholder.
Profit outlook 4.5p
Talkpool has historically had a high portion of recurring revenue (40%) with stable gross profit. The problem lies in the TNS-market, where it is directly exposed to pricing pressure. We therefore believe that it will be hard for Talkpool to achieve an EBIT margin in excess of 8% within the TNS-segment. However, the combination of IoT and TNS will give Talkpool a competitive advantage and thus higher prices.
Profitability 2.0p
It is difficult to assign a higher rating since Talkpool has historically not shown positive net income. We expect to see net income improve on the back of increased revenue and improved cost structure, which will boost this rating. Once the company is able to show positive net income and improved profits, this rating will improve.
Financial strength 4.0p
Talkpool have just a small amount of debt which makes their financial stability as raver favorable. After the share issue it is likely that Talkpool will have a cash position of SEK 5m, depending on the amortization of guarantors debt. A good thing for Talkpool is that the Company is not largely exposed to business cyclically. The reason why Talkpool did not receive a higher rating is due to that there is a few client who covers a big part of total sales and that Talkpool in the past have shown negative cashflow. .
TalkPool
Company analysis 46
Income statement 2015 2016 2017E 2018E 2019E
Net sales 10 12 16 27 29 Total operating costs -10 -12 -16 -25 -27
EBITDA 1 0 0 2 2
Depreciation 0 0 0 0 0
Amortization 0 0 0 0 0 Impairment charges 0 0 0 0 0
EBIT 1 0 0 1 1
Share in profits 0 0 0 0 0
Net financial items 0 0 -1 0 0 Exchange rate dif. 0 0 0 0 0
Pre-tax profit 0 -1 -1 1 1
Tax 0 0 0 0 0
Net earnings 0 -1 -1 1 1
Balance 2015 2016 2017E 2018E 2019E
Assets
Current assets Cash in banks 1 0 2 2 2
Receivables 2 2 4 5 6
Inventories 1 2 4 5 5
Other current assets 0 1 2 2 2 Current assets 4 5 13 15 15
Fixed assets
Tangible assets 0 0 1 1 1
Associated comp. 0 0 0 0 0
Investments 0 0 0 0 0 Goodwill 0 0 0 0 0
Cap. exp. for dev. 0 0 0 0 0
O intangible rights 0 0 0 0 0
O non-current assets 0 0 0 0 0
Total fixed assets 1 1 2 2 2
Deferred tax assets 0 0 0 0 0
Total (assets) 4 6 15 17 17
Liabilities Current liabilities
Short-term debt 0 0 2 2 2
Accounts payable 1 1 5 6 6
O current liabilities 2 3 1 1 1
Current liabilities 2 4 8 8 9
Long-term debt 1 1 4 4 4
O long-term liabilities 0 0 0 0 0
Convertibles 0 0 0 0 0
Total Liabilities 3 5 12 13 13
Deferred tax liab 0 0 0 0 0 Provisions 0 0 0 0 0
Shareholders' equity 1 1 3 4 5
Minority interest (BS) 0 0 0 0 0
Minority & equity 1 1 3 4 5
Total liab & SE 4 6 15 17 17
Free cash flow 2015 2016 2017E 2018E 2019E
Net sales 10 12 16 27 29
Total operating costs -10 -12 -16 -25 -27
Depreciations total 0 0 0 0 0
EBIT 1 0 0 1 1 Taxes on EBIT 0 0 0 0 0
NOPLAT 1 0 0 1 1
Depreciation 0 0 0 0 0
Gross cash flow 1 0 0 1 1
Change in WC -1 -1 0 -1 0 Gross CAPEX -1 0 0 0 0
Free cash flow -1 -1 0 0 1
Capital structure 2015 2016 2017E 2018E 2019E
Equity ratio 19% 23% 21% 23% 27% Debt/equity ratio 122% 95% 186% 162% 125%
Net debt 0 1 3 4 4
Capital employed 1 2 7 8 8
Capital turnover rate 2.5 1.9 1.0 1.6 1.7
Growth 2015 2016 2017E 2018E 2019E
Sales growth 17% 12% 37% 69% 7%
EPS growth (adj) 0% 0% -30% -199% 11%
Profitability 2015 2016 2017E 2018E 2019E
ROE NA -62% -33% 21% 19%
ROCE NA -19% 0% 13% 14%
ROIC NA -36% -1% 16% 14%
EBITDA margin NA -3% 1% 6% 6% EBIT margin NA -4% 0% 5% 5%
Net margin NA -6% -5% 3% 3%
Data per share 2015 2016 2017E 2018E 2019E
EPS NA -0.22 -0.15 0.15 0.17 EPS adj NA -0.22 -0.15 0.15 0.17
Dividend NA 0.00 0.00 0.00 0.00
Net debt NA 0.26 0.74 0.85 0.79
Total shares NA 3.00 4.72 4.72 4.72
Valuation 2015 2016 2017E 2018E 2019E
EV NA 11.4 21.7 22.2 21.8 P/E NA -15.5 -24.5 24.8 22.3
P/E diluted NA -15.5 -24.5 24.8 22.3
P/Sales NA 0.9 1.1 0.7 0.6
EV/Sales NA 1.0 1.4 0.8 0.8 EV/EBITDA NA -31.3 205.6 14.1 12.5
EV/EBIT NA -27.0 -
2,332.8
17.8 15.3
P/BV 0.0 7.7 5.8 4.7 3.9
Share information
Reuters code TALKP.ST
List Nasdaq First North Share price (SEK) 41.3
Total shares, million 4.7
Market Cap, MEUR 20.0
Management & board
CEO Erik Strömstedt
CFO Hanna Rubensson
IR Erik Strömstedt Chairman Magnus Sparrholm
Financial information
Q3 report November 30, 2017
Q4 report March 30, 2018
Analysts Redeye AB Anton Wester Mäster Samuelsgatan 42, 10tr
[email protected] 111 57 Stockholm
Dennis Berggren [email protected]
DCF valuation Cash flow, MEUR
WACC (%) 12.2 % NPV FCF (2017-2019) 0
NPV FCF (2020-2026) 6 NPV FCF (2027-) 13
Non-operating assets 0
Interest-bearing debt -1
Fair value estimate MEUR 19
Assumptions 2017-2023 (%) Average sales growth 14.1 % Fair value e. per share, SEK 38
EBIT margin 5.4 % Share price, SEK 41.3
Share performance Growth/year 15/17e
1 month 11.5 % Net sales 23.6 %
3 month 61.1 % Operating profit adj NA 12 month -12.7 % EPS, just 0.0 %
Since start of the year 13.5 % Equity 98.9 %
Shareholder structure % Capital Votes
Magnus Sparrholm 48.1 % 48.1 %
Erik Strömstedt 8.8 % 8.8 % IT Talks Sweden AB 3.4 % 3.4 %
KPR Capital 2.0 % 2.0 %
Ludwig Fresenius 1.0 % 1.0 %
Lena Sparrholm 0.7 % 0.7 % Comperte AB 0.5 % 0.5 %
TalkPool
Company analysis 47
Revenue & Growth (%) EBIT (adjusted) & Margin (%)
Earnings per share Equity & debt-equity ratio (%)
Sales division Geographical areas
Conflict of interests Company description
Anton Wester owns shares in the company : No
Dennis Berggren owns shares in the company : No
Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection
with this.
Talkpool is a global profitable Telecommunication Network Service
specialist and an IoT ecosystem enabler. The Company services,
designs, delivers technology and integrates IoT and
Telecommunication solutions. Talkpool is based in Chur, Switzerland.ool is a global profitable Telecommunication Network
Service specialist and an IoT ecosystem enabler. The Company
services, designs, delivers technology and integrates IoT and
Telecommunication solutions. Talkpool is based in Chur, Switzerland.
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
80,0%
0
5
10
15
20
25
30
35
2014 2015 2016 2017E 2018E 2019E
Net sales Net sales growth
-5,0%
-4,0%
-3,0%
-2,0%
-1,0%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
-1
-0,5
0
0,5
1
1,5
2
2014 2015 2016 2017E 2018E 2019E
EBIT adj EBIT margin
-0,25
-0,2
-0,15
-0,1
-0,05
0
0,05
0,1
0,15
0,2
0,25
-0,25
-0,2
-0,15
-0,1
-0,05
0
0,05
0,1
0,15
0,2
0,25
2014 2015 2016 2017E 2018E 2019E
EPS, unadjusted EPS, adjusted
0,0%
20,0%
40,0%
60,0%
80,0%
100,0%
120,0%
140,0%
160,0%
180,0%
200,0%
0
0,05
0,1
0,15
0,2
0,25
0,3
2014 2015 2016 2017E 2018E 2019E
Equity ratio Debt-equity ratio
Company: Sales per region
Source: TalkPool, Redeye Research
38%
26%
20%
16%
Middle East
Americas
Europé
Africa
TalkPool
Company analysis 48
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Rating Management Ownership Profit
outlook
Profitability Financial
Strength
7,5p - 10,0p 43 40 17 11 22
3,5p - 7,0p 69 64 96 34 44
0,0p - 3,0p 17 25 16 84 63 Company N 129 129 129 129 129
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