Growth, cash and opportunity

ZOO has announced an exceptionally strong H1 period (to end-September) with revenue almost doubling year on year and strong growth in both profitability and cash generation. The result is in line with September’s trading update, which prompted significant upgrades to estimates for this year and next. The business appears well positioned to benefit from ongoing growth in media content production, with the key streaming providers racing to deliver international (and therefore multi-language) content and ad-supported tiers. This represents a material opportunity for ZOO, underpinned by the well-timed roll-out of ZOO’s strategic geographic hubs and investment in capacity. The FY23E outlook remains in line with market expectations, and we look forward to further delivery in H2 and beyond.

Growth, cash and opportunity

SDI Group has announced the acquisition of Fraser Anti-Static Techniques Limited (Fraser), a UK-based global leader in the manufacture of anti-static equipment. The estimated total consideration is £13m, net of approximately £3.9m excess cash acquired. The acquisition will be funded from SDI’s existing cash resources and revolving credit facility; as at 30 September the group had c.£3.3m of cash, £7.0m bank debt and £13.0m undrawn bank facility. Fraser represents a departure from SDI’s usual sub-£10m targets. The business is already highly profitable, with sales offices in China and Germany. A large proportion of revenue is to overseas customers, and we see good scope to increase global market share across the SDI Group. The acquisition is expected to be immediately earnings enhancing. We therefore increase our estimates for this year and next, with a 4.2% uplift to fully adjusted EBITDA for FY23E and 2.6% for FY24E (given our assumption of lower Atik revenues).

Acquisition to increase global presence

Thruvision has announced a positive H1 23 trading update, to 30 September 2022, as the group continues to benefit from its diversified revenue base. The Customs division has contributed very strongly, and we expect the acceleration of growth to continue given the recently announced US Customs and Border Protection (CBP) framework agreement. The quantum of CBP spend is large, with the two recent orders totalling $9.7m, and we upgrade revenue by 26% for FY23E. Economic headwinds have created a challenging environment for retailers, with H1 23 Profit Protection revenue flat year on year having achieved 70% growth in FY22. Any uptick in demand in Profit Protection could allow further upgrades later in the financial year, and we note that there has been a good level of new business in this area, plus upselling opportunities.  We look forward to further developments as the technology becomes rapidly more accepted and mainstream.

Strong and reassuring trading update

CEPS has delivered solid H1 22 results, for the six months ended 30 June 2022, against a weaker comparative period that was impacted by lockdown restrictions. Total revenue increased by 45% to £13.0m (H1 21: £9.0m) and operating profit by 15% to £930k (H1 21: £809m). The subsidiaries have made good progress following the restructuring measures over the past three years and the ‘buy and build’ strategy is proving successful. However, given the worsening economic situation, management has flagged that ‘caution is our watch word’ and the companies are being managed accordingly. CEPS has not been immune to issues with product availability, labour shortages and sharply rising input costs. In particular, management is looking to automate processes where possible, over the longer term, to reduce costs.

Solid H1 22 but cautious outlook

ZOO recently held an in-person Capital Markets Day (CMD) for retail and professional investors. No new financial detail was given, but this note aims to summarise the additional market intelligence and operational understanding that we gained from the event. Overall it was a very upbeat and reassuring presentation, reaffirming that ZOO enjoys a strong position in an exciting and fast-evolving market.

Capital Markets Day highlights profit potential

Tern has successfully raised £1.6m gross proceeds through an issue of 17.3m subscription shares and 4m retail shares at 7.5p per share, a 14.3% discount to the closing price on 4 October. In line with management’s commitment to its overall shareholder base, retail and other investors were able to participate via PrimaryBid. The net proceeds are intended to bolster Tern’s commercial position by supporting further growth and strategic investment in its current portfolio companies. In the most recent funding rounds, Tern’s investment proportion has been relatively small as the businesses becomes attractive to third-party investors. In order to protect shareholder value already created, it is imperative that Tern has the ability to negotiate from a position of strength when competing with private equity providers that often have far greater resources. We see this fundraise as a logical step as the group continues to mature its position and offering.

Fundraise to strengthen negotiating position

Thruvision, the leading provider of ‘safe distance’ people screening technology, has this morning announced the signing of a purchasing framework agreement by US Customs and Border Protection (CBP), as well as a first order under this agreement for the amount of $7.0m. Both developments are significant positives for the near- and long-term performance of the group, coming hot on the heels of the $2.7m CBP contract award announced on 22 September. Given recent caution around Profit Protection, and in line with our comments last week, we will await the October trading update prior to revisiting forecasts.

US Customs & Border Protection framework

Thruvision’s FY results to 30 March 2022 demonstrate a return to growth, driven by a strong H2. Results were in line with our forecasts, which we reinstated earlier this year. Overall revenue grew by 25% to £8.4m (FY21: £6.7m), resulting in a reduced operating loss of £1.9m (FY21: £2.8m loss). Profit Protection delivered significant growth, with revenue up by 73% (FY21: 49%), now accounting for over 45% of group revenues. Although year-on-year Customs revenue was flat, material revenue was achieved in H2 and post period as the anticipated orders from US Customs and Border Protection (CBP) started to flow through. Management notes that although the economic situation has become more challenging for retailers, demand for the Thruvision product is robust, with trading in the current financial year to date consistent with the same period last year, ahead of the Christmas spike. We believe that Thruvision has returned to its pre-pandemic growth trajectory and importantly is firmly on track to deliver an EBITDA-breakeven result in FY23, for the first time in the group’s history.

FY results show growth trajectory back on track

Thruvision, the leading provider of ‘safe distance’ people screening technology, has announced a short trading update and contract award. The contract, totalling $2.7m, is with US Customs and Border Protection (CBP), to complete the process of upgrading CBP’s existing fleet of Thruvision 8-channel units to the latest 16-channel variant, with further orders anticipated in H2 23. Despite the economic situation creating a more challenging environment for retailers, management notes that trading in the current financial year to date (FY23) has been consistent with the same period in FY22, as the company heads into the historically busiest period for order intake. It’s worth noting that the trading update in April 2022 flagged that revenue from Profit Protection is expected to increase by at least 70% in FY22 compared to FY21. Full-year results for the year ended 31 March 2022 are expected to be announced in the last week of September and we will revisit our estimates at that time. Management acknowledges that publication is later than usual because of significant delays in the audit process due to resourcing and levels of scrutiny throughout the process.

Further US Customs contract

Tern has delivered a solid set of first-half results and further positive developments post-period. The portfolio is at an inflexion point, with configuration work turning to repeat licencing revenue and aggregated monthly recurring revenues (MMR) increasing 112% in H1. Recent third-party investments and uplifts in value recognised in 2021 and early 2022, coupled with the 35% net asset growth accomplished in 2021, are critical proof points that Tern’s model is delivering. The first Series B round was also successfully completed in the period for FundamentalVR. While the termination of the potentially transformative Pires deal was disappointing, we see significant value creation from Tern’s hybrid VC model and organic growth potential. We believe that recurring revenue growth will attract additional strategic interest and look forward to further positive newsflow.

Repeat licencing revenue a highlight of H1 22

ZOO has provided a brief but very positive trading update ahead of its AGM. H1 23 is expected to be ahead of guidance with revenue of at least $51m, up at least 89% on H1 22 ($26.9m) and 17% on H2 22 (£43.5m), and a considerable increase in EBITDA given operational gearing. We are therefore upgrading our FY23 and FY24 estimates, having increased confidence that ZOO will exceed its $100m revenue target in FY24E, with scope to achieve it this financial year if momentum continues. Strong revenue growth is driven by new production returning to pre-Covid levels and significant growth from territory launches, boosted by the well-timed roll-out of ZOO’s strategic hubs and continuing back-catalogue migration.

$100m revenue target within reach

RBG has reported a solid set of results for H1 22, in line with its July trading update, with strong performance in the core professional services businesses. The group remains on track against our FY22 estimates (revenue of £55.0m and adjusted EBITDA of £16.9m), with an expected positive skew in H2 from Convex and Lionfish. The integration of Memery Crystal (MC) is complete and the group’s diversified professional services revenue model has proved resilient against a continued backdrop of uncertainty. Demand for services across all three businesses remains buoyant, and management is optimistic in its outlook for the year and beyond, despite economic uncertainty. In our view, the valuation appears undemanding given forecast growth, both organic and through bolt-ons, coupled with the significant upside potential from contingent work and litigation finance.