STRATECH: "Value could be 4 - 6.9 cents," says Phillip Securities

Excerpts from analyst's report

Phillip Securities Research analyst: Richard Leow, CFTe

» iFerret appears to be gaining traction with new contract wins. » Share price has risen 63.2% since we first highlighted the stock six months ago. » No stock rating provided, but we look at relative valuation of Stratech compared to global peers.

What is the news?
We first highlighted Stratech in our report on 12 November 2014. Since then, the stock price had dipped 31.6%, subsequently recovered and has now pushed to new highs. The stock price has risen 63.2% from when we first highlighted the stock six months ago. We summarise the recent developments since our last report.

 February 2015: Announced contract to install iFerret at Hong Kong International Airport (HKIA).
 April 2015: Restructured from Stratech Systems Ltd to The Stratech Group Ltd. Announced contract to upgrade the iFerret at Changi Airport which is estimated to contribute S$1.7 million revenue.

Investment Thesis 
 Aviation safety coming under greater scrutiny. Global air traffic forecasted to grow 4.5% CAGR until 2030 (Source: ICAO). Recent aviation tragedies will likely place pressure on Aviation Authorities to tighten up on safety.
 Adoption is inevitable, just a matter of time. The most high-profile FOD-related accident involved an Air France Concorde taking off from Paris in July 2000. FOD damage is estimated to cost US$4 billion annually from aircraft repairs & maintenance, and up to US$13 billion annually. (Source: FAA)
 Key product of the iFerret appears to be gaining traction. Stratech recently announced two contracts. One for the installation of the iFerret at HKIA, and the upgrade of the iFerret at Changi Airport. The iFerret had also displaced the incumbent system at the Dubai International Airport last year.

Investment Merits
 Oligopoly market structure with high barriers to entry. With a few players in the market, competition will inevitably be less intense than in a highly fragmented market.
 Superior technology over competitors. The iFerret could become the de facto standard globally at both civil airports and military airbases.

Investment Actions
We do not provide a rating but we look at two scenarios and possible values of the stock. Contingent on the successful adoption of the iFerret globally, Stratech's stock value could range from 4.0 Cents (steady state) to 6.9 Cents (high-growth stage) based on P/B valuation methodology.