Canatu: Carefully aboard the growth story

Translation: Original published in Finnish on 10/22/2024 at 7:29 am EEST

We reiterate our EUR 13.0 target price but raise our recommendation to Accumulate (was Reduce). Canatu’s stock has fallen by about 12% since our initiation of coverage report, and there have been no significant changes in the company’s fundamentals in a good month's time. We believe Canatu is one of the most promising growth stories on the Helsinki stock exchange, and this is also still reflected in the high valuation of the share. However, since the price drop, the risk/reward ratio has improved, and we feel it favors cautious optimism about the stock.

Based on news flow, no significant changes have occurred in the growth story

Shortly after the SPAC listing, Canatu announced its first S-100 reactor delivery to a large customer in the semiconductor industry, which was already expected based on the information at the time of the listing. Canatu has announced that it will deliver the first two reactors this year. In the coming years, the ramp-up of the Reactor business will be key for the company’s growth targets (2027: revenue >100 MEUR and adj. EBIT > 30%), as recurring revenue from royalties and non-discretionary consumables will start growing with it.

Over the past week, Canatu's stock has been declining, which may have been partly affected by ASML's Q3 report which was weaker than expected. The orders received in Q3 by ASML, which in practice holds a monopoly position in EUV lithography systems, and the outlook for 2025, were disappointing compared to expectations. The weaker demand outlook is particularly related to EUV lithography systems, which offhand sounds a little worrisome for Canatu. However, based on ASML’s comments, customer demand for Low NA systems is shifting toward newer NXE:3800E systems, which is positive for Canatu. This system generation is the first where the power of EUV systems reaches a level where the properties of pellicles made of Canatu’s CNT (carbon nanotube) are clearly improved compared to traditional pellicles that cannot properly withstand the higher heat load and mechanical stress. It is also worth noting that ASML still expects its revenue to grow (2024e 28 BNEUR vs. 2025e 30-35 BNEUR), so Canatu’s potential EUV lithography equipment stock seems to continue to increase, as expected, although the development is somewhat more moderate than ASML’s previous expectations.

A deep tech company developing advanced carbon nanotubes

Canatu develops advanced carbon nanotubes, 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%). Canatu already has several significant customers and its proven mass production capability provides credibility for continued strong growth. The company’s unique and patented method of manufacturing carbon nanotubes seems a clear competitive advantage, which we believe is reflected in the company’s high gross margins through good pricing power (2023: 71%).

The risk/reward ratio turns cautiously positive

Despite the price drop, expectations of strong scalable growth have been priced in Canatu’s valuation (2024e EV/S 13x-15x depending on warrants and earn-outs). With the company’s investment profile and growth prospects, we believe a high valuation is justified and the risk/reward ratio now turns cautiously positive. We note that the current valuation still leaves no room for essential dents in the story. Using scenarios with different growth and profitability rates, we have estimated a wide value range of some EUR 6-20 for Canatu, which partly reflects the risks and opportunities associated with the company.