SMART TECHNOLOGIES INC SMT S
November 09, 2010 - 6:06pm EST by
todd1123
2010 2011
Price: 13.07 EPS $0.65 $0.50
Shares Out. (in M): 131 P/E 21.1x 26.1x
Market Cap (in $M): 1,712 P/FCF 0.7x 0.6x
Net Debt (in $M): 304 EBIT 130 100
TEV ($): 2,016 TEV/EBIT 15.5x 21.0x
Borrow Cost: NA

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Description

 

SMART Technologies (SMT) is a low quality business that's over-hyped by the Street (9 buys / 1 hold), operates in a competitive landscape that is fast changing (price pts by better capitalized peers is >50% below SMART's comparable offering) and is mis-perceived by the Street as a perpetual 25%+ growth biz but the reality is that the end-markets (school districts) are going through a challenged environment which will significantly impede growth.  At current levels (13.07 close), this is a compelling near-term risk / reward short proposition, with total return potential of >45% over the next 3 months (PT of $6.50 - $7.50 / share based on base case below).  Founded in 1987, SMART is the #1 provider of interactive whiteboards primarily used in classrooms (~50% market share - sells the hardware which is a one-times sale and there is no annuity stream following the initial sale given end-mkts are comprised of school districts) - as a result, SMART's biz is largely tied to state budgets / school district spending.  SMART recently went public in July 2010 and (at the time) banks that worked on the IPO pitched the biz as holding a potent 1-2 punch with dominant market position (#1 position in education market / ~50% share) and high growth (Street assuming >25% top-line p.a. for 5+ years given global penetration).  Investors took the bait as Apax Partners (prior owners) used the proceeds to exit a significant portion of their holdings - currently own ~36% of biz and lock-up expires in the next couple months).  On a side note, its also worth noting that Apax previously owned the #2 player (Promethean - traded on LSE under ticker PRW LN) and sold out of their PRW LN stake earlier this year.      

 

SMART reported earlier this evening and admitted the following: (i) pricing: admitted that pricing is slipping (down -3% yoy and mgmt confessed that they are going to start embarking upon "stimulative pricing" to help offset end-mkt weakness ... mgmt commented that "we are not approaching this as a price war but rather stimulative pricing"??), (ii) volumes: they took down their FYE March 2011 guidance (implies top-line growth of less than 8% in 2H YoY vs ~31% in the 1H ... i.e. seeing significant fall-off in end-mkts), (iii) mkt shares moves (seemed somewhat defensive in responding to this question), (iv) general skepticism from analysts (so starting to see more scrutiny of the biz).  Overall, I think the commentary earlier this evening was just the tip of the iceberg and believe SMT (which the market ascribes a ~10x EBITDA multiple) should trade more in-line w/ its closest peer - Promethean - at around 4 - 5x EBITDA (given a leveraged balance sheet - >250MM of net debt, could see enhanced downside).

 

Ultimately, SMART is a (i) low-quality biz (1-time sale and no recurring revenue post the initial sale -  notably, the penetration curve in the US should start seeing some deceleration in the medium term which will surprise the SMART bulls that expect 25%+ growth into perpetuity), (ii) over-loved (i.e. Street expectations are for >25% p.a. for the next 5+ years and myopically focused on global penetration ... and of the 10 analysts that cover the biz, 9 have buys and 1 hold ... but the reality is that US drives ~95% of the current business and n-term headwinds in education spending given state budget constraints will dampen these 25%+ growth expectations), (iii) mis-perceived (i.e. Street believes the market is a two player duopoly ... but the reality is that the competitive landscape is fast changing as there are many new entrants that are better capitalized including Epson, Sony, Mimio - backed by Newell Rubbermaid, Luidia - partnered w/ 3M - and others ... notably, these competitors sell their product at >50% discount to SMART), (iv) Street is overly-complacent on outlook (i.e. ~95% of biz is tied to US and #2 competitor  - Promethean - highlighted on q3 call on 10/28 that state budget constraints is the key driver that slowed growth down to ~12% YoY in q3 (vs ~35% in 1H 10 YoY) noting that "customers in US are telling us that new budgets are coming under pressure" and we "see this issue perpetuating over the next 9-mths".  More notably, Promethean mgmt commented on an interesting development that suggests states are deferring and cancelling spending that was originally allocated to education technology spend and is now being re-allocated toward teacher / wage retention ... per Promethean mgmt: "the curve-ball was that ~26Bln federal fund from Obama administration is being used to preserve future salaries ... many districts were expecting to lay off teachers but these funds are being viewed as a way to maintain salaries / employment ... these funds were supposed to be released in Aug but no schools have seen this yet ... and schools using other funds - including IT - to help fill this gap" ... this "will continue in q4". 

 

Street analysts have largely downplayed these US budget constraints arguing that this is "Promethean-specific" and that SMART is taking share, but this is just not the case (in fact, if anything, Promethean continues to be a share gainer - having taken up their share from 18% in 2006 to 24% in 2009 and is currently at around ~25.9% based on June 2010 figures).  Interestingly, our channel checks have highlighted more aggressive price promotions by Promethean in 2010 (5 - 10 % price promotions) which should (if anything) shift more share to Promethean (and could ultimately create a more aggressive industry-wide pricing dynamic) - my sense is that Street analysts are largely ignoring these pts.

 

Re: valuation, Mr. Market is applying a ~9.5x EBITDA multiple to SMART ... whereas Promethean trades at ~4x EBITDA (down ~25% since their recent commentary on 10/28 q3 call).  Interestingly, while SMART is roughly ~2x the size of Promethean (based on units sold / revenue / and mkt share), YET SMART has an enterprise value that's >7.5x that of Promethean.  Also somewhat notable is re: the technicals:  SMART biz lacks a logical investor base given it straddles both technology (SMART makes the hardware) + education (sells to education end-markets) so if near-term results / commentary surprise to the downside, there will likely NOT be any real buyer support is my sense.  SMART reports FY q2 ending September results on November 9th (this coming Tues) so I view this as the n-term catalyst on getting more color on end-mkts.

CAPITALIZATION (side-by-side comparison of SMART and Promethean)

SMART TECHNOLOGIES (SMT)

 

PROMETHEAN (PRW LN)

($ in USD)

   

($ in EUR)

 

Shares Out

131.0

 

Shares Out

203.6

Price / Share

$13.07

 

Price / Share

€87.5

Mkt Cap

1,712.2

 

Mkt Cap

178.2

         

Debt (June 2010)

468.0

 

Debt

0.8

Cash (June 2010)

164.0

 

Cash

15.7

Net Debt

304.0

 

Net Debt

(14.8)

         

TEV

2,016.2

 

TEV

163.3

FYE March 11E EBITDA

200.0

 

FYE Dec 10E EBITDA

40.4

TEV / FYE 11E EBITDA

10.1x

 

TEV / FYE 10E EBITDA

4.0x

FYE March 12E EBITDA

232.0

 

FYE Dec 11E EBITDA

44.3

TEV / FYE 12E EBITDA

8.7x

 

TEV / FYE 11E EBITDA

3.7x

 

 

 

 

 

SMART TECHNOLOGIES (SMT)

vs

PROMETHEAN (PRW LN)

-

Founded in 1987, #1 in interactive

-

Founded in 1996, #2 player in

 

whiteboards primarily in classrooms

 

interactive whiteboard mkt

-

Approx 50% mkt share

-

Approx 26% mkt share

       

-

Previously owned by Apax Partners

-

Previously owned by Apax Partners

 

(currently owns ~36%)

 

(currently owns 0%)

-

IPO on July 15, 2010 at $18 / share

-

IPO on March 17, 2010 at 200 pence / share

 

vs current $13.07 / share

 

vs current 87.5 pence / share

-

Street: 7 buys / 1 hold / 0 sell (1 no rating)

-

Street: 4 buys / 0 hold / 0 sell (1 no rating)

 

UPSIDE / DOWNSIDE:

 

UPSIDE: assuming 6x multiple to FYE March Normalized EBITDA of $125 - $175MM = $4.50 / share (vs current of $13.07 / share or >65% upside to the short)

 

BASE: assuming 6x multiple to peak FYE March 11E EBITDA of $200MM = $7.00 / share (vs current of $13.07 / share or >45% upside to the short)

 

DOWNSIDE: assuming 8x multiple to peak FYE March 11E EBITDA of $200MM = $10.13 / share (vs current $13.07 / share or >20% upside to the short)

 

   

EBITDA Multiple

 

-0.46442

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

 

$100

-88.3%

-82.3%

-76.3%

-70.4%

-64.4%

-58.4%

-52.4%

 

$125

-80.8%

-73.3%

-65.9%

-58.4%

-50.9%

-43.5%

-36.0%

Norm

$150

-73.3%

-64.4%

-55.4%

-46.4%

-37.5%

-28.5%

-19.5%

EBITDA

$175

-65.9%

-55.4%

-44.9%

-34.5%

-24.0%

-13.6%

-3.1%

 

$200

-58.4%

-46.4%

-34.5%

-22.5%

-10.6%

1.4%

13.3%

 

$225

-50.9%

-37.5%

-24.0%

-10.6%

2.9%

16.3%

29.8%

 

$250

-43.5%

-28.5%

-13.6%

1.4%

16.3%

31.3%

46.2%

 

$275

-36.0%

-19.5%

-3.1%

13.3%

29.8%

46.2%

62.6%

 

RISKS:

Core / normalized earnings power is greater than my view

This risk is contingent on the fact that competitive entrants do NOT erode margins (seems very low prob given commentary out of SMT earlier this evening)

 

Education stimulus surprises to the upside

While the macro on education budgets remains murky, I think SMART is one of the best standalone short bets on state budget constraints

  

DISCLOSURE:  We and our affiliates are short SMART, and may short additional shares or cover some or all of our shares, at any time.  We have no obligation to inform anybody of any changes in our views of SMART.  This is not a recommendation to buy or sell shares.

Catalyst

- earnings call commentary ("stimulative pricing" comment suggests pricing erodes faster than most expect)
- state budget outlook stays weaker / longer
- volume pressure from promethean / peers taking share (SMT's current 50% mkt share will erode over time)
- pricing pressure from better capitalized peers (selling at >50% discount)
- mgmt not "public" savvy and continues to trip over guidance
- Apax / owners sell out of remaining shares given lock-up expiry (note that Apax sold out of their interest in #2 / PRW earlier this yr)
- mkt starts to better appreciate the valuation mis-match (>10x for SMT and ~4x for #2 player - whereas #2 is taking share from SMT)
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