Initiation of Coverage

$5.40 would be nice.

Acusensus (ACE-ASX) provides a broad range of technologies to combat the growing problem of distracted driving. The company has pioneered its AI-enabled road safety technology that provides a patented first mover advantage in what it considers to be an immediate $1.8b market opportunity. Since the company's inception in 2018 ACE has grown rapidly; we estimate revenues of $41m in FY23E compared to $7m in FY21; representing one of the fastest-growing small cap stocks over the previous three years. ACE reports a highly recurring and profitable revenue growth profile, backed by a patented technology that should see the company grow revenues independent of the economic cycle.ACE's technology is used to detect and provide prosecutable evidence of distracted driving (mobile phone use), seatbelt compliance, speeding and railway crossing compliance as well as monitoring vehicles of interest. The company currently has 108 fixed trailer-based and car-based enforcement units (84 at IPO). While all revenues are currently derived from Australia, the company is exporting its technology and currently has pilot programs across 10 countries, providing a large global growth opportunity where contracts tend to be longer and larger than Australian state-based governments. To date, no country/state has undertaken a pilot program for mobile enforcement and not awarded a material contract, with ACE exhibiting superior technology in terms of accuracy and reliability, in our view.ACE's core technology is its Heads-Up product, that was designed to detect illegal use of mobile phones while driving. Since then, the technology has evolved into a comprehensive, multi-solution offering which supports speed (average and point), seatbelt non-compliance, and licence plate-based detection and enforcement.According to Frost and Sullivan, total revenues generated in the global traffic enforcement solutions market were estimated at A$4.6b in 2021, growing at a CAGR of +11% to reach an expected A$7.6b in 2026. Mobile phone enforcement solutions is an emerging sub-sector, with an estimated opportunity of A$1.8b where ACE holds a first mover and patented sustainable competitive advantage. This TAM has been extrapolated from its NSW government contract ($7m revenue p.a., 6m registered vehicles); however, we envisage significant upside as revenues are linked to the quantum of cameras in field, which should increase in line with program success (similar to the number of red-light cameras in operation).We identify five core growth drivers for ACE including: i) geographic expansion with pilot programs in 10 countries; ii) product expansion into other verticals (i.e. railway crossing monitoring, drugs or alcohol, road worker safety monitoring); iii) distribution agreements in new markets (capital light expansion); iv) bolt-on acquisitions given existing distribution ($23m cash, FCF positive); and v) upsell from existing contracts (>75% of FY23 revenue is from existing customers).ACE is a profitable, high growth with recurring revenues business that should generate elevated incremental EBIT margins (CGe gp margins >40%). ACE revenue is derived from highly predictable, long duration, high margin government contracts with no contract churn since inception. While the company is currently in an investment phase (elevated S&M for geographic expansion and R&D for product growth) we expect its EBITDA margins to expand to ~20% over the medium term. While the marginal investor may value ACE on a one-year forward EV/EBITDA multiple, we believe this materially underrates the long-term opportunity.Assuming a 15% discount rate, 10x terminal EBIT multiple, long-term gross profit margins of 45%, and a five-year opex/capex growth of +15%, the marginal investor is pricing in a five-year revenue CAGR of just +19% (vs FY19-23E CAGR +161%). We initiate coverage of ACE with a BUY recommendation and $5.40 price target premised on a two-stage DCF and FY28E revenue expectations of $83m.