H1 2020 results highlight product demand

Tern has delivered a strong set of first-half results and further positive developments post-period-end. All of Tern’s principal portfolio companies delivered significant progress with overall revenue up 75% year on year, compared to 62% in the comparative period. This demonstrates both a post COVID recovery and a fundamental shift in the adoption of Internet of Things (IoT) technologies. Employee headcount at portfolio companies – another important indicator of growth – increased by 14% in the half-year, driving an increase in revenue per employee of 53%. Despite investing £0.7m in its portfolio companies in the period, Tern held £0.4m in cash at 30 June 2021, which has since been boosted by a £4m fundraise in July 2021.

H1 2020 results highlight product demand

Tern reports on the continued progress made by its portfolio companies over the past few months, including a further £530,000 investment by Tern in FundamentalVR as part of a £1.16m funding. Tern notes strong business momentum across all its portfolio companies, which management expects to continue. In our view, the update highlights the benefits of Tern’s focus on IoT businesses whose solutions have seen an accelerated adoption in the current market environment. We look forward to further positive news flow with the interim results in September.

Portfolio update emphasises momentum

In our view, SDI Group has delivered an impressive performance in FY21, benefiting from the diversity of its products and end markets. Two product lines are benefitting from significant one-off COVID-19 related contracts in contrast to weaker demand due to the pandemic in some of its other end markets. This has significantly boosted sales and profitability which we expect to continue into FY22E. Growth has also been enhanced by the acquisition of Monmouth Scientific. Strong cash generation and balance sheet strength underpin its acquisition strategy.

Strong FY21 Performance

Tern has successfully raised £4m gross proceeds through an issue of 21.2m shares at 18.8p per share, a 15.5% discount to the last closing price. Retail and other investors were able to participate via PrimaryBid, reducing the dilutive impact for investors. The retail offer was oversubscribed and raised gross proceeds of £1.99m. The net proceeds are intended to bolster Tern’s commercial position by supporting further investment in its current portfolio companies and accommodate new value-enhancing investments. Although at a slight discount to the recent price, the new monies are being raised at a significant premium to where the share price has been trading, based on a 6 month average of around 16p.

Fundraise for flexibility

Tern has announced the proposed IPO and admission to the NASDAQ First North Growth Market in Stockholm of its portfolio company Wyld Networks (Wyld), with a likely market capitalisation of £8m. The announcement demonstrates the success of the Group’s investment strategy, delivering value from the portfolio even with the backdrop of COVID-19. At the current offering price, there is a small uplift to Tern’s book valuation of Wyld. The IPO allows Wyld to remain a core part of Tern’s portfolio whilst reducing dependence on Tern for future funding. Shareholders of Tern will continue to have exposure to Wyld, as it benefits from improved liquidity, access to finance, increased brand recognition and, geographical reach.

Milestone achievement – £8m investee IPO

SDI Group has published a second positive trading update ahead of July’s FY21E results announcement. Management’s guidance for revenue and adjusted PBT is approximately £35.3m and £7.4m respectively, ahead of our previous FY21E estimates (and previous guidance) of £34.0m and £6.7m. We upgrade our FY21E forecasts accordingly, with a 10% uplift to our fully adjusted PBT forecast. Current base guidance for FY22E remains unchanged with revenue of £42m and adjusted PBT of £8.7m. Consequently, we are keeping FY22E and FY23E forecasts unchanged. However, we note that the announcement confirms that March and April sales and order intake have been robust across all of SDI’s businesses. We look forward to further positive updates as SDI Group has entered its current financial year (FY22E) with a good tailwind.

Further upgrade to FY21E estimates

Tern has provided a summary of the progress made by its principal portfolio companies in recent months that will be included in the Chairman’s statement at its AGM later today, which will be followed by an online presentation and Q&A session for shareholders. Recent highlights at each of Tern’s principal portfolio companies are summarised below. The AGM statement also emphasises Tern’s strong focus on generating value for its own shareholders from the investments it has made in this broad portfolio of companies at the forefront of IoT technology, and that the market backdrop appears very favourable, with IDC forecasting the IoT market will maintain double-digit annual growth rates and surpass US$1tn in 2022.

Exciting times for Tern’s portfolio companies

Tern reported a 27% growth in total net assets during 2020 (from £18.9m to £24.0m), with NAV per share increasing from 7.0p to 7.3p. 2020 presented challenges due to the COVID-19 pandemic, but Tern marked the year with a new portfolio investee and a significant valuation gain. A £0.9m investment was made in Talking Medicines, which joined the portfolio in November 2020, while £1.1m was invested across three existing portfolio companies. This activity was funded by three equity raises for a total of £4.5m, with £2.1m cash held at the year end. The main valuation driver was a £2.6m uplift in the value of Tern’s investment in Wyld Networks to £4.0m. This substantial gain was partly offset by £0.6m of other adjustments, primarily driven by forex movements, resulting in a net £2.0m fair value uplift.

New investment and fair value uplift in FY20

SDI Group has published an extremely positive trading update, focusing on a significant follow-on order that has been received by group company Atik Cameras from an OEM manufacturer of real time PCR DNA amplifiers, used in the testing of COVID‑19 and similar diseases. The Board has given revenue and adjusted PBT guidance for FY21 and FY22 that is substantially ahead of our previous expectations and we upgrade our forecasts accordingly, with 15% and 44% uplifts to our fully adjusted EPS forecasts for FY21 and FY22, respectively. While the order does not represent recurring business, shipments are scheduled to continue into FY23 and we see further upside from Atik Cameras leveraging its traction in the PCR market segment, leading us to upgrade our fully adjusted EPS forecast for FY23 by 20%.

Major follow-on order for Atik Cameras

SDI Group has announced the acquisition by its recently acquired subsidiary Monmouth Scientific of Uniform Engineering, for cash consideration of £350k – funded by the group’s existing revolving credit facility. Uniform Engineering manufactures high-quality bespoke metal enclosures and housings used in a variety of applications including pharmaceutical, laboratory and safety equipment, and is a component supplier to Monmouth Scientific. The acquired business generated £1.0m in revenues and £0.1m profit before tax for the year to 30 May 2020, so we estimate that the purchase price equates to a reasonable c 3.5x EBIT multiple. We expect the acquisition to be immediately earnings enhancing and accordingly make minor upgrades to our FY21 and FY22 forecasts, with FY21 revenue growth now forecast at 33.6% and adjusted EPS growth at 38.7%.

£350k acquisition for Monmouth Scientific

Tern’s portfolio company Wyld Networks has completed a £750k fundraise, primarily from a third-party institutional investor, at a significant valuation uplift from the previous book value of Tern’s holding. At the same time, Wyld Networks’ capital structure has been simplified, with all outstanding convertible loan notes held by Tern and the third-party investor converted into Wyld Networks equity. As a result, Tern’s holding in Wyld Networks equity has decreased from 96.7% to 78.7%, while the book value of its holding has increased to £4.1m at the fund raise valuation, representing a 2.7x uplift to the c £1.5m that Tern has invested in Wyld Networks to date.

Wyld Networks completes £750k fundraise

Tern has provided an update on the recent activities of its principal portfolio companies, highlighting an acceleration in business momentum across all companies during the fourth quarter of 2020, which is seen to be continuing into 2021. Tern’s board sees portfolio companies demonstrating real progress towards its goal of generating significant value for Tern’s shareholders, not just in trading performance but, more importantly, increasing the number of critical proof points of their business concepts. This is particularly important in realising Tern’s goal of unlocking value through third-party investment, especially from US venture capital firms.