EQUITY RESEARCH - H1 2021 Update

EQUITY RESEARCH - H1 2021 Update November 9th, 2021

OUTPERFORM

Current Share Price (€): 0.265

Target Price (€): 0.340

H-Farm - Share performance since Feb 20

160
140
120
100
80
60
40
20
Feb-20	May-20	Aug-20	Nov-20	Feb-21	May-21	Aug-21	Nov-21
	H-Farm Share Price	FTSE Italia Growth Index

Source: S&P Capital IQ - Note: 3/02/2020=100

Company data

ISIN number	IT0004674666
Bloomberg code	FARM IM
Reuters code	FARM.IM
Industry	Digital innovation
Stock market	Euronext Growth Milan
Share Price (€)	0.265
Date of Price	09/11/2021
Shares Outstanding (m)	128.7
Market Cap (€m)	34.1
Market Float (%)	49.4%
Daily Volume	45,000
Avg Daily Volume YTD	221,598
Target Price (€)	0.340
Upside (%)	28%
Recommendation	OUTPERFORM

Share price performance

	1M	3M	1Y
H-Farm - Absolute (%)	-1%	1%	11%
FTSE Italia Growth (%)	4%	5%	78%
1Y Range H/L (€)		0.369	0.191
YTD Change (€) / %		0.04	1%

Source: S&P Capital IQ

Analysts

Franco Gaudenti - Head of Research [e-mail] Luigi Tardella - Co-Head of Research [e-mail]

EnVent Capital Markets Limited

42, Berkeley Square - London W1J 5AW (UK) Phone [phone]

This document may not be distributed in the United States, Canada, Japan or Australia or to U.S. persons.

H1 2021 update: discrete pace in reaching the new normal, steps towards full operations, Depop earn-out offsetting debt

Revenue growth over 20%, despite education bearing 2020 backlog and pandemic tail

Total Revenues up 23%. Fair profitability of Consultancy service lines which are running at the desired pace, back to pre-Covid volumes, despite the impact of the pandemic tail during Q1. Education revenues - all coming from 2020 enrollments - grow at a remarkable 18% last 12 months vs. prior full year, while haven't reached yet coverage of facilities expenses. Corporate cost - a significant caption in the mix - full coverage is a mid-term target. H1 consolidated EBITDA was still negative, €2.3m, vs. €2m of H1 2020, in both cases 8% of revenues. EBIT, after €2.8m D&A, was €5.1m loss, net loss was €5.9m, same as were in H1 20. On the balance sheet side, invested capital decreased by 10%, over €3m, mainly thanks to NWC deferred revenues evolution. Net financial debt at €3.3m as of June, then offset in July by the Depop earn-out.

€6.7m earn-out from Depop deal

H-Farm received at the beginning of H2 €6.7m, thanks to an earn-out clause activated by the Etsy, US marketplace listed on NASDAQ, $1.6bn acquisition of Depop, a 2011-bornstart-up backed by H-Farm and exited in 2018. The size of the gain significantly influences 2021 year-end results and makes mid-term targets for the venture portfolio BU as fairly achieved since now.

Outlook: handling the learning revolution

Going towards the end of 2021 and during the slowly calming longtail of the pandemic, we notice that for most companies in the domestic domain recovery of previous levels of activity progresses as desired, although at uneven paces. H-Farm updated financial trends show a mix of signals: a general stability of financial indicators, BU performances in the same desired direction, although with some delays, improvements in operating profitability although less than predicted, unexpected profits to balance delays in operations running as desired. The picture of cultural leader offering education and digital consulting services within the digital landscape is confirmed by the international University partnerships, which raise the level of appeal of the Education programs. The commitment in reinventing radically education with State-of-the-Art digital innovations, such as breaking physical barriers, is fitting the coming revolution of learning.

Target Price €0.340 per share confirmed, OUTPERFORM rating (from Neutral)

We overall confirm our estimates for 2021 year-end, with a different mix based on updated figures coming from H1. We recall that our mid-term projections are on the conservative side with respect to those envisaged by management. Our updated valuation results in a target price of €0.340 per share (unchanged), a potential upside of 28% on current price. We thus assign an OUTPERFORM rating on the stock (from Neutral).

Key financials and estimates

€m	2018	2019	2020	2021E	2022E	2023E	2024E
Revenues	56.7	61.1	52.7	65.9	80.7	95.7	110.9
EBITDA	(4.4)	(5.4)	(4.8)	(4.2)	0.4	3.3	5.6
EBIT	(8.3)	(10.0)	(10.4)	(7.8)	(3.3)	(0.7)	1.2
Net Income (Loss)	(4.9)	(12.7)	(14.8)	(2.5)	(4.8)	(1.8)	0.3
Net (Debt) Cash	(5.7)	(2.0)	(1.0)	2.4	0.8	11.1	16.9
Equity	21.3	17.3	12.4	9.9	5.1	6.7	2.3

Source: Company data 2018-20A, EnVent Research 2021-24E

The Issuer is a corporate client of EnVent Capital Markets Ltd., thus this Note is to be intended as a marketing communication, not an independent research. See final two pages for important disclosures.

Market update: outperformance

H-Farm - Share price performance and trading volumes since Feb 20

Trading price range €0.191-0.369 per share

Performance below Italia Growth index

160	FARM				FARM ending		8,000,000
				price €0.265
140	beginning					7,000,000
120	price €0.342						6,000,000
		-23%
100							5,000,000
80							4,000,000
60							3,000,000
40							2,000,000
20							1,000,000
0							0
Feb-20	May-20	Aug-20	Nov-20	Feb-21	May-21	Aug-21	Nov-21
	H-Farm volumes	H-Farm Share Price	FTSE Italia Growth Index

Source: EnVent Research on S&P Capital IQ - Note: 03/02/2020=100

Consolidated revenues reach €30m, up over 20% on H1 2020

In H1 2021 H-Farm reported Total Revenues/Value of Production of €30.5m vs. €24.8m of 2020 same period, +23% YoY. Sales figures were €26.6m vs. €22.5m of prior year. Education contributed 25% of total revenues and Consultancy 70%.

EBITDA contribution by BU was: €3.2m, a sound 15% margin, from Consultancy, and €2.5m loss from Education. The latter as a result of planned full charge of facilities cost starting in 2021 as contractually planned, not yet recoverable through a still limited occupancy during the pandemic tail of 2021. Corporate and Facility cost, after €1.1m revenue, added to the mix €2.9m additional imbalance. The six months consolidated EBITDA was still negative, €2.3m, same level in H1 2020, in the region of 7-9% of revenues. EBIT after €2.8m D&A was €5.1m loss vs. €5.2m loss in H1 2020. Net loss was €5.9m for both periods.

On the balance sheet side, Net Invested Capital was €10m vs. FY20 €13m. While investment in long-term assets was stable at €30m H1 21 vs. 2020 year-end, net working capital in the same period reached an offsetting figure of €(14.5)m vs. €(12.2)m at year-end 2020. The reduction is due to a higher value of deferred income from tuition fees, collected at the beginning of each calendar year while revenues are recognized along the year. The pandemic tail is likely to have amplified the effect. €1.5m lower receivables and €1.5m lower liabilities complete the picture of a lighter current invested capital. Net financial debt rose at €3.3m from €0.9m as of December 2020.

Source: Data classification according to EnVent Research financial analysis model

1

Consolidated Profit and Loss

€m	H1 2020	H1 2021
Revenues	22.5	26.6
Change in work in progress	0.0	1.4
Capitalization of R&D costs	1.4	1.2
Other income	0.9	1.3
Total Revenues	24.8	30.5
YoY %	-18.0%	22.6%
Materials	(4.2)	(6.2)
Services	(6.4)	(7.9)
Personnel	(13.4)	(14.7)
Leasing	(2.3)	(3.2)
Other operating costs	(0.7)	(0.7)
Operating costs	(27.1)	(32.7)
EBITDA	(2.3)	(2.3)
Margin	-9.3%	-7.5%
D&A	(2.9)	(2.8)
EBIT	(5.2)	(5.1)
Margin	-21.0%	-16.7%
Financial income	0.2	0.0
Interest	(0.3)	(0.7)
Writedown of equity investments	(0.5)	(0.0)
EBT	(5.8)	(5.8)
Margin	-23.3%	-19.0%
Income taxes	(0.1)	(0.1)
Net Income (Loss)	(5.9)	(5.9)
Margin	-23.6%	-19.3%

Source: Company data

Consolidated Cash Flow

€m	H1 2020	H1 2021
EBIT	(5.2)	(5.1)
Current taxes	(0.1)	(0.1)
D&A	2.9	2.8
Provisions	0.5	0.3
Cash flow from P&L operations	(1.9)	(2.0)
Trade Working Capital	(0.0)	(1.6)
Other assets and liabilities	4.4	4.0
Capex	(1.0)	(2.3)
Operating cash flow after working capital and capex	1.5	(1.9)
Financial income	0.2	0.0
Interest	(0.3)	(0.7)
Exchange gain (loss)	0.0	0.0
Gain on equity investments	0.0	0.0
Writedown of equity investments	(0.5)	(0.0)
Equity-based financial instruments	0.0	0.0
Changes in Equity	(0.4)	0.2
Net cash flow	0.5	(2.4)
Net cash flow before paid-in capital	0.5	(2.4)
Net (Debt) Cash - Beginning	(2.0)	(0.9)
Net (Debt) Cash - End	(1.5)	(3.3)
Change in Net (Debt) Cash	0.5	(2.4)

Source: Company data - Note: H1 KPIs calculated on LTM economics

Consolidated Balance Sheet

€m	H1 2020	2020	H1 2021
Inventory	1.7	0.8	2.2
Trade receivables	13.5	14.3	12.8
Advances from customers	(0.2)	(0.4)	(0.3)
Trade payables	(8.4)	(11.5)	(10.0)
Trade Working Capital	6.6	3.2	4.7
Other assets (liabilities)	(24.0)	(15.3)	(19.3)
Net Working Capital	(17.3)	(12.2)	(14.5)
Intangible assets	7.9	8.6	8.9
Goodwill	11.1	10.2	9.3
Property, plant and equipment	2.2	1.6	1.6
Equity investments and financial assets	13.2	10.1	10.2
Non-current assets	34.4	30.5	30.0
Provisions	(4.5)	(5.0)	(5.3)
Net Invested Capital	12.5	13.4	10.2
Bank debt	7.3	9.3	8.5
Convertible bonds	0.0	9.0	9.4
Other financial debt	0.3	0.0	0.3
Financial assets	0.0	(0.1)	(0.2)
Cash and equivalents	(6.1)	(17.2)	(14.8)
Net Debt (Cash)	1.5	0.9	3.3
Shareholders' Equity	11.0	12.4	6.7
Minority interests	0.0	0.0	0.0
Equity	11.0	12.4	6.8
Sources	12.5	13.3	10.0

Ratio analysis

KPIs	H1 2020	H1 2021
DSO	80	62
DPO	111	102
DOI	12	13
TWC/Revenues	13%	9%
NWC/Revenues	-34%	-28%
Net Debt (Cash) / Revenues	0.0x	0.1x
Net Debt (Cash) / EBITDA	nm	nm
Net Debt (Cash) / Equity	0.1x	0.5x
Cash flow from P&L operations / EBITDA	nm	nm
FCF / EBITDA	nm	nm
Per-capita revenues (€k)	98	103
Per-capita costs (€k)	47	52

2

Business update

H-Farm College international partnerships: Chichester university (UK), Luxembourg School of Business, Zagreb School of Economics and Management

Only European education organization at Expo 2020 Dubai to present "The future of Education"

• Consultancy - Back to full operations since 2021 and new clients additions. Revenues up 22% on H1 2020, almost at pre-Covid level. Highest recent EBITDA, 15% margin, doubling the H1 2020 7%.
• Education - Operations on track for all schools and university courses, within the limitations deriving from government measures. New partnerships with international universities and business schools. Operating margins struggling, as expected, due to rent and utilities costs equalized according to the full use of the campus facilities and ongoing marketing investments.
• Portfolio - Ongoing crowdfunding and fundraising for selected portfolio startups. One additional exit after Depop.
• Launch of "FuturED", the edutech acceleration program for startups in partnership with CDP Venture Capital
• Presentation at Expo 2020 Dubai of H-Farm's multichannel school model, in partnership with Dubai Cares, a non-profit organization for inclusive and equitable quality education. H-Farm My School is a hybrid school, multi-channel - with live and on-demand lessons in virtual and augmented reality - multi- presence, and customizable based on the students' needs. Experts, programmers, and teachers design 3D content dedicated and customizable to young people, promoting socialization and collaboration. The lessons part of the interactive installation were developed by BigRock, H-Farm's school for visual effects and video games.

Outlook: handling the learning revolution

During and after global lockdowns, current ways of working and studying went under critical challenges and new models are being explored exploiting the diverse opportunities offered by digital technologies for team communication and learning. Organizations will be urged to reinvent their development programs and to introduce a range of emerging technologies including extended reality, such as advanced forms of active learning creating a simulated environment where students interact with experiences.

We recall that H-Farm has invested to be a frontrunner in matching those sudden rising educational needs and that H-Farm Campus, with BigRock and My School, is likely to be among the few places where to go to make the learning change start to happen.

3

Estimates revision

H1 2021 revenues are suitable with our full-year estimates, while operating margins came in lower than expected, mainly due to BU Education rent and utilities fixed costs which need higher volumes to be absorbed. We have thus fine-tuned 2021 operating expenses and adjusted our mid-term profitability projection. We have also factored in 2021E accounts the €6.7m gain on investments from the Depop earn-out clause, which will materially impact operational result.

	Revised
€m	2021E	2022E
Revenues	65.9	80.7
EBITDA	(4.2)	0.4
Margin	-6%	0%
EBIT	(7.8)	(3.3)
Margin	-12%	-4%
Net Income (Loss)	(2.5)	(4.8)
Net (Debt) Cash	2.3	0.7
Net Debt / EBITDA	cash	cash

Change in estimates (€m)

110					95.7	95.7	10
90			80.7	80.7			8
70	65.9	65.9					6
50					3.8		4
				3.3	2
			1.4
30			0.4			0
10	-2.7	-4.2					-2
-10	2021E	2022E	2023E	-4

	Previous Revenues	Revised Revenues	Previous EBITDA	Revised EBITDA
Source: EnVent Research
			Previous				Change %
2023E	2024E	2021E	2022E	2023E	2024E	2021E	2022E	2023E	2024E
95.7	110.9	65.9	80.7	95.7	110.9	0%	0%	0%	0%
3.3	5.6	(2.7)	1.4	3.8	6.1	56%	-74%	-13%	-8%
3%	5%	-4%	2%	4%	6%
(0.7)	1.2	(6.4)	(2.6)	(0.6)	1.3	22%	29%	21%	-8%
-1%	1%	-10%	-3%	-1%	1%
(1.8)	0.3	(7.9)	(4.0)	(1.7)	0.4	-68%	19%	8%	-18%
10.9	16.7	(6.9)	(5.9)	4.0	9.1
cash	cash	nm	4.4x	cash	cash
Source: EnVent Research

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