Significant key accounts

Tern hosted an investor presentation and Q&A session on 9 January 2025. Presentations were given by the portfolio companies, which reinforced that all three businesses have made significant progress with major key accounts and important strategic partnerships. Tern has created, and continues to support, a portfolio of businesses that are generating significant traction, underpinned by third-party interest and financial support. Tern has also gained exposure to Sure Ventures plc, which should be an additional source of income. Tern is focused on supporting portfolio growth to create significant shareholder value when there is a liquidity event. However, with the businesses attracting sizable investors, it is even more important that Tern has sufficient capital to protect its position.

Significant key accounts

SDI’s H1 25 results, released this morning, highlight solid progress against its strategy refresh, outlined at the full-year results in July. This has included the value-enhancing acquisition of InspecVision for £6.1m. We note the improving margin from the underlying portfolio and significantly increased cash generation, with £4.7m of cash from operations in H1 25 (vs £3.3m in H1 24). Management notes an improving order book and good momentum going into the second half. We therefore maintain our estimates for the full year and introduce FY26 forecasts. SDI has made significant operational progress, addressing underperforming business and fostering collaboration. We expect a return to longer-term organic growth of 5%-8% and margins tracking to 15%, supported by a FCF yield of 12% on FY25 estimates. We remain confident long term given the track record demonstrated by SDI’s ‘buy and build’ model and the progress delivered by the management team.

H1 25 results deliver on refined strategy

ZOO’s H1 25 performance reflects the steady return of orders following the end to the Hollywood strikes by actors and writers. However, monthly budget allocations from ZOO’s customers remain at depressed levels due to ongoing strategic reviews at the major studios. Content strategies are evolving, and business models are being realigned to generate more profit and cash. This has resulted in unpredictable workflow patterns, but visibility is expected to improve throughout calendar year 2025, particularly given ZOO’s diversified client base as it continues to win business from significant new clients. We therefore introduce forecasts for FY26, which factor in a modest recovery to revenue but with ZOO returning to an operating profit, and good cash generation. Although current trading is in line with expectations, management notes visibility remains limited for Q4 orders and we therefore trim our FY25 estimates as a precautionary measure.

H1 25 results highlight steady return of orders

SDI Group has announced the acquisition of InspecVision Ltd, a UK manufacturer of computer vision, precision measurement systems for industrial applications, for a total consideration of £8.65m. Net of cash of £1.8m and property of £0.75m, which will be sold back to the vendors, the net consideration is £6.1m. The deal will be funded by SDI’s existing cash resources and revolving credit facility, highlighting the group’s balance sheet strength. The acquisition is expected to be immediately earnings enhancing. We therefore increase our FY25 estimates, with a 4% uplift to our fully adjusted EBITDA.

Acquisition of InspecVision

Thruvision’s H1 25 results are in line with the trading update on 14 October. The strategy under the recently restructured board remains unchanged as Thruvision establishes itself as the industry-leading provider of walk-through screening solutions, reaping the benefits of a broad customer base in international markets. There is good momentum in demand from new and existing clients, and strong progress in expanding its reach as it looks to scale the business through a broader set of sales partnerships, such as with Sensormatic. With a healthy order pipeline and potential larger orders that would significantly extend the order backlog, we look forward to further updates as the year progresses.

Strong progress in Retail Distribution in H1

Thruvision has issued an update on current trading for the first half of the year to 30 September and announced a number of changes to the board, including CEO Colin Evans leaving the company (with chairman Tom Black taking the reins until a successor is appointed). There is good momentum in demand from new and existing clients, and strong progress in expanding its reach through a broader set of sales partnerships, such as Sensormatic. Retail Distribution has performed well, accounting for 85% of revenue in H1, double the prior-year period. However, the lumpy nature of customs meant that there were no material orders in H1, compared to a single order for £1.9m in the prior year from an Asian customs agency. Given the timing of some of the larger orders, we have trimmed estimates for the current year. However, our revised estimates still factor in over 15% growth in revenue compared to FY24. Thruvision is reaping the benefits of a broad customer base in international markets, with a healthy order pipeline and potential larger orders that would significantly extend the order backlog. We look forward to further detail at the interims on 24 October.

H1 trading update and board changes

ZOO has published a white paper on AI in media localisation, highlighting its use as an assistive technology, where it is being used successfully and where challenges remain given the complexities of localising premium entertainment content. ZOO has been at the forefront of AI and has actively pursued R&D in technologies that will enhance and support traditional processes rather than replacing or eliminating the need for skilled human talent. We therefore believe that the AI revolution is an opportunity for ZOO to expand its technical capabilities and solidify its position. ZOO’s unique end-to-end, technology-centred approach is finding favour with the major streaming providers, delivering the levels of reliability, quality, security and scalability required to service the high levels of demand. We believe that the company is well placed to deliver long-term profitable growth through increased market share as the industry recovers from the recent disruption.

White paper highlights AI opportunities

Today’s AGM statement by ZOO confirms that customer demand has continued to steadily recover following the end to the industry-wide strikes of 2023 and a strategic realignment within the streaming industry. ZOO has seen a strong recovery in its pipeline in H1 FY25, and market commentators are forecasting a return to 2022 levels of entertainment output in 2025. For ZOO, visibility extends a few months to January 2025. However, management is confident it will meet current market consensus for FY25, and we maintain our estimates for revenue of $61.8m and adjusted EBITDA of $5.6m. ZOO’s strategy is focused on deploying innovative technology, including AI, to provide leading end-to-end services to its customers. ZOO is emerging post supplier rationalisation as one of the few trusted E2E suppliers, which we anticipate will deliver profitable revenue growth as the run-rate recovers.

AGM update shows continuing recovery

Tern announced on 23 September that it has raised £144k gross, via an open offer to existing shareholders, at an issue price of 1.25p. A general meeting (GM) was held on the same day, which passed the resolutions to disapply pre-emption rights. This gives Tern the ability to protect its commercial position by enabling additional funding possibilities and reopening its £3m facility negotiated last year, which requires the issue of warrants on drawdown. Tern’s H1 results earlier in the month highlighted that, despite the difficult backdrop for technology stocks, Tern’s core portfolio businesses are thriving rather than just surviving. Aggregated ARR improved 22% year on year and all other KPI metrics showed strong progress. The businesses are gaining commercial traction, with repeat licencing revenue through the SaaS models and a growing high-profile customer base. Operating costs have been cut by 42% but Tern remains focused on supporting the companies to grow. Third-party investments are critical proof-points that Tern’s model is delivering. Having strategic partners (such as Ten Eleven) highlights that Tern is attracting ‘intelligent growth funding’ from partners with substantial experience and reach across the US.

Financial flexibility reinstated

ZOO’s FY24 performance reflects the industry disruption due to the recent double strike (actors and writers), and the hiatus in orders and production that followed. FY24 is in line with guidance from the May update, however there has been a sequential month-on-month improvement in demand, with management expecting ‘an extended period of recovery to late 2025’. Although orders remain at historically low levels, market trends, which we discuss within the note, suggest that spend on content will return to pre-strike levels in 2025, although visibility for ZOO in H2 FY25 remains limited at this stage. ZOO has completed a cost-cutting exercise while maintaining headroom in capacity, taking advantage of its new facility in Chennai, which should lead to margin enhancement. Throughout the disruption, ZOO has retained its customers and added new ones, with significant revenue potential as orders increase and scope to gain market share as an E2E vendor, capitalising on vendor consolidation.

ZOO a clear beneficiary as recovery underway

SDI’s FY24 results, released this morning, confirm that while markets have experienced headwinds from inflationary pressures, and customer destocking issues linger, overall performance has been resilient. We note improving cash generation, with £3.8m of free cash flow in H2. Net debt was flat at £13.2m (FY23: £13.3m) after acquisition spend of £3.4m. Despite the unwinding of inflated Covid demand, SDI has made strategic and operational progress, with a strong team in place to support the next phase of growth. CEO Stephen Brown has conducted an operational review, addressing underperforming businesses and focusing on organic growth. This will be coupled with value-enhancing acquisitions, where the pipeline is strong. We remain confident for the long term given the track record demonstrated by SDI’s ‘buy and build’ model. SDI has the finances in place and strong cash flow generation to support its growth plans.

Resilient FY24 and strategy refresh

Thruvision’s FY24 results are in line with the April trading update, demonstrating progress in expanding its reach through a broader set of sales partnerships. The group’s unique offering and growing traction in its four core markets drove revenue growth of 85%, adjusting for lack of a US Customs and Border Protection (CBP) order. The technology is fully proven in the international security market and 70% of revenue across the group was from existing customers, most of whom are well-known government agencies and leading retailers. The broad customer base and activity in more markets is helping to offset the lack of a CBP order in this US Government fiscal year, given the well-publicised US Federal Budget stalemate. Given the current sales pipeline, we estimate that revenue and profitability is tracking towards the level achieved in FY23. We therefore introduce FY25 estimates with revenue of £10.9m and EBITDA of -£0.8m.