123fahrschule published a sound set of Q3 results, showing continuous top-line growth and a significantly improved profitability. Here are the key takeaways:

Q3 sales increased by 23% yoy to € 5.2m (eNuW: € 5.1m) driven by a significantly increased number of overall driving lessons (+19% to 146k) as well as a strong performance of the Professional Driver Education segment. In detail: Sales of the company’s core segment Private Customers rose 18% yoy to € 4.0m (eNuW: € 4.3m) thanks to last year’s M&A activities as well as organic growth carried by improving utilization rates. Notably, Professional Drivers Education continues to gain traction with yoy top-line growth of 114% to € 0.6m (eNuW: € 0.4m) after management significantly strengthened the respective salesforce, which is bearing fruit quicker than anticipated. Only the Driving Instructor Training segment fell slightly behind our estimates with sales down 12% yoy to € 0.4m (eNuW: € 0.5m).

Against this backdrop, the company provided a neutral Q3 EBITDA, which is a significant improvement compared to a negative € 2.0m in Q3’22. Mind you, that the FY EBITDA is still seen to turn negative (eNuW: € -0.7m) which is due to two main effects: (1) Seasonally weak December as students are generally reluctant to take driving lessons during Christmas. (2) Other OpEx are seasonally higher in Q4 based on the built up of provisions, especially vacation accruals, which are entirely built up at YE.

Still, from 2024e onwards, FY EBITDA looks set to turn positive driven by efficiency gains and economies of scale based on continuous strong oganic growth of 15% (eNuW). Thanks to its own driving instructor training centers, 123f is seen to cope well with the shortage of skilled workforce and thus continue to outperform the market. That said, the current budget crisis could have a negative impact on the awarding of education vouchers (eNuW: 70% of sales in Professional Driver Education & Driving Instructor Training segments), which implies some downside risk to our esimates.

Liquidity issue resolved. As flagged in our initiation, the company recently resolved a cash capital increase, raising gross proceeds of € 1.7m. With this, management eliminated liquidity as a risk factor as the company is now fully financed until FCF generation is seen to kick in in 2025e.

Shares continue to appear undervalued trading at 0.7x EV/Sales 2023e, especially after the recent weakness following the capital increase. Remains a BUY with an unchanged PT of € 8.70 based on DCF.