Vection Technologies — Bringing the unimaginable into digital reality

Vection Technologies (ASX: VR1)

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Research: TMT

Vection Technologies — Bringing the unimaginable into digital reality

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.

Max Hayes

Written by

Max Hayes

Associate Analyst

TMT

Vection Technologies

H123 results

Software and comp services

27 March 2023

Price

A$0.04

Market cap

A$50m

Net cash (A$m) at 31 December 2022

(including finance leases and term deposits)

9.3

Shares in issue

1,127m

Free float

49%

Code

VR1

Primary exchange

ASX

Secondary exchange

OTC (VCTNY)

Share price performance

%

1m

3m

12m

Abs

(20.0)

(18.5)

(56.0)

Rel (local)

(15.8)

(16.8)

(52.7)

52-week high/low

A$0.11

A$0.04

Business description

Vection Technologies (VR1), an Australia-based software company, operates in the field of extended reality, which encompasses immersive technologies such as augmented reality, virtual reality and mixed reality. The company’s immersive solutions suite, IntegratedXR, is a combination of technology solutions designed to integrate systems, processes and technologies via digital transformation. Vection Technologies partners with companies to build out the foundational elements that enable them to engage with the metaverse.

Next events

Q323 cash flow and activities report

N/A

Analysts

Max Hayes

+44 (0)20 3077 5721

Dan Ridsdale

+44 (0)7930 166512

Vection Technologies is a research client of Edison Investment Research Limited

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
end

Revenue
(A$m)

Adj EBITDA*
(A$m)

PBT**
(A$m)

EPS**

(c)

EV/sales
(x)

P/sales
(x)

Net cash***
(A$m)

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


General disclaimer and copyright

This report has been commissioned by Vection Technologies and prepared and issued by Edison, in consideration of a fee payable by Vection Technologies. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

This report has been commissioned by Vection Technologies and prepared and issued by Edison, in consideration of a fee payable by Vection Technologies. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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Research: Investment Companies

VietNam Holding — Investing for the long term

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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