React should benefit from coronavirus concerns

With today’s announcement by Prime Minister Boris Johnson that the spread of coronavirus in the UK “will get worse before it gets better” the impact of this global pandemic is starting to be felt here in the UK.

As the number of infected people hits 40, businesses are losing contracts, the stock market is falling, schools are closing and there is a general air of unease as the Government attempts to stop the spread of this virus.

Yet, it isn’t all doom and gloom, particularly for savvy investors.

Golden opportunity

For those seeking a hitherto overlooked stock that can benefit from measures to prevent the spread of Coronavirus, yet offers downside protection when the virus is eventually subdued, React could provide a golden opportunity.

Although this specialist cleaning company has almost tripled in price since first tipped here last year, the impact of the coronavirus means that its specialist deep cleaning services to eradicate infection in schools, hospitals, businesses and public transport will be very much in demand. For example, it has been reported that 15 schools have closed, all of which are likely to require deep cleaning.

The quality of React’s deep cleaning was recognised as recently as February when it was awarded a £121k contract to deep clean a prestigious health sector site in central London over a 7-month period. It also is experienced in maintaining high standards of hospital hygiene.

Admittedly, there isn’t even a broker note on the company but it is backed by two big funds, Helium Rising Stars (23.74%) and Octopus Investments (18.52).

Turnover for the year ended 30 September 2019 was £3.10m (2018: £3.30m) as unprofitable work was discontinued. Gross margins were 750-basis points higher at 28.5% (2018: 21.0%) and operating performance has materially improved to a loss of £183,000 (2018: loss of £1,951,000).

Investors should note that it is fairly illiquid, so that even slight buying/selling can move the price significantly.

At only 0.8p at the time of writing, React is definitely worth some deep research.

The writer holds stock in React.

Winner Wameja overlooked in market meltdown

Finally, the market is starting to wake up to the fact that stock markets are over-valued. It could be said that the Emperor (I have this crazy image of Donald Trump in  my mind) has sneezed and people can finally see he is sick and stark naked. Unfortunately, even when the Coronavirus scare is over he will still be naked, whatever he does with those golden locks of his.

What should investors do? Hold their nerve and go for value, not stocks pumped up on false expectations. A competent, trustworthy management is also key.

Wameja overlooked

One of the companies I’m keenest on is Wameja. Under the skilled management of John Conoley it has made the transition to a fintech in the lucrative payments space. It has a 35.68% stake in a global platform called Homesend, which is used by Mastercard under the name ‘Mastercard Send’ as a cross-border payments platform.

This platform is used by Paypal and Bank of America, as well as dozens of other banks in a multi-trillion dollar market. Volumes are starting to ramp up as is clear from the latest set of Key Performance Indicators.

Lorne Daniel, Director of Research at house broker FinnCap, has previously written how it is has effectively been de-risked as an investment. In his latest note, published today, he writes: “We continue to see this business as hugely valuable to Mastercard. Its recent Q4 results revealed that cross-border volumes were up 16%, continuing a trend of mid-teen% growth, and representing revenue of $1.4bn (of a $4.4bn total). In an analyst call, Mastercard management said it sees double-digit cross-border growth across most of its regions. And had “good, solid, steady performance” coming out of the US. In Middle East, Africa, and Asia Pacific it continues to see solid growth. It also noted Bank of America will now use Mastercard Send – based on HomeSend – for their business to consumer card disbursements in the US on an exclusive basis.”

He then concludes: “Cross border remains a key area of growth for the US financials giant. Mastercard shares currently trade on a multiple of 28x 2022E earnings. Wameja’s share of the HS earnings in that year would be €3.6m, valuing that stake on simply financial benefit at over €100m or £85m. Beyond that, there is the value of full control over a key element of its digital money strategy as well as greater confidentiality (since Wameja’s public listing somewhat exposes HS performance). We remain confident that Mastercard will bid a substantial sum for that stake, whether or not it is the final buyer.”

In spite of volatile markets  I expect this to be bought this year for at least Lorne’s Daniel’s price target of 20p, perhaps significantly higher.

Of course, I could be wrong so any investor should do their own research.

The writer holds stock in Wameja.

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

Seeing Machines storms CES

All the news coming out of CES is very positive for Seeing Machines and I’m more confident than ever that it’s on target to take 75% of the global DMS market over the next few years. (Naturally, Seeing Machines itself and its broker Cenkos prefer to state a target of 30-40% publicly).

The tie-up with Qualcomm was probably the highlight of the show for me and it’s great to hear that they’re both working with a “global premium automaker”. It has been suggested it is a new OEM, if it is I assume a more detailed RNS will eventually be published.

Yet the partnership with Qualcomm, apparently at the latter’s instigation, may also be much more significant than many realise. It opens the possibility of marrying industry leading eye-tracking with chips that can go inside mobile devices and VR/AR headsets. It is potentially a huge opportunity and some speculate that a lucrative licence deal is possible for Seeing Machines. (If so, let’s hope it arrives sooner than the “imminent” Aviation licencing deal that we are still waiting for!).

Further out, robots/cars should soon be capable of displaying empathy using eye-tracking that can also interpret cognitive load/read facial gestures.

With EU safety legislation now law, and other countries set to follow Europe’s lead, the near-term future is increasingly bright for SEE. Indeed, this is a company that should be worth billions right now.

Volvo

Strangely, though, there has been silence re. Volvo. My industry contacts tell me it has finally decided who will be supplying its DMS and I’m pretty confident it will be Seeing Machines as it’s the only system that can accurately tell if a driver is incapacitated – a feature teased by Volvo in early 2019.

I expect it will first feature in the 2021/22 Volvo XC90 but Volvo are staying tight lipped as are Seeing Machines and the likely Tier 1, Bosch.

While the share price has been motoring, the next trading update (expected in a week or so) should provide further proof that fleet is set to comfortably beat full-year estimates.

This is a stock on the move and I’m increasingly confident that a huge re-rating is just a matter of weeks away.

The writer holds stock in Seeing Machines.

Seeing Machines to surprise on upside

I spoke with 2 fund managers last week about Seeing Machines. I won’t reveal their names here but what they said reinforced my opinion that the revelation that fleet is well and truly fixed, coupled with proof that breakeven is imminent (when the Aviation licensing deal is signed), will really move the share price in the very near future.

The first fund manager knew and liked Seeing Machines but, because he runs a large fund, can’t invest in companies below a £200m market cap. 

The second fund manager used to hold Seeing Machines but sold because it appeared to have too many issues and there was no sign of breakeven. 

Their views are probably replicated ten times over with other fund managers, which means that there is a large weight of money ready and willing to come into SEE once it effectively communicates the fact that fleet is fixed and breakeven is coming very soon.

Admittedly, there must also be holders who have lost patience, particularly as the company appears to be in no rush to provide detailed updates on the progress on Fleet. I’m personally tired of hearing the figure of 16,000 fleet installations given out for months on end.

Fleet

My own view, as revealed at the CMD, is that Fleet installations must be at least 20,000 right now. It’s therefore great to discover that this figure appears to be correct, since it has been published on the website of Seeing Machines’ Latin American distributor in Chile. It has on its homepage the words: “Guardian salva vidas en mas de 30 paises del mundo monitoreando mas de 20.000 vehiculos en tiempo real.” Translated into english it means: “Guardian saves lives in more than 30 countries in the world by monitoring more than 20,000 vehicles in real time.”

Screen Shot 2019-11-21 at 13.58.00

Given this is the case, why isn’t Seeing Machines communicating this to investors and the wider market? Moreover, why isn’t Cenkos upgrading its projections?

Instead, the market is still being provided with the laughable estimate from Cenkos that fleet will only deliver revenue of A$20.9m for the full year 2020, based on uber conservative numbers that are even below Seeing Machines unrealistically low estimate of 27k-30k installations.

This is what Cenkos wrote in its note of 23 September, 2019 “….our Fleet connection forecasts are based on connections below the guidance of 27k-30k”.

One might reasonably ask for these projections to be updated. Still the questions remains, why haven’t they been updated? Okay, Cenkos is the house broker and is pretty dependent on Seeing Machines for a steer, so why haven’t they had it?

Reading an old blog post on Safestocks, I was reminded how management priorities differ from those of private investors.

There is an additional reason, I believe. Naturally, a prudent new CEO wants to have something up their sleeve to impress the market. Let’s not forget that Seeing Machines has disappointed investors many times over the past 5 years. The onus really is on him to deliver and keep on delivering.

The good news is that I think that is what is in store for investors in Seeing Machines. In short I expect fleet upgrades by the interims (at the latest) and then again for the finals.  Forget estimates of 27k-30k fleet units for this financial year, backed by uber conservative figures from Cenkos. The actual figures for installations should be nearer the 35k mark, which will blow away the existing estimates.

In addition, I expect such upgrades to be preceded by an RNS announcing an aviation licensing deal with with L3 Harris and/or CAE, that provides an upfront payment and ongoing royalties. If it lives up to the billing from Paul McGlone in a recent interview I expect it to bring forward breakeven from the end of calendar year 2021 to June 2020 this financial year.

That news, when eventually delivered, will cause a huge re-rating as IIs, who’ve lost interest or sat on the sidelines, jump into this stock.

For long suffering investors in Seeing Machines vindication is close at hand.

The writer holds stock in Seeing Machines.

The Pretenders are dead, long live the King of DMS

At yesterday’s Capital Markets Day for Seeing Machines it was standing room only, as Colin Barden an independent analyst at Semicast Research presented the news that investors in Seeing Machines have long waited to hear: though the coronation has been delayed, it will be the King of DMS.

It was hard news for rivals but, in one slide, Barnden presented his projections for the market shares come 2022. He estimates 40-45% for Seeing Machines, followed by 15-20% for Mitsubishi Electric. All other rivals are left lagging far, far behind, with Smart Eye in particular estimated at 5-7%.

That said, I saw no evidence of complacency from the Seeing Machines staff, quite the reverse. McGlone, in particular, came across as a man determined to deliver profitable growth. He certainly doesn’t look like the sort of guy who will let a rival eat his lunch.

Paul McGlone, CEO, Seeing Machines

Paul McGlone, CEO, Seeing Machines

The growing interest in its DMS technology was clear from the host of analysts I met at the event: Sanjay Jha of Panmure Gordon, Lorne Daniel at FinnCap, Caspar Trenchard at Canaccord Genuity and even one from Steifel (there may well have been others). I’m sure the house broker Cenkos was represented but house analyst Jean-Marc Bunce was the invisible man on this occasion.

Fleet

Probably, a wise decision on Bunce’s part as I’ve been trying to find out why he’s taken such a conservative stance on fleet. In his note dated 23rd September he states on page 1: “We believe the guidance for 27-30k connections at the end of FY20 is conservative and underpinned by a strong pipeline.”

Yet on page 4, he contradicts this, becoming ultra conservative, when he writes: “….our Fleet connection forecasts are based on connections below the guidance of 27-30k”.

I wondered why he decided to do this and also upon what number of fleet connections he actually based his projected revenue figure of A$20.9m? By my calculations to arrive at A$20.9m he must have used less than 18,000 installations, which does appear excessively low.

Yesterday the new CEO, Paul McGlone was in combative mood as he faced down attempts to extract projections on the number of Fleet sales for 2020, sticking to guidance of 27-30k. He even declined to provide a current figure. I assume this is because Seeing Machines hopes to upgrade at the interims and doesn’t want to spoil the surprise. Personally, I don’t particularly like surprises even to the upside.

The reduction in the unit cost of Gen 2 Guardian by 21% announced yesterday must surely drive increased uptake from fleets as will the increasing number of distributors and deals with insurers.

Mike Lenne, the Human Factors expert who heads up Fleet does appear to be its secret weapon when it comes to persuading Fleets to use their technology to improve safety. HIs calm, analytical approach should pay dividends and puts Seeing Machines in a league of its own.

It was the first time I’ve met Tim Edwards, one of the original brains behind the technology along with fellow co-founder of the company Sebastien Rougeaux. Edwards comes across as a very modest man, particularly for a genius who jointly developed this life-saving technology.

Aviation

While CEO McGlone and Pat Nolan, who heads up Aviation, were chided slightly for building up expectations re. an aviation licensing deal with CAE and L3 Harris, I got the impression such a deal is at most a 2-3 months away. We’ll see I guess. The great news is that end users (such as Alaska Airlines) are now requesting that manufacturers of full flight simulators now have eye-tracking from Seeing Machines.

Auto

As for Nick DiFiore, who heads up Auto, I’m expecting him to deliver a lot. Volvo for one, VW for another pretty soon. Followed by Japanese OEMs. Oem decision-making has been the main reason for delays up to this point but See does appear remarkably well positioned with Xilinx to grab market share from Nvidia and Mobileye. The fact that Fovio can identify an incapacitated driver makes it a shoo-in for Volvo and parent Geely may well have decided it needs it too.

The US market really needs to hear this in its own accent and so it was good to be told by Paul McGlone that it will be getting a US broker. I do hope it is Morgan Stanley. I’ve long wished to read/hear Adam Jonas extol the virtues of Seeing Machines.

Overall then, while I would have liked more opportunity and time for detailed questions, I feel that further patience will be handsomely rewarded here. Of course, every investor should do their own research.

The writer holds stock in Seeing Machines.

SEE: when will you deliver for investors?

I’ve tried being subtle, not that it suits me. Still the question now needs to be asked, when will Seeing Machines start delivering, instead of taking from its investors?

I’m concerned that the management of Seeing Machines has long forgotten that it runs the company not for itself but for its investors. This was brought home to me by a quick look at the latest Annual Report.

A case in point is the huge payment that Ex-CEO Ken Kroeger received last year: A$654K (£347K), revealed on page 47. That’s great pay considering the share price plummeted 75%. Admittedly, AIM CEOs are well known for paying themselves well regardless of performance, but (as a shareholder) I find this instance especially outrageous.

Nor does it end there, as staff recently received huge share bonuses for work over the same period. Clearly, management aren’t sharing the pain with us long-term investors.

I’d hoped that new CEO Paul McGlone would chart a new path but I don’t see it yet. Here are 3 issues I personally have:

  • There still seems to be no discernible PR strategy in place. For example, SEE has a fancy US PR firm that don’t seem able to generate mass coverage for what is an easy sell to editors; car tech that saves lives. As a case in point, when I tried to get some simple answers to some obvious questions about their RNS on Alaska Airlines recently they failed to deliver. Am I being singled out for special treatment or are all journalists treated so poorly?
  • Lack of transparency for shares awards to the CEO; why have no targets been set and communicated via RNS? This is how SEE do it. This is how another AIM company, Parity did it. Take a look at page 17 of Seeing Machines’ annual report to learn about a remuneration policy with no policy.
  • Lack of disclosure re. relationships with partners. For example, what is going on with Mix Telematics and why aren’t we being told? It’s been years since a contract was signed and we still have yet to see it bear any fruit. Hiding behind NDAs just looks weak.

I hope next week at the Capital Markets Day the management under new CEO Paul McGlone will adjust course and address longstanding investor concerns about the lack of transparency and poor news flow. After all, investing should work for the many, not the few.

This isn’t meant to knock the staff of Seeing Machines or its technology. I have the highest respect for the brilliant technology coming out of this company and the dedication of the majority of its staff to delivering life-saving technology to the masses. I just want more transparency and better execution from management.

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.