Board additions emphasise scale-up expertise

Board changes at Xaar will be welcomed by the investment community. On 30 May, Xaar announced the appointment of Dr Inken Braunschmidt as Independent NED. Ms Braunschmidt has international board-level experience in electronic engineering, digital innovation and transformation. Board ‘upskilling’ has been a theme at Xaar, with new appointees well-versed in governance, stakeholder management, finance, investment and having practical ‘coal face’ expertise in the international engineering and manufacturing industry. This appointment follows Alison Littley’s decision to step down as a NED, to be replaced by NED Richard Amos as the Senior Independent Director on 1 July. These moves follow FY23 results that were ‘in line’ and featured adj. EBITDA at £6.4m, up from £6.2m in FY22. The profitability uptick was achieved despite a weak end market where product debuts were delayed, affecting H2 23 and Q1 24 revenue. CEO John Mills concluded that while the external trading environment ‘remains challenging’ the product portfolio was generating ‘strong interest from customers’. Our investment view is that the medium-term outlook is nudging better and the inventory unwind boosts FY24 working capital. Shares have responded positively, up 33% since finals, and the 1.5x sales multiple illustrates a pedestrian valuation.

Board additions emphasise scale-up expertise

tinyBuild has a newly strengthened balance sheet, support from games royalty Atari, a lower run-rate cost base and a slate of new titles featuring ‘bangers’ (says Steam). The new development model gives 1,000-hour games from an indie cost model. Evidence is building that it is time to draw a line under 2023, an ‘annus horribilis’ across the US$211.2bn video games industry when it buckled under the strain of weak demand as a soggy consumer environment led to a funding desert and cancelled game debuts, with inevitable consequences for revenue, jobs, executive reshuffles and industry-wide restructuring. If you invested £1 in UK video gaming stocks in January 2023, you would be left with 45p now. Through industry-wide restructuring, tinyBuild retains emphasis on its IP, expanding title reach, debuts and monetising its extensive back-catalogue. Nervousness still pervades, competitor performance is mixed, but we explore why investors should be encouraged: (i) tinyBuild’s ‘best foot forward’ growth orientation, coupled with recent positive announcements like Duckside, Kingmakers and Level Zero, (ii) the clear valuation upside, and (iii) smatterings of industry evidence illustrating a slowly improving backdrop.

The big reBuild

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

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

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