finnCap Tech Chat | Shoot for the stars

Apr 09, 2021 / Tech Chat

The first space race in the 60s between the US and Soviet Union was for national pride and military advantage. Now we’re in the midst of a new space race with players like China, India, SpaceX, Blue Origin and Virgin Galactic pursuing various objectives, from commercial space flight to colonising or exploiting new planets.

NASA and SpaceX both prioritise Mars exploration. While Elon Musk aims to get an unmanned mission to Mars in 2024, NASA is already there. Both know that to get a manned mission to Mars requires significantly more environmental data to increase the astronaut’s chance of survival. Hence Mission Mars 2020 landed on the Jezero Crater in February: the Perseverance Rover joining two other live unmanned objects on Mars (the Curiosity Rover and the InSight Lander) looking for signs of ancient life, gathering rock and soil samples and trialling new technology for future human missions to the Red Planet. In space, preparation is the key to success when dealing with new environments: to inform future missions to Mars, the Mars Environment Dynamics Analyser (MEDA) system aboard the NASA Perseverance rover and separately, the Insight Lander, provide weather measurements to help NASA engineers inform their plans for manned and unmanned missions such as the Ingenuity Mars Helicopter flights due to start next week.

The preparation is all about dealing with the circumstances to suit the situation: no plan for a battle survives first contact, and so awareness and response to a change in circumstances is vital. In the last couple of weeks alone, company activity and results have shown resourcefulness putting in context the extreme influence of COVID: most of these now have returned to more reasonable valuations – and if not, they may go the way of Minds + Machines, with an offer from GoDaddy at a 92% premium. While some valuations have responded, others have been overlooked despite resourceful management responses:

Bigblu Broadband has had a transformational 18 months, as it sold its UK and European satellite operations for up to £39m in cash and simplified its balance sheet to a net cash position. Its three core assets provide it with an excellent foundation to deliver strong organic growth, with Australasia expanding at +20% pa and generating over £3m of OpFCF pa, focused investment in the Nordics set to enhance the subscriber base, and Quickline expanding its fibre-backed infrastructure after four tender wins in September-December 2020. Recent newsflow has also been very encouraging, with the UK government’s Project Gigabit looking very supportive for Quickline’s expansion, and Sean Royce joining as Quickline CEO. On 9x 12-month forward EV/EBITDA, BBB is looking undervalued as it is set to deliver FY21 organic revenue growth of +22% and +19% EBITDA growth.

Tracsis rolled with the blows, and while the group was absent £6m of revenue due to COVID’s effect, primarily on events & surveys, EBITDA moved only £-0.2m from the prior year, and the rail business even grew 5%. FY22 looks to return to become a normal year, and yet the stock, with no R&D capitalised and new large contracts in the pipeline, remains on only 17x EV/EBITDA.

K3 Business Technology grasped the nettle in selling Starcom, closing down the Dynamics business, and converting their loan notes. Results to Nov 2020 demonstrated KBT confronting and resolving their former risk elements. By strengthening the balance sheet, simplifying business lines and a robust performance of the core business, KBT delivered respectable results including ARR of £37m implying EV/ARR of 1.9x vs market norms of 3-5x.

Eleco's share price has recovered from the early impact of COVID in line with the wider AIM market, however, it was cheap before COVID and is looking even better value with its refreshed management team and new strategy for growth as laid out with the recent results. Its portfolio of construction and facilities management software holds a well-established position in key markets across Europe and the switch to a customer-centric model focused on key sectors of the building industry, looks set to drive strong growth from this secure platform. At just 12x FY21 EV/EBITDA the stock offers excellent value.

Amino is well placed to enable service providers to accelerate growth throughout COVID and beyond, highlighted by their deployment of PayTV+ solutions. Amino’s management report that due to COVID potential clients have accelerated their own growth plans by as much as 3 years, along with the expected expansion of the streaming market by 100% to $167bn by 2025. With a focus on revenue quality, the development of ARR in 24i, and a healthy cash flow enabling investment in software and services revenue, it looks attractively valued on 12m forward EV/EBITDA of 8x versus the finnCap Next 50 on 16x.

Crimson Tide looks forward to a transformation in scale and opportunity through strengthening its global partner network, delivering a swath of enhancements to its current enterprise solution and developing a new micro-offering for the global SME market. A £5m investment over the next few years buys a dramatic acceleration in high-margin recurring revenue and thanks to the gearing in its platform model, an even more dramatic acceleration in earnings from FY23. SaaS is highly prized in the market and valued at 4x EV/Sales. With every extra £1 of revenue driving £4 of EV, we target £60m EV by 2025.

What we’ve seen is constructive, if sometimes painful response, to the pandemic, which has so often proved effective. The Perseverance Rover demonstrated innovative technology for future human missions to the Red Planet such as a new autonomous navigation system to allow the rover to drive faster in challenging terrains. In the same way, successful companies post-lockdown boast new or refined strategies to enable growth in challenging, uncertain environments, and it is extraordinary to see how much more positive we are than if, back in April 2020, you’d told me lockdown would only now be lifting. Some valuations have responded, some are somewhat out of this world, but there remain some which still merit discovery.