|Shares Out. (in M):||0||P/E|
|Market Cap (in M):||70||P/FCF|
|Net Debt (in M):||0||EBIT||0||0|
Advanced Vision Technology Ltd. (AVT) manufactures and distributes bundled visual inspection machines and software used in the printing industry. It is a $70m market-cap company with shares trading on the German stock exchange, the Deutsche Börse, under ticker VSJ (Bloomberg: VSJ GR, Reuters: AVTE.DE, Yahoo!Finance: VSJ.DE).
AVT is a growth stock trading at a deep value price. With $7.00/share in cash and marketable securities, at a current price of $15.50 (€11.94) we are paying $8.50 for a company that generated a $1.13 of EPS in 2006, and will likely generate at least $1.30 of EPS in 2007 with management guidance for top line growth of 15% annually. Assuming that interest income generated about $0.20 of AT earnings, that works out to less then 9x 2006 EPS and 7x 2007E EPS excluding cash.
AVT’s machines detect printing errors much faster than the human eye, preventing waste of raw materials and ensuring quality control. The company went public much too early at the peak of the frothy 2000 IPO market. Since then, the company has developed a global footprint with offices in
Historically, customer adoption of Machine Vision Technology (MVT) in the printing industry has been slow; current estimated industry penetration for MVT remains less than 10%. However, based upon discussions with industry experts and visits with existing MVT users, we believe the printing industry is ripe for further MVT integration. With an average unit price of $100k, the purchase of an AVT machine is subject to customers’ capital spending budgets, which have been on the decline in the printing industry for a number of years. During this period; however, AVT has managed to grow steadily while educating the market of the benefits of MVT. As an illustration of the compelling economic argument for adoption, conversations with customers indicated a payback on their investment in AVT occurring in less than six months.
AVT is the recognized MVT market leader in the printing industry with approx. 50% market share. AVT’s largest competitor is BST Promark (a division of the publicly traded German company Elexis AG) with approx. 15% market share. Other competitors include CC1 and ISRA vision. From our discussions with industry experts, we’ve learned that AVT is considered to be the leader of innovations in the industry, and the only one that currently offers a complete MVT solution to customers. However, as with all technology-oriented companies, there remains the risk that emerging technologies could undermine AVT’s position. We believe that AVT can exploit its current advantages to benefit from accelerated industry adoption of MVT.
In addition to growth within their existing packaging and label product lines, the company recently initiated marketing of a new sheet-fed product line targeting a separate and distinct segment of the printing industry. AVT recorded their first sales within the new product line in Q3 2006. While we do not expect the sheet-fed product line to have a meaningful impact on the financials in 2007, we believe that it can become a significant growth driver for the company in 2008.
AVT benefits from favorable market and company specific characteristics which should provide a sustainable competitive advantage and mitigate pricing pressures:
- A low penetration product with demonstrated value to the customer (6 month ROI). With less than 10% penetration rate, the market for MVT is in its early stages. The value proposition is strong enough to warrant market adoption in the near term.
- A clear market leader with approx. 50% market share. We expect to see a “land grab” phase for market share as penetration increase. While we do not expect AVT to retain abnormally high market share, we believe the company will continue to see significant (double-digit) growth for the foreseeable future.
- A wide moat in the form of specialized niche market and a technological edge. AVT is considered to have the best and most complete product offering in the market. It also has a strong technological edge in the form of significant R&D spending and a strong, highly skilled, tech development team.
- A rock solid balance sheet, giving the company the flexibility to address new technologies or penetrate adjacent niche markets.
- Taxes: as an Israeli exporter, AVT enjoys an “Approved Enterprise” status under the Israeli tax law, The Company expects to be exempt from corporate taxes for the next 2 years, and is expecting a low effective tax rate of 5%-15% for the foreseeable future.
As market adoption of MVT expands, we expect to benefit from both improved earnings and multiple expansion.
We believe that the growth profile for the company warrants a P/E multiple of 15x on the base business. With a 2007E pro-forma EPS of $1.33 and expected $7.7/per share in cash by year-end the stock should trade at $27.7, implying over a 75% premium to the current price.
We were surprised to find that two sell-side analysts covering the company in
We believe that this stock is largely overlooked by the investment community. It’s a micro-cap company headquartered in
This is hardly ideal in terms of exposure to investors. Despite these factors we’ve found the company highly accessible:
The company’s fillings are U.S. GAAP compliant and with more than 1/3 of revenues coming from the
|Subject||Thanks for the excellent idea.|
|Entry||02/13/2007 09:43 PM|
|Thanks for the excellent idea.|
The 4th quarter was down year to year in operating income, due mainly to expense growth. Do you have any insights into that? Also, given the declines in the dollar against the Euro and the Israeli shekel over the past 2 years, and especially in 2006, is the growth rate lower than it appears, given that the company reports in dollars? Finally, has the company given any guidance on what they plan to do with their growing cash hoard?
|Entry||02/14/2007 05:23 PM|
|Thanks for your questions.|
The main reason Q4 operating income was down YoY was due to a one time “catch-up” in COGS associated with a revised reduction of royalty payments to the Office of the Chief Scientist. Essentially, AVT pays a 3.5% royalty off the top line to the Israeli government in exchange for R&D grants. Although this is an unusual method of receiving grants, ultimately it works in favor of the company. During the first 3 quarters of 2006 the company recorded a rate of 3% based on a planned reduction by the government agency. However, the company reversed the adjustment after the government announced that the reduction would only apply to grants received after 2007. Without this adjustment COGS would have been 38.7%, instead of 40.1%, of revenues in Q4 vs. 38.6% in the prior year. Looking at the other line items we actually see a net improvement in the operating metrics: Q4 R&D 13.6% vs. 13.2% last year (with the increase going to research of new product lines which we expect to contribute to top line growth going forward); Selling & Marketing 23.4% vs. 26.2% last year; General & Administrative 9.1% vs. 9.4% last year.
It is true that the company’s top line is helped by a weaker dollar (as more than half of revenues are outside of the US). However, as most of the company’s costs are not in U.S dollars, a weaker US dollar actually hurt margins. My understanding is that, in aggregate, currency fluctuations don’t typically have an impact on growth in the company’s dollar denominated bottom line.
We believe that management will likely use that cash for an acquisition. As in all acquisitive situations, there is risk that the money would be better put to use buying back shares. In this case there are a couple of mitigating factors:
A. Management has the reputation of being very conservative. We believe that if they make an acquisition they will buy something that makes sense both strategically and in terms of valuation.
B. We believe that the company is getting little credit from the street at this point for the cash, so an acquisition that enhances EPS should be viewed favorably.
|Entry||08/20/2007 07:14 AM|
|Looks like they made a big acquisition.|
what are your current thoughts?
|Entry||08/21/2007 05:38 PM|
|Note: We are no longer involved in the name because lack of liquidity prevented us from meeting our minimum position size requirement. However, below, I have shared some notes from a colleague who is actively involved in the name.|
Update on Advanced Vision Technology:
We still like AVT as an investment and believe there is conservatively 65% upside. There have been quite a few important developments at AVT over the past several months. First, the business is performing extremely well. Backlog in Q1 grew 55% and 51% in Q2. AVT is seeing increasing traction for its machine vision products in its core label and packaging markets. In addition, we believe AVT’s entry into the sheet fed market has been successful as initial reception to its new products has been strong. Given the backlog numbers and the company’s positioning, we believe it is likely that growth will accelerate from the 15% of the last two years to a higher rate in the coming quarters.
The GMI Acquisition
AVT announced that it was acquiring Graphic Microsystems (GMI) for $33 million USD. For the moment, we are willing to give management the benefit of the doubt on this acquisition. Over the last several years, the board has pressured the company to do deals which we believe could have destroyed value. Management has been cautious in moving forward on these deals. However, we understand that the GMI deal was initiated by management. They have watched this company for a long time and have been trying to buy it since 2001.
Furthermore, there are many aspects to GMI’s business that should provide synergies with AVT. GMI’s ink and color control systems will be integrated into AVT’s machine vision products which will improve AVT’s product offering. Furthermore, GMI has relationships with large printers. This is a market AVT has been looking to penetrate, and GMI’s customer relationships should help AVT gain customers among large printers. AVT should also be able to sell GMI’s products to some of its existing customers. Although GMI has high market share (60%), market penetration is low so GMI should be able to grow significantly going forward. We know that AVT paid a relatively modest 1x sales for GMI, that GMI is profitable, and that the deal will be accretive. Management cannot disclose earnings of GMI because of confidentiality agreements so we do not know the earnings multiple paid. Though we are generally skeptical of acquisitions, given the modest price paid our best guess right now is that the GMI acquisition should be value neutral, at worst.
Corporate Governance Improvements At The Board Level
Even after the GMI acquisition the company has 9 million Euros on the balance sheet and is generating significant cash flow. A number of the company’s investors have been telling the company to return this capital to shareholders through a share buyback or special dividend. We believe management is open to this type of action, but is held back by the board. In addition, the existing board has given itself option grants and salaries which are large by Israeli standards.
The final straw came in early August when the company put out a proxy statement. The proxy proposals would give away options grants representing 5% of outstanding shares to board members, none of whom are intimately involved in company operations or creating value for the company. The proxy also proposes increasing authorized shares from 15 million to 30 million and reelecting existing overcompensated directors to 3 year terms. The board also recently diluted existing shareholders by issuing treasury shares (at market prices). We believe that there is significant opposition to these proposals.
Over the last several weeks, a group of Israeli, European, and US institutional shareholders has emerged which is attempting to change capital allocation and board decision making at AVT. This group is happy with AVT’s management which is doing a great job. We believe this group of shareholders is likely to be successful in making board changes and influencing the company to institute a share buyback or dividend. In the long term, we believe capital allocation at AVT will be significantly improved. Management is supportive of the changes proposed by the institutional shareholder group.
We know that there are likely VIC members who are shareholders of AVT. We would strongly urge all shareholders to vote against the proposals in the proxy. As the Annual Meeting vote is only 9 days away, we would urge voting through the proxy system as soon as possible. The first step in the institutional shareholder group’s plan is to get enough votes to reject election of current board members. Once the current board is not reelected, the institutional shareholder group will propose a new group of board members. If there are any VIC members who would like to speak with the institutional shareholder group, please send an email to email@example.com, and we will put you in touch with them.
We still believe that AVT is significantly undervalued. We project the core business will earn 0.70 Euros in 2007 and 0.83 Euros in 2008 (ex. interest income). Given the high returns, low incremental capital needs, high growth, and high cash flow of this business, we believe the core is worth 13.50 Euros per share conservatively. Of the 6.37 Euros of cash and securities at the end of Q2, roughly 4.65 Euros will be spent on GMI, and 1.72 Euros will remain. If we assume that GMI is value neutral, we come up with fair value of 19.87 Euros (13.50 Euros for the core business + 4.65 Euros for GMI + 1.72 Euros of cash). Over time, we expect that the changes put into place by the institutional shareholder group (buybacks/dividends, better capital allocation, and board changes) will create additional value.