Spectra Systems Corporation, a leader in machine-readable high speed banknote authentication, brand protection technologies, and gaming security software, has announced that it has executed a comprehensive services contract with a ‘long standing' central bank customer for the development, manufacture and servicing of a sensor system. The initial development phases underpin our FY2021E estimates (with risk likely to the upside), but moreover, the balance of development work, comprising supply of sensors (estimated value up to $34m in 2024-25), servicing revenues ($7.5m) and resultant high margin material sales through to at least 2035, provides significant underpinning of future prospects. Our updated Sum-of-the-Parts valuation (reflecting higher than anticipated development revenues and margins) indicates a risked fair value of 240p (from 200p).
Companies: Spectra Systems Corporation
Spectra Systems, a leading provider of advanced technology solutions for banknote and product authentication markets, has announced a solid set of interim results. Moreover, significant H2 visibility, notably from central banking customers, yields upgrades to our FY 2020 and FY 2021 estimates with adjusted PTP increasing 17% and 16% to $5.8m and $6.1m respectively. In terms of H1 numbers, revenues increased marginally to $6.5m (H1-19: $6.4m), and adjusted pre-tax profit came in flat at $2.3m. The balance sheet retains its robust state which, even after the $4.1m FY 2019 dividend, distributed June 2020, still holds $10.9m (H1-19: $11.1m) of net cash (excluding restricted cash of $1.3m, H1-19 $1.1m). Our Sum-of-the-Parts valuation indicates a risked fair value more than 200p.
Caledonia's Q2 2020 production from its 64% owned Blanket mine in Zimbabwe was 13.5koz gold. This was an increase over the same period last year of 6.2%, leaving Caledonia with a first half production of 27.7koz – well ahead of this time last year (24.7koz) and on track to meet its 2020 full year guidance of 53-56koz (WHI etc. 55.5koz).
Spectra Systems Corporation is a provider of machine-readable high-speed banknote authentication, brand protection technologies and gaming security software. The company has announced that it has executed a new contract with a major world central bank to ‘enhance existing authentication sensors to detect a unique type of counterfeit notes'.
Companies: Spectra Systems Corp. Caledonia Mining Corp. Plc
It is disappointing that having made an impressive and validated bid to an Asian central bank at a keen price, Spectra has been underbid, at the final hurdle, irrespective of the strength of its technology, and notwithstanding its proven track record and secure production facilities. However it is important to note that (1) there is no impact on our (recently upgraded) forecasts, (2) SPSY retains a strong hand of other prospective opportunities in its $US100m-plus pipeline, (3) other, as yet unquantified, opportunities are building, and momentum has continued to be good from this perspective. We believe that refusing to chase an under-bidder was the right decision, and that this strategy will continue to be vindicated as SPSY's Level 3 technology finds its home with major and multi-year clients who value the combination of superior technology and an attractive price rather than price alone. Cash generation remains strong, with the company recently announcing an extra element to its dividend, this about to be paid to shareholders. SPSY continues to be a formidable and highly specialised provider of advanced technology solutions for banknote, product authentication, and secure lottery transactions, with $US16m cash on the balance sheet, meaningful contracted / highly visible revenues and many more opportunities.
Results ahead; forecast upgrades, special dividend, yielding 7%
SPSY has announced a strong set of results, with EBITDA and PBTA some 6% and 4% respectively ahead of our forecasts, following a succession of upgrades and some notable wins during 2019. Reflecting the strong momentum, and with forecasts well supported by firm contracts which exist independently of the current global crisis, the company is (1) trading ahead of expectations in the current year, and (2) with strong cashflow, feels confident to announce a special dividend this morning to be paid in June. With meaningful upgrades to the current year, and new, progressive, forecasts for FY2021E, the current outlook is strong at a time when this is rare for a mid-cap company; while key opportunities developed over the past eighteen months continue to be highly promising. SPSY provides advanced technology solutions for banknote, product authentication, and secure lottery transactions as a highly specialised operator, working in fields which offer valuable respite from Covid 19. Cash of $US14.3m is ahead of our expectations and some 13% ahead YoY. Well-invested and with well-controlled costs (and high gross margins), today's results provide further support for our fair value assessment, which in turn is far ahead of the current share price.
Good entry point for great business
Only marginally above levels last seen a year ago, we view shares in SPSY at the current price as representing an excellent entry point after coming off on profit taking. This was not, after all, an ordinary year for SPSY but an excellent one, characterised by upgrades, contract wins and most importantly, a significant collection of major opportunities which the company is working through and any of which has the ability to be a game changer for the business. To name a few among many: (1) potential further new work for a G7 central bank (existing client), (2) potential wins from a major Asian central bank, (3) major prospective polymer substrate contract, (4) tobacco smartphone authentication opportunities (TruBrand). As a provider of advanced technology solutions for banknote, product authentication, and secure lottery transactions, SPSY is a highly specialised producer of proprietary equipment, solutions and services, with high entry barriers to match. It is well-invested, hence the enhanced DPS in recent years; and the balance sheet is strong, with $11.1m of net cash (excluding $1.1m of restricted cash) reported with the most recent (H1) results, underpinning future growth expenditure. Importantly, our forecasts only encompass firm business prospects / established contracts. With TruBrand conducting tests in China (see above), this may have affected sentiment, but if so this is misconceived, since (a) this potential future revenue stream is immaterial or non-existent in our forecasts and (b) SPSY is not a one-trick pony – the pipeline is strong with other and major opportunities.
Companies: Spectra Systems Corp.
Spectra Systems (SPSY) – Corporate – Asian Central Bank – Into the next round | FIH Group (FIH) – Corporate – Sea-Lion newsflow – new partner underpins major spend, FIH to benefit
Companies: Spectra Systems Corp. FIH Group Plc
This morning’s announcement from SPSY of the five-year renewal of a service contract with a long-established and substantial G7 central bank client underpins yet more an already strong relationship, with the client’s use of SPSY’s materials in the future further locked in. A relatively small value agreement (though it has scope to grow), it carries, therefore, an important message. The contract relates to routine maintenance and will run for five years, layering on top of other existing service agreements with a major banknote printer with a global reach as well as additional service contracts with the G7 central bank. Spectra is a provider of advanced technology solutions for banknote, product authentication, and secure lottery transactions. As such, it is a highly specialised producer of proprietary equipment, solutions and services, with extremely high entry barriers to match. The company’s balance sheet is strong, with $11.1m (FY18: $12.6m) of net cash (excluding $1.1m of restricted cash) reported with SPSY’s H1 results last week, potentially supporting many future growth options for SPSY. This is an exciting time for SPSY, with many opportunites (detailed in our full note published September 24th).
Spectra Systems invents, develops, manufactures and markets highly specialised technology-based systems and consumables used for the authentication of banknotes and the protection of assets and products. Based in Rhode Island USA, Spectra has an enviable track record of highly visible, high margin revenues yielding consistent profitability and dividends. WH Ireland estimates capture near-term highly predictable revenue only. However each year Spectra typically receives additional orders resulting in upgrade cycles. Further, beyond our near-term estimates, Spectra is close to commercialising numerous other opportunities, with the ability to more than double the profitability of the company. This note adds more colour to those prospects. FY2020E estimates follow our tradition of being set conservatively, only incorporating existing contracted or highly probable repeat sales. Our new fair value estimate is 210p.
Spectra Systems-Interims – H2 underpinned – Record FY earnings, FV +40% to 210p | Pennant International-A river to cross, but a bridge to get them over it; strong strategic focus | Getech-Interim Results
Companies: Spectra Systems Corporation (SPSY:LON)Pennant International Group plc (PEN:LON)
Spectra is a global leader in machine-readable high-speed banknote authentication, brand protection technologies, and gaming security software. The company has announced funding approval for a $1.3m contract with a G7 central bank to deliver three advanced quality control units in 2020. In addition, a long-awaited opportunity from an Asian central bank is causing Spectra to bring forward manufacture of materials for a G7 customer into FY2019 to create anticipated in-house testing and production capacity for the Asian central bank. As a result, our profit estimates for FY2019 and FY2020 are upgraded by 13.6% and 4.5% respectively to a record $5.0m and $4.6m with further significant additional value creation opportunities beyond FY2020. The shares trade on FY2019E EV/EBITDA multiple of 9.6x, undemanding when set against other IP-led businesses. Given the continued quality of earnings, we see near-term fair value at 150p.
Caspian Sunrise (CASP) – Corporate – Interim Result | Spectra Systems (SPSY) – Corporate – New QC equipment, Asia news and PTP/EPS upgrades | i3 Energy (i3E) – Corporate – New NED
Companies: CASP SPSY I3E
As a global leader in machine-readable high-speed banknote authentication, SPSY’s achievement in developing a highly secure polymer substrate – a unique, new product – has the potential to unlock substantial commercial rewards for the company. The new product, unveiled by SPSY at the start of August together with a ten-year supply agreement to its development partner, a major polymer supplier, has now been highlighted in a key industry publication. Important points that arise are (1) the extent of the opportunity, with banknote volumes including SPSY’s feature which could top 10bn notes per year; (2) the size of the polymer substrate market, which is projected to grow nearly three-fold in the next five years; and (3) SPSY’s likely ability to use its unique (in polymer notes) Level 3 covert feature to enforce a major competitive advantage in this growing market. Although the immediate opportunity has taken the form of a partnership and supply agreement with a major company, we have not included this potential in our (conservatively-based) forecasts. Compared with many IP-led businesses, SPSY’s c.17x PE is by no means challenging, particularly if we allow for c.22p in net cash, which in turn robustly underpins our 150p fair value assessment.
Spectra is a global leader in machine-readable high-speed banknote authentication, brand protection technologies, and gaming security software. This morning’s news of a Polymer Banknote Substrate Supply Agreement is significant in that it unlocks the potential for Spectra to move up the banknote production supply chain, through the supply (but not manufacture) of polymer banknotes with Spectra’s trade secret protected materials and patent pending sensors covert technologies embedded. This product will be the first and only such substrate, opening a new and exclusive market for polymer notes. Although our current estimates are unchanged this morning, we see significant additional value creation beyond FY 2020E as a result of this announcement. The shares trade on FY2019E EV/EBITDA multiple of 12.1x, undemanding when set against other IP-led businesses. Given the continued quality of earnings, we see near-term fair value at 150p.
WANdisco (WAND) – Corporate – Highly strategic joint development programme | Spectra Systems (SPSY) – Corporate – Lottery contracts awards
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While the pandemic continues to disrupt normal economic activity, the hazardous waste market has proved relatively resilient. Augean faces a shift in challenges in H220 as North Sea decommissioning activity declines and waste flows return towards more normal levels following H120 shutdowns. Encouragingly, cash flow remains strong and we anticipate a positive net cash balance at the year end.
Companies: Augean PLC
TP Group (TPG) has announced that it has completed the disposal of its loss-making Manchester-based subsidiary (TPG Engineering Ltd) for a nominal sum of £1 to private equity firm Rcapital. This disposal will improve the group's margins, and allow it focus on its core markets. Given the uncertainty caused by the pandemic, we continue to withhold forecasts from the market, and our rating remains Under Review.
Companies: TP Group Plc
H1’20 saw a step-up in revenue driven by successful customer product launches incorporating Itaconix’ sustainable ingredients. These tend to be consumable products (e.g. dishwasher tablets), representing a solid base of recurring revenues on which to build. Today’s statement again highlights the near term goal of sustaining revenue growth to reach profitability, which the recent $2.2m fundraise should help to support. Itaconix looks set to close out FY20 in a position of relative strength with revenue momentum going into FY21.
Companies: Itaconix plc
The Group has issued a trading update ahead of its interim results due on 12th November 2020. Overall, the first half has seen a strong recovery in activity and the Board now expects to report H1 revenues and operating profit of at least $200m and $20m respectively. This is materially ahead of market expectations and with a high degree of visibility through Q3 FY2021E we are upgrading our operating profit forecasts by 39% and 25% for FY2021E and FY2022E respectively. The Group is seeing strong growth in EV charging cables and bespoke high-performance cabling solutions, and consumer electronics demand has also remained robust. Together with investment in automation and cost efficiencies, the Group operating margin is now 10%, which is a testament to management’s operational and strategic focus. The shares trade on an FY2021E EV/sales multiple of 0.9x which compares to a sector based multiple of c.1.2x for companies with comparable operating margins and growth.
Companies: Volex plc
Inspiration Healthcare has announced its H1/21A results, reporting on a period in which the company completed the transformational acquisition of SLE, supported the NHS response to COVID-19 and moved forward on its development of Project Wave. Financial results were equally strong, with revenue growth of 77% based on 25% underlying growth, acquisition contribution and NHS orders completed in the period. Further, the company has announced its maiden interim dividend. We have introduced FY22E forecasts which we believe highlight the significant undervaluation of Inspiration Healthcare shares at this time. We reiterate our Buy recommendation.
Companies: Inspiration Healthcare Group PLC
We have today released a new note on The Ince Group plc - this is the first of a series of "explainer notes" that take an in-depth look at the various aspects of the Ince investment case our investors have told us require more clarification. This edition examines the partner remuneration model - the headline for which is that this isn't discretionary bonus, it's more of a revenue share that partners are given in lieu of pay. Thus their remuneration is entirely variable, rather than representing a fixed cost.
Companies: Ince Group plc
Seeing Machines has announced that it has signed a non-binding Memorandum of Understanding with global aerospace and defence technology company L3Harris Technologies. The MOU frames the intent to enter into a global non-exclusive license agreement to enhance pilot training technology with Seeing Machines's dedicated precision eye-tracking system for flight crew training in the full flight simulator (FFS) environment. A license arrangement is currently in advanced discussions between the parties and subject to the negotiation and execution of definitive, binding licensing and other legal agreements. Further announcements regarding the progress of the negotiations in relation to such binding documentation will be made when appropriate.
Companies: Seeing Machines Limited
As legendary investor Warren Buffet succinctly puts it: “it is better to buy great companies at fair prices, rather than fair companies at great prices”. Today, we think Mpac has done exactly that by acquiring Ohio based Switchback Group, Inc. for a maximum of $15m in cash (£11.4m). Equivalent to modest takeover multiples of 7.1x EV/EBIT and 1.1x EV/sales – with $13m of the consideration paid upfront, and the rest structured as a $2m earnout depending on EBITDA performance over the next 24 months.
Companies: Mpac Group PLC
XP Power’s Q3 trading update confirmed that production volumes grew rapidly in its Asian facilities, allowing the company to satisfy some of the orders placed in H120. As expected, bookings returned to a more normal level in Q3. XP reported 28% y-o-y growth in revenues for Q3, prompting upgrades to our FY20/21 revenue and EPS forecasts. The company also announced that CEO Duncan Penny will retire at the end of the year, to be replaced by current CFO Gavin Griggs from 1 January 2021.
Companies: XP Power Ltd.
OPG has produced a strong set of full year results. Revenue increased 9.5% YoY to £154.0m whilst strong free cash flow generation enabled material debt repayments. Post period end, the Group continued to make debt repayments and favourably refinanced a portion of its debt. Management swiftly implemented a COVID-19 cost reduction strategy and capitalised on financial stimulus provided by the Government and the Reserve Bank of India. Importantly, September 2020 showed signs of a recovery as Chennai plant load factors increased to 63% (H1/21A 46%). We believe the long-term structural growth dynamics in the Indian power production sector remain compelling.
Companies: OPG Power Ventures Plc
Rolls-Royce reported a better-than-expected set of FY19 results, beating expectations on the operating profit and FCF lines. The performance was largely driven by Aerospace. Management reaffirmed its £1bn FCF guidance for 2020. We were given litle detail about the 2019-nCoV outbreak, except an unquantified impact on air traffic growth in the near term. All in all, a good development in H2 19, but uncertainties remain in our view.
Companies: Rolls-Royce Holdings plc
OTAQ has reported impressive FY2020 results ahead of expectations, with revenue increasing +117% to £3.42m (2019: £1.58m) and +73% organically. Within this, Aquaculture continued its impressive growth at +43% with £1.9m from product rentals and a further £0.2m from product sales while the new divisions Offshore contributed £0.62m and Connectors £0.70m. The Group's Sealfence product increased its market-leading position in Scotland to a 40%+ share and has made inroads into the sizable Chilean market (c.6x the size of Scotland) with c.150 units on rental at year end. In Scotland, OTAQ has rapidly rolled out its Sealfence product with units deployed increasing from 12 in March 2016 to 1,014 at March 2020. The Group is focused on innovation and R&D to broaden the Company's reach through the development of an active biomass measurement system and a plankton/ algal bloom early detection system which would sit alongside Sealfence in a 'one-stop shop', cloud-based solution for farmers. We take confidence from the recurring revenue model of the Sealfence product and believe the Group can continue to win market share in the key Scottish (currently 40%+ share) and Chilean (currently 1.4% share) markets.
Companies: OTAQ plc
Strix has published reassuring interims and announced the acquisition of LAICA, conditional upon approval from the Council of Ministers in Italy. Against a backdrop of global disruption caused by COVID 19, Strix’s H1 performance is in line with expectations. Net sales down 21% YoY, with a much smaller impact on net profits on the back of strong cost management. Encouragingly, FY 20 profit expectations are now underpinned, at around £28.9m PAT. Taking into account the LAICA deal, we provisionally upgrade FY 21 PAT/EPS by 6%. The shares are already up materially YTD, but the Strix growth story remains compelling.
Companies: Strix Group PLC
Powerhouse Energy’s interim results reflect a period of major progress with the company now on a more stable financial footing and development of the company’s first DMG waste-to-hydrogen project now underway. Powerhouse has laid the foundations to take its technology to commercial reality in our view.
Companies: Powerhouse Energy Group PLC
TP Group (TPG) delivered robust organic growth of 13% during H1/20A. However, the impact of COVID-19, together with increased investment and a shift in business mix, meant that Adj EBITDA reduced by £0.9m YoY to £1.4m. TPG has today announced it is in advanced discussions to dispose of its non-core oil and gas focused engineering business. Despite the strong and expanding order book, COVID-19 continues to create uncertainty around the timing of contract deliveries. As such, our forecasts remain withdrawn and our rating Under Review.