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Last close As at 27/03/2023
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▲ −0.50 (−11.76%)
Market capitalisation
GBP7m
Research: Industrials
In December, Light Science Technologies Holdings (LSTH) noted that high input costs have resulted in strong interest in the group’s controlled environment agriculture (CEA) products because they help growers operate more efficiently. This demand has generated a sales pipeline for the group of quoted work worth more than £60m (as of December 2022), including forward orders and contracts of £18m (contingent on meeting certain milestones). However, high input costs have caused growers to defer capital investment decisions, resulting in longer sales cycles. This has adversely affected FY22 trading because some anticipated revenue streams for the CEA division are now more likely to materialise in FY23 rather than FY22. Based on this information, we are introducing estimates for FY22 and FY23.
Light Science Technologies Holdings |
Pluses and minuses of high energy costs |
Trading update |
Tech hardware and equipment |
6 February 2023 |
Share price performance
Business description
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Light Science Technologies Holdings is a research client of Edison Investment Research Limited |
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In December, Light Science Technologies Holdings (LSTH) noted that high input costs have resulted in strong interest in the group’s controlled environment agriculture (CEA) products because they help growers operate more efficiently. This demand has generated a sales pipeline for the group of quoted work worth more than £60m (as of December 2022), including forward orders and contracts of £18m (contingent on meeting certain milestones). However, high input costs have caused growers to defer capital investment decisions, resulting in longer sales cycles. This has adversely affected FY22 trading because some anticipated revenue streams for the CEA division are now more likely to materialise in FY23 rather than FY22. Based on this information, we are introducing estimates for FY22 and FY23.
Year end |
Revenue |
EBITDA |
PBT* |
PAT |
DPS** |
P/E |
11/20*** |
6.9 |
0.5 |
0.2 |
0.2 |
0.0 |
43.6 |
11/21 |
7.4 |
(1.1) |
(1.6) |
(2.1) |
0.0 |
N/A |
11/22e |
8.2 |
(1.7) |
(2.3) |
(2.7) |
0.0 |
N/A |
11/23e |
10.9 |
(0.4) |
(1.0) |
(1.4) |
0.0 |
N/A |
Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excluding payments pre-IPO. ***Restated for predecessor method of merger accounting.
Strong demand underpins £60m+ sales pipeline
The group has signed four trial contracts for its smart sensor system, which was launched in June 2022. These could roll into subscriptions collectively generating up to £1.1m over a three-year period. It is also working on several customer trials, including one at a vertical farm R&D facility and one with a major UK manufacturer of preserves, marmalades and associated products, which could potentially result in lighting orders collectively worth c £3m over the next 12 months.
Capital projects delayed during FY22
In December, management noted that the inflationary environment had caused CEA growers to postpone capital expenditure projects, resulting in FY22 group revenue growth of 10.5% ie an implied £8.2m. In addition, gross margins at the group’s contract electronics manufacturing (CEM) division were under pressure during H222 because of significant price volatility in the global electronics component market. Consequently, management expects the reported group loss before tax to be c £0.85m wider than the guidance it provided in June of £2.0m.
Valuation: Dependent on CEA roll-out
Our scenario analysis shows that converting 60% of the existing CEA pipeline and delivering on the Zenith Nurseries contract could generate annual CEA revenues of £31.4m and £4.6m group EBITDA. This is only a small proportion of the global market, which we calculate could be worth c £2.9bn in the UK alone. Announcements about new contract awards are therefore catalysts to crystallise shareholder value.
Introducing estimates for FY22 and FY23
Exhibit 1: Divisional analysis |
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Source: Edison Investment Research |
FY22 estimates
Our estimates model group revenues and loss before tax in line with management guidance, reducing CEM margins as noted in the December trading update. (We note that the divisional split may differ from our analysis.) We model a similar working capital position at the end of the full year and the half year, namely assuming the delay in CEA deliveries means that any build-up in working capital to support growth is also deferred into FY23. We model similar levels of depreciation, share-based payments, finance charges, capital expenditure, capitalised R&D and R&D tax credits in H222 to H122.
FY23 estimates
CEA performance: Our £2.8m revenue is based on the weighted value of the sales pipeline for the year with a 50% discount applied to the weighted total. We model gross margin at 34.4%, as most of the revenue is attributable to lighting sales rather than subscription revenues related to sensor installations, which we do not expect to start generating meaningful revenues until H223. We expect the gross margin on subscriptions to be higher than for lighting sales. The estimates assume growth in salaries of 5% and 7% for general overheads.
CEM performance: We model 6% year-on-year revenue growth and an improvement in gross margins to 24%, supported by an increase in the proportion of more demanding work for sectors such as medical and defence. The assumptions for indirect costs are the same as used for the CEA division.
Working capital: We model an increase in working capital of £0.6m to support CEA activity. We note that the company intends to take deposits from its customers for larger CEA projects, which should cover the cost of materials, helping reduce working capital requirements.
Financing: Our model identifies a minimum funding gap of £1.3m, which we model as satisfied through debt in line with Edison policy. Together with existing debt facilities, this results in £0.3m finance charges.
Investment activities: We model £0.5m expenditure on capital equipment for the CEM division including in-line automatic inspection equipment and additional feeders for pick and place machines. This investment is intended to help the division diversify into sectors such as medical and defence, which have very specific quality standards, and to improve efficiency. We maintain capitalised R&D at FY22 levels.
FY24 performance
While the CEA sales pipeline extends into FY24, there is insufficient visibility of the likelihood of this converting to sales for Edison to introduce FY24 estimates at present. However, using the same analysis of the sales pipeline that we used for FY23 gives CEA revenues totalling £5.0m, generating losses before share-based payments, interest, depreciation and amortisation of £0.5m, if 34% gross margin and a 4% increase in indirect costs are applied. If we assume that the CEM division is successful in attracting medical and defence customers, year-on-year revenue growth of 9% in FY24 and a gross margin (excluding depreciation) of 26% are feasible, giving divisional revenues of £9.0m and generating £1.2m EBITDA if the increase in indirect costs is restricted to 4%. (These calculations include an allocation of all central costs between the two divisions and give group revenues of £14.0m generating £0.7m EBITDA.)
Valuation
The group’s contract assembly division, UK Circuits (UKC), is profitable as a standalone activity, with the £0.9m divisional EBIT (before deducting group costs) generated in FY21 indicating that the business on its own justifies a valuation that is a meaningful proportion of the group’s current market capitalisation. However, although UKC should benefit from any move to re-shore manufacturing to the UK, the opportunities for it to generate strong revenue growth by taking market share or expanding geographically are relatively limited compared with prospects for the CEA activity. Consequently, even though LSTH has yet to generate material revenues from sales of products to the CEA market, the potential for this division is such that we believe that the group’s value resides primarily in the potential revenues and profits generated as LSTH converts its CEA product pipeline totalling £40.6m (excluding the contract with Zenith Nurseries) to sales and takes meaningful market share. This means that our valuation discussion concentrates on the potential profits ascribable to the CEA division and that announcements about new CEA contract awards are the key catalysts to crystallise shareholder value.
In Exhibit 2 we present a scenario analysis exploring potential revenues and EBIT for different levels of conversion of the CEA qualified pipeline. For simplicity, our analysis assumes that the there is no improvement in CEM revenues or gross profit margin compared with H122 and flexes indirect costs at 10% of incremental revenues compared with the H122 cost base. We add a further £7m in revenue to represent annual sales from the blanket roll-out phase of the contract with Zenith Nurseries. We model a gross margin of 30%. This is an approximation which ignores the uplift on gross margin from including software that could achieve 60% gross margin in the SensorGROW subscription packages and the downwards effect of including sales of third-party equipment in the advanceGROW system.
Exhibit 2: Scenario analysis for different rates of CEA pipeline conversion |
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Source: Edison Investment Research |
For example, converting 60% of the existing CEA pipeline and delivering on the Zenith contract could generate annual CEA revenues of £31.4m and £4.6m group EBITDA. Since there is no certainty as to when LSTH could achieve this revenue level, we are not attempting to derive an indicative share price from this analysis.
Exhibit 3: Potential UK market for CEA sensors and horticultural lights* |
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Source: Light Science Technologies Holdings, (1) Ceres Agritech, (2) Department for Environment, Food & Rural Affairs. Note: *Based on current hectarage occupied by polytunnels, glasshouses and vertical farms. **Average number of lights/hectare. ***Average cost/light. |
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In Exhibit 4 we present a scenario analysis exploring potential revenues and EBIT achievable with different levels of market penetration. We split this analysis into the potential revenues attributable to receiving annual subscriptions for sensors and software from a specified percentage of the UK indoor agriculture market and new sales of horticultural lights to a specified percentage of the market in a single year. Exhibit 3 shows how the market sizes have been calculated. We model a gross margin for sensor subscriptions of 46.7%, in line with management guidance, as the calculation only includes the sensor system part of any advanceGROW sales.
Exhibit 4: Scenario analysis based on different rates of market penetration |
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Source: Edison Investment Research |
Exhibit 5: Financial summary |
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Source: Company data, Edison Investment Research. Note: *Number of shares on admission to AIM. **Excluding payments prior to admission to AIM. |
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Research: Healthcare
Actinogen’s recent quarterly update confirmed that the company remains on track to start US recruitment in H1 CY23 for its six-month, placebo-controlled Phase IIb portion of the XanaMIA study. The study is designed to assess the safety and efficacy of Xanamem in a population of patients with mild cognitive impairment (CI) and mild Alzheimer’s disease (AD), who at baseline will have been confirmed as biomarker-positive for AD (as determined through elevated blood phosphorylated Tau, or pTau). The company also started enrolment in Q4 CY22 for its XanaCIDD Phase IIa study assessing Xanamem in patients with CI relating to persistent depression despite ongoing treatment with standard-of-care medications. We expect the next material clinical data milestone for the company will be the XanaCIDD results, due in late CY23 or early CY24.
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