Growing broker coverage for Seeing Machines

Seeing Machines is picking up more broker coverage from quality analysts as it nears an inflection point from growing license fee income from autos and trucks. Berenberg today issued an initiation note with a ‘Buy’ recommendation and a price target of 12p, while Peel Hunt has also tipped SEE. 

Berenberg 12p target

While Berenberg’s price target is quite conservative, the arguments and conclusions contained within the note were reassuring as they confirmed that:

  • Seeing Machines has the “best-in-class DMS technology among peers”.
  • Aftermarket (Fleet) product is a hidden gem. “Guardian…is considered a top product by customers such as Shell, Caterpillar and National Express, who say it has significantly reduced their traffic accidents and cut their transport insurance premiums.”
  • Stellar growth from auto license fees is a near certainty. “As we expect royalty revenues to more than double yoy from 2022E up until 2025E (c113% CAGR), we see an inflection point for the OEM business and for SEE. To top it off, all the revenue projected up until 2024 has already been awarded (ie as long as the cars are manufactured, SEE will hit these revenue forecasts).” 

This extract from the Berenberg note is worth quoting at length:

OEM business (c60% of 2025E sales) at an inflection point: SEE receives royalty revenue each time a car using its DMS technology is produced. We expect this revenue to more than double every year from 2022E to 2025E (c113% CAGR) based mostly on contracts already awarded. This is, however, assuming just a 33% win rate for SEE and a c25% drop in per-car royalty revenue over 2022-25E. Our channel checks provide a high level of confidence that the group has unparalleled DMS technology, with capabilities to power other smart car features as well (eg occupant monitoring), which along with the regulatory tailwinds mandating DMS should bring about an inflection point for the group’s OEM business. In a blue-sky scenario where SEE has a higher win rate (60% by 2025E) and maintains pricing power (by releasing more features), we see c65%/95% upside to our 2025E group base-case top-line/gross profit estimates. With SEE winning 46% of recent bids, the blue-sky scenario is within reach.”

Note that in its base case for 2025, Berenberg has sales at A$137m and gross profit at A$84m.

In the blue-sky case, Berenberg has sales at A$225m and gross profit at A$163m.

Personally, I expect upward revisions to this very soon as my base case is 70%.

Peel Hunt tips Seeing Machines

Separately, Peel Hunt analysts in their regular ‘Tech: Bits & Bytes’ note recommended Seeing Machines as “a pick-and-shovel play for the smartification of transport”.  

They added: “Seeing Machines is finally starting to see non-NRE OEM revenue’s come through. As the OEM engagements evolve, ARM-like high margin royalty revenue streams should unlock for Seeing Machines.”

Seeing Machines now has broker coverage from Stifel (house), Cenkos, Panmure Gordon and Berenberg, while it is clear that Peel Hunt is clearly following the story closely. As Seeing Machines picks up more auto contracts and grows fleet, not to mention Aviation (and possibly starts to move into other markets, such as marine), I believe this will re-rate. 

Yes, SEE is well down with market jitters. Yet, I’m more convinced than ever that Seeing Machines is likely to be the subject of a bid within the next few months. There is no need for it to show a profit as the coming revenues and profits are clearly coming as license fees ramp up.

Ukraine

As to Ukraine, I think there is scope for negotiation that will reduce tension provided the US and NATO stop trying to bully Russia in its own backyard, using Ukraine as a stick (though that stick got a bit smaller yesterday). Tariq Ali has written great analysis in the New Left Review that puts the recent moves in perspective – though you won’t see him being interviewed on any mainstream media news outlet in the UK.

I’m certainly concerned about a proper stock market crash later this year, as inflation concerns give way to deflation and the growing realisation that only debt is holding the wider stock market up. So Seeing Machines, my advice is to get the deal done by June.

The writer holds stock in Seeing Machines.

Toyota or bid announcement?

The good news for investors in Seeing Machines is that I’m hearing from multiple sources that Seeing Machines is set to win a contract with Toyota next.

Apparently, it’s the only driver monitoring system (DMS) that is being specified in multiple Tier 1 bids – as was the case with the big BMW win recently. If true – and I see no reason to doubt my sources’ information – it just goes to further reinforce the global domination of Seeing Machines’ Fovio DMS in the auto industry.

Bid coming?

For that reason, I’m not surprised that there are now 10 market makers for the company on the London Stock Exchange, up from 4 a year ago. Most recently, Berenberg have started broking them. The better news is that I think this German bank may be acquiring shares for a company that plans to bid for Seeing Machines.

I could be wrong about that last assumption: Berenberg may be buying for a German fund. Nevertheless, various sources are warning of an imminent low ball bid – somewhere around 25p-30p a share for Seeing Machines. 

Some of my sources believe it is a Tier 1 auto supplier, others discount that theory. Interestingly, when asked about this in a previous interview back in March, Ken Kroeger did tease: “I agree it is either someone like that who can see the full value or a really diverse Tier 2 or Tier 1, as opposed to the OEM.”

While traders might be impressed by that figure, anyone with any knowledge of the auto industry and even an average understanding of Seeing Machines proven technological global dominance in driver monitoring systems shouldn’t be.

If such a bid should materialise I’ve been told by multiple sources that certain chip manufacturers (Intel/Nvidia, Xilinx and Qualcomm) would most likely be prepared to offer a lot more than a measly 30p. So I fully expect a competitive bidding situation to materialise if the rumour turns out to be fact.

Seeing Machines house brokers haven’t issued any upgrades in a long while. Still, based purely on old figures from Canaccord Genuity’s Caspar Trenchard note of Jan 9, (which excludes any figures for the huge Ford win as well as the big BMW win) it must be worth at least 59p a share. That is 30 times forecast revenues for 2019 of A$79.5m = 59p a share.

You could even argue that SEE should be on a higher multiple, such as the 42 times revenue multiple that Intel paid for Mobileye when it went for US$15.3bn. That would equate to roughly 83p a share for Seeing Machines. (This obviously ignores any value for Fleet, Rail and the Caterpillar business).

Yet, the strategic importance of Seeing Machines to the future of transport (never mind vision for robotics) will have been noted far and wide. In such a situation, I’ve been told that the chip companies are often prepared to pay up without months of haggling over the odd US$1bn. It’s small change to them when global domination is at stake.

Even Apple and Alphabet (parent of Waymo) can surely see the sense in DMS, so for what is petty cash for them they could also come in.

The writer holds shares in Seeing Machines.