Strategic sales partnerships set to drive growth

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.

Strategic sales partnerships set to drive growth

Tern’s FY23 results highlight improving metrics that should attract additional strategic interest across the portfolio. All companies are gaining significant commercial traction, with configuration work turning to repeat licencing through SaaS models and growing high-profile customer bases. However, valuations across the global technology landscape remain depressed, which has flowed through to Device Authority and Wyld, as detailed overleaf. Therefore, despite the significant improvement in performance metrics, Tern has reported a £12.4m reduction in net assets. We reiterate that Tern’s funding-to-exit model requires patience, with all portfolio companies now firmly into their growth stage and leaders in their targeted markets. Management continues to drive value creation from its portfolio of high-growth businesses in sectors poised for substantial growth. We look forward to positive news flow over the coming months.

Significantly improved KPIs

SDI Group’s trading update for the year ended 30 April 2024 is in line with current guidance for FY24, with good momentum heading into FY25. This reflects the hands-on approach under the new CEO, addressing short-term issues that had led to underperformance in some businesses. The underlying portfolio performed well in terms of profitability and cash generation, with improved trading in a number of businesses. The increased cashflow in H2 and significant headroom within its banking facilities leave SDI well placed to continue its buy and build strategy.

Solid update reflects strong second half

This morning’s trading statement from ZOO confirms that customer demand has continued to recover following the end to the industry-wide strikes of last year, with FY24 expected to be ‘at least’ in line with current market consensus. We maintain our FY24 estimates, which we increased slightly at the recent March update, with revenue at $39.9m and an adjusted EBITDA loss of $13.4m. New productions are translating into a healthy order pipeline, with market commentators forecasting a return to 2022 levels of entertainment output in 2025. ZOO’s strategy remains focused on developing and deploying innovative technology, including AI to provide leading and differentiated end-to-end services to its customers. ZOO has recently received dubbing and subtitling orders following its appointment as a primary vendor for another major studio. This provides further evidence that ZOO is emerging post supplier rationalisation as one of the few trusted end-to-end (E2E) suppliers, with its capital-efficient approach involving production hubs in key locations, which we anticipate will deliver profitable revenue growth as the run rate recovers.

Recovery continues as pipeline accelerates

Thruvision’s year-end trading update confirms revenues broadly in line with our expectations at c.£7.8m, and an EBITDA loss of c.£2.5m. There is good momentum from both new and existing clients, with Thruvision reaping the benefits of a broad customer base, spanning a number of international markets. Adjusting for the impact of US Customs and Border Protection (CBP) orders, revenue growth was 85% to £7.6m (FY23: £4.1m). Demand has been strong from the Entrance Security market given the worsening geopolitical climate, and recent policy changes are driving demand from US Aviation. Around 70% of revenue came from existing customers, most of whom were upgrading to the group’s WalkTHRU technology, which is gaining significant traction. We are encouraged by the level of revenue growth outside of CBP and will look to introduce FY25 estimates as the year progresses, with the multi-year CBP framework in place for when funding support returns.

Strong growth outside CBP

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

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

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

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

Tern recently took part in an interview with DirectorsTalk following the announcement in late December that portfolio company Device Authority (DA) had received a US$7m strategic investment from Ten Eleven, a global leader in cyber security with a strong foothold in automotive and medical devices. The next step to accelerate growth for DA’s KeyScaler is to expand the sales footprint, particularly in the US. Having Ten Eleven as a partner marks a significant milestone for DA in this respect, attracting ‘intelligent growth funding’ from a partner with substantial experience and reach across the US, complementary to the Tern structure. In our view, pressure to realise cash through an exit is unfounded given the timeframe required to deliver maximum value to shareholders by preparing a business for harvest. Tern remains focused on the route of value creation and ultimately exit at the appropriate time.

Supporting investee secured for DA

SDI has indicated that a slowdown in the life science / biotech market, and some resultant destocking, is likely to impact its expected FY24 revenue, leading the group to moderate current year guidance for both revenue and adjusted EBITDA. SDI notes that FY24 represents a short-term phenomenon, due to the over-ordering of the past three years caused by inflated Covid demand. However, we remain confident for the long term, given the strength of SDI’s ‘buy and build’ business model, with a number of smaller niche autonomous businesses operating in different end markets.