Battle of the Titans draws ever closer

I’m glad to finally get confirmation from Seeing Machines that the Mercedes S Class contains its driver monitoring system. Especially, as this website was the first to reveal this 4 years ago. The additional models announced today are all good news too.

Okay, we all know about NDAs and lead times in the auto industry by now but, as the deadline for mandatory DMS in Europe nears, SEE is clearly benefitting from a rush for its tech from OEMs.

The good news is that there is a growing pipeline of auto wins that I expect over the next 6 months,  My firm view is that Seeing Machines will (eventually) be in a position to announce wins with VW (and Audi), Toyota, Honda, Subaru, Volvo etc. etc.

Seeing Machines has effectively crushed the opposition and with the help of Qualcomm and Xilinx is scaling up its auto operations beyond the expectations of many.

It’s also making huge strides in getting its technology into the real world via Fleet and Aviation. More on that in due course.

My view is that overall it’s heading for A$1bn+ turnover by 2025. Of course, until the news is ‘official’ and house brokers have put the numbers out, there will be justifiable scepticism. Still, the exact number is less important than the massive revenue and profit acceleration path it is forging. That is now becoming increasingly clear to a host of sweet-toothed companies that would love to acquire a de-risked jam factory.

That is why I expect there to be a massive battle to acquire SEE well before 2025. By late 2022, early 2023, I reckon.

The leading runners and riders will doubtless include some or all of the following:

Expect at least one left field bidder, who could even start the auction off with an opportunistic bid.

As to the price? Well, my minimum is £1 a share. My maximum is £4 by 2023.

A warning: I could be completely wrong. After all, maybe it really was blind luck that I guessed about the Mercedes S Class back in 2017. Moreover, circumstances and stock markets can change quite rapidly, defying conclusions based on fairly accurate analysis.

If you’re in two minds about this you have to ask yourself one question: “Do you feel lucky?”

“Well do you punk?”  (2m 11sec)

In any case, do your own research before investing.

The writer holds stock in Seeing Machines.

 

 

 

 

 

Why Seeing Machines is grossly undervalued

Long term holders of Seeing Machines are well aware that it is the global leader in Driver/Occupant Monitoring and seems set to take a 60-75%, chunk of the automotive market driver/occupant monitoring by 2026.

Now estimates of the size of the light vehicle automotive market by this date do differ but not hugely. IHS estimates 110m light vehicles will be sold annually by 2026. Cenkos estimates 112m and a penetration rate for DMS of 67%, with Seeing Machines estimated to win 38% market share in calendar year 2026 producing an annual revenue figure of A$248m from auto alone. (You can see this information on Page 8 of its note issued on 2 February 2021).

Cenkos has a price target of 16p, which certainly appears miserly given the massive revenues that are coming further down the line. The reason for this is two-fold:

  • Firstly, Cenkos has applied a discount rate of 11.5% on its future guaranteed cash flows from vehicles in which Seeing Machines’ DMS and OMS is to appear.
  • Secondly, Cenkios can’t provide figures for RFQs that are expected to be won this year and the cars in which it will appear with Qualcomm. That’s fair enough although Cenkos has admitted that the figures against contracts already signed are minimum amounts and quite likely to increase at least 3 times.

Discount rate to fall

This year, as auto contracts are won – and they will be won – I’d expect a double whammy to significantly increase the Cenkos target price as future guaranteed revenues rise and its discount rate falls.

I’d argue that even now a discount rate of 7% based purely on the conservative (how I dislike that word) figures from Cenkos would be more appropriate given the quantum of risk. Were that to be applied, the price target from Cenkos would be nearer 40p right now.

[For the purposes of simplicity I’ve ignored the accelerating revenues from its driver monitoring as a service Guardian products that feature in trucks. I’ve also ignored its products in aviation — though, they’re expected to be very significant in time.]

Despite the po-faced analytical rigour adopted by many analysts  when discussing equity risk premiums it’s hardly an exact science, more of an art.  The disparate factors you need to take into account are the stuff of which academic careers are made. And anyone who doubts the complexity in modelling them should read this paper by Aswath Damodaran.

Conclusion

What I’m trying to convey is that Seeing Machines is grossly undervalued currently and, though I expect it to hit 40p this year as Cenkos ups its price target due to increased future auto revenues and a reduced risk rate, I don’t expect it to hit fair value even then.

Only when people realise Seeing Machines’ market share is going to be in the 60%-75% region and that it is likely to be bought for many billions as Mobileye was (US$15.3bn), will Seeing Machines price come close to matching its intrinsic value.

My guess is that uninformed observers will wonder in awe as Seeing Machines’ share price accelerates over the coming 12 months. My view is that it’s all very predictable if only you’d conducted sufficient research.

The writer holds stock in Seeing Machines.

Has Airbus consortium won Aussie contract?

I woke up this morning with a hunch, luckily nothing to do with an uncomfortable mattress, due to my subconscious putting together a jigsaw puzzle that I wasn’t aware I was even attempting to construct.

I’m wondering if the next piece of news that Seeing Machines will announce is that the Airbus-led consortium, to which it belongs, has been chosen to deliver a fleet of specially adapted H145M attack helicopters to the Aussie Special Forces.

If true, It’s not earth-shattering news but would further validate the importance of its pilot monitoring technology in the aviation sector.

In time, this technology may feature in flying cars and also spacecraft. All, additional reasons why the Battle of the Titans, may be kicked off by a bid from either Qualcomm or Intel in order to dominate the automotive space.

Quite aside from the prospects of a bumper pay-day for investors, the sheer long-term potential of Seeing Machines’ technology excites me.

Personally, I’d love to read an interview with one of the founders of Seeing Machines, Tim Edwards. As one of the visionaries behind the company he is probably best suited to explain how  eventually giving robots the ability to recognise and understand human emotions is going to change our world forever. It would be quite something if he eventually shared his insights in an article or, better still, a book.

The writer holds stock in Seeing Machines

Wameja low-ball takeover by Mastercard

Well done holders of Wameja who held onto this stock and who have received a bid from Mastercard, albeit at a very low-ball price of 8p, well short of its 20p valuation from FinnCap. That is the price of holding only a minority interest, I guess.

Holders should hold on for the time being for 2 reasons:

  • 1) They won’t lose 0.5p a share as the offer price from market makers is currently 7.5p,
  • 2)  I noted the wording in the RNS today: “In the absence of a superior proposal” the bid has been accepted. There may be a slim chance Visa could come in to frustrate the process and set off a bidding war.

I hope long term holders of WJA as well as readers of my blog made some money out of this  stock, as Wameja was mentioned on Safestocks as a takeover play. However, it would be remiss of me not to acknowledge that FinnCap analyst Lorne Daniel put me onto it with his excellent analysis.

Lessons for Seeing Machines

There are lessons from this for private investors (and even management) in Seeing Machines, I believe.

Firstly, Lombard Odier, which holds 23.45% has accepted the Wameja offer. I do hope Seeing Machines is eventually taken out at a healthier premium. However, at its current price it remains vulnerable, particularly as Lombard Odier, via Volantis 1798, holds a jumbo 19.9%.

This also has lessons for holders of any share; there is an opportunity cost for holding a stock for years and years in the hope of a bumper pay day.

The writer holds stock in Wameja and Seeing Machines.

 

React cleans up after Covid-19

In an exclusive interview with Safestocks, Shaun Doak CEO of AIM minnow React (AIM:REAT) reveals that this specialist cleaning and decontamination company has benefitted from the high demand for its decontamination and infection control services to eliminate the virus responsible for the coronavirus.

Currently, React is carrying out Covid-19 decontamination clean-ups from everything from police vehicles to offices to manufacturing plants. “I can’t give you much detail, because it’s commercially sensitive IP, however the way we carry out our decontaminations is lot more thorough than many of our competitors, that is for sure. We do ‘before’ and ‘after’ testing to ensure we have decontaminated property to a high standard and certify swabbed areas are clear from traces of the virusWe use the correct chemicals and equip our operators beyond the standards required to ensure their health & safety. We set ourselves apart by doing things the right way.”

He continues: “Just to give you a little flavour of that, we do a lot of Covid-19 decontaminations that have already been decontaminated, allegedly, 2-3 days before. But they haven’t been done properly. The ATP-testing we apply hasn’t been done, which we do in order to certify the property as clear.

Not only have its 90 staff been working flat out to meet demand for its specialist decontamination services but he also foresees that this pandemic may alter the mindset of people as to the importance of regular deep cleaning. “We’ve all worked in offices that have never experienced a deep clean but I think that moving forwards things may be very different. I think it has to be.”

“Once lockdown is relaxed I think there will be an increased sensitivity towards hygiene in the workplace.  More specifically, there will likely be pushback from employees that won’t readily wish to go back to their place of work until the premises have been decontaminated. That may not necessarily be a Covid-19 decontamination, it may be just a deep clean. However, any incidents of property being exposed to the virus will be dealt with rapidly until such time that COVID-19 no longer remains a threat. That is certainly some of the information I am receiving from customers out there, anyway.”

Indeed, just as London bus drivers have hit out at lack of protection and are demanding that their buses are properly deep cleaned, it would be surprising if employees (especially unionised ones) across the whole of the UK don’t want to ensure premises are safe before returning to work after the lockdown. Indeed, I believe employers will wish to eliminate the risks to their employees, visitors and the business of repeat infections as a result of contaminated property.

For its part, React provides its employees the best PPE equipment available and certainly to a higher standard than your average deep cleaner, as Doak explains. “When Covid-19 reared its ugly head, people who were working on contract work for us, including  hospital work and rail sector, we went above and  beyond Public Health England and the World Health Organisation requirements to protect our staff. The reason I did that was firstly, I have a background in construction and place a heavy focus on health and safety. Secondly, we are only as good as the staff out there carrying out their job. As a brand we have a strong reputation for the excellent standard of work carried out by our staff. The last thing I wanted to do was to risk exposing them to danger in any shape or form.”

React goes after difficult work with decent margins and therefore its employees are also paid well, which certainly seems fair and makes for a well-motivated workforce. “We pay our specialist operatives well, a lot higher than most would appreciate, but we appreciate what they do is unpleasant stuff that no one else wants to do.

Beyond Covid-19

Doak is at pains to stress that React is not just a provider of Covid-19 decontamination services. “We are not just a Covid-19 clean-up company, we are a specialist deep cleaner. I believe the best out there.”

“We carry out specialist cleaning and decontamination work that other companies just don’t want to, or aren’t qualified to do. Because of that our customers value what we do and pay us appropriately. Likewise, we pay our staff well and appropriate for the specialist work they carry out.”

Thus, it gets involved in everything from deep cleaning within the healthcare sector, hospital trusts, cleaning up after road traffic accidents, picnic sites after a bank holiday, huge fly tips by the side of the road, drug dens knee-deep in needles, flea invested properties as well as train fatality clean ups for the majority of train companies. All of this takes place right across England, Scotland and Wales using its partnership/sub-contractor network.

It is also important to appreciate that the React business is divided into 2 parts: of approximately equal size of revenues; reactive cleaning services – which is supporting the deep cleaning requirements; and regular maintenance services.

What has become clear with the £500k contract in the rail sector that was won in January is that React is now able to leverage relationships that it has built up, to be a one-stop shop for a variety of complex cleaning jobs, a sort of facilities management house for specialist cleaning services. 

I therefore believe that the increase in demand for its services isn’t just a flash in the pan and that it is set to be profitable from here on in — something of a rarity for a growth stock.

This company is flying beneath the radar of most investors, both because of its tiny £3m market cap and the lack of forecasts in the market. That said, it is expected to be profitable at the interims and for the full year. As it said in a Trading Update RNS published on April 6th: “At the start of the financial year, which runs to 30 September 2020, management expectations had been for the business to move into profitability after reporting annual losses for the last four-years.  Recent trading, notably in March, has been ahead of management expectations and as result the Group is likely to have delivered a small operating profit in the six months to 31 March 2020, which puts the Group in a good position to meet or exceed management expectations for the full year.”

Another positive is that aside from CEO Shaun Doak, who appears to be doing a fine job selling the services of the company with some big contract wins recently, there appears to be a surprising amount of in-depth management expertise within this micro-cap. These include a new Financial Director and a new Operations Manager. 

In summary, React is much more than a Covid-19 play and I believe the business will continue to grow profitably. As it does, the share price should appreciate substantially. Indeed, in time, I’d hope to see a dividend.

The writer holds stock in React.

The bad, the good and the ugly

Seeing Machines put out a half year trading update yesterday that for entertainment value rivalled a Spaghetti Western. All that was lacking was a thumping soundtrack by Ennio Morricone, though many investors’ racing hearts would have supplied that as they read the announcement and accompanying broker note.

Certainly, the update was a slight disappointment, albeit a massive improvement on the first half a year earlier.

The Bad

Although the company’s guidance for the full year to June 30th 2020 remains unchanged, house broker Cenkos (in a note littered with errors – see page 3) took the opportunity to downgrade revenue projections, increase losses, indicate that SEE could need cash by end of financial year 2021, all while lowering its valuation to 11.4p from 12.1p. No wonder the price dropped!

Here are the changes for the current financial year:

  • Estimated revenues for financial year 2020 reduced from A$47.5m to A$45.5m.
  • Adjusted pre-tax loss increased to A$39.2m from A$35.9m

In FY 2021, according to Jean-Marc Bunce’s own figures this leads to a funding shortfall of A$4.4m.

The concern in investors minds must therefore be how might SEE deal with this if these figures turn out to be accurate? It’s certainly worth keeping an eye on.

The good

Still, both SEE and Cenkos hint that it may be a problem that will soon find a solution. After all, Seeing Machines “remains in advance (sic) discussions with parties for a licensing deal” say Cenkos, quoting Paul McGlone. It assumed that this is for aviation and cranes/ferries but may also be for gaming via Qualcomm.

There are also long overdue OEM auto deals that haven’t yet been announced that I believe SEE has won as well as many more due this year. For example, I’m in the camp that believes SEE have already won Volvo and I am hoping that Veoneer will announce a win its forthcoming quarterly update.

Thus, while panicked investors and canny traders have recently been selling, an announcement on a material deal that puts to bed funding concerns will see a huge and immediate rise in the share price. That is surely why Volantis 1798 have been buying up shares as weak hands let go. They are big and active investors and seek to make huge gains. I expect them to continue buying up to 19.99% and obtain a boardroom seat.

I am sure that they, like me, believe See is fundamentally undervalued and potentially worth billions. Those who doubt this statement need to do more research and then decide for themselves. In the words of Warren Buffett: “Price is what you pay; value is what you get.”

The ugly

I don’t believe Paul McGone would risk his reputation saying deals are expected if they weren’t coming. He has already lost some credibility with the delay over the ‘imminent’ Aviation licensing deal. As a result he can’t be said yet to be ‘walking the walk’, although fleet does seem to be largely fixed. If SEE fails to close the Aviation deal and announce some OEM wins in the next 3 months, he’ll be looking as if he is walking like Max Wall (watch from 3m 50secs). The best option then might be to follow in the footsteps of previous management and say, ‘Auf Wiedersehen’.

What annoys me is the lack of transparency as per the fleet 20k installations saga.  I also don’t like the underplaying of contract sizes and Seeing Machines’ likely share of the automotive market. Yet, stealth has its advantages when your share price makes you vulnerable to a low-ball bid. 

The writer holds stock in Seeing Machines

DMS requirement to become law in EU

I can now confirm that the new European Union ‘General Safety Regulation’ rules are set to enter into force in January/February 2020, then start applying 30 months later.

The process, I’ve been told by an EU spokesperson, is as follows:

  1. The Council of the EU decides to adopt by accepting the European Parliament’s (EP) amendments to the Commission Proposal (8th November)
  2. Then the act is signed by the President of the EP and the General Secretary of the Council in the week beginning 25th November.
  3. Within a month it gets published in the Official Journal of the EU.  The act in this case provides that it enters into force (obtains legal existence) 20 days after publication in the OJ.

The act also provides for a 30-month transitional period for most provisions, which means it will only start to apply 30 months after entry into force.

Note: the exact date(s) will be known only once the act has been published in the OJ as all deadlines depend on that date.

2020 the year of DMS

Enough of EU procedures: the good news is that from 2020 there will be a legal requirement for all completely new car models to have systems to monitor drivers for drowsiness and also distraction by June 2022, while even refreshed models will have to comply by 2024.

Euro NCAP, which has traditionally set car safety standards well beyond legislative requirements, is pushing equally hard for advanced driver monitoring. It is developing test and assessment protocols that will be introduced at the beginning of 2021. Moreover, requirements to measure driver distraction and fatigue/drowsiness will be built into Euro NCAP’s 5 star safety ratings from 2022.

Thatcham Research, is also working with Euro NCAP to develop testing protocols to ensure future cars have effective driver monitoring systems.

While these regulations and standards are intended to be ‘technology neutral’, it is now obvious that the only technology that can effectively meet these requirements is camera-based DMS.

This is very positive news for Seeing Machines, in particular, and I’m expecting some big auto contracts to be announced soon.

The writer still holds SEE stock!

CAT-style Aviation licence deal is coming

The announcement by Seeing Machines that it is collaborating with Alaska Airlines is significant as it underlines its intention to extract value from its leadership position in this niche of the Aviation market.

In a note issued today by house broker Cenkos, analyst John-Marc Bunce reiterated Seeing Machines’ determination to sign a CAT-style license agreement with two major aviation simulator manufacturers.

Bunce wrote: “With Seeing Machines many years ahead of its nearest rival in this sector, it is looking like the company could be in a strong negotiating position in discussions with the two major simulator manufacturers for a license. We believe a successful outcome could include an upfront payment as well as a value driven or recurring royalty element.”

It doesn’t require too much detective work to find out who these two are likely to be but, as I don’t want to prejudice any final negotiation or comms plan, I’ll avoid speculating publicly for the time being.

Such a deal should certainly bring forward breakeven and act as a catalyst for a significant re-rating. This is before the announcement of further auto OEM auto wins in Europe — never mind Japan.

The writer holds stock in Seeing Machines

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.