With the 10 MEUR share issue last week, Aiforia’s financial situation strengthened. In light of positive sales news, the company seems to continue moving toward a strong position in its rapidly emerging markets, although weak growth predictability still argues for certain caution in pricing the potential. However, we still find the risk/reward ratio of the company’s promising long-term growth story attractive. We raise our target price to EUR 4.6 on the back of the decline in the risk level and forecast changes (was EUR 4.2) and reiterate our Accumulate recommendation.

A stronger balance sheet and sales continuing on track lower the risk level

Aiforia carried out a directed share issue last week, raising some 10 MEUR (estimated good 9 MEUR after expenses) from domestic and international institutional and professional investors. The pricing of the issue met our expectations, but eliminating the financial risk was still positive. In the spring, the company has also announced two new contracts (veterinary medicine and Fimlab) and seems to continue its successful sales work. Competitive tendering is actively underway, especially in Europe, so visibility of growth in the next few years and our forecasts has again improved slightly. On the other hand, the timing for customer ramp-ups and new regulatory approvals remain as uncertainties.

Digital pathology is catching on, although it is difficult to predict how fast the market will develop

The digitization of pathology is at a very early stage, and by 2020, only 14% of pathology samples were digitized worldwide. Technological limitations that were a barrier have largely disappeared over time. With an aging population, the need for pathology analysis is expected to increase and there is already a shortage of pathologists. We believe there are clear demand drivers for solutions that increase efficiency and capacity, although the competitive landscape of the young market is still being formed. However, given Aiforia's differentiating factors (customizability, cell-level detection, first commercialized predictive AI model) and significant clinical references, the company's competitiveness appears very promising. We believe the company is well positioned to become a long-term winner in its market.

Strong growth is expected, but timing also depends on factors outside the company

We revised our cost forecasts, which slightly improved the negative cash flows in the coming years. We expect Aiforia's commercial success to more clearly translate into revenue in 2024-27, as clinical customers expand their use of the software. We expect annual revenue growth to be a very high 75-90% from a low base and EBIT margin to strengthen from a loss-making investment phase to 3% in 2027. We expect revenue in 2030 to already be 74 MEUR (target: >100 MEUR ~2030). Our forecasts assume that the company will remain among the few winners in the clinical market and proceed effectively in terms of both regulatory approvals and customer implementation. We compensate for the forecasting risks associated with this with a higher return requirement than usual.

The potential is still more attractive than the risks at the current price

Aiforia's valuation (24e EV/S 22x, 25-26e 13-8x) relies on expected very strong and scalable growth. With methods that price growth at various slopes and confidence intervals, we can justify the company's value at a wide range of EUR 1.4-8.0 per share (previous EUR 1.0-7.6). In light of the evidence provided, our confidence in the company’s growth is strong and financial risks have also eased (we cut WACC -% 13.8% -> 13.1%). However, the uncertainty of the slope of growth still results in elevated risks. We see the risk/reward ratio at the current price as attractive as a whole, however. Winning new customers and likely strengthening of revenue growth offer positive drivers.