Lleidanetworks Serveis Telemàtics S A : Litchfield Hills Research · Abril 2021

Lleidanetworks Serveis Telematics S.A. LLN-ES/LLEIF-US-Buy-$12 (€10) PT

Action Summary - 22 April 2021

Analyst Theodore R. O'Neill - Reiterate our Buy rating and $12 PT

• Lleidanetworks Serveis Telematics S.A. reported 1Q21 EPS of 0.02 EUR (based on our estimate of taxes) on 4.0 million EUR of revenue compared to our estimates EPS and revenue estimates of 0.04 EUR and 4.7 million EUR respectively. There is no consensus.
• While the results were a shortfall to our estimates, the shortfall in revenue was primarily the result of a decline in the ICX Wholesale segment which was down 25% Y/Y and 14% Q/Q
• Its SaaS business, which is part of the global digital shift in commerce was also down Q/Q (20%) but up 46% Y/Y. Some industry peers place this market at more than 10B USD and growing double digits.
• There are significant barriers to entry. Its SaaS products are protected by more than 200 worldwide patents
• We are lowering our 2021 estimates to reflect the decline in its ICX Wholesale segment; We are looking for Y/Y growth in the SaaS business. Our 2021 Revenue and EPS estimates fall to 18.4 million EUR and 0.12 EUR, respectively from 19.5 million EUR and 0.04, respectively.
• The company reports quarterly and while it does not report in U.S. GAAP, we have come as close as we can to that format here in our financial presentation and estimates.
• Attractive valuation. The shares appear to us inexpensive on an absolute and relative basis.

	4/22 Closing price: $5.80	Market cap: $93 million	2022 P/E: 19	2022 EV / Sales: 3.4
	Shares outstanding: 16.05	Insider ownership: 62%	Avg. trading volume on	Dividend/Yield: NA/NA
	million		OTCQB: 500

	GAAP estimates (EPS in Euros - Revenue in Euro millions)		Cash balance (in Euro
											thousands)
								EBITDA
		Period		EPS	Revenue	Margin
					•	2020P		•	3.87
		1Q20A		0.00	4.05	10.5%			•	2021E		•	2.30
		2Q20A		0.02	3.77	16.9%			•	2022E		•	7.39
		3Q20A		0.04	3.91	26.7%
		4Q20P		0.00	4.69	13.4%			Debt (in thousands)
		FY20P		0.06	16.42	16.6%
								15.6%			•	2020P		•	1.75
		1Q21A		0.02	4.00			•	2021E		•	0.0
		2Q21E		0.02	4.40	14.9%			•	2022E		•	0.0
		3Q21E		0.02	4.50	15.0%
		4Q21E		0.06	5.50	22.8%
		FY21E		0.12	18.40	17.4%			EBITDA (in thousands)
		1Q22E		0.05		5.50	22.5%			•	2020P		•	2.6
						•	2021E		•	3.2
		2Q22E		0.07		6.00	26.3%
						•	2022E		•	6.0
		3Q22E		0.05	5.50	23.9%
		4Q22E		0.09		6.50	28.7%
		FY22E		0.26		23.50	25.5%
	Note: Numbers may not add due to rounding. See our full model in the back of this
	report. P means preliminary
Risks/Valuation

• Risks include: Highly competitive business; changes in customer demand; COVID-19.
• Our $12 target is derived using a discounted future earnings model
  Company description: LLEIF is a telecommunications company with a Software-as-a-service (SaaS) product suite that is benefitting from the global digital shift in commerce as business transactions of all kind go digital and move online. It also sells SMS services to business customers.

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860-435-0150 * Important disclosures can be found at the back of this report

Lleidanetworks Serveis Telematics S.A. LLN-ES/LLEIF-US-Buy-$12 (€10) PT

Trading History

The shares have traded on the OTCQB since November 2020 so the short history of trading and low volume on that exchange is not unusual (see Figure 1). The company has been public since October 2015 and has a rich history of trading and volume in Madrid (see Figure 2).

Figure 1 - LLeidanetworks Serveis Telematics SA - Trading on OTCQB since November

2020

Source: FactSet

© 2021 Litchfield Hills Research LLC, 79 Belgo Road, Lakeville, CT 06039 | Contact the analyst: [e-mail]| www.HillsResearch.com	Page 2
860-435-0150 * Important disclosures can be found at the back of this report

Lleidanetworks Serveis Telematics S.A. LLN-ES/LLEIF-US-Buy-$12 (€10) PT

Figure 2 - LLeidanetworks Serveis Telematics SA - Trading in Madrid LTM

Source: FactSet

Valuation Methodology

We believe LLEIF is undervalued and we support that belief with two valuation techniques, both of which suggest the shares are undervalued at the current price. For the purposes of determining our price target we use a discounted future earnings model. For the purpose of confirming our price target we look at comparable company valuations:

1. The discounted value of all future earnings was used for our price target (see Figure 3)

Discounted2) ValuationFuturerelative Earningsto peers (see-FigureBasis4)for Price Target

Our 12-month price target of $12.00 (€10) is based on a discounted future earnings model (Figure 3). For the purposes of deriving an earnings-based price target, we assume the company generates a small profit for FY21 and continues to grow into the future. The model sums up all earnings per share, discounted at 7% to arrive at a per share valuation. Note, this model understates future novel product developments, probably understates the tax benefits, but offsetting that, the earnings never have a down year. The implied share price is €10.08 and at 1.20 conversion equals $12.10, which we round down to $12.00.

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860-435-0150 * Important disclosures can be found at the back of this report

Lleidanetworks Serveis Telematics S.A. LLN-ES/LLEIF-US-Buy-$12 (€10) PT

Figure 3 - LLeidanetworks Serveis Telematics SA - Implied Price Target Calculation

Discounted Earnings	€ 10.08
	Year 1 is	Forecast	Discounted
	2021	EPS	EPS
	1	0.12	€ 0.12
	2	0.26	€ 0.23
	3	0.30	€ 0.24
	4	0.45	€ 0.34
	5	0.60	€ 0.43
	Terminal
	Value		€ 8.72

ValuationSource: LitchfieldRelativeHi ls Res archto LLCPeers

If we compare LLEIF to a simple average of its peers (Figure 4), the shares sell at a significant discount on every metric. These metrics indicate the stock price should be more than 100% higher than where it is today. This supports our $12 price target. If the shares traded for $12.00 today, its 2021 and 2022 Sales Multiples would still be below average. Details on each of the peers can be found in Figure 6 near the back of the report. The companies we used in Figure 6 are in similar lines of business although none of them are a perfect match.

Figure 4 - LLeidanetworks Serveis Telematics SA - Summary Discount to Peers

	2022 PE	2022 EV /	2021 PE	2022 Sales	2022 EV /	2021 EV /
		EBITDA		Multiple	Revenue	EBITDA
Peers	66.22	43.92	108.69	9.84	9.32	64.01
LLEIF	23.17	19.26	50.22	4.94	4.92	36.12
Discount to	65%	56%	54%	49%	47%	44%
Peers

Source: Litchfield Hills Research LLC and Refinitiv Eikon

Notes on our Financial Forecasts

The company reports results using the Spanish New General Accounting Plan 1990, which is non-US GAAP. However, what we show in our published financials is our best translation into US GAAP. Because our financial model's, income statement, balance sheet and cash flow are fully integrated and rely on GAAP data, we may have to infer some balance sheet or income statement items in order to tie it all together. When we do that, we make the adjustment in the last line in the cash flow.

© 2021 Litchfield Hills Research LLC, 79 Belgo Road, Lakeville, CT 06039 | Contact the analyst: [e-mail]| www.HillsResearch.com	Page 4
860-435-0150 * Important disclosures can be found at the back of this report

Lleidanetworks Serveis Telematics S.A. LLN-ES/LLEIF-US-Buy-$12 (€10) PT

The pandemic, and the way businesses have adapted to it has had a major impact on revenue. We make the assumption that the macro business trends driving the move to digital continue. This enhances gross profit margins. We also assume the company has sufficient cash by the end of 2021 to pay off its debt, although there may be solid reasons to keep it unchanged or add to it, for instances if it decides to add growth through acquisition.

Financial forecasts always contain an element of uncertainty and it is no different here, but we expect that over time, the estimates will get increasingly accurate.

Quarterly Results - Variance Analysis

Lleidanetworks Serveis Telematics S.A. reported 1Q21 EPS of 0.02 EUR (based on our estimate of taxes) on 4.0 million EUR of revenue compared to our estimates EPS and revenue estimates of 0.04 EUR and 4.7 million EUR respectively. There is no consensus. While the results were a shortfall to our estimates, the shortfall in revenue was primarily the result of a decline in ICX Wholesale segment which was down 25% Y/Y and 14% Q/Q. The 0.02 EPS shortfall was due to lower revenue, and higher expenses, partially offset by better margins and lower non-operating expenses (Figure 5).

Figure 5 - LLeidanetworks Serveis Telematics SA - Variance Analysis

			2021			2021
								Better/(worse)
($000)		Q1E		Q1A		than forecast
Income Statement
	Total Revenue		$4,700		$3,987			($713)
	Total cost of revenue		2,397		1,984			413
	Total Gross Profit		2,303		2,003			(300)
Operating expenses:
Staff expenses		$900		$1,013			($113)
External Services		600		566			34
Other operating (income)/expense		(150)		(196)			46
	Total Expenses		1,350		1,383			(33)
EBITDA		953		620			($333)
Amortizations and other		(300)		(265)			35
Operating profit		653		355			(298)
Other non-operating expenses		(40)		36			76
Earnings before Tax		613		391			($222)
Tax expense/(benefit)		5		5
Net income		$608		$386			($222)
								$	-
EPS		$0.04		$0.02			($0.01)
Diluted common shares		16,050		16,050

Source: Company data and Litchfield Hills Research LLC

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