Vection Technologies — Poised to reach guidance after a strong quarter

Vection Technologies (ASX: VR1)

Last close As at 22/02/2024

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Research: TMT

Vection Technologies — Poised to reach guidance after a strong quarter

Vection Technologies’ Q323 activities report confirms that contract growth continued to accelerate in H223, with the company reporting 100% total contract value (TCV) growth from the end of January to 28 April. The momentum in TCV growth indicates that management is well-positioned to deliver the triple-digit half-on-half top-line growth required to reach its FY23 expectations. Cash receipts on a quarterly and nine-month basis increased year-on-year. Vection Technologies’ balance sheet is set to be sustained by a further A$3.5m in Q423 from an R&D tax receipt and outstanding invoices, supporting the company’s M&A pipeline.

Max Hayes

Written by

Max Hayes

Associate Analyst

TMT

Vection Technologies

Poised to reach guidance after a strong quarter

Q323 activities report

Software and comp services

4 May 2023

Price

A$0.05

Market cap

A$51m

Net cash (A$m) at 31 March 2023
(including H123 lease liabilities of A$0.4m)

8.9

Shares in issue

1,127m

Free float

49%

Code

VR1

Primary exchange

ASX

Secondary exchange

OTC (VCTNY)

Share price performance

%

1m

3m

12m

Abs

4.4

(26.6)

(38.2)

Rel (local)

4.8

(22.8)

(36.5)

52-week high/low

A$0.11

A$0.04

Business description

Vection Technologies, an Australia-based technology 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

Q4 activities report

July 2023

Preliminary FY23 results

August 2023

Analysts

Max Hayes

+44 (0)20 3077 5721

Dan Ridsdale

+44 (0)79 3016 6512

Vection Technologies is a research client of Edison Investment Research Limited

Vection Technologies’ Q323 activities report confirms that contract growth continued to accelerate in H223, with the company reporting 100% total contract value (TCV) growth from the end of January to 28 April. The momentum in TCV growth indicates that management is well-positioned to deliver the triple-digit half-on-half top-line growth required to reach its FY23 expectations. Cash receipts on a quarterly and nine-month basis increased year-on-year. Vection Technologies’ balance sheet is set to be sustained by a further A$3.5m in Q423 from an R&D tax receipt and outstanding invoices, supporting the company’s M&A pipeline.

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)

12.2

14.6

2.2

06/22

18.9

0.9

(7.0)

(0.67)

2.2

2.7

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.

Guidance maintained following strong Q323

Vection Technologies reported A$5.7m in cash receipts in Q323, up 85% y-o-y and up 24% q-o-q. Its balance sheet remains robust with net cash of c A$8.9m at period end, despite total cash burn of A$3.1m. Management expects Q4 cash inflows of A$1m from a 2022 R&D tax refund (expected on 24 May), and A$2.5m from net outstanding invoices. TCV at 28 April was A$20m, up 100% versus H123 and already ahead of the A$19m reported in FY22. At this rate, the company is well on track to meet management’s A$24–26m guided range and our A$25m revenue forecast for its IntegratedXR product suite. We note the company’s proven track record of converting c 100% of TCV into revenue by year-end, but we leave our forecasts unchanged reflecting the current uncertain trading environment.

TCV driver presents larger opportunity

Following our last TCV update, Vection Technologies announced that its major defence pilot order has increased from A$1m to A$2m. First mentioned in our H123 update, the pilot forms part of a larger tender of up to A$30m, which management expects to finalise within the next four months. It has a pipeline of M&A targets, which could be used to grow its product stack to enter new verticals or encourage more upsells and cross-sells among existing clients. Its acquisitive firepower should benefit from a A$1.1m increase in its credit facilities to A$5.0m, of which A$2.9m remains undrawn, as well as from management’s and our expectations of a strong Q423. Partnerships and technology integrations, such as its latest with expert.AI to digitise technical manuals, will also be key to the company developing its technology.

Valuation: Delivering on objectives could drive stock

Vection Technologies currently trades on 1.6x EV/sales for FY23, representing a 63% discount to our small-cap peer group average and a 3pp decline since our last update. In the short term, we believe additional TCV growth towards management’s guided range and further detail on potentially transformational contracts, including its defence order, could act as catalysts for its stock performance.

Exhibit 1: 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)

Profit/(loss) from discontinued operations

(36)

-

-

Minority interest

(137)

(419)

(371)

Net income (norm, to Vection Technologies equity holders)

(2,533)

(7,144)

(6,580)

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)

(0.62)

(0.50)

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)

2,067

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 other marketable securities

(2,164)

(10,774)

(11,543)

Source: Vection Technologies, 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).

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.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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