Canatu Intiation of Coverage: Attractive growth story also reflected in valuation

Translation: Original published in Finnish on 9/17/2024 at 7:13 am EEST

We initiate coverage of Canatu, a manufacturer of advanced carbon nanotubes (CNT) with a Reduce recommendation and a EUR 13.0 target price. Canatu’s unique and patented production technology offers the company a competitive advantage and significant growth opportunities in markets that will mature to proper growth in coming years. The hidden growth potential in the company has also already been generously priced in the stock valuation and we believe that the risk/reward ratio favors waiting for better buying opportunities in one of the most promising growth stories on the Helsinki stock exchange.

A deep tech company developing advanced CNT

Canatu is a deep tech company that develops advanced CNT, related products and production equipment for the semiconductor industry, the automotive industry and medical diagnostics. In recent years, Canatu has moved from the technological development stage to commercialization and grown very quickly (2020-23 CAGR 108%). For this year, the company's guidance is revenue of 20-25 MEUR (growth 47-84%). Canatu already has several significant customers and its proven mass production capability provides credibility for continued strong growth. In addition, the company’s unique and patented method of manufacturing CNTs seems to be a clear competitive advantage, which we believe is reflected in the company’s high gross margins through good pricing power (2023: 71%).

Among markets in the early development stage, the semiconductor industry is maturing first

Canatu's target markets are still in a very early development stage but they offer the company a significant market potential (estimated 2-4 BNEUR)  by the end of this decade. In the coming years, the key aspect of the company’s growth is the introduction of the latest EUV lithography machines in the semiconductor industry. The use of these requires EUV pellicles that protect the photomask in the production process, which can be made from Canatu's CNT. The characteristics of CNTs produced using Canatu’s patented method seem to be better suited for this purpose than competitors' products, which gives the company an attractive starting point to pursue a significant position in this market. In the automotive industry, the demand for film heaters developed by Canatu depends on the progress of self-driving cars and the development of the number of EVs. In medical diagnostics, CNT-based biosensors serve as a long-term growth option for the company.

We expect the company will achieve its demanding growth targets at a slightly slower pace

Canatu aims to achieve over 100 MEUR in revenue and adj. EBIT margin of above 30% in 2027. Considering the company’s cost structure and planned recruitment and investments, we feel the profitability level can be achieved as growth materializes. We believe the key to growth will be the ramp-up of the reactor business, which will lead to growth in recurring revenues from royalties and non-discretionary consumables. Visibility for this is still very weak, but the market is clearly starting to move, as indicated by Canatu’s first two reactor deliveries this year. With our estimates, Canatu will reach its goal in 2028.

High valuation requires strong earnings growth

Expectations of strong scalable growth have been priced in Canatu’s valuation (2024e EV/S 16x-18x depending on warrants and earnouts). With the company’s investment profile and growth prospects, we believe a high valuation is justified but from the viewpoint of the risk/reward ratio, the current valuation leaves no room for bigger dents in the growth story. Through scenarios modeling growth and profitability at different rates, we have estimated a wide value range of some EUR 6-20 per share, which partly reflects the risks and opportunities associated with the company.