I’ve just sold my holding in QRS for an 86% return. I’ll buy back in if the SP drops below 17c, but here’s why I sold at 28c.
1) While QRS’s technology is TSA certified, QRS Limited is not a TSA certified EDS supplier. Thus, contrary to what is implied in the recent announcements, QRS cannot sell stand-alone machines to the TSA that will be installed in US airports etc. The recent sales to Rapiscan were merely sales of improved proto-type units to assist Rapiscan integrate QRS’s technology into a new TRX-QR scanner. (The T3-QCP unit generates far fewer false positives than earlier proto-type units). QRS has no production line to produce stand-alone units, and unless QRS can quickly raise $100million+ and build a production line, I find it hard to imagine that sales of stand-alone units could exceed perhaps 8 per year (since they are effectively built by hand). In any event, while a stand alone QR machine is good for detecting plastic explosives, it is not particularly effective in detecting guns, knives etc, so the potential market for stand alone QR machines is highly specialised and thus relatively small.
2) Given that QRS’s licensing partners are still purchasing proto-type units, it looks like it will be some time before an integrated QR product (e.g. a CT-QR scanner) is ready for commercial release. QRS’ management have said that they expect their licensing partners to have new integrated scanners ready for market release by the second quarter of CY05. But to the best of my knowledge, the TSA is yet to formally certify any integrated QR scanner and I’m factoring in a delay of around 3-6 months. (Some TSA testing has happened, but no formal certification). Thus I’m not expecting commercial sales of any new QR products by QRS' licensees until the end of CY05.
3) There is an emerging possibility that the retrofit programme will not go ahead, and that the bulk of QRS’ revenue in the foreseeable future will be limited to licensing revenue on the basis of new CT-QR machine sales beginning in FY06. If this is the case, QRS’ revenue in the foreseeable future is unlikely to exceed around US$3-5mill per year (US$10k per machine licensing revenue on global annual sales of 300-500 new machines). On US$5mill revenue per year, QRS’ profit is unlikely to exceed $2mill.
4) In order for QRS’ SP is be re-rated above present levels, the retrofit programme needs to be implemented on a massive scale (10k retrofitted machines per year). Until there is clear evidence that such a retrofit programme is immanent, I don’t think it prudent to factor such a programme into valuations of the company. And even if a massive retrofit programme does take place (which is unlikely), it will have a maximum life span of around 3 years.
5) I’m loosing confidence in QRS management. The tone of the recent announcements seem to me to be intentionally misleading. Combined with the timing of the recent announcements, it looks like management is crudely attempting to pump up the SP prior to the capital raising. Punters will wise up soon enough.
6) While some genuine buying took place in July, all the price hikes that have occurred in August are 100% generated by day-traders, not investors.
QRS Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
