Time to re-rate SEE 2.0

Seeing Machines’ (AIM: SEE) full year results indicated strongly that the issues that affected its fleet division are fixed and I expect news flow over the next few months to drive a significant re-rating.

In a note issued yesterday, house broker Cenkos upgraded its price target to 12p. Analyst John-Marc Bunce explained: ‘We believe the turnaround in fleet will drive the company to profitability in under 2 years with the cash runway looking sufficient even before accounting  for licensing deals or financing against recurring revenues.”

This was reiterated in a webcast from CEO Paul McGlone today in which he assured investors: “Fleet is fixed and starting to perform”. He added that there were no plans for a dilutive equity fundraise in his 3-year plan. Moreover, an aviation licence deal (expected to happen before year end) would effectively mean the company is funded to profitability.

Fortunately, the new CEO seems to have pressed the reset button and confirmed that over the past 6 months he has made significant changes: “The business is now focused on profitable revenue, we don’t chase strategic business.”

Cenkos has pencilled in a conservative (how I dislike that word) A$47.5m revenue figure for the full year to June 2020, with a pre-tax loss of A$35.9m. Thereafter losses fall in 2021 to A$10.6m and SEE reaches profitability in 2022 (A$47.5m).

I think these estimates will be revised over the course of the coming year, bringing forward breakeven by at least a year.

After so many years of disappointment and failure to deliver against financial targets I think this will be a transformational year for Seeing Machines. It will hinge on these 3 things happening:

  1. Acceleration in the installation of Guardian in fleets and cheaper units produced in H2.
  2. More auto OEM contract wins.
  3. Aviation licence deal by the year end.

 

Positives

Fortunately, signs look good for all three.

  1. Fleet growth should accelerate further this year as Cenkos confirms: “We believe the guidance for 27k-30k connections at the end of FY2020 is conservative and underpinned by a strong pipeline.” Moreover, the unit costs of Guardian are due to come down significantly from the the second half of this financial year, driving more profit. In addition, McGlone today revealed that SEE is expecting solid growth in the US market.
  2. I’m expecting two existing US customers to extend their existing contracts and Seeing Machines to win two more OEMs in Europe very soon. This is aside from continued progress in Asia over the course of this financial year.
  3. We now know (after the webcast) that Aviation licence deals are coming soon. That will improve the bottom line without involving significant risks and costs.

Lest we forget, there is also a bigger game afoot, as Bunce pointed out in his note:

“… one could argue that Seeing Machines has greater strategic value than Mobileye has as we highlight the ever-increasing importance for reliable face, eye and emotion tracking in the real world for many applications beyond automotive and transportation; from retail, medical, personal robots and personal computing devices. This value would be seen not just but major chip and software platform providers like Intel, but also the world’s tech giants.”

I’d advise all investors to do their own research and the above is my opinion only.

The writer holds stock in Seeing Machines.

10 questions to Seeing Machines

I’m expecting Seeing Machines to provide positive news and an upgrade for its 2020 financial year when it releases its full year results for 2019 on 23rd September.

However, this is no time for complacency, especially given the errors of the past under the previous management. In particular, questions have been raised about its operational costs and whether it has sufficient cashflow to avoid another raise. I hope we’ve entered a new chapter but we’ll soon know.

Unfortunately, for a few months now Seeing Machines has refused to engage with me and answer my questions. Fine.

However, it would be a shame if hard questions aren’t asked and answered by management when these results come out. To aid that transparency, here are 10 that I hope investors will be asking when the results are published.

1. Analyst Sanjay Jha at Panmure Gordon has previously stated, in a note dated 5th June, 2019 that Seeing Machines isn’t funded to breakeven. “We continue to believe the funds raised in April are not going to last 18 months as the company continues to pursue opportunities in 4 different sectors (Automotive, Fleet, Aviation, Off-road).” When do you now anticipate breakeven and will you need to raise again before then?

2. Regarding operational costs: how many people are now employed by SEE? Did operational costs increase in 2019 and by how much? How much are operational costs planned to increase in the current financial year (2020)?

3. Are you actively seeking to renegotiate the Rail contract with Progress Rail? If so, when do you expect it will be concluded?

4. Given you don’t have the cash to develop automotive, are you actively seeking a CAT-style licence deal for aviation? Do you expect it will be concluded before the calendar year end?

5. Is the monthly growth in fleet revenues sufficient to avoid any further fundraise? Can you quantify this growth?

6. Why has the relationship with Mix Telematics failed to produce much revenue? Is this likely to change in this financial year? How and why?

7. What is the number of Guardian installations you  expect to have in place by June 30, 2020. What is the monthly installation rate? Can you confirm that these are generating cash immediately? What’s the lag?

8. Re. Auto, are you now gunning for the low, mid and high end auto market?

9. Is it the case that if a budget OEM needs a cheap DMS you can provide a DMS chip with less functionality at a reduced price?

10. Are you actively working with Japanese OEMs. Have they finalised exactly how they want DMS to work? (Eg. Integrated into ADAS).

I’m far from infallible and I’m sure investors may have additional questions. Good luck to all holders!

 

The writer holds stock in Seeing Machines.