SMN:AU - A Golden Opportunity.

Good morning guys.

I am an american investor that has been buying shares of SMN.

To be honest, I started a small position back in 2017 for $1 AUD per share. I added to my position this past January and this March after seeing the financial statements for the 6 months ended Dec/2022.

In my opinion SMN is a great opportunity and many have brushed it aside because they have been jaded by the eternal wait and false starts. This is about to change and I have been putting my money where my mouth is.

To begin this discussion, let’s contextualize where we are trading:

At 50 cents/share this company has an EV of 80mn AUD = 65mn mkt cap + 15mn in net debt.

Expected revenues for calendar year 2023 excluding CVM is 20mn AUD.

Expected EBITDA for calendar year 2023 excluding CVM is 4mn AUD.

This means we are trading at 4x EV/Sales and 20x EV/EBITDA for a top line and EBITDA growth rate above 30% per year.

The industrial sector in the US trades at 14x EV/EBITDA and the compounders within this space trade at 17x. Given our superior growth, it is fair to think that the current price of SMN is not pricing in the CVM opportunity and just valuing the AEM division. AEM has done a nicr M&A with Eagle, which proved accretive and allowed for a new growth avenue in the avionics/sound business.

Now that we have addressed where we stand in terms of valuation, let’s discuss management and recent developments and then finalize this post by trying to assess the CVM upside opportunity.

1. Ross Love has been a great CEO and his communication with the market is a significant improvement to what we had before. We have visibility now as to what the company is doing to boost sales and to finalize the regulatory approvals pertaining to APB application - expected in calendar 2Q this year.
2. SMN obtained approval for the gogo wifi application, but by the time it got it, Delta had switched its wifi system and no longer needed that CVM application - this was a big disappointment for those of us that believed FCF was right around the corner. On the positive side, the gogo wifi application was used as a stepping stone to obtain the almost finalized and very relevant APB application, as it forced the FAA, Delta and Boeing to take the technology seriously and create a blueprint for future new applications.
3. In between the gogo application and the APB application the world experienced the COVID-19 pandemic that crushed airlines and paralyzed non-urgent capex. In addition to that, our main partner Boeing got itself hurt by the Max saga, which also slowed down the approval and testing of our technology.
4. SMN produced several kits that are sitting in its inventory and hired people/ built a new facility that enables the company to take many orders as soon as all APB approvals are in place - again, expected by June 2023.
5. Out of the 71 Boeing 737NG in the Delta fleet, SMN has already installed CVM APB kits in 21 of them - this was done for free to Delta and at a major cost to us, but it helped to prove that the technology worked so it de-risked the whole situation to all stakeholders.
6. For the first time in its history SMN has received cash for its CVM technology. This information was announced on March 8th 2023 and is a MAJOR positive milestone. We received 260k AUD from Delta for the installation of 4 new APB kits - this means that each kit was likely sold for 65k. This occurred despite the fact that we are still waiting to receive the final stamp of approval for APB kits - in my opinion Delta assumes that the approval is very likely otherwise they wouldn’t have proceeded this way.

Quick back of the envelope calculation to try to assess CVM value to SMN:

Delta has 71 Boeing 737NG planes. Delta has a 16% market share in the US market, so on a rough math, there are 443 of such planes that could be fitted in the US alone with our APB kits.

This suggest a potential revenue of 443x65k = 28.7mn AUD, assuming a conservative 70% EBIT margin on these kits, we are looking at a 20mn AUD just on the APB application for Boeings 737NG in the USA alone. Considering that the US is 20% of the airline market, we are looking at a 100mn AUD in global opportunity that could be unlocked by the APB approval for just the 737NG plane model.

If we were to assume that as soon as Boeing approved this, Airbus will be next in line for the same application given that both firms are basically a duopoly - Delta uses 56% Boeing planes and 44% Airbus planes, the Airbus opportunity for just one of their airplane models would also be roughly 100mn AUD.

The point here is that there are several other applications that are being evaluated and several other Boeing models to be serviced - Boeing alone has 20k jet planes flying around in today’s world. Let’s assume Airbus also has 20k jet planes and that they also would like our technology.

The potential global TAM for just the APB application would be:

20k*65k*2=2.6bn AUD - of course we will not fit every plane in the world, but assuming a 10% share would get us to 260mn AUD. That’s a 5x from where we are now - and we are only talking about the APB applications. There are the helicopter applications, other applications such as the wifi, and the potential integration and roll-out of our kits during the Boeing production - using their 25 planes per month estimate, that’s a yearly 20mn USD recurring revenue opportunity, which could be doubled if Airbus also integrated us into its production.

My bottom line is that shares seem to be sightly mispriced

Good luck to all and please do you own due diligence.