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.

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.

Long live the King of the DMS

In a recent note from Redeye, its analyst commented that whoever wins VW or Toyota in the second half of the year will be ‘King of DMS’. He seems to think it may be Smart Eye, whereas I’m convinced it will be Seeing Machines that wins both.

I also believe Smart Eye will soon suffer the embarrassment of Volvo choosing Seeing Machines for its 2021 flagship XC90’s DMS.

Certainly, after a successful fundraise Smart Eye looks ‘strong and stable’ but as the British electorate knows only too well, the truth will out. Propaganda eventually has to give way to reality. That time has arrived for Theresa May and will very shortly arrive for Smart Eye. Tick tock.

Enough of analogies, Smart Eye even as number 2 will have its share of the cake that SEE doesn’t want. China is a big market and I wish it well there. I just hope Chinese consumers don’t take a ride in Byton’s M-Byte when it launches later this year — it features SEE’s superior DMS.

I also believe that the BMW X5 and Audi A8 will revert to Seeing Machines – for as the Beatle song Drive My Car, could have said:  ‘Using a DMS at up to 37mph is all very fine, but I can show you a better time’.

In the auto world premium means ‘the best’. In a very competitive market Audi and BMW can’t afford to look like chumps v. Mercedes when it comes to safety. That is why auto OEMs are telling, yes telling, Tier 1s to use Seeing Machines technology.

Some will naturally dispute what I’m saying. Still, let those with ears to hear, hear.

The writer holds stock in Seeing Machines.

Silver lining in a cloud of investor misery?

Following today’s news that Seeing Machines is having a deeply discounted  conditional placing and subscription to raise £27.5m, the management of the company seems to have lost both the goodwill and trust of many private investors. 

Indeed, the fact SEE couldn’t get even get a placing with existing institutional investors away at 5p tells you a lot.

It’s quite frankly shocking that the company had to offer shares at 3p in order to raise cash and follows a long series of fleet and train related mishaps that Chris Grayling would be proud of.

The only silver lining I can see is that with the expected OEM wins still to be announced it becomes a sitting duck for an opportunistic bid. My sources tell me that last year, after numerous ‘discussions’, it came close to being snapped up by Bosch for around 17p. Well, I dare say, it is still available at a knock-down price.

Anyone want a to buy a company with great tech but poor management? 10p? Anyone? 7.5p?

UPDATE

For those investors despairing tonight, I’ve some hope. Ironically it comes from house broker Cenkos who put out a note today. Analyst Jean-Marc Bunce clearly cares about his reputation and though he lowered the price target to 9p, Bunce can’t help but admit on page 15:

“Strategic value is significant – 39p at 8% discount rate

To demonstrate the significant value in the increasingly visible future cash flows from Seeing Machines’ automotive license fees, we note that a large organisation with a market average Beta of 1 would have an equity cost of capital of 8%. At an 8% cost of capital our valuation for Seeing Machines rises to 39p and we note the weighted average cost of capital for a large corporate would likely be even lower through debt financing.”

In fact, the more times I read this note the more I get the sense that it is setting out a case for SEE being sold at a particular price. We’ll see.

The writer holds stock in SEE.

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.

Seeing Machines wins strategic FCA contract estimated at US$200m

Seeing Machines has won the contract to supply US carmaker Fiat Chrysler (FCA) with its Fovio chip Driver Monitoring System, as predicted here months ago.

Ostensibly it is a US$6m contract (for Jeep or Ram, I believe) but as we all know the value is likely to end up far higher as DMS is swiftly rolled out across all its various car marques and models.

My estimate for the eventual worth of this deal is nearer to the hundreds of millions of US dollars. FCA produces 4m cars a year. Within 3 years I expect the Fovio chip to be in approximately 50% of them, say 2m cars. At US$20 a pop (volume discount from US$30) that is at least $40m a year. EVERY YEAR from 2022!

As the lifetime of a model is 5 years, my belief is that this strategic contract should end up being worth at least US$200m.

Clearly FCA couldn’t afford to let Ford with its F-150 pick-up outcompete in the premium DMS arena. They just had to have it.

I feel a twinge of sympathy for Smart Eye who at one stage hoped to win FCA. Indeed, as i believe the Tier 1 is Aptiv Seeing Machines are rubbing salt into its wounds — it is the equivalent of your partner running off with your worst enemy.

Unfortunately, Smart Eye don’t have an automotive grade chip, although they are trying to develop one. Unfortunately for them, Seeing Machines has already passed the finishing line where the US premium auto OEMs are concerned. After all it has now bagged FCA, Ford and GM.

In addition the next race has nearly been won in Europe where it will win VW to add to BMW and Mercedes and I don’t expect the result to be any different in Japan (Toyota and Honda are coming I believe).

This latest win brings an eventual bid for Seeing Machines much, much closer. So far as DMS is concerned SEE really is the next Mobileye. Indeed, I imagine the calculations I’ve roughed out will be replicated by many chip companies.

The writer holds stock in Seeing Machines.

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.