Surface Transforms Plc - Fundraising Update

Fundraise highlights strong revenue expectations & nicely developing return on capex, but price not ideal.

Surface Transforms Plc, profiled recently here at 45.15p, yesterday announced a fundraise to support growth.

In the original article it was anticipated that the company may raise £15m to fund the increase in revenue capacity from £50m / year to £75m / year, working with a price of 50p / share (inline with the raise in January 2021) but with a view that they should be able to obtain a higher price given progress to date.

Given the materiality of the raise, this post comments on key points.  

Note: Updates from companies profiled will not necessarily be commented on.

Terms of Fundraise

Up to £19m total at 40p per share:

• £15.8m from placing

• £0.2m from director subscription

• Up to £3m from open offer

Therefore, the maximum shares issued would be 47.5m or c. 24% of prior undiluted shares - clearly a material event. 

Capital Requirements & Purpose

Total identified capital requirements of £50m:

• Phase 3.1 - Maximise production from current factory, growing yearly revenue capacity from £50m to £75m.  Cost £10m, takes c. 18 months to implement.

• Phase 3.2 - Build a new factory close to existing one, with £75m yearly revenue capacity.  Cost £30m.  Takes 9-12 months to build factory, and 18 months to install & commission equipment.  Total time c. 30 months / 2.5 years.

• Working capital to support growth £10m.

Positives

Disclosure of strong revenue expectations in near / medium term:

• Will be selling at £20m / year run-rate before year end 2022 i.e. now or shortly.

• Expect to exceed Phase 2 capacity, which is £50m / year revenue run-rate by mid-2024.  

• Expect Phase 3.1 to take c. 18 months, this provides revenue capacity of £75m / year, however within 6 months of this they expect additional capacity will be required.  I am not clear if they would start on Phase 3.1 after completing this fundraise, or wait until Phase 2 installation completes in H1 2023.  This indicates that by late 2024 or mid 2025 they could exceed £75m / year run-rate vs current market expectations for 2025 of £40m.  

Planning ahead for up to £150m / year revenue capacity with the Phase 3.2 additional factory.  While we can’t count on the pipeline all being won, they are clearly positioning themselves to be ready, per yesterday’s announcement:

Putting this in context, the Company's combined current OEM contracts and prospective contract pipeline total £590 million, and assuming an average contract term of five years, provides an annual equivalent revenue requirement, should all the prospective contract pipeline be formally awarded, to approximately £118 million annual revenue

The revenue capacity per capex requirement is developing nicely, with an increase of £25m revenue capacity / year at the existing site costing £10m, and a new factory with £75m revenue capacity / year costing £30m.  This indicates each £1m revenue capacity / year costs £0.4m capex, at scale operating margin of c. 20% this would indicate capex payback in c. 2 years.

Negatives

Price & Timing - 40p per share is not ideal, given the January 2021 raise was completed at 50p and the company has made substantial progress since then.  Timing doesn’t seem ideal, given they are likely to announce another contract win in 2022, and the expectation that 2022 FY results will be a material positive event (moving to profitability for the first time, exiting with substantial run-rate revenue).  It will be interesting to get more colour from management on the 3rd October call, however I assume the raise was pressing to support growth, and the market environment dictated the price to some extent.

Lack of clarity on how capital requirements will be fully met.  They are raising up to £19m, but have capital requirements for £50m (of which £10m is working capital).  The indication is the placing & subscription will raise £15.2m net, with a further c. £25m coming from the open offer and operating cash flows, with the remainder (if required) coming from various potential sources.

Disclosure

Long Surface Transforms Plc at time of posting.

This post is NOT investment advice & may contain errors.