Seeing Machines 061217...Seeing Machines* 6 December 2017 The Eyes have it 3 Investment case Prior to this £35m placing, Seeing Machines (SM) has received in excess of £35m investment

*Denotes corporate client of finnCap . This research cannot be classified as objective under finnCap research policy. Visit www.finncap.com

The Eyes have it CORP

On the back of the recent extremely positive newsflow, the group has raised an additional A$61m from equity to accelerate the development of the technology product and platform, expand global infrastructure and provide working capital headroom. Crucially, the contract award from a second OEM demonstrated that Seeing Machines (SM) has a credible DMS solution for the global automotive industry and is likely to win a significant share of a huge global market. Equity investors are now beginning to appreciate the scale of the opportunity and the true value of this business. To date, enthusiasm and valuation have been tempered by a relatively heavy investment programme for AIM and an obvious funding gap with likely dilution. We adjust our forecasts to reflect the post-placing investment; however, it clears that final hurdle and opens a path for SM to achieve its remarkable potential. We also highlight upside from a potential re-rating.

Automotive OEM: We are confident of long-term success in the huge automotive OEM market following the contract from a second OEM, evidencing that SM is a leading player in automotive DMS and is likely to secure a significant share of the imminent global deployment of this technology. Regulatory and safety bodies are encouraging DMS adoption in new vehicles by 2020 and the three-year design period should see other contract announcements in FY 2018.

Fleet: The aftermarket business is steadily growing through direct sales and through channels (regional distributors and telematics partners). With few competitors, it is beginning to work with the insurance industry and building a base of recurring high-margin monthly revenue. The working capital requirement is being reduced by factoring, and the costs of hardware and monitoring are being sharply cut by improved technology, increasing margins and the return on investment. Fleet is on track for profit from FY 2020, thereafter supporting the OEM business to its own profitability.

FY 2018 will be heavily H2-weighted. We expect c.70% of FY 2018 revenue from Fleet and a further 70% of that to come in H2 due to the inherent bias in the model exacerbated by the introduction of second-generation devices in H2.

Achieving the TP: This funding removes the last hurdle to SM achieving its global aspirations and accordingly we retain our TP despite the 33% dilution.

Seeing Machines*

6 December 2017

Ticker SEE

Price 5.6p

Target Price 12.0p

Upside 113.0%

Market Cap* £122.7m

Market AIM

Sector Tech Hardware & Equipment

Net Cash* A$80.0m

Shares in Issue* 2,191.7m

Next Results Interims in February

What's changed From To

Adj. EPS (FD) -1.6c n/c

Recommendation

Target Price 12.0p n/c

*post placing Share Price Performance

Source: Thomson Reuters

% 1M 3M 12M

Actual -8.2 +79.9 +36.3

Company Description Development of innovative vision-based human/machine interfaces Analyst:

Lorne Daniel 020 7220 0545 [email protected] Sales:

Rhys Williams 020 7220 0522 [email protected] Stephen Joseph 020 7220 0520 [email protected] Tony Quirke 020 7220 0517 [email protected] Sunila de Silva 020 7220 0521 [email protected] Malar Velaigam 020 7220 0526 [email protected] Sales Traders: 020 7220 0531

STX 73240

Year ending June (A$m) 2016A 2017A 2018E 2019E 2020E

Data

Sales (A$m) 33.6 13.6 40.6 81.9 141.0

Adj EBITDA (A$m) -1.4 -25.5 -30.2 -12.6 25.1

Adj PBT (A$m) -0.9 -26.3 -32.6 -15.2 22.1

Tax rate (%) nm nm 0 0 nm

Adj EPS (FD) (c) -0.1 -2.2 -1.6 -0.7 1.0

DPS (c) 0.0 0.0 0.0 0.0 0.0

Ratios

EV/Sales (x) 3.7 9.3 3.1 1.5 0.9

EV/EBITDA (x) n/a n/a n/a n/a 5.0

P/E (x) n/a n/a n/a n/a 9.8

Yield (%) 0.0 0.0 0.0 0.0 0.0

Cash flow yield (%) -5.1 -13.4 -26.1 -16.7 11.8

EPS growth (%) 94.0 1,895.4 25.2 57.2 245.5

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Dec Mar Jun Sep Dec Mar Jun Sep Dec

Seeing Machines* 6 December 2017 The Eyes have it

2

Key Financials

Income Statement Cash Flow


Sales 33.6 13.6 40.6 81.9 141.0

Gross profit 27.3 0.1 16.0 43.4 88.9

Operating expenses -28.7 -25.6 -46.2 -56.0 -63.8

Adjusted EBITDA -1.4 -25.5 -30.2 -12.6 25.1

Depreciation/Amortisation -0.9 -1.3 -2.5 -2.5 -2.8

Adjusted EBIT -2.3 -26.8 -32.7 -15.1 22.3

Associates/Other 0.0 0.0 0.0 0.0 0.0

Net interest 1.4 0.5 0.1 -0.1 -0.2

Adjusted PBT -0.9 -26.3 -32.6 -15.2 22.1

Adjustments -0.7 -2.3 -2.0 -2.0 -2.0

Reported PBT -1.6 -28.5 -34.6 -17.2 20.1

Taxation 0.0 -1.1 0.0 0.0 0.0


Reported earnings -1.7 -29.7 -34.6 -17.2 20.1

Average no.shares (FD) 981.7 1,264 2,011 2,186 2,186

Adj. EPS (FD) (c) -0.1 -2.2 -1.6 -0.7 1.0

DPS (c) 0.0 0.0 0.0 0.0 0.0


EBITDA -1.4 -25.5 -30.2 -12.6 25.1

Net change in working capital -5.0 8.9 -3.0 -10.0 -15.5

Other items 0.0 0.0 2.0 3.0 13.0

Operating cash flow -6.4 -16.6 -31.2 -19.6 22.6

Cash interest 1.4 0.1 0.1 -0.1 -0.2

Tax paid 0.0 -1.1 0.0 0.0 0.0

Capex -2.5 -2.2 -7.5 -5.0 -5.0

Free cash flow -7.6 -19.9 -38.6 -24.7 17.4

Disposals -1.1 0.0 0.0 0.0 0.0

Acquisitions 0.0 0.0 0.0 0.0 0.0

Dividends 0.0 0.0 0.0 0.0 0.0

Other -1.7 -1.6 0.0 0.0 0.0

Issue of share capital/(Buyback) 13.2 25.9 57.8 0.0 0.0

Net Change in cash flow 2.7 4.5 19.1 -24.7 17.4

Opening net (debt)/cash 14.4 17.1 21.6 40.7 16.0

Closing net (debt)/cash 17.1 21.6 40.7 16.0 33.4

Balance Sheet Ratio Analysis


Tangible assets 0.7 1.0 2.5 2.5 2.5

Goodwill 0.0 0.0 0.0 0.0 0.0

Other intangible 10.7 7.0 10.5 13.0 15.2

Other 0.1 0.1 0.1 0.1 0.1

Non current assets 11.5 8.1 13.1 15.6 17.8

Inventories 8.4 0.7 1.0 2.1 3.8

Trade receivables 6.8 7.6 10.6 20.5 35.8

Cash 16.9 21.4 40.6 15.9 33.3

Other 1.0 8.8 8.8 8.8 8.8

Current assets 33.1 38.6 61.0 47.3 81.7

Trade payables -1.8 -5.6 -5.9 -6.9 -8.5

Other current liabilities -2.4 -3.5 -5.5 -8.5 -21.5

Short term debt 0.0 0.0 0.0 0.0 0.0

Net current assets 28.9 29.5 49.6 31.9 51.8

Long term debt 0.0 0.0 0.0 0.0 0.0

Pension 0.0 0.0 0.0 0.0 0.0

Other/Minorities 0.0 0.0 0.0 0.0 0.0

Net assets 40.4 37.6 62.7 47.5 69.6

Net working capital 13.4 2.7 5.7 15.7 31.2

NAV per share (c) 3.8 2.5 2.9 2.2 3.2

NTA per share (c) 2.8 2.1 2.4 1.6 2.5

Year ending June 2016A 2017A 2018E 2019E 2020E

Growth

Revenue growth (%) 161.0 -59.6 199.5 101.6 72.2

EBITDA growth (%) 90.3 1,687 18.6 58.3 299.3

EPS growth (%) 94.0 1,895 25.2 57.2 245.5

DPS growth (%) n/a n/a n/a n/a n/a

Returns

Gross margin (%) 81.3 0.6 39.3 53.0 63.0

EBITDA margin (%) n/a n/a n/a n/a 17.8

EBIT margin (%) n/a n/a n/a n/a 15.8

RoE (%) n/a n/a n/a n/a 28.9

RoCE (%) n/a n/a n/a n/a 32.0

Liquidity

Net debt/equity (%) n/a n/a n/a n/a n/a

Net debt/EBITDA (x) 12.0 0.8 1.3 1.3 n/a

Interest cover (x) nm nm nm nm 125.5

Net working capital to sales (%) 39.9 19.7 14.0 19.1 22.1

Cash conversion (%) 533.1 78.0 127.8 196.1 69.3

Dividend cover (x) n/a n/a n/a n/a n/a


3

Investment case Prior to this £35m placing, Seeing Machines (SM) has received in excess of £35m investment from equity investors in the past five years – funding which has taken it to the brink of success and opened a wealth of opportunities across multiple markets. Successful delivery on exciting prospects appears ever closer, as its varied business segments mature and crystallise revenue and profit. Over the long term, the automotive OEM application remains one of the largest and most lucrative opportunities, yet it is notorious for high cost of development and length of time to payback. Success there requires deep pockets and much patience, but its ultimate value is demonstrated by Intel’s US$15.3bn purchase of a comparable automotive vision specialist, Mobileye, on a striking multiple of 42x sales. FY 2017 saw continued heavy investment in the product and infrastructure for a growing international operation. The adj. LBITDA of A$25.5m led to A$19.9m cash outflow offset by an A$25.9m equity injection. This left A$22.0m net cash in June. However, with the continued expansion we estimate the business has a cash burn of c.A$3.0m pm and on its previous funding level our forecasts showed very little working capital headroom, margin for slippage or investment resource. SM required the additional funding to provide confidence and secure its huge market opportunities. With additional funding, we expect two more years of heavy cash outflows from investment: c.A$40m in FY 2018 and c.A$25m in FY 2019 before positive cash flow of over A$15m in FY 2020, building rapidly thereafter from recurring high-margin Guardian monitoring fees, augmented by a growing royalty stream from automotive OEM.

Revised expectations post funding

Source: Company reports, finnCap estimates (1AUD to 0.6 GBP)

Following the placing, expected losses in FY 2018 and FY 2019 will be exacerbated by working capital requirements and capex, leading to a cash nadir of c.A$16m in June 2019 before generating cash in H1 2020 and thereafter. SM has recently enjoyed a raft of good newsflow, mainly in the automotive OEM market, but spanning all areas of operation: Driver Monitoring Systems (DMS) becoming critical for Euro NCAP rating; a second major OEM contract; a new Tier-1 supplier collaboration; new telematics partnerships and rapidly growing Total Contract Value (TCV) for Guardian with a huge pipeline of business as it

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6

Automotive OEM The past 18 months has been a remarkable period for SM’s automotive OEM business and its Fovio platform; impressive and encouraging newsflow culminating in that crucial second OEM commitment:

The 1st-generation DMS chip (SiP) has been launched and in time it will become core to the group's OEM and aftermarket offering across multiple markets;

The automotive OEM business has been retained and self-funded within the group, without losing IP to external investors in a spin-off;

Exclusivity with Takata has formally been terminated, allowing SM to work with multiple other Tier-1 suppliers, notably Autoliv, a global leader in automotive safety systems;

SM is supplying over 100 systems for trials and development with more than 20 OEMs and Tier-1 suppliers, representing an estimated 40% of current global automotive production;

Rental, consultancy and engineering fees are steadily building, ahead of major royalty streams from FY 2020;

The original firmware solution with Takata is now on the road in GM’s semi-autonomous Cadillac CT6 and is contracted for use in eight future higher-volume GM models, due from 2020; and

A second major OEM (a premium German brand) has also selected Fovio for volume deployment commencing in 2020. This indicates that it will eventually be used in a wide range of marques and models; the market leader in DMS, it will eventually see widespread use in the global automotive industry.

This newsflow convinces us that although the OEM automotive business has absorbed significant investment, it will ultimately deliver on huge potential and it is worthwhile investing additional resources to see it through. Growing demand for DMS

Improving technology is seeing Advanced Driver Assistance Systems (ADAS) becoming standard equipment in new vehicles. With growing threat and incidence of distraction from mobiles and other devices, DMS is rapidly becoming crucial ADAS functionality, and is eventually likely to be mandated. There is a growing risk of serious accidents from diminishing driver vigilance due to mobile device usage and complacency from increased autonomous capability.

Drivers who use mobile phones have been found by researchers to be four times more likely to be involved in a crash resulting in injury. 1

In 2016, motor vehicle-related crashes on U.S. highways claimed 37,461 lives and research shows that 94% of serious crashes are due to human error.2

In 2015, out of 1,469 fatal crashes in Great Britain, police recorded 400 incidences of the contributory factor of ‘failure to look’ and a further 101

1 Role of mobile phones in motor vehicle crashes resulting in hospital attendance, University of Western Australia 2005 2 NHTSA

A standout period for the automotive OEM business

DMS is a crucial element of ADAS

Increased risk


7

incidences of the contributory factors of driver in-vehicle distractions, distractions outside the vehicle, and phone use.3

Of 11,000 drivers observed in a study in St Albans, 1 in 6 were found to be engaged in a distracting activity, such as talking on a phone. The study found younger drivers more likely to be engaged in distracting activities.4

As vehicles offer greater autonomy and ADAS, driver concentration and awareness naturally declines. Yet for the foreseeable future, technology cannot offer full autonomy and still requires driver attention.

To deal with this, automotive and transport regulatory, rating and investigative bodies around the world have begun to issue new recommendations for DMS as an integral part of new vehicle designs; both Euro NCAP and the US NTSB are recommending imminent deployment of advanced DMS technology. Euro NCAP highlighted DMS as a key criterion in its stars safety classification; from 2020, if an OEM wants a five-star rating for a new model it will need to incorporate a DMS. The global market for DMS is now forecast to reach 64.8m units by 2020.5 There are various DMS solutions but vision-based real-time eye/gaze/face-monitoring is proving by far the most useful and reliable form. The technology eliminates the need for complex sensors built into seats and steering wheels, or biometric sensors that require physical contact with the driver. DMS was first introduced in 2006 with Toyota’s innovative Driver Attention Monitoring System in luxury Lexus models, which used an integrated dashboard camera to monitor the driver’s face. Other OEMs followed with their own DMS systems, but these typically monitored inputs on the vehicle (steering / pedals) rather than the driver. Early examples include: the Driver Attention Monitoring System (Toyota); Attention-Assist (Mercedes-Benz); Driver Alert System (Volkswagen); and the first standard fit DMS – Driver Alert System (Volvo). DMS will help to reduce the obvious risks associated with the migration to Autonomous Vehicles (AV). Technology is not yet sufficient for a vehicle to cope with all of the issues encountered (bad weather, poor street marking and signage, off-road parking etc.) and effective DMS is essential to ensure that drivers remain sufficiently engaged and/or ready to re-assume control as and when required. This is increasingly likely to be enshrined in legislation as AV capability becomes more common. Even the fully autonomous (level 5) vehicles of the far future, will require occupant monitoring systems (OMS) for safety and convenience. There are just two specialist sub-system suppliers of eye-tracking DMS technology; SM is the clear market leader, with Swedish competitor Smart Eye AB trailing in both technology and market position. We note that Smart Eye recently announced a contract to supply its eye-tracking software to a non-German OEM (thought to be JLR) to be included in a range of 13 car models. Smart Eye was involved in several pilots (notably with Delphi) while SM was tied into its Takata exclusivity. With that exclusivity ended, SM is now able to engage with all Tier-1s in true competition.

3 Reported road casualties Great Britain in 2015, Department for Transport 4 A roadside study of observable driver distractions, Cranfield University, 2014 5 ABI Research

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11

both its technology stack and market position. Notably, Smart Eye claimed dominance with German OEMs shortly prior to SM announcing a contract with a premium brand German OEM, and the majority of its design-ins comes from just one OEM (thought to be Indian OEM, JLR). We believe that SM's vast depth of real-world experience, and its development of a SoC solution, set it significantly ahead of Smart Eye. Nevertheless, there is plenty of room in this huge market for both and we doubt that the industry would accept a single source supplier. Tobii

Another Swedish supplier of eye-tracking technology, Stockholm-based Tobii, (TOBII) has three units facing different markets: Assistive Communication (for the disabled); Human Behavior (research); and Consumer Electronics (mainly gaming and VR but also DMS for vehicles). It claims to have developed an eye-tracking SoC solution similar to SM. Tobii is a large business with c$100m sales; however its technology has been developed for internal rather than external environments. It has struggled for any traction in automotive and its most recent application is tracking the attention of potential buyers in Toyota car showrooms. We do not believe that it will gain serious market share. Harman

In February, Samsung purchased automotive audio/electronics supplier, Harman International. In early 2016, Harman announced a pupil-based, eye and pupil-tracking DMS measuring cognitive load and mental multitasking, which signals the car’s other safety systems to adapt to the driver’s state. However, it is reportedly based on SM technology and in any case there has been little further news on it. iMotions

A Danish company founded in 2005, iMotions developed a software platform for eye tracking aimed at the research market. It offers its Attention Tool: eye-tracking software for marketers, market researchers, media and advertising agencies, universities, etc. with no cross-over in SM's markets. Larger technology players

Google acquired Eyefluence, a 2013 start-up in the Augmented/ Virtual Reality market (headsets/eyewear). Eyefluence tracks the eye to pre-empt intention and can tell if the user is afraid, amused, elated or aroused. Microsoft is also experimenting with a built-in eye-tracking support and an experience called Eye Control, inspired from the winning MS hackathon project in 2014. It allows the disabled to use an eye tracker to operate a mouse, keyboard and text-to-speech. Again, neither have crossover with SM’s operations. The case for the automotive OEM investment

Supplying solutions to the automotive OEM industry is undoubtedly expensive and usually takes many years to see returns, but it also offers huge upside to those with sufficient backing and patience. While the forecast R&D spend seems heavy in the present scale of the company and indeed the AIM market, it is minimal – a comparative shoestring budget – by the scale of the global automotive industry.

Also worth noting the larger technology players

Current investment is slight compared to industry


12

Mobileye, a developer of vision-based ADAS solutions, spent >US$65m on R&D last year (probably c.$10m higher due to offset NRE) and has spent almost US$200m over the past six years. In contrast, SM has spent less than US$18m on R&D across FY 2015, FY 2016 and H1 2017 – a pittance in comparison.

Mobileye R&D spending

Source: finnCap

The automotive industry as a whole spends over $100bn annually on R&D:

Automotive industry R&D spending

Source: PWC Innovation 1000 study

The upside of this investment will be an extremely valuable share in the global automotive industry. Global vehicle production is comfortably on track for annual production of 100m units and at an estimated c.US$25 per vehicle for a SoC-based DMS solution (compared with $9 for the original firmware solution), it represents an eventual US$2.5bn annual opportunity for SM when DMS is obligatory standard fit. SM’s own forecasts expect the DMS market to exceed US$1bn by 2026, with the latest industry reports expecting penetration rates exceeding 50% by 2024.

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16

There is a working capital impact from opex sales (both direct and through telematics partners); however, SM will build regular recurring and cash-generative revenue stream from the monthly fees. To offset the working capital outlay as the Fleet business ramps up, SM is factoring these sales over the next few years. As its own net cash balances build from FY 2021, the group can become self-financing. Early issues for Guardian included the high cost of the device (>US$1,000) and a confusing plethora of connected technologies offered to fleet managers: telematics, route-scheduling, vehicle/load monitoring as well as driver behaviour reporting. This could see multiple hardware installations and maintenance, multiple suppliers as well as multiple connections and monitoring fees for each vehicle. We expect the cheaper second-generation device due in the next few months to make a significant difference, as will the closer collaboration and eventual integration with telematics suppliers. Accelerating down the road

Five new distributors appointed in FY 2017 are significantly boosting the rollout. Fleet revenue has grown from A$3.3m in FY 2016 to A$9.1m in FY 2017. Moreover, the TCV is building rapidly. TCV of A$7.9m at the start of the year grew to A$36.5m in June, with A$28.6m signed in the year and A$22m yet to be recognised.

YoY growth in Guardian TCV

Source: Company reports

There was a strong H2 performance, accelerating through the year with TCV more than doubling in H2 compared with H1 (roughly $7m/$22m). We understand there are now over 120 Fleet customers worldwide, with >10,000 vehicles being monitored. Looking ahead, there is potential to sign TCV of A$25m in H1 alone. The deal pipeline for Guardian is now c.$200m, with numerous assessments underway; c.75% of that pipeline is in negotiation with a proposal and proof of concept and SM enjoys a strong track record of converting trials into contracts (70-80% conversion).

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18

12 field support specialist (trainers), installations are taking place across the globe. Guardian launched in Malaysia in May and recently expanded into the UK with an initial major 320-vehicle contract from FreshLinc. Guardian continues to evolve both its products and services; the business model is driven by the cost of the hardware; reducing this will allow a faster breakeven on the contract and a strong return on investment. Fleet 1.0 was simply a de-ruggedized version of the original, expensive mining device. We anticipate the much cheaper yet higher-function Fleet 2.0 device to be available early next year. Specifically designed for purpose, Fleet 2.0 offers more than a 50% reduction in cost, weight and installation time, as well as better performance. Fleet 3.0, based on SM’s own Fovio chipset, is already on the roadmap. That will be 50% cheaper again and is targeted for a 2019 launch. Eventually we expect it to share a hardware platform with selected telematics partners, further reducing costs. Given the cost differential, limited stocks of Fleet 1.0 have been built, so this is likely to make the Fleet business particularly H2-weighted in FY 2018, and since Fleet will comprise the vast bulk of FY 2018 group sales, we are prepared for a relatively weak H1 performance. The results give us increasing comfort that Guardian will become a major global business, building a revenue base and generating profit whilst allowing the OEM automotive business to scale up over the next few years. This remains a massive market. There are over 200m heavy commercial vehicles suitable for Guardian deployment, representing a global SAM of over US$2bn (A$2.5bn) TCV annually, yet Guardian remains the only credible supplier of retrofit DMS. CAT’s off-road business expected to rebound Little has been heard about the original off-road business which was licensed to CAT for five years for A$22m in 2016. This is part of CAT’s move to build an ecosystem and recurring revenues around its hardware sales and extensive fleet of vehicles in use; a response to the downturn in resource markets and a corresponding fall in equipment sales. Receiving only royalties on hardware and monitoring sales, SM has had to wait for the slow process of CAT training its sales force and global distributor network. Some 5,000 mining trucks are now being monitored and we are encouraged to see that the upturn in commodity prices is feeding into a recovery in the resource sectors and corresponding CAT equipment sales rebound. We therefore forecast increased CAT royalty receipts through FY 2018 and FY 2019 at near 100% margin.

Next generation expected H2

H2-weighted sales

Fleet success allows Automotive to build

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20

Use of the extra funding The company raised £35m (over A$60m) to accelerate development of its platform and product, as well as expanding the infrastructure to support the expected sharp ramp in customer programmes. Management has been highlighting the need for additional investment in the automotive platform and the requirement to support high levels of engagement with both OEMs and Tier-1 suppliers across all its target markets: automotive, rail and aviation. The group also requires infrastructure expansion as it grows into a global business, and additional working capital headroom.

Use of funds

A$15m Accelerating Platform/SoC product development

A$11m Offices and infrastructure in Canberra & US/EU/APAC

A$8m Working capital for Fleet business growth

A$8m Increase Fovio automotive OEM teams from 2 to 5

A$4m Guardian and auto aftermarket product development

A$3m Global sales & marketing expansion

A$1m New (non-transport) business development

Source: Company reports

While strong growth is expected from Guardian, clearly the group requires external funding; SM continues to actively explore discussions with a number of potential strategic and financial partners with regards to supply agreements, joint ventures and strategic investment, but equity remains the best source of capital. The group will undertake significant extra work on the core platform. This would accelerate the product roadmaps and build machine-learning infrastructure. We note that management sees significant opportunities in ML and AI monitoring. The business is developing into an ‘AI vision platform’; it has world-class capabilities in this area, which we agree will become extremely valuable in future. Core technology platform investment is needed for all markets. Whilst some R&D/engineering spend is unique to each, the majority is on a common platform which is key to group strategy. Automotive will be the first to utilise Fovio chips but all the businesses will in time. A Field Programmable Gate Array platform has been used to reduce cost and risk; configured after manufacturing, it provides the benefits of a hardware-optimised product but at lower cost, less time and lower risk than dedicated chip development. SM will have a range of solutions; some for which the Fovio processor hardware will be a good fit, and some (more basic/early stage) that will suit a firmware approach. Beyond the additional R&D, funds will be used to scale the Fleet business (sales, support and operations) and build the wider group’s global footprint (US and European offices, followed by Japan, Korea, and China). We estimate an additional A$13m would be spent in FY 2018 (A$6m expensed and A$7m capitalised) and an additional A$8m in FY 2019 (A$5m capitalised), increasing the expected EBITDA losses to A$30.2m and A$12.6m, respectively. We envisage some relatively small further capital spending in FY 2020 and FY 2021, although by then SM should be making significant cash profit.

Increased investment targeted

Seeking strategic investment as well

Additional R&D areas targeted

Engineering a common platform

Further investing in business

Majority of additional spend in next two years


21

Forecasts We expect the additional investment to make no change to revenue in the short term; this is more focused on reducing funding risk, consolidating market leadership and taking a greater share of the market in the long term. Our financial forecasts show the business relying on extremely tight working capital management and these funds provide much needed headroom, significantly reducing risk. They will also be used to provide further development of the core technology with intent to secure a larger portion of the huge market opportunity in the longer term. Revenue forecasts

Since the additional spend will have little immediate revenue benefit, we make no change to near-term sales forecasts on this fundraising. With the sale of the off-road business to CAT for an A$22m licence fee in FY 2016, group revenue growth over the next few years relies heavily on the Fleet business (retrofitting of Guardian devices). Initially this is direct and through distributors but soon through telematics partnerships. The royalties from CAT sales have c.100% margin but will take time to build while the CAT sales staff and dealer network are trained. The OEM Automotive business will see growing levels of NRE fees this year and next but will start to deliver significant revenue from FY 2021 from use in production models launched in 2020.

Revenue forecast by division

Source: finnCap estimates

From the A$13.6m delivered in FY 2013, driven by continued momentum in Fleet, group revenue is expected to grow “in-line with market expectations” (broker consensus c.A$40m) during FY 2018, rising to “under A$100m” in FY 2019. We expect that FY 2018 sales will be heavily H2-weighted due to the reliance on Fleet revenues. As with Telematics, Guardian revenues build through the period and this will be exacerbated as customers are likely awaiting the introduction of second-generation devices due from December. There are strong orders but the second generation devices will be lower-cost and will provide higher profit so deliveries are targeted for H2. Over 70% of fleet revenues are anticipated in H2 2018 so investors should not be overly concerned at a weak H1.

0.0

50.0

100.0

150.0

200.0

250.0

300.0

FY18e FY19e FY20e FY21e FY22e

A$

m

CAT Fleet Rail Air Automotive

Revenue relies on Fleet ramp up

FY 2018 revenue guidance

FY 2018 to be heavily H2 weighted


22

Earnings

With the additional funding, we expect investment to increase both opex and capex, and adjust our EBITDA expectations accordingly:

Post funding adjustments

A$m FY 2018 FY 2019 FY 2020 FY 2021 FY 2022

Revenue (revised) 40.6 81.9 141.0 210.9 279.8

Revenue (old) 40.3 81.5 131.4 209.0 267.3

EBITDA (revised) -30.2 -12.6 25.1 70.2 116.6

EBITDA (old) -23.8 -10.0 22.4 77.9 125.2

Capex (revised) -7.5 -5.0 -5.0 -5.0 -5.0

Capex (old) -0.5 0.0 -4.0 -4.0 -4.0

Net cash (revised) 40.7 16.0 33.4 90.5 172.4

Net cash (old) 0.5 0.4 28.9 83.1 175.2


Without the new funding, SM would not have been able to make investments in platform development or international infrastructure, nor would it have had leeway for error. Our previous forecasts had little capitalised development spend and, based on the company’s previous spending plans, very little headroom in cash (less than A$0.5m) for FY 2018 and FY 2019, even with highly optimistic working capital management. Earnings analysis

The high-margin CAT royalty business should see profit this year in FY 2018, while we expect Fleet to transition to profitability in FY 2019, with Rail and Air also making small positive contributions.

EBITDA by division


The heavy development spending on both the central platform and on OEM Automotive solutions is expected to continue throughout the next five years; funded by equity in FY 2018 and FY 2019 but then by Fleet profit from FY 2020 and thereafter. While not making contribution in the near term (we target positive EBITDA for the unit in FY 2023), OEM Automotive is a long-term benefit, providing a share of a huge global market.

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

FY18e FY19e FY20e FY21e FY22e

A$m

CAT Fleet Rail Air Central / Platform Automotive

Pre-funding forecasts left no headroom


23

Divisional breakdown of five year forecasts

A$m FY18e FY19e FY20e FY21e FY22e

Y/E Jun-18 Jun-19 Jun-20 Jun-21 Jun-22

Revenue

CAT 3.7 6.5 9.2 11.4 13.3

Fleet 27.6 56.5 95.7 140.5 185.1

Rail 1.0 3.0 7.0 11.0 15.0

Air 1.0 1.8 5.0 9.0 13.0

Automotive 7.3 14.0 23.9 38.5 52.9

40.6 81.9 141.0 210.9 279.8

Gross Profit

CAT 3.7 6.5 9.2 11.4 13.3

Fleet 3.9 23.5 55.1 95.9 140.3

Rail 0.7 2.1 4.9 7.7 10.5

Air 0.7 1.2 3.5 6.3 9.1

OEM Automotive 6.9 9.9 16.0 24.8 33.3

16.0 43.4 88.9 146.4 206.8

39% 53% 63% 69% 74%

Overheads

CAT -0.2 -0.2 -0.2 -0.2 -0.2

Fleet -11.0 -12.3 -12.6 -14.0 -16.0

Rail -1.0 -1.0 -2.0 -4.0 -6.0

Air -1.0 -1.0 -2.0 -4.0 -6.0

OEM Automotive -20.0 -31.5 -37.0 -41.0 -45.0

Central costs & platform -13.0 -10.0 -10.0 -13.0 -17.0

-46.2 -56.0 -63.8 -76.2 -90.2

EBITDA

CAT 3.5 6.3 9.0 11.2 13.1

Fleet -7.1 11.0 42.0 81.1 123.1

Rail -0.3 1.1 2.9 3.7 4.5

Air -0.3 0.2 1.5 2.3 3.1

OEM Automotive -13.1 -21.6 -21.0 -16.2 -11.7

Central costs & platform -13.0 -10.0 -10.0 -13.0 -17.0

-30.2 -12.6 25.1 70.2 116.6


Metrics used (average pricing)

Y/E Jun-18 Jun-19 Jun-20 Jun-21 Jun-22

Off-road units 1,500 2,750 3,750 4,400 4,850

Fleet units 24,000 45,000 70,000 95,000 115,000

OEM units 45,000 210,000 330,000 555,000 750,000



24

Valuation The current valuation is clearly not representative of the opportunity. AIM investors have contributed c.£70m investment of the current £122m (post-funding) market capitalisation. This clearly does not reflect the technology; the work input; or the market opportunities ahead. We expect SM to generate >A$110m (c.£63m) adj. EBITDA on a recurring revenue base in FY 2022. At that point, we would apply a 12x EV/EBITDA multiple, valuing it at £750m – or 37p per share (post-funding). The current share price is an 85% discount to this value, reflecting both execution risk and the previous funding concerns. We accept that at this stage some discount is still warranted for timing and execution but after recent newsflow and the placing, the overall risk is substantively reduced. Our 12p TP still represents just a third of that likely FY 2022 valuation, which we feel is a reasonable discount for the remaining risk given the newsflow. Following the funding, the shares are likely to appreciate in value towards our 12p TP. We also feel that the share price will rise on further OEM contracts, which are likely to follow the recent NCAP announcement on DMS.

Worth £750m on 2022 forecast

Reduced risk not factored in yet


25

Income Statement


Sales 33.6 13.6 40.6 81.9 141.0

Sales growth (%) 161.0 -59.6 199.5 101.6 72.2

Cost of sales -6.3 -13.5 -24.6 -38.5 -52.1

Gross profit 27.3 0.1 16.0 43.4 88.9

Gross margin (%) 81.3 0.6 39.3 53.0 63.0

Operating expenses -28.7 -25.6 -46.2 -56.0 -63.8

Adjusted EBITDA -1.4 -25.5 -30.2 -12.6 25.1

Depreciation/Amortisation -0.9 -1.3 -2.5 -2.5 -2.8

Adjusted EBIT -2.3 -26.8 -32.7 -15.1 22.3

Adjusted EBIT margin (%) -6.9 -197.4 -80.6 -18.4 15.8

Associates/Other 0.0 0.0 0.0 0.0 0.0

Net interest 1.4 0.5 0.1 -0.1 -0.2

Adjusted PBT -0.9 -26.3 -32.6 -15.2 22.1

Adjustments -0.7 -2.3 -2.0 -2.0 -2.0

Reported PBT -1.6 -28.5 -34.6 -17.2 20.1

Taxation 0.0 -1.1 0.0 0.0 0.0


Post tax profit -1.6 -29.7 -34.6 -17.2 20.1

Minorities -0.1 0.0 0.0 0.0 0.0

Reported earnings -1.7 -29.7 -34.6 -17.2 20.1

Weighted average no.shares 981.7 1,264.4 2,011.0 2,186.0 2,186.0

Average no.shares (FD) 981.7 1,264.5 2,011.0 2,186.0 2,186.0

Stated EPS (c) -0.2 -2.3 -1.7 -0.8 0.9

Adj. EPS (FD) (c) -0.1 -2.2 -1.6 -0.7 1.0

DPS (c) 0.0 0.0 0.0 0.0 0.0

Source: Company reports, finnCap estimates


26

Cash Flow


EBITDA -1.4 -25.5 -30.2 -12.6 25.1

Net change in working capital -5.0 8.9 -3.0 -10.0 -15.5

Share based payments 0.0 0.0 0.0 0.0 0.0

Profit/loss on disposal 0.0 0.0 0.0 0.0 0.0

Net pensions charge 0.0 0.0 0.0 0.0 0.0

Change in provision 0.0 0.0 2.0 3.0 13.0

Other items 0.0 0.0 0.0 0.0 0.0

Operating cash flow -6.4 -16.6 -31.2 -19.6 22.6

Cash interest 1.4 0.1 0.1 -0.1 -0.2

Tax paid 0.0 -1.1 0.0 0.0 0.0

Capex -2.5 -2.2 -7.5 -5.0 -5.0

Free cash flow -7.6 -19.9 -38.6 -24.7 17.4

Disposals -1.1 0.0 0.0 0.0 0.0

Acquisitions 0.0 0.0 0.0 0.0 0.0

Dividends 0.0 0.0 0.0 0.0 0.0

Other -1.7 -1.6 0.0 0.0 0.0

Issue of share capital/(Buyback) 13.2 25.9 57.8 0.0 0.0

Net Change in cash flow 2.7 4.5 19.1 -24.7 17.4

Opening net (debt)/cash 14.4 17.1 21.6 40.7 16.0

Closing net (debt)/cash 17.1 21.6 40.7 16.0 33.4



27

Balance Sheet


Tangible assets 0.7 1.0 2.5 2.5 2.5

Goodwill 0.0 0.0 0.0 0.0 0.0

Other intangible 10.7 7.0 10.5 13.0 15.2

Other 0.1 0.1 0.1 0.1 0.1

Non current assets 11.5 8.1 13.1 15.6 17.8

Inventories 8.4 0.7 1.0 2.1 3.8

Trade receivables 6.8 7.6 10.6 20.5 35.8

Cash 16.9 21.4 40.6 15.9 33.3

Other 1.0 8.8 8.8 8.8 8.8

Current assets 33.1 38.6 61.0 47.3 81.7

Trade payables -1.8 -5.6 -5.9 -6.9 -8.5

Other current liabilities -2.4 -3.5 -5.5 -8.5 -21.5

Short term debt 0.0 0.0 0.0 0.0 0.0

Net current assets 28.9 29.5 49.6 31.9 51.8

Long term debt 0.0 0.0 0.0 0.0 0.0

Pension 0.0 0.0 0.0 0.0 0.0

Other/Minorities 0.0 0.0 0.0 0.0 0.0

Net assets 40.4 37.6 62.7 47.5 69.6

Net working capital 13.4 2.7 5.7 15.7 31.2

NAV per share (c) 3.8 2.5 2.9 2.2 3.2

NTA per share (c) 2.8 2.1 2.4 1.6 2.5



28

NOTES


29

NOTES


30

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Research Mark Brewer 020 7220 0556 [email protected] Guy Hewett 020 7220 0549 [email protected] David Buxton 020 7220 0542 [email protected] Mark Paddon 020 7220 0541 [email protected] Lorne Daniel 020 7220 0545 [email protected] Martin Potts 020 7220 0544 [email protected] Andrew Darley 020 7220 0547 [email protected] Alex Pye 0207 220 0554 [email protected] Harold Evans 020 7220 0552 [email protected] Roger Tejwani 020 7220 0548 [email protected] Jeremy Grime 020 7220 0550 [email protected] Dougie Youngson 020 7220 0543 [email protected] Raymond Greaves 020 7220 0553 [email protected]

Corporate Broking Sultan Awan 020 7220 0592 [email protected] Simon Johnson 020 7220 0525 [email protected] Andrew Burdis 020 7220 0524 [email protected] Alice Lane 020 7220 0523 [email protected] Richard Chambers 020 7220 0514 [email protected] Emily Morris 020 7220 0511 [email protected] Camille Gochez 020 7220 0518 [email protected] Stephen Norcross 020 7220 0513 [email protected] Mia Gardner 020 7220 0512 [email protected] Tim Redfern 020 7220 0515 [email protected] Nikita Jain 020 3772 4652 [email protected] Abigail Wayne 020 7220 0594 [email protected]

Sales Stephen Joseph 020 7220 0520 [email protected] Louise Talbot 020 3772 4651 [email protected] Tony Quirke 020 7220 0517 [email protected] Malar Velaigam 020 7220 0526 [email protected] Sunila de Silva 020 7220 0521 [email protected] Rhys Williams 020 7220 0522 [email protected]

Investor Relations Lianne Tucker 020 7220 0527 [email protected] Lisa Welch 020 7220 0519 [email protected] Lucy Nicholls 020 7220 0528 [email protected]

Sales Trading Kai Buckle 020 7220 0529 [email protected] Danny Smith 020 7220 0533 [email protected] Mark Fidgen 020 7220 0536 [email protected] Oliver Toleman 020 7220 0531 [email protected] David Loudon 020 7220 0530 [email protected]

Market Makers Steve Asfour 020 7220 0539 [email protected] James Revell 0207 220 0532 [email protected] Russell Jackson 020 7220 0538 [email protected] Ben Tonnison 020 7220 0535 [email protected]

Investment Companies Johnny Hewitson 020 7720 0558 [email protected] Mark Whitfeld 020 3772 4697 [email protected]

A marketing communication under FCA Rules, this document has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This research cannot be classified as objective under finnCap Ltd research policy. Visit www.finncap.com

The recommendation system used for this research is as follows. We expect the indicated target price to be achieved within 12 months of the date of this publication. A ‘Hold’ indicates expected share price performance of +/-10%, a ‘Buy’ indicates an expected increase in share price of more than 10% and a ‘Sell’ indicates an expected decrease in share price of more than 10%.

Approved and issued by finnCap Ltd for publication only to UK persons who are authorised persons under the Financial Services and Markets Act 2000 and to Professional customers. Retail customers who receive this document should ignore it. finnCap Ltd uses reasonable efforts to obtain information from sources which it believes to be reliable, but it makes no representation that the information or opinions contained in this document are accurate, reliable or complete. Such information and opinions are provided for the information of finnCap Ltd's clients only and are subject to change without notice. finnCap Ltd’s salespeople, traders and other representatives may provide oral or written market commentary or trading strategies to our clients that reflect opinions contrary to or inconsistent with the opinions expressed herein. This document should not be copied or otherwise reproduced. finnCap Ltd and any company or individual connected with it may have a position or holding in any investment mentioned in this document or a related investment. finnCap Ltd may have been a manager of a public offering of securities of this company within the last 12 months, or have received compensation for investment banking services from this company within the past 12 months, or expect to receive or may intend to seek compensation for investment banking services from this company within the next three months. Nothing in this document should be construed as an offer or solicitation to acquire or dispose of any investment or to engage in any other transaction. finnCap Ltd is authorised and regulated by the Financial Conduct Authority, London E14 5HS, and is a member of the London Stock Exchange.

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