Zues Capital Research note 1st May3 May 2024 16:04
Below is from Zeus. Note the part about the development loan - debt covenants being renegotiated - does this mean we havent drawn down on the loan yet? Will have plenty of cash headroom.
Surface continues to target increasing factory capacity to £75m of annualised sales over the next few years, with a medium-term target of £150m. As recent trading statements have shown, improving manufacturing resilience is at least as important as the capacity build out, and this is being addressed diligently by management. The production team has now removed almost all the single points of failure and scrapping rates have reduced significantly in the past two months.
Surface has a secured and prospective risk weighted customer pipeline for c. £700m of sales; it can sell as many discs as it can manufacture. Over £390m of the c. £700m is expected orders, with an average revenue of c. £79m each year. Customers, who are global and significant OEMs, remain supportive.
We assume base case 2024e revenue of £17.5m, against £8.3m of sales in 2023a, and recent guidance from Surface for a range of sales of £17.5m to £22m. We assume a gross profit margin of c. 55% for 2024e, rising to 57% in 2025e helped by planned unit cost reductions. This remains conservative against our expectation of a normalised run-rate of c. 60% over the medium term. The gross margin will vary with revenue levels and mix, particularly relating to the volumes of sales made to global OEMs versus other customers. In this note we provide quarterly estimates for 2024e to show the movements in capacity, revenue, and cash for the near term.
We expect operating cash generation to turn positive later in 2024e. Working capital intensity should start to reduce as volume production normalises. With a successful fundraising, cash balances will start to look much stronger, and improve rapidly with further positive cash generation in 2025e.
Debt financing is in place for capex funding with the Liverpool City Region’s Urban Development Fund (which is part funded by the ERDF). In this way, equity investors are somewhat shielded from the significant cash outflows associated with further large equipment purchases. Surface Transforms and Liverpool City Region’s Urban Development Fund have agreed revised financial covenants for the loan facility, with banking documentation currently being prepared.
The market opportunity remains significant, measured in the billions of dollars over the medium term. We believe the adoption of this durable and light weight technology will expand significantly as the unit price falls for the end-customer.
The supplier market structure is attractive with an effective global duopoly comprising one major competitor. Barriers to entry, particularly driven by the complexities of volume production, are high.
With the proceeds from this fundraising combined with the capex loan, Surface Transforms should now be funded through to the next phase of g
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