Premium Snack Demand And Global Diversification Will Drive Long Term Royalty Expansion

Catalysts

About EnWave

EnWave designs and manufactures proprietary Radiant Energy Vacuum technology used to dehydrate and process food and other products for global customers.

What are the underlying business or industry changes driving this perspective?

• Expansion of large scale REV installations with existing partners like MicroDried and Procescir, supported by bulk orders already in fabrication and negotiations with four additional counterparties, should drive a step change in high margin equipment revenue and recurring royalties as installed capacity ramps.
• Rising demand for premium, clean label snacks and pet treats, evidenced by new applications in dairy, fruit, vegetables and pet categories, positions EnWave as a key processing enabler, supporting sustained growth in partner volumes and an expanding royalty base that can compound top line and earnings.
• Global diversification of projects across Europe, Mexico, North America, Australia and emerging regions such as Northern Africa reduces customer and regional concentration risk, which should support more stable revenue growth and improved visibility on future cash flows.
• Investment of recent equity proceeds into pre building large scale machines and adding sales and marketing capacity shortens delivery timelines and improves conversion of a robust pipeline, which is likely to accelerate revenue recognition while allowing better absorption of fixed costs and margin recovery.
• Growing use of REVworx as a toll manufacturing and demonstration platform for major snacking and ingredient companies lowers adoption friction and can translate pilot volumes into full machine sales, enhancing machine revenue in the near term and supporting higher long term royalty and EBITDA growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming EnWave's revenue will grow by 40.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -16.7% today to 10.4% in 3 years time.
• Analysts expect earnings to reach CA$3.2 million (and earnings per share of CA$0.03) by about December 2028, up from CA$-1.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 44.6x on those 2028 earnings, up from -22.8x today. This future PE is greater than the current PE for the CA Machinery industry at 19.8x.
• Analysts expect the number of shares outstanding to grow by 6.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The sales pipeline for large-scale REV Machines remains inherently lumpy, and if prospective deals slip or cancel due to project specific issues at counterparties, EnWave could face prolonged periods with few machine sales, constraining top line revenue and delaying the anticipated ramp in royalty income and earnings growth.
• Despite management’s expectation of margin recovery, the recent drop in gross margin from 44% to 19% shows how vulnerable profitability is to product mix, bulk discounts and the absence of high margin 10 kilowatt units, and persistent pressure on pricing or mix would limit future net margin expansion and weigh on earnings.
• Royalty revenue growth is still modest at 1% in the latest quarter and remains concentrated in a small number of partners such as MicroDried and Procescir, so any underperformance, capacity underutilization or contract termination by these key customers would materially impact recurring royalties and long term earnings stability.
• The strategy of pre building large scale machines and expanding sales and marketing requires ongoing capital, as evidenced by the recent equity raise and planned use of the credit facility, and if machine demand does not materialize as expected, higher inventory levels and operating expenses could erode cash, depress adjusted EBITDA and increase dilution risk for shareholders.
• EnWave continues to operate at an adjusted EBITDA loss, and while management expects acceleration in machine and royalty growth, any slowdown in global demand for premium snacks, pet treats or ingredient innovation, or stronger competition from alternative drying technologies, could delay the shift to sustained profitability and limit long term earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$0.8 for EnWave based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CA$30.8 million, earnings will come to CA$3.2 million, and it would be trading on a PE ratio of 44.6x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of CA$0.36, the analyst price target of CA$0.8 is 55.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.