Theon International - Quantitative Analysis

Update on Qualitative Analysis

Firstly, I think it is relevant to share updates and further qualitative information which arose during the previous months since the previous write-up.

Incentives

The company IPO took place a little over a year before my previous article and the first remuneration report wasn’t released at that point in time. I assumed that Mr. Hadjiminas large stake ownership (over 75% at that time) ensures alignment with shareholders.

In the FY24 earnings report executive management remuneration was finally disclosed. As it can be observed from figure 1, most executives and non-executives have a base salary comparable to that one of an engineer in Western European countries.

Moreover, CEO receives a base salary for his position at the board while the deputy CEO has a fixed salary of 30,000€ due to his management position. Most of their compensation comes from shares appreciation & dividends (introduces a bias towards capital distribution).

Regulatory Barriers

During the Q1 2025 earnings call of Spyrosoft, a Polish digital services consultancy which I am also a shareholder of, management emphasized how lengthy the process to get the certificates, clearances aned completing the public procurement process is. See video below min 30:00 to 31:15. This is what a company “only” doing software expriences, imagine the bureaucratic burden Theon’s competitors will have to overcome if they were new to enter in the defense industry.

This reinforces the idea of the defense sector being a sector with high-barriers of entry to new competitors.

Acquisitions

Theon went on an acquisition spree during the last 18 months using the proceedings of its IPO. This is aligned with outlined expansion plans at IPO and will be further discussed in the capital allocation section.

Balance Sheet

Theon International presented a strong balance sheet at the end of H1 2025. However, since the closure of the first semester of the year the company has executed multiple investments and acquisitions that have shifted it.

Prior to the spree of investments and acquisitions Theon has embarked during 2025, balance sheet ratios were healthy. See table below.

Moreover, it should be highlighted that almost €21 million out of €26.6 million in short term debt obligations are personally guaranteed by Christianos Hadjiminas. That is skin in the game.

Cash Flow Statement

FCF Generation

Cash generation has been lagging due to the large investments in NWC that the company has undertaken in 2022 and 2024. Excluding those two periods, cash conversion has ranged between 60 - 70%.

CapEx has grown in line with sales during the period of scope.

Working Capital

Looking at Theon's working capital, the cash conversion cycle has worsened over the past five years. This is primarily due to the company's strategic focus on building up inventory to meet an anticipated surge in customer demand, which has materialized. However, the main driver of the cash conversion cycle's deterioration from 2023 to 2024 was a tripling of accounts receivable, indicating Theon is facing challenges in collecting payments from its customers.

I expect the cash conversion cycle trend to revert in the coming years and lead to accretive cash generation. Its evolution should be carefully followed.

Capital Allocation

M&A

When IPOd, management had a clear ambition to deploy the proceeds from the equity into bolt-in acquisitions to strengthen the company as well as other growth initiatives. The company wasn’t new to this operating model as they already followed this same playbook when they were private (e.g. Hensholdt acquisition in June 2022).

Let’s have a recap of the acquisitions Theon has done over the last 18 months:

I. Harder Digital majority stake acquisition

Harder Digital is a German company specializing in the production of Image Intensifier Tubes (IITs), essential components in NVDs. The €35 million investment (for 60% of Harder Digital) is structured to serve multiple purposes. The majority of the funds are earmarked for upgrading Harder Digital’s production facilities with a focus on expanding capacity for third-generation IIT manufacturing lines.

Harder Digital’s acquisition gives Theon access to advanced Image Intensifier Tubes. While U.S. manufactured IITs lag behind technologically, they also face export restrictions. Hence this acquisition + capacity expansion in combination with long-term supply agreements with Exosens ensures Theon’s access to latest generation IIT’s.

Harder Digital targets €17 million sales with 10% EBITDA in 2024, and expects tripling sales with mid-twenties EBITDA margin by 2028.

II. Focus Optech acquisition

In January 2025, Theon acquired Focus Optech, a small South Korean firm specializing in precision optical components, for €357,670 (100k in cash and remaining as a loan transferred to consideration).

Based on the size of Focus Optech and its reported balance sheet by Theon, it seems this has been an opportunistic acquisition of a company in a financial distressed situation to set foot in the Asia-Pacific region.

III. Kappa Optronics acquisition

Kappa, a German specialist in aviation and land optronics, offers solutions for defense mobility and autonomous machines on the ground and in the air. This bolt-on acquisition immediately positions Theon International as a direct supplier to Airbus. Kappa Optronics' existing contributions include supplying cameras for the Eurodrone program and the vision system for in-flight refueling.

Theon is funding the $69 million acquisition with a mix of cash and debt. Kappa's fiscal year 2025 financial projections are strong, with expected revenue of $37 million and $8 million in EBITDA. Theon's management has also indicated that after synergies are realized, Kappa's operating margins are expected to quickly converge with Theon's.

IV. Andres Industries AG minority stake acquisition

In July 2025, Theon acquired a 10% strategic equity stake in Andres Industries AG through a 1.1 million share capital increase, with options to increase its stake up to 24.99% within two years for a total consideration of EUR 4.5 million. This acquistion will reinforce their collaboration in the thermal clip-on offering.

V. Partnership with Kopin Corporation

In August, under its "Theon Next Initiative", Theon announced its partnership with Kopin Corp., a leading U.S. defense specialist in micro-displays and subsystems. Theon's $15 million investment will establish a new European joint venture to co-develop augmented reality-enabled systems and manufacture microLED displays.

This partnership is a pivotal move for Theon's U.S. strategy. While it provides access to Kopin's Scottish facility (49% acquired through a $8 million capital increase), which is a major step into the UK, the agreement’s most significant aspect is the establishment of Theon’s first fully owned U.S. manufacturing facility in Reston, Virginia that will be dedicated to US AR activities. Unlike its previous co-owned facilities with EOTech and Elbit Systems, this new site gives Theon an independent operational base. This is crucial for Theon's long-term growth, as Kopin's work on several advanced U.S. armed forces programs could provide a key competitive advantage.

VI. Varjo Technologies minority stake acquisition

Also in August 2025, Theon announced the acquisition of a minority stake in the Finnish firm Varjo Technologies, specialized in VR/XR headsets and software. This investment aims to support “Theon Next Initiative” and consist in €5 million convertible loan plus additional €5 million under the same terms.

In total, Theon has deployed €125.5 million over the last year with additional options to deploy another €9.5 million in some of the deals described above.

The company also mentioned during the last earnings call that they are looking into further acquisitions in markets that will support their geographical expansion:

CapEx

Theon has spent €25 million in CapEx since going public in 2023 with 40% of that amount being invested over the last 12 months.

Most of that CapEx has been dedicated to improve the manufacturing facilities including:

• Greece HQ and manufacturing facility expansion.

• Harder Digital production facility enhancement (part of acquisition deal).

• Latvia manufacturing expansion.

  In July, Theon announced the establishment of a new 6,400-square-meter facility in Latvia to manufacture Multi Channel Plates, a critical component in night vision tubes.

• Establishment of Theon Belgium subsidiary.

  In July 2025, Theon announced the creation of its new subsidiary, Theon Belgium, and the establishment of a production facility in Zaventem, nearby NATO HQ. The company's goal is to begin production at this new facility in the fourth quarter of 2025.

Buybacks

On the 1^st of September, the company announced the initiation of its share buyback programme after obtaining the relevant authorizations from Cyprus Securities and Exchange Commission.

The buyback programme was approved in June during the annual General Meeting, targeting the repurchase of 1.400.000 shares. Theon International currently has 70M shares outstanding. Hence, the buyback programme aims to reduce the company’s share count by 2%.

Considering the share price at the time of approval was above 30€ per share, I estimate that the company is targeting to dedicate between €33M and €45M on the buyback programme during the coming year.

Dividends

The company pays a dividend. They are committed for a 30-40% payout ratio.

During 2025, they paid a dividend of 0,34 EUR per share, which equals a dividend yield of approximately 1.2% at current share price.

Capital Efficiency

Theon's financial returns are exceptional, with a reported ROIC consistently exceeding 15% and a company-wide ROCE (including goodwill) of over 30%. This high ROCE, however, may become a less accurate measure in the short term. Due to recent acquisitions, the company will likely shift its focus to a business ROCE—a metric that temporarily excludes goodwill. This will provide a clearer view of returns from core business activities and the successful integration of newly acquired assets.

Valuation

Revenue Projection

Revenue has been broken down into each of the product lines and projected using the following assumptions:

1. NVDs

   Expected to represent 90% and 80% of revenue in FY25 and FY26, respectively.

   From there on, NVDs growth rate will slide down from the upper end of NVDs market growth rate towards global defense budgets growth of 5% CAGR.

2. Thermal

   Expected to represent 8% of sales in FY25

   Less technological advanced segment. Expected to grow during the next decade at global defense budgets growth of 5% CAGR.

3. A.R.M.E.D

   For FY26, this segment's sales are calculated as 20% of total sales less the thermal segment's expected sales, since the two segments combined will make up 20% of sales that year.

   After FY26, the segment will follow the same growth path as NVDs, with an additional 2.0% annual growth to reflect management's guidance that it will outpace NVDs.

4. Electro-optics (Kappa Optronics products)

   Conservative assumption that electro-optronics category will not grow, staying flat at €37 million FY25 estimated sales of Kappa Optronics due to lack of information about this new segment.

Note: The FY25 sales projection is based on H1 2025 sales plus 40% of the soft backlog, as guided by management. From this, each product category's sales were calculated.

DCF model

Once revenue has been projected, I built the DCF model based on the following assumptions:

• EBIT margin to decrease in the coming years while Theon integrates and realizes synergies from acquired companies. EBIT margin will later return to 25% (observed average over the last 5 years).

• CAPEX peaking this year at 2025 as some production sites are expected to be finalized in the coming months (Harder Digital improvement and Belgium production site). The CAPEX-to-Sales ratio will come down to 3.0% in the long-term.

• D&A increased from current levels at 1% of sales, up to 2.5% in ten years.

• The company has a mid-term target of 35%. Let’s consider the worst case and assume they will not be able to improve their working capital management once the hypergrowth stage comes to an end and Harder Digital acquisition is fully integrated.

Note: Above model implies returns on invested capital (ROIC) ranging 40-50% for the coming decade. This will not reflect the real business returns as the company is investing in the form of R&D expenses and also will continue doing acquisitions (at least in the coming months as per H1 2025 management comments during the earnings call).

Based on the above model, I get an estimated share fair value of 33,14 euros per share on the above base case using conservative assumptions. Return from current share price will be 14.0% CAGR plus a dividend yield of 1.22%.

Valuation ratios

Theon’s project ratios show how if the company is able to hold its current trajectory for a couple of years the price paid would be within market averages.

Moreover, Theon is usually one of the most undervalued stocks among its peers group (L3Harris, Exosens, Teledyne, Elbit Systems & Hensoldt AG) when making a comparison based on their trailing and forward valuation ratios.

Conclusion

After reviewing the financials and observing how Theon International has executed over the last 6 months my conviction on the company has just grown bigger.

However, a few unknowns make me cautious: we don't have the details on how acquisitions will be funded or what their full financial impact will be. Additionally, it's unclear if bolt-on acquisitions will become a key, recurrent part of the reinvestment plan.

Moreover, while we now understand the management's remuneration policy, it's unclear if the founders and the deputy CEO will prioritize cash distributions over reinvesting in the business.

Because of these uncertainties, I need a sufficient margin of safety. Hence I would like to have a 30% margin of safety so I would consider adding the company to my portfolio if stock price reaches a level around 23.2€ per share.