Seeing Machines at a crossroads

Regular readers of this blog will know I’m very keen on Seeing Machines. However, its would-be spin-off, Fovio has been delayed for a few months now (it was intended to spin it off by July 1, 2016) and the costs are still being borne by the main business. Therefore, while Monday’s results show great progress in many areas I wanted to concentrate on the likelihood of its being ‘forced’ to raise cash in the very near future.

From my discussions with management it appears that the cash position is now A$11m. The present cash holding will be boosted by an in principle agreement with CAT to bring forward  US$7M by Christmas (for although the revenue was recognised in the 2016 accounts, the actual cash is spread out). In addition, there should be around A$4-$5m coming in from fleet sales to assist working capital.

Even if SEE were to carry the full cost of auto, which is estimated by the Lorne Daniel, analyst at house broker finnCap as A$14m, overall net spend will be A$25m in FY 2017. This means that although finance would be tight by next June the company isn’t compelled to fundraise immediately. 

According to SEE’s interim CFO, James Palmer: “The plan is still to spin off Fovio by Christmas. However, we can comfortably carry Fovio until June 30, 2017, which would give us ample time to go to a plan B if we need to. That is if plan A wasn’t working in the best interests of the shareholders and we had to look at an alternative structure.”

Chief Executive Ken Kroeger stressed: “The only thing that would change that is if we decided that a spin-out isn’t the best thing for current shareholders. We have invested another A$4m into automotive since year end and we’re not necessarily going to get more equity for that. In parallel to that, that $4m has delivered a whole lot of outcomes that we might not want to give away to somebody else and we are out there pursuing business that we could win between now and Christmas that would increase the value of the company, and which we might not want to give away at the current valuation.”

“Our view is that the delay, while consuming cash, is increasing the value of our business and unless that is properly recognised in the spin out, we have the ability to reshape that if we choose to,” added Kroeger.

Certainly, SEE seems keen to let potential investors know that it isn’t desperate for cash and its trump card is that the auto industry is desperate for its technology. Indeed, among auto OEMS, I understand that it’s only the Koreans that are not using its DMS technology. All the rest they are doing something with.

Fleet

Fleet is very important as aside from CAT it is the only part of the business currently generating revenues. In the year, ended 30 June 2016 it sold 1,666 units and already in the first quarter of its 2017 financial year it has managed to ramp up sales by approximately 3000 units, with a cumulative total of now 6,000 units sold.

Moreover, its pipeline of assessments continues to grow. At the end of June it had 34 on the go but when I sat down with Chief Operating Officer Paul Angelatos this week he joked: “We’ve not been sitting on our hands since the year end and in fleet we now have 45 assessments underway.” The total number of units this potentially represents is roughly 160,000. 

In addition, part of the strategy is to work with telematics providers in order to get sales in very large volumes as he explained: 

“Most of the large fleets we are working with already have a telematics solution installed, (tracking the vehicle, tracking driver behaviour in terms of harsh braking, cornering, acceleration, etc., with GPS and an ability to transmit data)…Our product development is now focused on being able to integrate with the existing technology, stripping further cost out of our product, reducing the complexity of installation but more importantly allowing us to access existing customer bases with these partners.”

SEE now has memorandums of understanding (MOU) with 3 telematics providers and is having preliminary discussions with a fourth. As Angelatos commented: “The strategic telematics partners that we are now talking to effectively give us access to an installed base of over 2m vehicles.”

“We should be able to return some revenue from these strategic partnerships this financial year. It won’t be significant but it does set us up for FY18, where we have the new product, we’ve proven the integration, we’ve proven that our technology works together, so we’ll be able then to access that volume market.”

In this financial year (2017), fleet revenues will be derived largely from direct sales and distributors.

“Typically our model now is selling as a service, so we are looking at a bundled subscription fee per vehicle each month which is in competitive with other Mobile Resource Management (MRM) solutions. This provides a customer with a hardware solution and the full suite of analytics and monitoring of their fleet,” added Angelatos.

“We have expectations of a certain number of units this financial year and next financial year it is an exponential increase based on the fact that we are going to be able to access some existing installed base with those partners plus new sales, ” he concluded.

Conclusion

It appears to me that that there is a possibility that if SEE doesn’t get the deal it wants for the auto spin-off very soon, one option could be to fund this division itself with a smallish capital raise in order to retain more value and control.

While this might appear fanciful, if revenues from Fleet continue to increase over the next few months, the amount to be raised for auto needn’t be hugely dilutive to existing shareholders. 

There certainly wouldn’t be any shortage of Silicon Valley VC capital willing to invest in SEE itself, not to mention mutual funds and private investors.

Moreover the upside it would be capturing and retaining for investors might well outweigh the short term effect of any dilution. Indeed, if a fund or company bought in at a premium that would be a very bullish sign.

What I would hate to see would be a dilutive fundraise followed by a share consolidation that wipes out long term private investors such as myself. Yet, I get no indication such a move is on the cards.

Certainly, concerns over cashflow have been holding it back for a good while now and it makes strategic sense to keep Fovio in-house, in my opinion.

An eventual flotation of the whole company on Nasdaq could then set it up for a meteoric rise. For example, just look at the mouth watering (US$9.2bn) valuation of Mobileye and ask yourself where SEE is likely to be a year from now.

This last thought is pure speculation on my part and there are a lot of hurdles to be surmounted before then. Still, whichever plan SEE chooses to  follow it is very much undervalued at its current share price.

As always, I’d advise that investors do their own research and not rely on the thoughts of others.

The writer holds stock in Seeing Machines.

Analyst very positive on Seeing Machines

As the UK was voting to leave the EU I was speaking with Lorne Daniel, the analyst at house broker FinnCap who covers Seeing Machines.

It was Lorne who first opened my eyes to the enormous potential of this AIM-listed company.

Like me, he’s very much looking forward to the automotive spin-off, expected to raise up to US$50m, perhaps in two tranches. Interestingly, he feels confident that SEE will maintain a high stake, around 75% in the initial funding round, perhaps dropping to around 50% in the second round.

This is what he said: “In the initial round, I was thinking Seeing Machines would have 75% and the investors will have about 25%. Then it would drop to around 50% for the second round.  Nothing has been confirmed yet but that was my thinking.

“I guess we will find out but as I understand it they need around US$50m. So, however that comes in, (for example, $25m and then $25m), I would be disappointed if they didn’t value their own IP at US$50m plus. I think it is worth, far more than that by any sort of calculation.”

“But to be fair, these initial investors are likely to be industry giants taking a big stake and they will want their cut. That’s fine.

“The template is Mobileye which has a US$8bn valuation on the US market with revenue of just US$240m. If Seeing Machines’ automotive spin off gets anywhere near that rating nobody will worry what that initial valuation was.”

Now my belief is that GM Ventures is the cornerstone investor and that VS Industries is investor number two. I don’t know who the third might be but I’m hoping it may be Intel. 

We shouldn’t have to wait too much longer to find out, given that Seeing Machines announced that lead investor had signed a term sheet on May 16. 

Fleet

Not only is SEE getting 15% of the growing royalty stream and monthly revenues  from sales of its product by Caterpillar, but it involves virtually no cost. Moreover, as soon as a telematics deal gets announced, and we already have MOUs, this will have forecasts upgraded substantially. This is turn should lead to a significant price rise and a further re-rerating. 

It’s significant that Seeing Machines is now leveraging insurers and telematics companies to roll out its technology in a cost-effective way. 

As it starts to grow you can also expect momentum traders and larger funds to start getting interested in the company, which would drive the price up further.

Of course, all this supposes that things go smoothly, which is never the case in business. 

Price target

Lorne Daniel currently has a price target of 12p on SEE and I’d expect that to rise following either the launch of the auto-spin-off or a significant fleet contract. 

Takeover

I’d be concerned that as the company is so undervalued, particularly given the limited downside and the virtually unlimited upside, an attempt to take it over on the cheap can’t be ruled out. This could be a direct competitor, or possibly a partner on the telematics front, or even Mobileye whose technology offering would be significantly enhanced.

In fact, I could reel off half a dozen companies that might logically seek strategic advantage by buying SEE.

However, the auto spin-off (by providing independent valuation of its IP far in excess of its current market value) will make this eventuality less likely. Certainly, any company then wishing to takeover Seeing Machines will have to pay a significant sum. I personally don’t think US$1bn would be an unrealistic sum to expect at that stage.

As the auto spin-off is very likely to be completed this side of Christmas (key management should definitely be in place by then), I’m prepared to stick my neck out and say that within 18 months I expect SEE to have a valuation of between 50-75p. That’s quite a rise from 3.25p at the time of writing.

Of course, you should always do your own research before investing.

The writer holds stock in Seeing Machines.

Seeing Machines share price

This is just an update following the unusual movements in the Seeing Machines share price.

Yesterday I contacted Ken Kroeger, Chief Executive of Seeing Machines, to try and find out if he or FinnCap knew of any reason for the recent falls. What he told me was: “Everyone’s view is that it’s Dixon’s selling of the original holding from the IPO”.

Hopefully, that should put some minds at rest. There is a natural tendency to jump to the wrong conclusions when trying to reason why a share price is so volatile, particularly as ‘buys’ are often reported as ‘sells’ with this share.

Certainly, the business is progressing and I don’t believe long term holders (investors) should be concerned – though day traders will have to have their wits about them.

Re. Fleet I’ve had it confirmed by Kroeger that Seeing Machines has “responded to a taxi tender in Dubai and expects a response in the next few weeks”. I also believe a similar process is underway with the Public Transport Authority in Dubai and that a response to that tender will likely follow along a similar timeframe.

The reason for the tendering process is that as government agencies they are required to put contracts out for tender.

In addition, See is also close to appointing 2 more distributors for the Fleet product, but they are not signed up yet.

As to how this week’s retail roadshow has been going, the feeling is that it has been very “positive”.

The writer holds shares in Seeing Machines.

Polar Capital Technology Trust holds SEE

The Polar Capital Technology Trust has a big cap bias and has125 holdings. It has delivered Net Asset Value returns of 234.84% over the past 10 years, with share price growth of 214.19%

Fund Manager Ben Rogoff has 125 holdings in the £788m fund, the top 5 holdings in the £788m fund are: Alphabet (9.4%), Apple (7.3%), Microsoft (6.5%), Facebook (5.4%) and Amazon (2.9%).

However, 7.5% of the fund is invested in small caps, stocks below $1bn. Indeed, he also holds at least one microcap; AIM-listed Seeing Machines, which constitutes 0.1% of his fund. He told me: “We don’t normally invest in companies at this stage of their development. We made an exception for Seeing Machines because we wanted to gain exposure to the automotive safety theme and believe that the company’s Driver Monitoring System (DMS) has great potential, both as an advanced driver assistance system (ADAS) and as a key component in future semi-autonomous vehicles. The company’s size and relative immaturity is reflected in the position size.” 

Crimson Tide issues earnings upgrade

Aim-listed Crimson Tide, issued a very encouraging update today in which it detailed that it expects to beat profit expectations for the year ending 31 December 2015.

It noted: “Profit before tax will be higher than market expectations and significantly higher than for the previous year.”

In addition, analyst Eric Burns at house broker WH Ireland raised his profit forecast for the stock from 2.25p to 3.5p and changed it from a ‘Speculative Buy’ to a ‘Buy’.

The outperformance was due in no small part to the massive win with Tesco that I wrote about on this blog some time ago. (17 September RNS in which Tesco was not named).

In a detailed note out today, Burns confirmed that he expects it to start paying a dividend this year, which coupled with earnings upgrades should lead to a further re-rating of the stock.

He wote: “Forecast risk exists due to the phasing of new customer rollouts (with Tesco being an example of upside risk as it was rolled out faster than anticipated) but recurring revenue is building (65% est of our FY16 revenue forecast) and provided TIDE can continue to build its subscriber base there could be material upside to the shares trading on 12.9x our new FY17 EPS forecast. In our view, the introduction of a dividend in the current year (which we now forecast) will add to the shares’ attractions.”

The EPS for FY16 is estimated at 0.11 putting it on a forward PE of 15.8, dropping to a PE of 12.9 with EPS of 0.22p for 2017.

However, I expect upgrades for 2017 as Tesco and Nestle sign up more users to its subscription-based software as a service.

Just to reiterate, Crimson Tide is a fast growing, profitable, operationally-geared company with great scope for growth. It has no debt and plans to pay a dividend. What’s not to like?

I’d be very surprised if more small cap funds don’t start piling into this very soon. Indeed,  given the illiquid nature of AIM stocks and the fact that the shares are tightly held, this could easily double again in price within 18 months. It is currently around 3.5p to buy.

Of course this is my personal view and not a recommendation to buy. You should do your research before ever investing in a stock and never invest more than you can afford to lose.

The writer holds stock in Crimson Tide.

See and Tide float my investing boat

I’m hardly surprised that stock markets around the world have been tanking, indeed the surprise for me has been how long it has taken for people to realise that the global economy is in a very bad way. Moreover, things are likely to get a good deal worse as the US economy weakens.

This doesn’t mean I’m completely bearish about stocks: I favour some small caps. In an era of low GDP growth, innovative and well run small caps will still thrive. One of which, Crimson Tide (TIDE), has been re-rated slightly following good news but it has much further to go.

Another, Seeing Machines (SEE) has barely moved despite lots of evidence that it is making inroads into selling its eye-tracking technology into the Driver Monitoring Systems of automotive manufacturers, while conducting successful trials with fleet managers.

The price is stuck at around 5p and I guess it won’t start to move until official RNS news comes out  detailing launch dates of cars containing its technology and signed contracts with trucking and bus companies. I’m taking advantage of this stalled stock price to load up, as opportunities like this don’t come round too often in my experience.

With its technology proven by the likes of Caterpillar it isn’t a jam tomorrow stock but rather a caviar fairly soon one. We’ll see – perhaps I’ll end up eating my words?

One piece of information I haven’t seen elsewhere is that Miton hold around 4% of SEE. And fund manager Gervais Williams is still keen on the stock as he revealed in this article (P62 ‘From Tech Acorns…)

I hold both companies but do please conduct your own research before investing your hard-earned cash.

SQS Software falls on profit downgrade

SQS Software issued a veiled profit warning when reporting its interims yesterday and promptly fell 15.7% to 480p.

It’s had a great run since December 2011 when its shares were only 146.50p and investors clearly decided to take profits. Given the balance of risks, that seems like a sensible move.

The cause of the fall was the revelation that: “We will further react, adapt and manage potential impacts on our clients from continued global economic uncertainties. For all these reasons we have to be more cautious and anticipate our profits for the full year to be slightly below the Board’s previous expectations.”

According to management, analysts had expected adjusted pre-tax profit for the full year to be in the region of €22.5 to €25m, but it has been downgraded to around €21m. It has been hit by lower gross margins in Regular Testing Services (RTS) business (34% of revenues), which have declined from 33.6% from the first half of 2014 to 26.4% in this half.

This news is hardly disastrous but, if you’re bearish on the prospects for both the US and German economies as I am, they could be in for tough times. Certainly, the balance of risk in the short term is to further downside.

For the six months to 30 June 2015, revenues increased by 16.1% to €150.3 with pre-tax profits of 5.2m against €3.3m for the same period a year earlier.

Although its two recent US acquisitions should drive up US business, paying for them has increased its net debt to €26.5m. Moreover, operating cash flow  was also negative to the tune of €5.2m, compared with an outflow of 2.6m at the same stage in 2014.

That said, the company explained: “we continue to expect receivable days to return to more normalised levels during the second half of the current year to

deliver strong cash generation resulting in a significantly strengthened balance sheet by the end of the current financial year.”

Management confirmed that, as payments are weighted to the second half, by year end it expects positive cashflow to the tune of €26m — as in 2014.

In a note issued yesterday, Canaccord Genuity reduced its price target from 730p to 650p and maintained its ‘Buy’ stance. Analyst Arun George commented: “We downgrade our full year 2015 adjusted pre-tax profit forecast by around 7% to €22.8m and full year adjusted pre-tax profit by around 6% to €27.7m. Given the uncertainty on the timing and path of margin recovery, we reduce our price target to 650p (previously 730p). This implies an estimated calendar year EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) of around 8 times.”

A global stock market crash is coming

Those of you tempted to believe that this week’s ‘Black Monday’ was an aberration should note that a huge, global stock market crash is likely to be with us pretty soon.

China is exporting a tidal wave of deflation to the US (an economy already in trouble) and as it hits things are going to get very bad indeed.

Forget the market soothsayers employed to talk up the prospects of the stock markets. Their analysis is wanting, their predictive powers non-existent.

You’d be better off following the analysis of the three men below. Compared to the vast majority of commentators they are market oracles. The message they have to impart is sobering.

Professor Steve Keen

No less a figure than economist Professor Steve Keen, who predicted the 2008-09 Great Recession, explained in an interview last year that the US was headed for a long period of stagnation. It is due to the build up of private debt (among both corporates and the general public).

Economies across the globe have been fuelled by the growth of private debt and, given the already high levels of debt, further growth cannot be sustained for very long. That is why the ‘recoveries’ in the US and UK are below trend and stop start.

Because of this reducing private debt not public debt is the issue that should be concentrating the minds of our politicians and economists. Hence QE for the people, which reduces this burden makes a lot more sense than QE for the banks.

Until now, all QE for the banks has done is:

  • encourage banks to continue speculating with cheap money from tax payers
  • created asset bubbles in areas such as property, stock markets and bonds where this money has been invested
  • encouraged ordinary investors to take on excessive risks in order to get decent returns
  • blinded the public to the way they are being fleeced by the political-financial elite that rule over us and finance this Ponzi scheme.

It is a pity that until the arrival of Jeremy Corbyn the Labour Party leadership failed to explain that the bank-bail out was the real reason the UK public debt ballooned. 

In any case, austerity in the present economic climate is madness, the wrong medicine at the wrong time.

Mitch Feierstein

Mitch Fierstein is the author of Planet Ponzi and a hedge fund manager. He knows the system from the inside out and is one of the sharpest commentators on the manipulation at the heart of our financial system. At the very least you should follow his twitter feed. The insights fly out of him like sparks from a Catherine Wheel.

Often only when going over his comments in detail do you become aware of the really deep knowledge he is imparting. For example, the most recent revision to US second quarter GDP, indicates that the US economy is doing fine growing fine with an annualised rate of growth of 3.7% revised up from 2.3%.

However, as Feierstein pointed out in a tweet yesterday (August 27th) US Gross Domestic Income (GDI) increased at an annual rate of just 0.6%.

This is what Shadowstats had to say on the matter in a note published yesterday: “Not only was that revision unbelievable, it also ran counter to the indication of stagnant economic activity seen in the initial estimate of second-quarter 2015 Gross Domestic Income (GDI), the theoretical and a practical equivalent to the GDP. The pattern of GDI stagnation for first-half 2015—not the faux surge in second-quarter GDP—is consistent with better quality monthly reporting seen in series such as industrial production and real retail sales.”

Albert Edwards

He’s been labelled a ‘bear’ by many bulls. Yet he accurately predicted that Chinese devaluation was coming months ago and that it would lead to a tidal wave of deflation heading West.

When it hits the US, it won’t be pretty. Forget cheaper gasoline prices and commodities. They aren’t much use when you’re out of a job because your economy has gone back into recession.

Okay, the US won’t raise interest rates. When it becomes clear that it is falling back into recession, QE4 may be unleashed. However, more bank bailouts (which is what QE is all about) won’t save the US economy from turning Japanese and stagnating.

This week, in a note published on August 27th, Edwards explained: “Despite deflation fears washing westward and US implied inflation expectations diving to levels not seen since the 2008 Great Recession, there remains a touching faith that the US is resilient enough to withstand further renminbi devaluation. And if it isn’t, why worry anyway, because QE4 will be around the corner. But let me be as clear as I can: the US authorities CANNOT eliminate the business cycle, however many QE helicopters they send up. The idea that developed economies will decouple from emerging market turmoil is as ridiculous as was the reverse in the first half of 2008. Remember Emerging Market and commodities had then de-coupled from the wests woes until they too also crashed. “

He also stated that we are already in a bear market. “While equities rebound investors are hoping things are quickly returning to normal. One of the many lessons from equity investing during Japan’s Lost Decade is that in a secular bear market hope is a killer. In a secular bear market hope should only be flirted with briefly during cyclical upturns, but it must be ruthlessly rejected as the cycle turns. In a secular bear market being wedded to hope destroys portfolios as the bear slashes to ribbons the hard-fought gains of the previous bull market. Gains that have taken years to accumulate are gone in months. One key measure we monitor informs us conclusively: we are now in a bear market.”

Time to be fearful

When men as smart as the 3 oracles above tell you that things are turning nasty it is time to listen. Far from being greedy it is now time to be fearful.

Certainly, it is time to take profits/hedge your winnings. Avoid leverage and take all money you need for the short term out of the market.

Even in a bearish environment physical gold and silver should do well and probably selective, innovative, small caps.

P.S. Please BBC put on a show like RT’s The Keiser Report and interview these 3 people. Their deep knowledge is desperately needed by a mainstream audience fed incoherent nonsense until now.