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While commercial delays have affected Vection Technologies’ H123 financial performance, lead indicators are encouraging, underpinning management’s reiterated guidance of FY23 IntegratedXR revenue growth of 45% y-o-y using the midpoint of its A$24–26m range. According to the company, the majority of these commercial delays have now been resolved, supporting the 50% q o q uplift in total contract value (TCV) in Q3 (to 22 March). Also in Q3, the company started several pilot projects, most notably a A$1m pilot in the defence sector that could extend to a A$30m tender, where a portion of this could be delivered before year-end if it wins the tender.
Vection Technologies |
H123 results |
Software and comp services |
27 March 2023 |
Share price performance
Business description
Next events
Analysts
Vection Technologies is a research client of Edison Investment Research Limited |
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While commercial delays have affected Vection Technologies’ H123 financial performance, lead indicators are encouraging, underpinning management’s reiterated guidance of FY23 IntegratedXR revenue growth of 45% y-o-y using the midpoint of its A$24–26m range. According to the company, the majority of these commercial delays have now been resolved, supporting the 50% qoq uplift in total contract value (TCV) in Q3 (to 22 March). Also in Q3, the company started several pilot projects, most notably a A$1m pilot in the defence sector that could extend to a A$30m tender, where a portion of this could be delivered before year-end if it wins the tender.
Year |
Revenue |
Adj EBITDA* |
PBT** |
EPS** (c) |
EV/sales |
P/sales |
Net cash*** |
06/21 |
3.5 |
(0.4) |
(2.5) |
(0.27) |
11.7 |
14.3 |
2.2 |
06/22 |
18.9 |
0.9 |
(7.0) |
(0.67) |
2.2 |
2.6 |
10.8 |
06/23e |
26.1 |
3.7 |
(6.4) |
(0.59) |
1.6 |
1.9 |
11.5 |
Note: *Adjusted EBITDA is normalised, excluding non-cash payments, exceptional items and interest revenue. **PBT and EPS are normalised, excluding exceptional items and interest revenue. ***Includes debt, financial leases and term deposits.
Commercial delays hinder H123 progress
In H123, revenue declined 10.9% y-o-y to A$8.3m and TCV fell 9.0% y-o-y to A$10m, primarily due to delayed contract signings as a result of macroeconomic uncertainty. The EBITDA loss increased to A$1.6m, with a lower variable cost of sales (COGS) not sufficient to offset a significant increase in share-based payments. An increase in non-cash finance and acquisition costs of A$3.8m, as well as a A$3.5m impairment expense drove an 83% increase in EBIT loss to A$4.3m. The balance sheet remains robust despite the loss, with net cash of A$9.3m, which includes leases and term deposits, due to the high proportion of non-cash expenses.
Uplift in TCV supports positive outlook
Management reaffirmed its FY23 guidance of an IntegratedXR revenue range (excluding other income) of A$24–26m and we maintain our total revenue forecast of A$26.1m. So far in Q323, the company has seen a 50% uplift in TCV to A$15m, supported by the signing of delayed contracts and upselling to existing clients. Management also signed a A$1m pilot order with a top 10 global defence contractor and has made developments in virtual reality for the aerospace and real estate sectors. The potential extension of this pilot into a A$30m tender offers the greatest opportunity for growth in the second half, which could be supported by new contracts in other various verticals. We leave our adjusted EBITDA materially unchanged from our previous forecasts at A$3.7m (margin: 14%), which excludes share-based payments. Delivering an adjusted EBITDA profit for the full-year supports our forecast A$2.2m h-o-h increase in year-end net cash to A$11.5m (including financial leases and term deposits).
Valuation: Potential contracts offer upside potential
Vection Technologies trades on an FY23e EV/sales multiple of 1.6x, a 66% discount to its small-cap peers. We believe this discount could close if management builds a track record of delivering on further contract opportunities, as well as continuing to successfully execute on its land and expand strategy in the longer term.
TCV growth and robust pipeline underpin outlook
Following its H123 results, Vection Technologies secured A$5m of additional TCV in the real estate, defence and aerospace sectors, alongside progress made with its existing partners, which include Fortune Global 500 professional companies, such as Accenture, DXC Technology, NTT Data and Toshiba Tec.
In aerospace, it has signed a A$0.4m agreement with Next One Film Group to develop virtual reality (VR) content to promote space travel and educate the next generation through the creation of environmental, space conditions to provide life-like scenarios in a digital forum. The agreement is part of a larger Memorandum of understanding with Thales Alenia Space, Next One and ALTEC to create a dedicated metaverse platform called Lunar City.
Management also signed a A$1m agreement in its Defence vertical, marking the company’s initial entry into the production chain of an authorised NATO Tempest producer (a NATO equipment and systems provider). This pilot forms part of a larger tender of up to A$30m, where the group could finalise subsequent order awards within the next six months if the tender is won. In the long term, the project offers the opportunity for the group to implement its land and expand strategy, with management believing its technology’s ability to create realistic digital environments will have significant value-add for the defence sector.
Most recently, management announced that it had won several new clients after it showcased examples of its 3D modelling, rendering and animation capabilities to architects and real-estate developers at the Sydney Build on 6 and 7 March. This helped drive an additional A$1m TCV secured between the end of January to 22 March.
Securing these orders will be key to achieving the c A$10m of additional TCV required to reach management’s FY23 revenue guidance and our forecast.
Vertical integration remains key for long-term growth
Product development, either internal or through acquisition, and the subsequent integration into its IntergratedXR suite has enabled the company to expand into new verticals and strengthen its position in existing ones. Recently, the integration of acquired Mindesk and Blank Canvas VR technologies into its product suite has enabled the company to create photorealistic animation in VR to showcase unbuilt environments. Not only does this provide contract opportunities within real estate, its largest vertical by revenue (FY22: 47%), but it could also have applications for television and film production, one of its smallest verticals by revenue (FY22: 6%). Management has stated that the progress made within real estate in March has been accretive to FY23 TCV growth, although the monetary amount has not been specified.
Vertical integration is key to the company’s growth strategy as it reduces reliance on external partners, increasing its share of larger contracts once successful pilot projects are completed, leading to potentially significant uplifts in revenue.
H123 results and review of our forecasts
Vection Technologies’ H123 results to end-December showed an 11% fall in revenue to A$8.3m, primarily due to delays in commercial decisions from its clients owing to an uncertain macroeconomic environment. Management has now resolved a high proportion of these delays, supporting the A$5m uplift in TCV seen in Q3.
A fall in variable cost of sales due to a change in sales mix led to a A$375k reduction in adjusted EBITDA loss to A$275k at the half year, excluding share-based payments. As shown by Exhibit 2, a significant increase in share-based payments relating to performance rights from its latest acquisitions led to an increase in EBITDA loss. The operating loss increased by 83% y-o-y, primarily due to a non-cash A$3.5m impairment expense of the intangible assets. Net income was also affected by a A$3.8m finance and acquisition cost, relating to an accounting change in the period.
Lower cash receipts from customers had a small material impact on its net cash position, which management expects to resolve in H223.
Exhibit 1: Summary of results and changes to forecasts
|
FY22 |
FY23 |
||||||
(A$’000s) |
H1 |
H2 |
FY |
H1 |
H2e |
FYe (old) |
FYe (new) |
Change |
IntegratedXR solutions and services |
8,969 |
8,248 |
17,218 |
7,912 |
17,088 |
25,000 |
25,000 |
0% |
Other |
348 |
709 |
1,056 |
393 |
663 |
1,056 |
1,056 |
0% |
Total revenue |
9,317 |
8,957 |
18,274 |
8,305 |
17,751 |
26,056 |
26,056 |
0% |
Other income |
- |
620 |
620 |
- |
- |
- |
- |
N/A |
Operating expenses (ex exceptionals, D&A & SBP) |
(9,967) |
(8,046) |
(18,013) |
(8,580) |
(13,781) |
(22,357) |
(22,361) |
0% |
Adjusted EBITDA |
(650) |
1,531 |
881 |
(275) |
3,970 |
3,699 |
3,695 |
0% |
Share-based payments |
(178) |
(1,714) |
(1,892) |
(1,323) |
(1,283) |
(1,400) |
(2,606) |
86% |
EBITDA |
(828) |
(183) |
(1,011) |
(1,598) |
2,688 |
2,299 |
1,090 |
-53% |
Depreciation and amortisation |
(559) |
(399) |
(958) |
(545) |
(455) |
(1,000) |
(1,000) |
0% |
Other non-cash operating costs |
(978) |
(2,960) |
(3,938) |
(2,376) |
(270) |
(44) |
(2,646) |
5911% |
Normalised operating profit |
(2,364) |
(3,543) |
(5,907) |
(4,519) |
1,963 |
1,255 |
(2,557) |
N/A |
Exceptionals |
11 |
33 |
44 |
219 |
66 |
285 |
285 |
0% |
Reported operating profit |
(2,353) |
(3,510) |
(5,863) |
(4,300) |
2,028 |
1,540 |
(2,272) |
N/A |
Finance and acquisition costs |
(24) |
(1,045) |
(1,070) |
(3,785) |
(55) |
- |
(3,840) |
N/A |
Tax |
(44) |
(124) |
(168) |
(118) |
(66) |
(312) |
(183) |
-41% |
Normalised net income/(loss) |
(2,433) |
(4,712) |
(7,144) |
(8,422) |
1,842 |
943 |
(6,580) |
N/A |
Normalised diluted EPS ex minority interest (cents) |
(0.21) |
(0.41) |
(0.62) |
(0.90) |
0.19 |
0.08 |
(0.53) |
N/A |
Revenue growth (y-o-y) |
1201% |
275% |
488% |
-11% |
98% |
43% |
43% |
0% |
Revenue growth (h-o-h) |
290% |
-4% |
N/A |
-7% |
114% |
N/A |
N/A |
N/A |
Adj EBITDA margin |
-7% |
17% |
5% |
-3% |
22% |
14% |
14% |
0% |
Reported operating profit margin |
-25% |
-39% |
-32% |
-52% |
11% |
6% |
-9% |
-15% |
Net (debt)/cash inc leases and term deposits |
15,787 |
10,774 |
10,774 |
9,322 |
11,543 |
10,613 |
11,543 |
9% |
Total contract value (TCV)* |
11,000 |
19,000 |
19,000 |
10,000 |
15,000 |
N/A |
N/A |
N/A |
Source: Vection Technologies, Edison Investment Research. Note: *TCV for H223 is based on the figure at 22 March 2023.
Vection Technologies is guiding for FY23 revenue of between A$24m and A$26m, which solely includes sales generated from its IntegratedXR suite and excludes interest received and R&D tax credits. We leave our FY23 revenue forecast for its IntegratedXR suite unchanged at A$25m (+45% yoy), assuming that sales generated from its IntegratedXR will fall at the mid-point of the guided range. We estimate that total revenue could increase by 43% y-o-y to A$26.1m.
We have increased our overall FY23 cost estimates to reflect higher than expected operating and finance expenses in H123, as well as the financing arrangements detailed in the Q223 cash flow report. Vection Technologies has currently drawn A$2.8m from its available A$3.9m total financing facilities, which we estimate to have a cost of borrowing of c 4%. We note that a portion of the company’s current arrangements provides protection from potential interest rate rises due to several fixed-rate terms. The increase in our cost assumptions moves our forecasts from a profit to a loss from the EBIT line down.
We leave our FY23 adjusted EBITDA at A$3.7m, in line with our unchanged top-line assumption. Additionally, adjusting for the A$8m term deposit recorded in H123 our end of net cash position would be A$11.5m, A$0.9m higher than our previous forecast.
Exhibit 2: Financial summary
A$000s |
2021 restated |
2022 |
2023e |
|
Year end 30 June |
AAS |
AAS |
AAS |
|
PROFIT & LOSS |
||||
Revenue |
|
3,471 |
18,894 |
26,056 |
Variable Cost of Sales |
(849) |
(11,454) |
(13,127) |
|
Gross Profit |
2,622 |
7,440 |
12,929 |
|
Operating Expenses* |
(3,993) |
(10,453) |
(11,595) |
|
Adjusted EBITDA |
|
(424) |
881 |
3,695 |
Non-Cash Payments |
(230) |
(1,892) |
(2,606) |
|
EBITDA |
|
(654) |
(1,011) |
1,090 |
D&A |
(658) |
(958) |
(1,000) |
|
Operating Profit (normalised) |
|
(2,285) |
(5,907) |
(2,557) |
Exceptionals/Other |
(26) |
(44) |
(285) |
|
Operating profit/(loss) (EBIT) |
|
(2,259) |
(5,863) |
(2,272) |
Net Interest and financial expense |
(171) |
(1,070) |
(3,840) |
|
Profit Before Tax (norm) |
(2,456) |
(6,977) |
(6,397) |
|
Profit Before Tax (AAS) |
|
(2,430) |
(6,933) |
(6,112) |
Tax |
(77) |
(168) |
(183) |
|
Profit After Tax (norm) |
|
(2,533) |
(7,144) |
(6,580) |
Profit After Tax (AAS) |
|
(2,506) |
(7,100) |
(6,295) |
P/(L) from discontinued operations |
(36) |
- |
- |
|
Minority interest |
(137) |
(419) |
(371) |
|
Net income (norm, to Vection Technologies equity holders) |
(2,533) |
(2,533) |
(7,144) |
|
Net income (AAS, to Vection Technologies equity holders) |
|
(2,543) |
(7,100) |
(6,295) |
Average Number of Shares Outstanding, basic, millions |
931 |
1,071 |
1,118 |
|
EPS - normalised, basic (A cents) |
|
(0.27) |
(0.67) |
(0.59) |
EPS - AAS, basic, to Vection Technologies equity holders (A cents) |
(0.24) |
(0.24) |
(0.62) |
|
Gross Margin (%) |
75.5% |
39.4% |
49.6% |
|
EBITDA Margin (%) |
NA |
NA |
4.2% |
|
Operating Margin (before GW and except.) (%) |
NA |
NA |
NA |
|
BALANCE SHEET |
||||
Fixed Assets |
|
18,273 |
17,785 |
14,912 |
Intangible Assets |
17,338 |
17,028 |
14,180 |
|
Tangible Assets |
240 |
293 |
339 |
|
Right of Use Assets |
632 |
424 |
361 |
|
Other |
63 |
41 |
33 |
|
Current Assets |
|
13,063 |
22,419 |
25,055 |
Cash |
7,084 |
14,869 |
7,379 |
|
Receivables |
4,879 |
6,208 |
7,502 |
|
Inventories |
1,084 |
1,341 |
2,174 |
|
Other |
17 |
- |
8,000 |
|
Current Liabilities |
|
11,272 |
8,475 |
12,428 |
Trade and other payables |
3,615 |
6,974 |
10,637 |
|
Provisions and Other |
6,405 |
30 |
183 |
|
Employee benefits |
36 |
78 |
108 |
|
Lease liabilities |
168 |
195 |
183 |
|
Borrowings |
1,047 |
1,199 |
1,317 |
|
Long Term Liabilities |
|
4,637 |
3,751 |
3,429 |
Provisions |
- |
- |
- |
|
Employee benefits |
333 |
433 |
477 |
|
Lease liabilities |
530 |
286 |
233 |
|
Borrowings |
3,175 |
2,415 |
2,103 |
|
Other |
599 |
616 |
616 |
|
Net Assets |
|
15,428 |
27,977 |
24,111 |
Minority Interest |
(117) |
(479) |
(898) |
|
Shareholder's Equity |
|
15,545 |
28,457 |
25,009 |
CASH FLOW |
||||
Operating Cash Flow (before interest, tax, etc.) |
|
(2,251) |
(1,092) |
3,067 |
Net Interest |
(50) |
(50) |
(30) |
|
Tax |
(24) |
(104) |
(183) |
|
Capex |
(66) |
(164) |
(246) |
|
Purchase of intangibles |
(1,330) |
(1,838) |
(1,838) |
|
Acquisitions/disposals |
2,305 |
(21) |
- |
|
Equity financing |
7,221 |
12,127 |
- |
|
Lease payments |
(96) |
(80) |
(65) |
|
Change in net cash |
5,708 |
8,777 |
704 |
|
Opening net debt/(cash), not incl. leases |
|
(735) |
(2,862) |
(11,255) |
Exchange rate movements |
(280) |
(383) |
- |
|
Other |
(3,301) |
0 |
(8,000) |
|
Closing net debt/(cash), not incl. leases |
|
(2,862) |
(11,255) |
(3,959) |
Closing net debt/(cash), incl. leases and term deposits |
|
(2,164) |
(10,774) |
(11,543) |
Source: Company accounts, Edison Investment Research
|
|
Research: Investment Companies
VietNam Holding (VNH) seeks to capture the growth of Vietnam through an actively managed, high-conviction portfolio of companies. It has been managed by Dynam Capital (Dynam) since 2018 and has outperformed both the VN All Share and MSCI World indices over five years, with NAV and share price annualised total returns of c 7% and c 5%, respectively, versus c 2% and c 1% for the indices. Vietnamese growth paves the way for the continued expansion of domestic consumption and Dynam’s investment team chooses businesses intending to benefit from the positive demographic, industrial and urbanisation trends. As global market volatility continues, with renewed recession concerns triggered by recent events in the US and European banking sectors, following SVB’s and Credit Suisse’s rescues, Dynam continues to find attractively priced Vietnamese stocks with high long-term return potential.
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