Targeted acquisition strategy aids growth path

Acquisitions have been an important element of Severfield management’s growth strategy, with the aim of adding new products, sectors and regions to what we have identified as exciting long-term organic opportunities. In this Spotlight report, we focus on the group’s targeted M&A approach, highlighting three significant deals.

Targeted acquisition strategy aids growth path

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

Severfield’s new divisional structure and Project Horizon operational improvement programme, outlined at the recent Capital Markets Day, better focuses the UK’s leading construction steel specialist on growth markets, in our view. These initiatives, and the opportunity for further expansion in Europe and India, could imply upside to our FY25E estimates and improved growth beyond that. We also believe that greater revenue transparency could suggest the potential for a re-rating.

Structurally re-engineered to face new horizons

ZOO Digital enjoys a strong position in an exciting and fast-evolving market. Its unique end-to-end, technology-centred approach is finding favour with the major SVOD providers, delivering the levels of reliability, security and scalability required to service the large – and increasing – levels of demand. ZOO’s clients are committing huge sums to new content, with the large streaming providers embroiled in ‘content wars’ to grow and maintain market share. Localisation is also experiencing a boom due to aggressive geographical expansion, enabling ZOO to rapidly increase dubbing revenue in an underpenetrated market. Having considered ZOO’s technology offering (in particular ZOOstudio) relative to competitors, we believe that the company is well placed to deliver long-term profitable growth through increased market share in a large, growing and constantly evolving segment.

Technology-led proposition drives growth

The turnaround of Xaar in recent years has been driven by effective and clear management action. The business has been stabilised and realigned with its markets, new products released, and small but strategic acquisitions made. In amongst all this, it is easy to overlook the underlying technology, particularly how it compares with the competition and the opportunities that lie ahead. With the business on the front foot again, we highlight how the structure and design of Xaar’s printheads provide competitive advantages in overcoming the key challenges faced in several of the areas that make up the company’s $1bn addressable market opportunity.

In the thick of it – addressing market needs

Prospects for Severfield, the UK’s top steel construction specialist, should be underpinned not only by existing markets including infrastructure and datacentres but also, longer term, by three key themes: security, decarbonisation and lifestyle changes. The group’s specialist skills ideally place it for new nuclear, green energy and ‘gigafactories’. This wide-ranging note peers over the horizon to Severfield’s longer-term opportunities.

Opportunities abound amid new world order

Tern recently issued a strategy update following the termination of its proposed acquisition of Pires Investments plc. While the termination was disappointing given the complementary portfolio potential from Pires, we believe that focus should shift to Tern’s hybrid VC model and the value and organic growth potential from its own network of companies. 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. Coupled with delays due to Covid, we believe this would make an immediate exit premature. The group has delivered consistent valuation uplifts, with 35% year-on-year total net asset growth achieved in FY21. Tern remains focused on the route of value creation and ultimately exit at the appropriate time, and has the model to succeed in this.

A hybrid VC model to access the IoT opportunity

With the global economic situation increasingly uncertain, we have taken the opportunity to review recent industry forecasts on the streaming video market. The message remains positive: the industry continues to expect robust growth in the near/medium term, despite the challenging macro backdrop. We have also taken a deep-dive into Netflix Inc’s Q1 22 release, which revealed that the industry leader in streaming video is facing a number of headwinds. In our view, one difficult quarter for Netflix is not a sign of turbulence for the global video streaming market, nor an indication of more challenging conditions for the markets addressed by Aferian.