Nano Dimension: Strong Cash Position But Needs To Find A Purpose

seekingalpha02-24

Nano Dimension is an Israel-based company providing 3D printers and consumables for the additive manufacturing industry.The company has pursued a heavy M&A strategy to improve its products and ...

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If interested in the industry, here are my previous articles on Materialise NV (MTLS), 3D Systems Corporation (DDD), Proto Labs (PRLB), Xometry (XMTR), Stratasys (SSYS), and The 3D Printing ETF (PRNT). I believe that NNDM is not currently the best option to invest in the long term in additive manufacturing, having identified competitors who are performing better economically and are developing their businesses more effectively. However, NNDM presents a strong cash position ($862.9 million as of Sep 23) which cannot be ignored, having great potential for a revival, and ensuring the company has a strong quantitative position relative to its competitors (35% upside on a 1Y forecast share value computed solely through a Sales/EV ratio analysis). For these reasons, I currently assign a Hold rating to the stock, awaiting relevant updates. Throughout this analysis, I will delve into NNDM's recent M&A transactions and financial performance to provide a rationale for my Hold rating on the stock. A recent history shaped by M&A transactions In recent years, Nano Dimension has pursued a very focused strategy of acquiring other companies to increase the quality of its products and services. In April 2021, DeepCube was acquired for c.a. $40m in cash and $30m in shares and NanoFabrica for an aggregate amount of c.a. $54.9 m-$59.4 m. The former deals with deployments of advanced Deep Learning-based artificial intelligence systems, the latter with precision digital manufacturing. In November 2021 NNDM acquired Essemtec, a Switzerland-based companies leader in adaptive highly flexible surface mount technology, for a total sum in cash ranging between $15.1m and $24.8m. In January, Global Inkjet Systems was acquired for $18.7m in cash, plus an additional $1.3m to $10.7m within the 27 months following the date of the acquisition. In July 2022, NNDM acquired Formatec Holding, which includes its subsidiaries Admatec and Formatec, which are both developing 3D printing systems for ceramic and metal end-user parts. The total cost of the operation was $12.9m in cash. In the same month, the management announced the acquisition of 12% of the outstanding shares of Stratasys. These operations resulted in NNDM's total outlay ranging from $172.9m and $196.5m. Revenues, on the other hand, went from $3.4m in FY20 to $56.2m in FY23 (according to the preliminary data provided by the management). In my opinion, this is not an exciting result considering the investments made, even more so if we look at the marginality which continues to remain heavily negative, although it would seem to be improving in 9M23. seekingalpha.com and Author's Analysis In March 2023, Nano Dimension submitted a cash offer of $18 per share to further acquire Stratasys' shares, which was later raised three times to $25 and always rejected by SSYS shareholders. Finally, in December 2023, a preliminary proposal was submitted to purchase all the outstanding shares of Stratasys for $16.5 per share in cash. Although a definitive answer has yet to come, I believe that this offer will also be rejected. This claim of mine is also supported by the statement made by the Stratasys Board in July 2023: \"Nano has a track record of value destruction and trades at a negative firm value under CEO Yoav Stern's leadership. In addition to Yoav Stern's misleading claims about Stratasys, he is not qualified to manage Stratasys. Since Yoav Stern's appointment, Nano has spent more than $500 million in cash and increased its revenue by only $44 million\". Nano Dimension Investor Presentation May 2023 A pile of cash with no purpose seekingalpha.com and Author's Analysis Nano Dimension, as of Sep 23, holds a Net Debt of -$862.9 million, which is an incredible amount of cash that exceeds even the current market capitalization, rarely seen in a company at this stage of growth. This was achieved through two capital increases made in 2020 and 2021. In purely quantitative terms, this is an astounding value, which should exclusively be viewed positively by an investor. However, I believe that there are several reasons why one should not be fooled by appearance. Firstly, between FY21 and 9M23, more than $200m and nearly $600m have been burned in operations and investing, respectively, without achieving significant results at the P&L level. In my opinion, the company as it is currently structured could burn more of these resources in the fiscal years to come. Secondly, the management seems intent on using these resources for further acquisitions, a fact confirmed by the still-valid bid for Stratasys. In my opinion, this may not be beneficial to investors, considering that Stratasys currently has rather high multiples (the link to my recent article on SSYS is in the introductory paragraph) and that the offer of $16.5 per share is at a 30% premium to the current share price. The overall industry is currently characterized by high multiples, so even if management decides to give up Stratasys to move on to other acquisitions, they may not necessarily find viable alternatives. To conclude then, NNDM has in its favor an outstanding financial position, but it will lose its relevance if management does not find a purpose that can turn it into profits and cash flow production. Valuation Due to NNDM's unprofitable state and negative Enterprise Value (meaning the net cash position is currently higher than market capitalization), I obtained my target price solely through the Sales/EV ratio analysis. It is in fact neither possible to perform a DCF analysis nor a multiples analysis with conventional earnings-based ratios. I considered the three competitors most similar to NNDM at the business level, namely DDD, Desktop Metal (DM), and SSYS. The analysis was performed using current market cap, Net Financial Position as of Sep 23, FY22 sales as historical data, and FY23-FY25 sales as perspective years (sourced from Seeking Alpha). The result is a 1Y forecast share value of $3.6, c.a. 35% above the current price. As already anticipated, the current net debt is an outstanding value at the quantitative level, which is why the multiples method rates NNDM as undervalued relative to main competitors. Since, however, the business goal is the going concern, meaning the investor cannot currently lay hands on the cash, the key element is to understand how this cash will be used by management. seekingalpha.com and Author's Analysisseekingalpha.com and Author's Analysisseekingalpha.com and Author's Analysis Upcoming Q4 results Nano Dimension has not yet officially announced the release date of Q4 2023 results, which are expected to be 2/28/2024, although preliminary data has already been provided in January. In particular, unaudited revenues are expected to be $14.3m for Q4 2023 (+18% vs Q4 2022) and $56.2m in FY23 (+29% vs FY22). The latter would deliver an improvement of 12.4% compared with consensus estimates, which currently stand at $50m. However, over the past 6 years except for FY20, the revenue surprise has always been heavily negative. Although, as I discussed earlier, the marginality in both EBITDA and Net income would seem to be improving looking at 9M23, the earnings surprise of the past 4 financial years for Q4 was always characterized by a 3-digit negative surprise. I believe that again this year, considering how other companies are performing in additive manufacturing, the release could bring bad news to investors, especially in terms of marginality. seekingalpha.comseekingalpha.com Conclusions  In my view, Nano Dimension is currently not the right company for an investor who wants to position himself or herself in the additive manufacturing industry for the long term. There are competitors of NNDM that I have analyzed, in the same or complementary businesses, that are bringing better numbers and more profitable investments, such as SSYS, MTLS, PRLB, and XMTR. I am not convinced by the policy implemented by management at the M&A level in recent years, and I expect that the Q4 2024 release, which will take place shortly, may bring unpleasant updates. However, the current net cash position cannot be ignored, both because it has the firepower for a breakthrough change and because it places NNDM in a quantitative position of strength relative to main competitors (35% upside on a 1Y forecast share value). 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