STRATECH: Key takeaways from meeting with CEO

Stratech – Key takeaways from an exclusive meeting with CEO

Dr David Chew, executive chairman of Stratech Group. Photo: www.storm.sgSome of you would remember the terrible Concorde plane crash on 25 July 2000 where Air France Flight 4590 met with an accident while departing from Paris airport.

The accident was attributed to a titanium alloy strip left behind on the runaway from the previous departing Continental Airlines DC-10. This strip was not removed as an originally scheduled runway inspection was not carried out.

This “preventable” accident caused 113 fatalities. (Source: Wikipedia)

How could the above accident be prevented? With Stratech’s iFerret system, the debris would have been spotted and removed. The system seems to be superior to other incumbents and has garnered recognition from various large airports.

After looking into the company, I decided to email Stratech to request for an exclusive meeting with Dr David Chew, its Executive Chairman. To my pleasant surprise, Dr David promptly replied (even though he was overseas) and agreed to the meeting.

My key takeaways

Potentially a US$67b market

There are more than 7,400 IATA registered commercial international airports around the world with an estimated US$67 billion market solely for Foreign object Debris (“FOD”) Detection Systems for runways. In addition, such FOD contracts have a maintenance portion where there is recurring revenue equivalent to 10% to 15% of the acquisition cost for the maintenance every year.

Moreover, according to Stratech’s management, this figure of US$67b could increase by at least 50% if other airfield surveillance capabilities are included.

FOD market is just taking off

Previously, there was no technology or / and financing for FOD market. The practice of manual FOD sweeps two to three times a day is inadequate and inefficient. With the issue of FAA Advisory Circulars (“AC”) in Sep 2009 & Sep 2010, 3 fixed base and one mobile FOD Detection systems / technologies were certified.

Table 1: Four systems certified by the FAA

Source: Various, FAA, Philip Securities

Financing mechanism / Funding is made available through the AIP (Airport Improvement Program) & PFC (Passenger Facility Charge). Airports which wish to utilize the above grants need to use one of the certified systems.

How is Stratech's system different from the other players?

With reference to Table 1 above, Stratech uses high resolution intelligent vision whereas the other three systems use radar. There is a likelihood that the use of radar technology may interfere with the performance of other equipment in the airport. Although Stratech’s system incurs higher upfront costs, it typically requires less maintenance due to its reliability, resulting in lower life cycle costs.

The iFerret contract awarded by the Dubai Airport in Jan 2014 was significant on two fronts. Firstly, according to figures from Airports Council International, Dubai Airport was the busiest airport for international travel in 2014. Thus, a contract win from such an established airport bore testament to the superiority of the iFerret system. Secondly, Stratech had beaten the Xsight FODetect and replaced the incumbent QinetiQ Tarsier.

Intellectual property valued at S$249m - S$810m vs current market capitalisation of S$51.7m

Stratech has spent more than 25 years in investing and creating intellectual property (“IP”). According to an independent valuation report conducted by Stone Forest Corporate Advisory, Stratech's IP may be worth between S$249m and S$810m. It is noteworthy that notwithstanding the recent spike in the share price, Stratech’s current market capitalization as of 15 May 2015 is S$51.7m.

Inroads to military airport & airfield surveillance

In Sep 2013, Stratech announced that its iFerret has been selected by one of the world's top air forces. iFerret is equipped with the RADAS (Rapid Airfield Damage Assessment System) capability which can rapidly detect, locate, categorise and measure the severity of damages and hazards on runways and taxiways. In peacetime, iFerret can be deployed for FOD Detection.

Stratech also won a contract from our Singapore government to upgrade the iFerret infrastructure to include airfield surveillance. This is noteworthy on two fronts. Firstly it marks the entrance of iFerret into Airfield Surveillance. Secondly, the FOD market / size of FOD contract could increase by at least 50% if other airfield surveillance capabilities are included.

Potential turnaround play

Stratech posted a net profit of S$1.4m for FY14 (financial year ends in Mar), compared with a net loss of S$9.4m for FY13. For 9MFY15, Stratech registered S$10.5m revenue and –S$1.7m loss. There is still a likelihood that Stratech may narrow its losses or become profitable in 4QFY15.

According to management, Stratech is bidding for several airport contracts and believes FY16F should be a good year, should they secure the tenders. According to The Edge Singapore weekly, Stratech is currently in negotiations to install the iFerret on six runaways at a major airport.

Valuation

According to a Philip Securities research report dated 6 May 2015,  Stratech may be able to trade between S$0.040 (steady state) to S$0.069 (high growth stage).

Chart

Since 10 Apr 2015, Stratech has appreciated around 100% from $0.016 to $0.032 today. Its recent share price performance has been spectacular. However, if we pull back the chart to a ten year period, Stratech's 10 year high and low price (after accounting for corporate actions) were approximately S$0.110 and $0.010, respectively.

Stratech seems to be consolidating between S$0.030 – 0.039 after its hefty gains. Measured eventual technical target for an upside / downside break points to S$0.048 / 0.021.

Supports and resistances are at $0.030 / $0.025 and $0.034 – 0.035 / $0.039 – 0.040 respectively.

Conclusion

This is just a brief introduction on Stratech. Readers should be cognizant of Stratech’s watchlist status, volatile share price, and dependence on the acceptance of its iFerret. However, the recent significant contract wins, coupled with the positive industry outlook should make it an interesting stock to keep on the watchlist.

P.S. Readers should refer to the company website http://www.thestratechgroup.com/ for more information and can email me at This email address is being protected from spambots. You need JavaScript enabled to view it. for the informative unrated Philip Securities research reports.

This article was recently published on Ernest Lim's (left) blog and is republished with permission