Core portfolio thriving

Tern hosted an investor presentation and Q&A session on 26 March. Each of the four presentations from the portfolio companies highlighted increased commercial traction, with configuration work turning to repeat licencing through the SaaS models, a growing high-profile customer base and important strategic partnerships. The presentations reinforced the chairman’s statement that Tern has created, and continues to support, a portfolio of businesses where 80% are not just surviving but thriving, compared with the industry venture capital norm of a 40% success rate. Operating costs have been cut by 40% but Tern remains focused on supporting the companies to grow, which ultimately should create significant shareholder value when there is a liquidity event.

Core portfolio thriving

Today’s trading statement from ZOO highlights a ramp-up in demand following the end to the industry-wide strikes of last year. ZOO struck a note of caution in its January update regarding the timing of orders. However new productions are starting to translate into a healthy order pipeline, with a good recovery in revenue anticipated in H1 FY25. The update guides to revenue of at least $40m for the year to March 2024, ahead of our estimate at $36.8m. We have improved our adjusted EBITDA loss marginally to $13.4m. ZOO has also announced a significant new contract with a major studio, operating as preferred partner for subtitling and primary vendor for dubbing. This demonstrates ZOO’s quality as a services vendor and provides evidence that ZOO is emerging post supplier rationalisation as one of the few trusted end-to-end (E2E) suppliers.

Recovery underway and a significant contract

Xaar’s final results for FY23 are in line with revised guidance. The figures feature adjusted EBITDA at £6.4m (FY22: £6.2m), with good performance from EPS, FFEI and Megnajet. This was achieved despite a weak end market that delayed product debuts and affected H2 23 and Q1 24 revenue. The reported PBT loss of £2.4m reverses last year’s £0.8m profit, but pleasingly Xaar sees no further deterioration. CEO John Mills concludes that while the external trading environment ‘remains challenging’, the product portfolio continues to generate ‘strong interest from customers’. We maintain FY24 forecasts and introduce FY25 estimates. In our view, the medium- and longer-term outlook is nudging better, with the inventory unwind boosting FY24 working capital. Shares have suffered following the November warning (YTD TSR -4.8% vs sector 0.2%), but with no further deterioration the FY print is a calming balm. Some investors might await news of a more favourable backdrop; some will buy the pullback as others are fearful.

Final results in-line and no further deterioration

Gamma’s results for the year ended 31 December are in line with the expectations confirmed in the January trading update. Revenue of £521.7m is 8% ahead of FY22, with gross profit at £267.2m showing the same progress. Adjusted EBITDA grew by 9% and PBT by 10%, although the impact of higher tax rates was seen in the 5% increase in adjusted EPS. Cash generation was strong once again, with 108% adjusted cash conversion. Year-end cash of £134.8m is £42.3m above the year before, even after the £30.5m in acquisition spend. Perhaps the most anticipated element of today’s news is the statement regarding the £35m share buyback programme, alluded to in the January trading update. On an operational basis, Gamma is making good progress in Business, Enterprise and Europe. For those looking at ‘undervalued’ UK equities, Gamma’s growth stands out.

More happy returns

Beeks interim results sparkle with: (i) 25% Y/Y growth in Annualised Committed Monthly Recurring Revenue, (ii) PBT +121% Y/Y, and (iii) operating cash flow +27% Y/Y, marking a decisive turn in cash generation. The strength of the business is reflected in 87% recurring revenue (H1 FY23: 93%), the low 0.5% attrition rate (H1 FY23: 0.8%), and improving operational leverage (underlying EBITDA 35.6% margin, +110bps Y/Y). The print is ‘significantly ahead of prior expectations’ and Exchange Cloud is a ‘transformational opportunity’ (via IaaS sales to exchanges, which in turn sell to clients). In our view, the risk to estimates is on the upside. The shares have been strong since the 6 Feb Trading Update, with TSR +71.7% YTD (vs sector +2.7%), yet valuation remains undemanding (EV/EBITDA c.10x vs sector 16.5x). Read on to learn about this structural growth compounder.

H1 sparkles as Beeks secures secular growth

Tern’s portfolio company Talking Medicines, the data science/AI specialist, has raised a total of £440k via the issue of unsecured convertible loan notes (CLNs). The raise will provide funding for the next stage of development and expansion in the US. Talking Medicines is on a positive trajectory with significant momentum, and we see huge potential in the next phase of growth. Already at the forefront of AI, Talking Medicines is well placed to take advantage of Large Language Models (LLMs) following the media attention given to Open AI’s Chat GPT. This was highlighted with the recent launch of the company’s Drug-GPT, which stands apart as a specialised ‘Curated Large Language Model’. In our view, Talking Medicines has evolved quickly to address the marketing-driven reality of US Big Pharma and has built relationships that could become very lucrative in short order.

Talking Medicines…and revenue potential

Beeks has this morning provided a robust (in-line) update for H1 FY24 (six months to 31 December 2023) and outlook for the full year. There is also news of two significant contracts and guidance to upgraded estimates for FY25E based on recent competitive tender wins. We see this combination as a major move forward for the business, both in terms of near-term financials and the scale and style of future client wins. The business is clearly enjoying rude health against a challenging global backdrop. We expect further good news in coming months and believe that performance could become even stronger if markets continue their recent form.

This year good, next year better

Thruvision has issued a positive update on current trading, reiterating the message at the interim results in November that there is good momentum in demand from new and existing clients. The group’s diversified business model, with a broad customer base spanning a number of international markets, is continuing to bear fruit. Retail Distribution, its largest market, is winning notable contracts, including a recent order for WalkTHRU from a global sportswear brand for use in its US operation and further WalkTHRU lane orders from two existing FTSE 100 clients. In Customs, additional systems have been ordered by an Asian agency customer. The renewed focus on Entrance Security continues, with further units ordered by a European prison service and a Gulf state. We are encouraged by this secured pipeline, with orders totalling £1.3m since November’s interims, all of which are expected to be delivered in H2. We maintain FY24E estimates.

Reassuring trading update

Idox’s results for the year to 31 October are in line with the November trading update. Revenue grew 11% to £73.3m (FY22: £66.2m), with the principal driver being growth in the LP&PP division. Adjusted EBITDA improved 9% to £24.5m with a margin of 33%, vs £22.5m and 34% for FY22, respectively. With free cashflow generation of £9.1m (FY22: £7.2m), net debt at the year-end was £14.7m (FY22: £6.7m). The outlook statement is confident, but we have revised our forecasts to reflect increased spending on technology development alongside the sales and marketing required to capture the significant potential within the Geospatial business.

FY23 delivered – preparing for the next phase

This morning’s trading statement from ZOO confirms that production companies are taking longer than expected to complete projects. This follows the resumption of new production after the industry-wide strikes ended in November 2023. The anticipated January ramp-up has yet to fully materialise, with entertainment projects expected to complete in January now moving into February and beyond. However, ZOO has been notified by its largest customer of a pipeline of orders that provides good visibility for the next two quarters, an improvement on the usual quarterly order certainty. These orders, coupled with workflow from ZOO’s other major clients, are expected to deliver ‘a strong recovery of revenues’. We have adjusted our estimates for FY24E to reflect the slight delay in workflow resuming for ZOO, but maintain estimates for FY25E, with a return to profitability.

Update flags delays in production completions

Gamma’s trading update for the year ended 31 December confirms adjusted EBITDA and adjusted EPS in line with market consensus (£113.8m-£116.0m for adj. EBITDA and 74.2-77.4p for adj. EPS). Business is performing well and making progress with the development of its product offering, while Enterprise is winning notable contracts. In Europe, Gamma has made strong financial progress. Year-end cash was £134.8m (FY22: £92.5m) with operating cash conversion over 100%. The statement refers to an update on the approach to capital allocation with the full-year results in March.

Aligned with the stars

Xaar has reiterated the message from its November trading update, with both revenue and profit expected to be within the previously announced ranges (£70-72m and £2.5-3m, respectively). Cash of £7.1m at 31 December 2023 is ahead of management expectations and significantly up on the £3.7m reported at 28 November, which we assume is due to a combination of working capital improvements and tight control over costs. The outlook for FY24 ‘remains as stated in the November update’; at that time, the tone was cautious, with weaker demand in Q4 23 expected to continue into 2024. We take comfort from the strong cash flow late in the year, performance otherwise as anticipated in the November update and unchanged guidance around FY24.