Magal is a leading homeland security technology provider, selling sensors and video products, as well as full turnkey solutions that provide the technological layer of perimeter protection around critical infrastructure. While 2018 was a strong growth year, 2019 so far has been more subdued and the stock has strongly pulled back. Given a recent uptick in bookings and backlog, combined with a resurgence of interest in border protection solutions, there is potential for renewed order growth and increasingly profitable recovery in the latter part of 2019 and beyond.
Magal provides smart technological protection of borders, airports, seaports, correctional facilities, nuclear power stations and, more recently, cannabis farms, where security is a critical requirement. Around 40% of revenues come from Magal’s product division, which sells its sensors, security cameras and video analytics to integrators, and typically sees ongoing steady growth. Magal’s solutions division executes full turnkey perimeter protection solutions for customers, but often sees lumpy revenues as projects are executed. This has been the case to date in 2019, but management expects this division to show overall long-term expansion, driven by growing global demand for security solutions.
While the company is focusing on a number of verticals for growth, it sees strong potential from current interest in border solutions, especially the US. As a market leader, Magal can demonstrate significant experience in supplying the integrators with its technology for use on borders. An example is the Israeli border, where Magal’s technology has reduced undetected infiltrations to almost zero.
Five years ago, FIMI, the largest private equity fund in Israel, acquired control of Magal to bring accelerated revenue growth and increased profitability. Magal’s relatively new management has successfully increased overall revenue levels from around $60m to c $90m. Management has also worked on stabilizing the expense level, so much of the future organic growth can drop to the bottom line. Looking ahead, management indicated in the recent Q219 call that despite a weaker first half of 2019, it had seen an uptick in bookings and the order backlog has resumed growth. Combined with renewed demand for its products, we believe there is the potential for a re-rating in Magal’s stock as the company resumes revenue growth with increased profitability in the coming quarters.