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.

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.

 

eServGlobal: M&A thoughts

FinnCap, the house broker for eServGlobal, has published a note highlighting the accelerating pace of M&A activity in the payments industry and its implications for the AIM-listed minnow.

There have been 3 big mergers so far this year in the payments industry:

  •   Fiserv’s acquisition of payments processor First Data for $22bn;
  •   Visa’s acquisition of Earthport for £200m; and
  •   Worldpay acquisition of FIS for $43bn.

In addition, after missing out in the Earthport auction, Mastercard has bought Transfast. This prompted EservGlobal to issue an RNS today in which it stated: “Transfast is a network partner of HomeSend, offering reach and connectivity principally into Africa and Latin America, together with foreign exchange and ancillary services. Network relationships are a critical element of HomeSend’s services and HomeSend continues to grow these partnerships through several regional network partners, such as Transfast, together with HomeSend’s own direct connections, to deliver across multiple markets and channels.”

FinnCap Director of Research Lorne Daniel explained: “After missing out in the Earthport auction, Mastercard has bought Transfast. We see this as augmenting not replacing HomeSend. The Transfast acquisition will augment Mastercard’s well-defined and established strategy to dominate global payments with a range of solutions. Purchasing one of the technologies underlying Mastercard Send gives greater control, adding capacity as well as reach.”

Daniel noted: “We continue to expect Mastercard to seek full control (from its current 64.31%) of HomeSend, which it continues to flag as a key platform to dominate international Account-to-Account and Business-to-Business transfers. Indeed, the recent surge in M&A activity in the segment should hasten that move.”

Daniel currently has a target price of 20p on the share.

The writer holds stock in eServGlobal.

SEE is worth over £1 a share

Ridiculous as it might sound, when Seeing Machines is currently 4p a share, I believe its intrinsic value is even now well over £1 a share. This is because it will continue to dominate the automotive driver monitoring niche for the next few years at least.

Anyway, here’s my thinking in a nutshell. I’ve based my valuation on auto alone as I think that is the real driver of value with SEE (excuse that pun!).

In his note on January 16th Jean-Marc Bunce, analyst at house broker Cenkos, revealed: “Seeing Machines has a far more conservative approach to announcing automotive revenue visibility that its competitors”.

In the note he pointed out details on the deals already done. I’ve outlined my thoughts on them here:

  • OEM 1 [General Motors] — Supercruise will be rolled out to entire range of Cadillacs (some 350,000 cars by end 2021). Thereafter, I’d expect it to go into most of GMs 10m cars.
  • OEM 2 [Mercedes] — Programme is just for its flagship S Class saloon car, equivalent to 5% of the total cars produced.
  • OEM 3 [BMW] — stated minimum contract value of USS$25m. However, BMW sells 2.3m cars a year and Fovio chip will be rolled out across the entire group.
  • OEM 4 [Ford] — F-150 is a phenomenal earner for Ford and last year Adam Jonas, the famous Morgan Stanley analyst, stated the franchise could be worth more than Ford itself. It has been estimated that Ford will is planning to produce around 1m a year of these in the future. I expect Ford will also roll it out across other car models in due course. Note that Ford produced 6.6m cars in 2017.
  • OEM 5 [Byton] — relatively small volumes but I’d expect them to grow and other premium electric cars to put Fovio into their offerings.

Imminent wins

By the end of this financial year I expect SEE to have announced wins with FCA, Volkswagen and Volvo with Toyota and probably Honda following shortly after.

Alternatively, you can gain a sense of the value of Seeing Machines auto business by looking at the macro picture. Assume 70% of cars have DMS by 2022, and SEE have at least 50% of that market, with estimated global car volumes of around 110m in 2022. If SEE received US$20 a car (blended average of Fovio selling at US$30 a chip and software at US$10) that would deliver revenues of approximately US$770m a year.

If Gen 2 Fovio can maintain pricing at US$30 a car, revenues would be nearer US$1.1bn a year. EVERY YEAR!

Then, were SEE to be sold for a Mobileye-type valuation of 42x revenues it would be worth a minimum of between US$32bn to US$46bn. Note that Mobileye sold for US$15.3bn.

Now discount that back for execution risk, meteor showers etc and even the meanest industry player would probably pay at least US$5bn (£3.6n) for its strategic value and future cash flows this year. That is about £1.50 a share from its current 4p.

I know some will say that is totally unrealistic. Still, the figures are there if you dig. It has happened before to shares with far less real value than SEE.

Takeover

But don’t worry, I anticipate that long before 2022 Seeing Machines will be bought by a huge company that does see the potential here. In any case, when SEE announces a couple more huge OEM wins (before the end of June) the price should start to appreciate substantially.

So why hasn’t it happened already? Well, I think the market has yet to catch up with reality. But the aroma of coffee is wafting inexorably towards its nose and it will wake up very, very soon.

Colin Barnden, Lead Analyst at Semicast Research wasn’t keen to be drawn on the exact valuation of Seeing Machines but did explain: “What is clear to me is no one is following the DMS market (the big investors still believe in autonomous driving at Levels 4 and 5). This will change soon enough and CES was a big step in that direction. Certainly the car OEMs are in no doubt. I think the delays have come about from the OEMs taking longer to decide which T1/T2 to use, and then rolling DMS out much faster than had been previously thought. All will be clearer by June.”

My fears of a low-ball bidder getting SEE on the cheap have now receded substantially, given the accelerating take up of its camera-based DMS into cars. Any such bid, if publicly acknowledged, would surely just ignite a bidding war.

The writer holds stock in Seeing Machines.

Cadillac extension gives Seeing Machines US$10m boost

News from Motor Authority that Cadillac is rolling out Super Cruise across its entire range of Cadillacs from the end of 2020 is very positive for Seeing Machines, as the system incorporates its Driver Monitoring System (DMS).

Cadillac

Global sales for Cadillac were 356,00 in 2017 and at approximately US$10 a car (only software being used not the chip, apparently), Seeing Machines can look forward to initial revenues with milestone payments of up to US$10m. Thereafter, annually it is likely to be less unless GM moves to a Gen 2 chip or extends the DMS to its entire range of cars.

The Super Cruise system, which enables safe hands-free semi-autonomous driving, was only this week voted the 2019 Technology of the year by Autoblog.

This extension across the entire Cadillac range is certainly materially important, so I’d expect a full RNS at some point. Personally, I think its the first stage in what eventually will be a roll-out across all GM cars. For, just as every car now has seat-belts, DMS is going to be mandated as an essential system around the world to prevent accidents from driver fatigue and inattention.

I’m also expecting confirmation, whether from news articles or RNS announcements, of several other huge auto OEM wins over the next few months.

Fleet

It’s also very encouraging to learn that First Bus, one of the UK’s leading bus operators, to deploy Guardian to numerous bus services across the UK & Ireland.

In the blog post on the Seeing Machines website (why not via an RNS?) the company revealed: “Following an extended evaluation of at the Reading RailAir coach service, running from Reading train station to Heathrow Airport, First Bus has decided to rollout the technology further across their fleet.

“Phase one of the agreement is the fit-out of Guardian to a number of services in the UK and Ireland and has begun with Glasgow Buchanan Street Bus Station to Glasgow Airport. The installation across the region will comprise a mix of retrofit to existing coaches and new builds with Guardian pre-installed. This phase is expected to cover more than 70 buses and coaches and to be completed in early 2019.”

Broker notes

I look forward to Cenkos, and yes even Canaccord Genuity, soon producing updated estimates for this year and well beyond. This is because I believe projected revenue growth over the next 3 years, led by auto, will amaze many. Moreover, contracted revenues should grow exponentially this year, led by further deals with auto manufacturers who are keen to incorporate Seeing Machines Fovio driver monitoring technology into their cars.

The writer holds stock in Seeing Machines.

Waymo good news to come

I’m convinced Waymo has chosen to use Seeing Machines Backup Driver Monitoring System (BdMS). (As predicted by “The notorious blogger” a few months ago).

This follows hints on social media, great reporting from US journalist Amir Efrati at The Information about the incorporation of a BdMS in Waymo ‘driverless’ vehicles and the reluctance of Waymo to refute suggestions that it is using Seeing Machines’ eye-tracking technology.

Oh, and let’s not forget an RNS issued by Seeing Machines on September 11th announcing its first BdMS win, which stated other customers were on the way.

Here’s the sentence from that RNS: “Seeing Machines has signed an agreement with one customer and is in advanced discussions with a number of companies at the forefront of autonomous vehicle development.”

In addition, I’m expecting much more positive contract news on the OEM front in the first quarter of 2019. Plus I’m looking forward to the launch of the Byton M-Byte SUV featuring the Fovio chip in late 2019 in China (US and Europe in 2020). What a great looking car it is.

Funding concerns

Now the share price is in the doldrums and fears of a dilutive fundraise are part of the reason.

Re. funding concerns, I think Seeing Machines will probably need more cash to service this growing demand by the end of June 2019 at the latest.

Note that Jean-Marc Bunce, analyst at house broker Cenkos, stated in a note published on September 19th that there was no immediate cash requirement and that SEE had a “clear cash runway through FY19.”

Still, he did add: “Our model indicates a cash requirement of A$15-20m in FY20, based on these projections.”

My own thinking is that when more OEMs officially come on board, cash requirements to fund that work will be needed sooner, more likely by April 2019.

I don’t see this as a negative, provided there is little or no dilution to existing shareholders. Indeed, Seeing Machines has to grab as much OEM land as possible next year.

I believe it will succeed in the doing the latter.

Funding options

Personally, I don’t think existing institutional investors will be keen to support yet another annual fundraise before more auto OEM contracts are announced. An alternative would be to trawl round new investors but why dilute existing investors with such an unimaginative move?

A CAT-style deal for fleet, with a chunky up-front payment (say A$30-50m) would be a better option.

Alternatively, a very imaginative option might be to raise some debt via a convertible bond. I noted that the new CFO, Luke Oxenham has experience of raising cash via bond issuance. Moreover, with big company experience I’m hoping he will be willing to consider big company actions.

Logically, there must have been a reason this sentence was included in the official RNS: “Luke has substantial experience of integrating business planning, business performance and capital modelling and of accessing various sources of capital from the debt and equity markets.”

Tesla used convertibles in 2014 to raise US$2bn. Twitter also recently used it to raise US$1bn according to Reuters.

So Luke, how about this? A 5-year convertible bond with a conversion price of 8p at around 6%–7% interest. (Okay, I admit the idea came from someone much smarter than me.) I’d prefer a 20p conversion price!

The writer holds stock in Seeing Machines.

Level 4 is dead, long live Seeing Machines

Here’s the latest piece of analysis from Colin Barnden, Lead Analyst at Semicast Research on Seeing Machines, Driver Monitoring Systems (DMS) and the auto industry.

“EuroNCAP has moved to 2022*. This is why contracts aren’t being announced, as OEMs and T1s have more time to do evaluations (see Hansen Report). Ironically, the delay takes away the ‘Takata penalty’ hanging over Seeing Machines. Had 2020 stood for camera DMS, pretty much every OEM would have had to go with SmartEye, other Tier 2s or the in-house Japanese Tier 1s. The first half of 2019 is likely to be busy for OEM direct wins, ready for 2022.

Level 4 is dead for mass market vehicles. The trend I see is ‘less autonomy, more DMS’ (L2/3 with DMS). That suggests to me the technically best DMS. The key part of Fovio is the hardware accelerators for real-time vision analysis (and to lower power consumption). ‘Hardware agnostic’ is a trade-off not a free ride. The significance of the 1.3 bn kms RNS in the summer is also now clear. Artificial Intelligence/Machine Learning is all about quantity of data. I see Seeing Machines even put live updates of the total on their website. This is smart.

OEMs are acutely aware of regulatory and political threats. Dieselgate was a disaster and emissions in general has been handled poorly. Now the political threat is number of road deaths (hence Vision Zero) and that issue is also being dumped on OEMs’ doormats. Waymo and robo-taxis are an existential threat, OEMs have got to find a way to reduce fatalities fast and win political points. They won’t mess up twice and DMS is the obvious way to proceed. Again that suggests technical excellence over anything. If they are smart, OEMs will ‘front run’ the politics and put DMS into everything as fast as they possibly can. There could be a huge ramp from 2023-2025. Again, a fast ramp up supports longer evaluation times and careful decisions for T1s and T2s.

That’s as far as market analysis can go. What matters now is the actual decisions OEMs make. My role is to make an argument but it is up to everyone to make their own individual decisions about how they think things will play out. No one has a crystal ball.”

*’Europe on the Move’ announced Advanced Distraction Recognition (camera-based DMS) from September 2023. EuroNCAP 5* requirements are looking like they will move to demand camera DMS about a year before.

Chris Menon holds Seeing Machines stock.

Eserve Global: a bargain share powered by Mastercard

I’ve found what I think could be a bargain share, Eserve Global (AIM: ESG). It’s price has fallen approximately 90% over the past couple of years, it’s unloved, currently loss-making and therefore ignored by most private investors. Thus, it has a ‘sucker stock’ rating from Stockopedia.

So far, so bad.

The good news is that FinnCap’s Lorne Daniel, an analyst who actually deserves that title, believes it is worth multiples of its current price. Okay, he is with the house broker but I genuinely value his views. Moreover, he tends to have a conservative bias on valuations, which means when he gets excited about the prospects for a stock I tend to take note.

In his latest note he puts a 20p price target on the stock, which is currently only 5.95p.

The main reason for investing is simply that  the Homesend joint venture, of which Eserve holds 35.69% (to Mastercard’s 64.31%) is set to become a major platform for cross-border transactions by global banks.

Cross-border payments is a  huge market and Lorne believes the HomeSend platform is applicable to around a tenth of it, making it a US$22 trillion market.

If HomeSend captures only a small fraction of that, commission payments to eserve will run into tens of millions of pounds. Logically, Mastercard won’t want to have a minority holder in the JV and will buy Eserve Global out.

This is clearly what Lorne believes, as stated in a note published on 27 September, 2018: “Success and significant earnings are now imminent, and we expect that Mastercard, a $220bn market cap global financial services giant, will be keen to secure the operation in totality.”

How much is Mastercard likely to pay? Well, Lorne Daniel states: “Mastercard shares currently trade on a P/E of 20.7x its forecast 2021 earnings. We expect HomeSend to deliver $45m of earnings in that year; worth $930m to Mastercard at present. It is entirely conceivable that Mastercard would value eServGlobal’s 35.7% stake at over $300m (£230m).”

Eserve also has its Paymobile operations valued at around £10m, which are possibly going to be sold before too long.

I’ve therefore taken a small position into what I believe could be a profitable investment over the next  6-12 months.

Of course, it’s not without risks. Mastercard could decide to be miserly about the takeout price, or it could take longer than expected to build up the transaction volumes via banks on the HomeSend platform. Yet, Mastercard appears fully committed to marketing this platform.

Nevertheless, I’d advise anyone thinking of investing to do some research. I can and do make mistakes, especially about the quality of management. Still, the Executive Chairman, John Conoley came across very well in an excellent interview with PI World.

The writer holds stock in Eserve Global.