Vection Technologies — Enterprise-grade metaverse

Vection Technologies, an Australia-based software and services company, operates in the field of XR. It operates in the B2B space with offices across the globe, and generates the majority of its revenue from Europe, although a key part of its strategy is to extend its reach into the United States and the Asia-Pacific region. Vection Technologies’ goal is to assist its clients in their digital transformation efforts by providing the foundational products and services needed to engage with the metaverse. Its growth strategy involves several facets, including growth in existing verticals that are underpenetrated, strategic acquisitions and partnerships to enter new verticals or add to its core technology stack, up-selling and cross-selling its solutions to customers and its recently launched online engagement strategy. Its primary solutions suite is IntegratedXR, which consists of five key solutions designed to meet specific client needs, as well as the services to support them.

Vection Technologies generated revenues of A$18.9m in FY22, up more than 5x over FY21’s A$3.5m, helped by the contribution from acquisitions. The company’s total contract value (TCV) continues to expand too, propelled by wins in the defence, military and law enforcement and machinery verticals. Management credits previous investments in technology, people and acquisitions for this growth, which are now bearing fruit. We forecast that FY23 revenues reach A$26.1m, up 38% from FY22, in a combination of growth across Vection Technologies’ core business and significant acceleration from the two recent acquisitions (JMC Group and Blank Canvas Studios), but excluding any future potential acquisitions. We estimate that following several recent capital raises, Vection Technologies is well-funded to support growth through FY23e with estimated net cash (including debt and financial leases) of A$9.8m at end September 2022.

We compare Vection Technologies to a peer group of large and small companies involved in the metaverse and related technologies and/or providing digital transformation services. Vection Technologies trades at 1.9x EV/revenue in FY23e, a 63% discount to the 5.1x average of its small-cap peers. If it were valued in line with its small-cap peers and taking into account its A$9.8m in estimated net cash (including debt and financial leases), the company would trade at about A$0.13/share, c 150% above its current A$0.05/share. If it traded at the overall peer average multiple of 7.2x, it would reach A$0.18 or more than three times its current price. While we would expect some level of discount due to its smaller size compared to its peers, we expect revenue to grow 38% (including a full year contribution from JMC Group and Blank Canvas Studios), which is substantially greater than the FY23 12% consensus estimate for its small-cap peers. If the company can successfully execute its strategic plan by growing in existing verticals such as defence, architecture and film making, expanding in the relatively new healthcare and pharma vertical and into others via acquisitions, and developing partnerships with large tech companies to expand its distribution network, it has the potential to trade at a premium to its more mature peers.

The primary factors that could have an impact on our estimates would be increasing competition, execution risk, customer adoption, general economic and political risks, and net cash burn rates. As Vection Technologies is a relatively new, early-stage company with a mix of organic and inorganic growth, where the timing and size of vertical and geographic expansion opportunities are unknown, we do not have sufficient clarity to forecast past FY23.

Vection Technologies is an Australia-based software and services company operating in the field of XR, which encompasses immersive technologies including augmented reality (AR), virtual reality (VR) and mixed reality (MR). Its goal is to support clients’ digital transformation efforts by providing products and services that clients would use to access the digital world (the metaverse), from the physical world.

Vection Technologies operates in the B2B space, and over the past four years has expanded its operational presence through nine locally based offices and/or subsidiaries in Asia-Pacific, Europe, the Middle East and the United States.

Note that AR and VR are often conflated, but they are not the same. According to Gartner, ‘AR is the real-time use of information of the form of text, graphics, audio, and other virtual enhancements integrated with real-world objects.’2 Intel describes it as ‘overlay[ing] digital information on real world elements.’3 For instance, a surgeon could use the Magic Leap headset while operating on a patient’s heart, with the heart’s valves and chambers displayed on their headset.

In contrast, VR according to Intel is ‘fully immersive, which tricks your senses into thinking you’re in a different environment or world apart from the real world’.4 With VR, one could use an Oculus headset and handheld controllers to virtually swim in the ocean, and visually and auditorily interact with creatures of the deep. The key difference between the two is the real-world component: with AR you still see the physical world around you and interact with it while wearing the headset, while with VR, you do not, as the headset blocks out your view.

MR combines the real and virtual worlds, and as Intel explains, ‘you interact with and manipulate both physical and virtual items and environments, using next-generation sensing and imaging technologies. Mixed Reality allows you to see and immerse yourself in the world around you even as you interact with a virtual environment using your own hands—all without ever removing your headset.’5

Vection Technologies’ history began in 2019 via what was essentially a reverse merger when ASX-listed ServTech Global Holdings Ltd (SVT) acquired the European-based Officine 8K S.r.l, a full-service software development company with advanced AR and VR development capabilities, and renamed it Vection. The parent company, SVT, renamed itself Vection Technologies in November 2019 and trades on the ASX.6 Furthermore, on 22 June 2022 Vection Technologies launched an American Depository Receipt (ADR) program to increase the company’s exposure to North American investors and partners, and trades on the US OTC market under the symbol VCTNY, with one ADR representing 120 existing ordinary shares.

Vection Technologies’ immersive solutions suite, IntegratedXR, is a combination of software and services designed to help customers integrate their client-facing systems, day-to-day operations and XR technologies. As part of its customer’s journey to a digital workplace, Vection Technologies partners with them to build out their key foundational hardware and software elements to enable them to engage with the metaverse. Moreover, IntegratedXR’s suite enables users to integrate a wide variety of technologies, software, and hardware systems, such as shown in Exhibit 3.

Vection Technologies is expanding its global reach, with nine offices spread across the globe, including Perth and Sydney, Australia; Ahmedabad, India; Milan, Rome and Bologna, Italy; Abu Dhabi; and San Francisco, United States. It operates in three primary regions: APAC (Asia Pacific), EMEA (Europe, Middle East and Africa) and AMER (the Americas). The majority of its revenue has historically come from EMEA (78% in FY21, 80% in FY22). However, as can be seen in Exhibit 4, its efforts to expand geographically have resulted in the APAC and AMER regions growing to 18% and 2% of total revenues in FY22, respectively. For instance, the acquisition of Blank Canvas in 2021 extended Vection Technologies’ reach into the Australasian architecture and real estate industries.

In line with its geographical expansion, Vection Technologies has also spread its customer base across many different verticals, ranging from real estate, healthcare and pharma to defence and military. As of 30 September 2022, Vection Technologies reported A$6m in TCV for Q123, spread across these verticals, as Exhibit 5 shows, with Architecture, Engineering & Construction (AEC) and Real Estate at 47%, Media & Communication at 23%, and Defence, Military and Law Enforcement at 13%. This metric, TCV, is a primary key performance indicator for Vection and represents all contracts executed with clients to date that Vection Technologies expects to deliver during the current fiscal year. To be clear, it is not an annualised revenue measure, though it could include recurring software revenue, and is specifically for FY23.

Vection Technologies’ strategy is to enable companies to engage with the growing and expanding metaverse. The metaverse is a popular and frequently mentioned topic in tech and business news, earnings reports and recent M&A transactions. It is the setting for recent hit movies such as Ready Player One and has hosted recent live concerts attended by multitudes of users.7 Moreover, Facebook rebranded itself as Meta8 in order to focus its activities and investments on the metaverse.

Defining the metaverse can be challenging, as it is a rapidly growing and evolving space and there is no specific agreement on its definition. The company defines it as ‘A seamless convergence of the physical and digital worlds that allows people to have immersive experiences; from training, commerce and gaming to social meetings and interactions.’9 Marty Resnick, VP analyst at Gartner, explains, ‘The Metaverse will allow people to replicate or enhance their physical activities. This could happen by transporting or extending physical activities to a virtual world or by transforming the physical one.’10

The metaverse is at an early but rapid stage of evolution, with many companies and technologies being developed to support its variety of infrastructures, products, interfaces and platforms. As Resnick describes, ‘Vendors are already building ways for users to replicate their own lives in digital worlds… From attending virtual classrooms to buying digital land and constructing virtual homes… they will take place in a single environment – the metaverse.’11

To enable companies to engage with the metaverse, Vection Technologies employs its IntegratedXR technology to redesign its clients’ processes and to enable the seamless integration between Vection Technologies’ XR technology and the client’s systems, technologies and operations. As more and more companies begin engaging with the metaverse, Vection Technologies’ focus is to provide the foundational elements necessary to do so. That is, it builds those elements within enterprises to assist them with their journey into the metaverse. Management calls this ‘combinatorial innovation’, where it links and integrates AR, the cloud, the internet of things (IoT), AI, etc. These elements are necessary to build the metaverse, where people can replicate or enhance physical activities, transforming day-to-day physical activities into a digital environment, and connecting both the physical and digital.

Vection Technologies’ plan for growth has several key avenues, including further penetrating existing verticals, strategic M&A to acquire new companies or technologies in order to enter new verticals, and partnerships with large firms such as Dell and Cisco. In particular, we note the addition of Siegmar Haasis, former CIO of Daimler Mercedes Benz, for the growth in the automotive sector and the addition of Mr Vittorio Terzi, former MD of McKinsey Mediterranean, to assist in M&A activities and framework agreements with Fortune 500 global consulting firms.

As mentioned earlier, M&A activity and partnerships are key components of Vection Technologies’ strategy of what management calls verticalization, or significantly expanding its footprint into new verticals, deepening its penetration of existing markets and protecting its market position. Over the last two years, Vection Technologies has entered into ventures and made several key acquisitions that have opened up important new verticals, including:

Another illustration of how Vection Technologies’ partnerships expand its distribution network is its collaboration with Webex by Cisco. In November 2021, Vection Technologies unveiled the FrameS release with autonomous 3D world content creation. This was considered a strategic milestone towards the integration of Vection Technologies’ products into the metaverse. On 28 July 2022, Vection Technologies published what management considers the first-of-a-kind metaverse embedded app in the Webex App Hub. The company’s collaboration with Webex resulted in a 3D app enabling hybrid workforces and 3D workflows, where participants engage in virtual environments custom built in a simple, no-code interface without ever leaving the Webex meeting (see below for more details on the 3Dframe embedded app).

IntegratedXR works across three layers to help clients integrate and digitise their systems and hardware, as seen in Exhibit 8. It begins with the data acquisition layer, pulling in data from networks, databases, hardware and various other systems and software. The data is then fed through IntegratedXR, where it is integrated into a stream usable by the end applications, including PCs, smart devices and ultimately XR devices.

The IntegratedXR suite itself encompasses multiple essential solutions designed to meet client-specific needs, as well as services to support these solutions (see Exhibit 9):

For instance, when designing a structure, engineers must be aware of the surrounding area, as one cannot design a facility in a vacuum without considering adjacent areas. There are often laws concerning how the final facility relates to the streets, setbacks from the nearest building, locations of homes, fauna, etc, so it is essential to know the location data of the environment around the building, such as the height, width and length of structures, the types of roads, the height of trees, etc. Vection Technologies is exploring a solution to this problem by building an integration of Microsoft’s Bing 3D map data into the company’s Mindesk solution that AEC designers can use to put their building information modelling (BIM) data in context. The Mindesk platform takes the data from say a CAD system, integrates it into VR and then sends it to the rendering engine for a real-time display of the final product. For example, in a recent Irish cultural centre project in San Francisco, Mindesk combined a direct feed from Bing 3D maps with the BIM model to create an AR report for the presentation. Bing’s 3D maps provided data from the surrounding area and gave context to the project.

Vection Technologies’ solution is the EnWorks platform. EnWorks allows customers to create step by step procedures for employees in multiple applications, such as manufacturing operations, sales support, etc. One can use EnWorks to design 2D or 3D step-by-step procedures that trainees can then follow using AR headsets, mobile devices, etc (see Exhibit 10).

One interesting module of EnWorks is Remote Assistance. A challenge facing companies is the cost of supporting employees or customers out in the field. For instance, supporting a maintenance tech on a remote location can be expensive and challenging, especially if they are working with a complicated piece of machinery or dealing with an unusual problem.

Using AR headsets, tablets or even smartphones, Vection Technologies’ Remote Assistance tool is designed to improve the support of remote field workers, potentially reducing travel costs, downtime and operations. Remote Assistance shares the operator’s point of view with a remotely connected specialist. The specialist can virtually give the operator directions on what to do and see the results in real time.

As mentioned earlier, though its partnership with Webex, Vection Technologies provides the 3Dframe solution to address the challenges of remote presentations. The recently launched metaverse embedded app provides a collaborative virtual environment that uses IntegratedXR to hold meetings and presentations in 3D and VR. 3Dframe allows clients to access pre-defined content or create their own, such as 3D models, pdfs, videos and images, all displayed in their own 3D world. Clients can build their own 3D world to connect people via the metaverse to conduct virtual meetings via Webex, presentations and events worldwide. Participants can interact in this 3D virtual environment without needing VR gear or VR-ready desktops, making it inclusive to everyone in the meeting. Of course, those with VR equipment can enjoy a deeper level of 3D interaction with the product models too.

3Dframe opens up a significant potential market opportunity for Vection Technologies as this integration should increase Vection Technologies’ brand awareness as the use of Webex by Cisco increases and more users learn about the company and its cutting-edge technology and solutions. Increased awareness would then meaningfully expand Vection Technologies’ existing customer base and provide a significant opportunity for market expansion and subsequent revenue growth. For instance, Webex counted over 590m monthly participants during the recent global pandemic.

To address these needs, Vection Technologies designs configurators and provides the software infrastructure for consumers, sales teams, style designers, etc. Showrooms, and designers can experiment with colours, materials and accessories to create proposals, or clients can create their favourite combination of style and accessories, as illustrated in Exhibit 11. Through VR and AR visualisation, Vection Technologies’ solution enables customers to virtually interact with a 3D model, providing a new way to view and experience the desired customised product.

The company’s services sell the hardware, technology and software needed for customers to smoothly and efficiently adopt its products, getting them up and running quickly. Management views this as a key gateway to win contracts: the ability to provide what clients need to install, start up and operate Vection Technologies’ solutions.

To address this fast-growing sector, Vection Technologies continues to invest in the development of its proprietary solutions and services suite of metaverse-related technologies, called IntegratedXR. The technology enables businesses to seamlessly adopt metaverse technologies within their workflows, through IntegratedXR. Management states that this differentiates Vection Technologies from many of its competitors, which are focusing on niche applications or developing custom customer-specific solutions. During the past four years, the company has been expanding its patent portfolio in the EU and the United States and is currently seeking legal advice for protection strategies.

Gianmarco and Lorenzo Biagi joined the company in March 2019 when Officine 8K conducted a reverse merger transaction with SVT, with Gianmarco appointed as managing director and Lorenzo appointed as executive director and chief sales officer. Other key leaders include Bert Mondello, non-executive chair of the board and a director since 2017, Gianmarco Orgnoni, who was added as an executive director in 2017 and chief strategy (CSO) and chief marketing officer (CMO) since 2022, Gabriele Sorrento, non-executive director since 2020, and Derek Hall, company secretary and CFO.

The company’s CEO, Gianmarco Biagi, has over 20 years’ experience as an executive across multinational manufacturing and technology groups. Based in Italy, Gianmarco is very active in enterprise-focused associations and holds several institutional roles. His positions include president of AICIM, president of AISOM and board member of the scientific and technical committee of the Italian model for risk management in healthcare of the LUISS Business School. He is also an author of management strategy publications.

The advisory board includes Siegmar Haasis and Vittorio Terzi. Vittorio Terzi currently serves as managing partner of Terzi & Partners, a strategic advisory firm to diverse high-growth companies in the field of innovation with a specific focus on the software, biotech and fintech industries. Dr Siegmar Haasis is a highly experienced automotive executive with 26 years of international digitization experience with Daimler, one of the biggest producers of premium cars and the world’s biggest manufacturer of commercial vehicles, of which the last eight years were as CIO R&D of Mercedes-Benz.

On 9 November 2022, the company proposed the addition of Mr Jacopo Merli to its board of directors (ASX: 28 October 2022). Mr Merli is the founder and CEO of JMC Group (JMC), which was acquired by Vection Technologies during 2021 to accelerate the expansion within the EMEA region in line with its IntegratedXR objectives.

The company has structured its global sales to focus on specific regions: EMEA, APAC and AMER. Aligned with this, Vection Technologies will appoint local regional CEOs to bring to market a cohesive IntegratedXR offering, enabling intra-regional synergies, and cross- and up-selling opportunities:

The company’s global Research and Development (R&D), Marketing and Financial Administration divisions are centralised to effectively service its global regional sales operations as they scale up, while maintaining a strong control function.

In November 2022, Vection Technologies announced several key additions to its ranks. These include, among others:

These new additions are pivotal to the company scaling globally, which is also supported by its growing numbers of partners in the consulting and solutions space. These include Accenture, DXC Technology, NTT Data and Toshiba Tec, among others.

Further details on the management team can be found at the end of this report.

Executive directors and senior managers receive an annual remuneration, and hold ordinary shares and performance rights, providing incentives for management to successfully execute its growth plan. Moreover, Gianmarco and Lorenzo Biagi (via Officine 8K) are the biggest shareholders of Vection Technologies with 29.5%, giving them substantial alignment with the company’s success.

The rise in digital transformation activities is driving much of the XR market’s growth, as many companies focus on digitally transforming their businesses. The term digital transformation broadly encompasses the process by which companies adopt digital technologies across multiple areas of a business, fundamentally changing the culture of a business, including operating internally, relating to customers and ultimately how a company provides value. While it does not have to include XR, for some it means increasing their use of or offerings in the metaverse whether it be via an Oculus VR headset, AR glasses, iOS mobile device, gaming PC or large monitor. Some companies are moving to a digital environment for networking, meetings, brainstorming or social gatherings like minigolf, while others conduct virtual meetings or townhalls for employees within an XR environment, such as shown in Exhibit 12.12

What does this have to do with Vection Technologies? Each of the above examples require the use of XR hardware, software and related technologies, providing a significant opportunity for Vection Technologies’ IntegratedXR platform in the upcoming years.

One of the purposes of a digital transformation (in addition to improving efficiencies and lowering costs) is so that a company can access the metaverse. Earlier we defined the metaverse, and as displayed in Exhibit 13, it consists of six primary layers with a variety of companies involved in building each one. The layers include the infrastructure (technologies necessary to support a user’s experience), the access/interface (hardware that determines how people enter and interact with the metaverse), virtualisation tools (software, 3D engines, etc, that companies like Vection Technologies and its clients use to build the metaverse worlds and experiences), virtual worlds (where people interact while in the metaverse), economic infrastructure (how users actually purchase goods and services in the metaverse) and the experiences of the users (goods and services such as games, virtual concerts, virtual real estate and virtual work).13

As companies go through a digital transformation to access the metaverse, they will engage with it by using extended reality solutions and services. Extended reality is a term that covers immersive technologies such as VR, AR and MR. These technologies are used to create a simulated environment that a user can interact with. So rather than merely seeing a 2D image on your monitor, you could view and interact with a 3D world with multiple senses such as vision, hearing and touch, and eventually even smell. For instance, Dassault Systèmes has modelled the heart in 3D with realistic electrical, structural and fluid flow dynamics to study cardiac defects and diseases.14

Various firms estimate that the XR market will grow at a 47–58% CAGR from 2022–27,15 providing a significant opportunity for Vection Technologies’ XR business. Many key trends are driving this market, including the increasing use of VR in education away from a physical classroom, the rise of first-person gaming with VR gear, the adoption of XR tech for diagnostic use in healthcare (eg making a 3D model of a heart that a doctor can interact with via a headset) and the growing use of AI in XR applications.

The metaverse is a very fragmented market, with many public and private companies involved, both large and small, and includes Apple, Roblox, Unity, Epic Games, Qualcomm, etc (see Exhibit 13). As the metaverse has grown, it has enjoyed increasing attention with many companies entering the space via fund-raising or takeovers, such as Epic Games’ April 2022 raise of US$2bn at a US$31.5bn valuation,16 Roblox’s initial public offering (IPO) at a US$41.9bn valuation17 and Nike’s purchase of virtual sneaker company RTFKT.18 We see this trend of greater involvement and attention as supportive to Vection Technologies’ business, significantly growing the total addressable market of companies that would benefit from Vection Technologies’ IntegratedXR solution. Moreover, as it is not dominated by a few large firms, the metaverse provides plenty of opportunities for small- and mid-cap investors to gain exposure to this growing market.

We compare Vection Technologies to a representative sample of large and small firms from multiple geographies that are involved in the metaverse, related technologies and/or provide digital transformation services. Exhibit 14 provides a snapshot of these comparable firms.

Vection Technologies primarily sells the software and related services that companies need to engage with the metaverse. It typically charges customers an installation fee and then recurring, annual licence and service/maintenance fees. Its core IP is in the IntegratedXR software platform, but if needed it can also provide the necessary hardware and other services to implement Vection Technologies’ solutions, such as creating a 3D model, developing a virtual meeting or operating room, integrating it with existing ERP systems, Product Lifecycle Management solutions, CAD, etc. While management does not disclose specific gross margins by product, we would expect the highest margins from Vection Technologies’ own-IP software and the lowest margins from hardware sales, with services somewhere in between.

The company’s investments in growth continued to bear fruit in FY22, with revenues up more than 5x times from COVID-19 affected FY21’s A$3.5m to A$18.9m in FY22. Of the A$17.3m in Integrated XR sales, A$17.1m were recognised at a point in time such as projects and A$0.2m over time such as ongoing development work. The effect of acquisitions was not split out by the company, but we estimate that the strong underlying growth was augmented by the contributions from Blank Canvas and JMC. We estimate the approximate FY22 split as Vection Technologies A$6m, Blank Canvas A$1.7m, JMC A$11m. Exhibit 15 presents information on the two key acquisitions and related earnout targets.

Vection Technologies is investing heavily in technology and building out its infrastructure to support future growth across existing and new verticals. As a result, its operating expenses have naturally increased in recent periods, with FY22’s normalised EBIT falling to a A$5.9m loss from FY21’s loss of A$2.3m. Vection Technologies’ results were also affected by expenses related to the Blank Canvas Studios and JMC Group acquisitions. Vection Technologies’ geographic expansion into new regions was also evident in FY22, with EMEA at 80% of total revenues (A$13.7m) as APAC grew to A$3.1m from A$0.7m in FY21 and the Americas grew to A$0.4m from A$0.1m in FY21. Finally, FY22’s adjusted EBITDA was a A$1.0m loss, with the net loss of A$7.1m boosted by several add-backs including significant non-cash accounting charges (A$3.1m), non-cash payments (A$1.9m) and one off-transaction costs (A$1.7m) (see Exhibit 17).

The company’s prospects in FY23 and FY24 appear promising. As can be seen in Exhibit 16, TCVs and revenues have been accelerating in the recent periods with wins in the defence, military & law enforcement and machinery verticals. Management is guiding revenues to reach A$24–26m for FY23e, up from A$18.9m in FY22. Exhibit 17 provides details of our FY23 forecast of A$26.1m revenue and A$1.3m normalised operating profit (EBIT) as management continues investing in marketing, sales, technology and enterprise systems to support existing and future growth.

Vection Technologies’ goal is to grow revenues in FY23 and FY24 through a mix of organic growth in the existing verticals, geographic expansion and inorganic growth from potential future acquisitions. We estimate that FY23 will generate A$26.1m revenues (A$25.0m from IntegratedXR solutions and about A$1.1m from interest received and other revenue), driven by organic growth in its existing verticals, further expansion into the United States, EU and APAC, and growth from its new partnerships, as well as full year contributions from JMC and Blank Canvas. We estimate that Vection Technologies will improve its adjusted EBITDA to about A$3.7m in FY23e (A$0.9m in FY22), based on net income of A$1.0m and adding back D&A (A$1.0m), non-cash payments (A$1.4m) and income tax (A$0.3m). While management is planning further acquisitions, we do not include any future potential acquisitions in our forecasts.

At the end of FY22, Vection Technologies’ assets were primarily cash (A$14.9m), receivables (A$6.2m) and intangibles from products it developed and business acquisitions (A$17.0m). Net cash as of FY22 was A$10.8m (including leases) with modest debt of A$4.1m (including leases), and we expect management to keep debt at about this level over the forecast period. Major cash inflows and outflows in FY22 (aside from the usual customer receipts and payments to suppliers and employees) include A$2.0m in capex and intangible payments, and A$12.1m in share issue proceeds (net of transaction costs). The company reported a gross cash balance of c A$14m at 30 September 2022. We estimate Q123 (30 September 2022) net cash at about A$9.8m (including estimated debt and leases as of 30 September 2022) as cash receipts were up 58% over Q122. Lastly, Vection Technologies capitalises software development costs and amortises them with a straight-line method, and FY22’s amortisation for software patents and development costs was A$0.8m.

There have also been several significant capital raises and movements in share capital since FY20. In FY21, Vection Technologies issued 72.5m shares as performance rights vested across July to October (various tranches; vesting based on company share price, Officine 8K revenue, etc), and issued 66.5m shares (worth about A$6.0m) on 9 October 2020 as part of a capital raise. During FY22, the company issued 63.9m in shares on 4 August 2021 for the JMC Acquisition, and on 3 December, Vection Technologies placed 60m shares at A$0.20 per share for about A$12m in proceeds as part of an equity funding round. The company also issued about 32.5m unlisted share options with an exercise price of A$0.25 per share and a three-year expiry, as well as 13.5m performance rights to directors, both on 3 December 2021. On 30 January, Vection Technologies issued 6.5m shares as part of the company’s Performance Rights Plan, though as of 30 June, 100m of Class A performance rights (associated with Vection Italy) held by directors lapsed.

At this time, barring any acquisitions, major investments, expansions into new geographies or verticals, or other special situations, we do not expect Vection Technologies to need further equity raises nor raise significant amounts of debt to fund operations. As of FY22, the company’s basic share capital comprises 1.11bn shares while diluted is about 1.14bn shares.

We expect the company’s operating cash flows to improve from FY22’s net cash consumption of A$1.2m, driven by expanding sales, though much of it could be affected by acquisitions and variations in margins. We expect investing cash flows to grow slightly, especially for intangible assets as Vection Technologies continues building out its products and technology. Finally, we forecast net cash (including finance leases) of A$10.6m at the end of FY23, absent any capital raises.

Vection Technologies’ common stock has experienced some volatility over the last year, trading as high as A$0.28 in November 2021 and as low as A$0.05 in June and November 2022. Currently, it trades at A$0.052 per share, down 61% year to date reflecting the recent weakness and falls in the broader technology sector (the S&P/ASX All Technology Index is down 31% year to date, the NASDAQ-100 Technology Index is down 36% year to date).

It is challenging to value a firm that is several years away from profitability and has a short operating history, with many contracts in their initial stages. Therefore, we use EV/revenue multiples as a way to determine a relative valuation for Vection Technologies. As discussed above, its business model covers several rapidly growing industries, including digital transformation and the metaverse, and it operates across a wide variety of verticals. We use three peer groups for Vection Technologies: large-cap (above A$5bn EV), small-cap and an overall average across all peers. Each of the comparative sets (shown earlier in Exhibit 14) trades at a higher EV/revenue multiple than Vection Technologies, with large-cap at 8.6x, small-cap at 5.1x and the overall average at 7.2x (see Exhibit 18). If Vection Technologies were to trade at the small-cap peer average of 5.1x, it would be valued at A$0.13 or about 150% above its current price. If it traded at the overall peer average of 7.2x, it would reach A$0.18 or c 240% higher than its current price.

Furthermore, as shown in Exhibit 19, our estimates for Vection Technologies’ revenue growth in FY23e (38%) are considerably higher than the market estimates of growth for the large- and small-cap peers (14%). As an early-stage company with high projected growth rates compared to its more mature peers, Vection Technologies could justify a premium. On the other hand, part of the gap in valuation could be due to Vection Technologies’ smaller size and being earlier in its life cycle, as well as sales rising off a smaller base. Nevertheless, assuming the company executes on its growth plans and valuing it at the small-cap and overall average peer multiples would imply a price of A$0.13–0.18/share on a diluted basis.

Closing the gap in revenue multiple could take time and ultimately depends on Vection Technologies successfully executing its strategic plan. Over the next year, we will be watching for several milestones that could signal its success, including profitable growth in its existing verticals, expansion into new, promising verticals via M&A or partnerships, and controlling costs and gross margins as it continues investing for future growth.