This is not investment advice. Do your own research before taking a position in any of the securities mentioned in the post below. The author may hold positions in any of the securities mentioned.
So, what do these guys do?
AVA Risk is an ASX-listed technology business that provides risk management services for logistics/storage and high-value assets (e.g., defence areas or data centres).
I do not profess to understand the technology, however, essentially AVA design, make, and distribute security systems, and biometric pass readers for customers in 60 countries (notably the US). There are three parts to this business: Future Fibre Technologies (FFT) and BQT Solutions (BQT), and the soon-to-be sold Ava services division.
Why are they worth looking at?
Before I go any further, I want to explain that I am not an investor in AVA Risk; simply because a) the small size of FFT/BQT revenue makes it too small for me and b) whilst they have patents over their technology they did not invent fibre optic sensoring so there are competitors who do it slightly differently overseas
Despite that being the case, I wanted to highlight that they have some favourable financials & governance factors:
Sales cliff is offset by a good cash balance: after winning the Indian Ministry of Defence (IMOD) deal - they have the credibility to win other meaningful deals. Even if AVA face a short-term "revenue cliff" from the roll-off of that contract they have plenty of cash runway (+$47m as Jun'21 including business sale). Revenue/cash for IMOD below
Buyback: In Aug’21, they bought back c.10% of their shares (always a plus) for $12m
Reasonable asset backing: It currently trades at 2x NAV assuming (Jun’21 NAV adjusted for sale = $70m - $12m buyback = $58m) vs. market capitalisation of $114m
Ok pricing of future earnings: Despite losing $7m of future earnings from the services sale; they’re likely to make $7m or 16x P/E assuming no major customer wins/losses
Future Fibre Technologies (FFT) - The main engine for earnings
FTT part is where a fibreoptic cable is placed around whatever is trying to be protected (e.g. a fence or gas pipeline) with beams of light running through a cable. If an intrusion does occur (e.g. an excavator digging near a pipeline), this will cause vibrations and AVA’s sensors can pinpoint the precise location of the intrusion and send this information to a central control room to alert authorities of the intrusion.
This is the biggest part of their business and some of their customers are pretty decent in size (e.g. Defence, Energy companies, Aerospace)
Believe it or not; their growth play is conveyor belts & SaaS
Industrial conveyor belts are long (>5km) and have high outage costs if the source of the problem is not identified. With the same fibreoptic technology the use with other customers, faults in conveyor belts are able to be precisely identified
The company thinks this conveyor belt tech (Aura IQ) has a TAM of $300m and that the current sales pipeline for Aura IQ consists of over 50 sites ($50 million over the first 3 years).
Note - concerningly - they have had a JV with Mining3 for two years now and not got any sales from the tech but I can assume this tech needs a lot of testing.
Another area where they are hoping to monetise is the software that stops the technology from sending off "false alarms" all the time (e.g. when it rains). This tech is called FOSS 5.0. Best to wait and see if this software has any traction as it is brand new, however, it will likely be a small/sticky source of cash
BQT Solutions - Smaller & lower margin but profitable
In terms of revenue generation, BQT Solutions is AVA’s smallest segment. It is responsible for the design/manufacturing of biometric cards/readers. Unlike the licencing model, these products are manufactured in Aus and typically generate a lower gross margin of around 45-60%.
Like most of their tech; it is quite confidential so investors have to take a punt that their customer base justifies the technology
Why I decided to write about AVA
If you had the technical skills to properly understand AVA's technology, which I do not, you can see the need for their product. Governments are spending big to protect cyberinfrastructure (e.g. Aus plans on spending $1.67bn over 10 years) and whilst there are big players in cybersecurity - there are not many players in this space.
In the near term, I do not think the IMOD revenue cliff is serious (because they have plenty of cash) but I do think they will have to fill this with the conveyer belt revenue/SaaS income to bridge the loss of the services business
So in conclusion:
There is a structural tailwind for this company (security) but you have to take a high-risk punt on them filling the revenue of the sold services business
They have patents, but arguably this does not stop them from having competition because they don't own fibre-optic intrusion technology
The company is not very liquid and you cannot take comfort in there being notable small-cap funds on the register (if that matters!) although management is mostly in their Top 20 shareholders
Comments