For me, the most interesting development arising from Seeing Machines’ results last week was house broker Cenkos lowering its share price target from 19p to 15p.
That arguably could provide ‘independent’ justification of Seeing Machines value if a low-ball bid comes in. Understand, I don’t consider Cenkos to be independent myself but in many takeovers the house broker target price is used to support a bid.
I hope I’m wrong but the pattern of communications from Seeing Machines over the course of many months, together with the slow mo correction of problems with fleet looks like carelessness at best.
Smoke and mirrors
On the face of it, the new price target from house broker Cenkos is predicated largely on the basis of lower fleet revenues in the 2019 financial year, bringing down overall revenues and gross profit for Seeing Machines.
So how credible is that fleet revenue estimate?
Cenkos has estimated fleet revenues for 2019 will be only A$14.1m vs. the figure of A$49.1m, which it had forecast as recently as August 3rd.
However, I’m having difficulty working out how such a low figure is even possible given the number of units Fleet has out in the field.
By my calculations in this financial year (2019) Fleet should have recurring revenues from the existing 10,000 fleet units installed up to the end of the 2018 financial year (circa A$17m) plus revenues from the 5,500 that were shipped at the start of 2019 financial year plus a further 4,000 that Cenkos state will be installed by the end of the 2019 financial year.
Seeing Machines itself stated in the RNS announcing its full year results this week: “Total cumulative contracted Fleet (Guardian) revenue of A$82 million as at 30 June 2018. A$50 million revenue yet to be recognised over a three-year period.”
[When I divide $50m by 3 I get £16.6m – what do you get Mr Accountant?]
Well I contacted Seeing Machines via email and this was their reply:
- “The Cenkos analyst provides his independent view on the Company.
- Guardian revenue is recognised as follows:
- Total connected Guardian units is 10,000.
- TCV is based on total cumulative contract value since Guardian was launched.
- Contract sizes vary.
- Revenue is recognised firstly when hardware sales are recognised and secondly, once the unit is connected into the vehicle, monthly recurring revenue is generated.
- Each fleet varies in contract size and it takes varying amounts of time to connect each vehicle in a fleet to Guardian.
- TCV was published as A$82 million. A$50 million of that revenue will be recognised over 3 years – ie by end of FY2021.”
Of course, while we’re all pondering about fleet revenues are we possibly missing something? Yes: Seeing Machines is going to be acquired because it’s the leading global DMS and BdMS supplier.
Any potential acquirer probably wants Fleet ‘smoothly transitioned’ (as Cenkos put it in a note on19th September) to a licence model. The beauty of the strategy, the sheer genius, is that it has made Seeing Machines more attractive as a target by both moving the business on and conveniently reducing its short term value.
A potential bidder, let’s call it company ‘B’ for now, can either take advantage of the reduction in SEE’s price while the sale is on or SEE will go it alone and use the extra engineering resource from fleet to help service the multiple auto OEM contracts that are on the way.
The window for a cheap sale will have run out within a few months.
Can you hear that clock ticking?
The writer holds stock in Seeing Machines