I have been updating my FA for SMN after this most recent announcement and thought that I would post my ideas for everyone in a new thread. I don't usually put the full details of my financial analysis on HC as I am a rank amateur and I don't want to influence other amateurs with what could be quite flawed assumptions. SMN however has been quite a difficult investment for me to get my head around and I would appreciate feedback from my fellow investors on this one. Please take all of this with a grain of salt - also I have transcribed this from a spreadsheet I had set up which is quite complicated and has multiple pages with formulae and would be very difficult to post. As such I have simplified some of my calculations however the difference between the two is minimal:
I am working on the Australian taxation year for my calculations, therefore ignoring H1 2018 in my calculations (AEM revenue only), and many of the dates have been chosen to make the calculations more simple:
Starting with our only current revenue stream, AEM:
Known:
Current EBITDA C$2M = A$2.02M pa
Projections:
SMN are aiming for what they call conservative grown of 30-45% over 3 years. For ease I will increase EBITDA by 10% per year:
Assumptions: I believe management are deliberately being quite conservative with time frames these days having learnt their lesson from past mistakes. I am assuming that Lab Testing to develop Probability of Detection Curves will be completed in H1 2018, and OEM and regulatory approval of submitted applications will also occur by late H1 2018 in order to keep calculations as simple as possible. In reality I expect that to occur around August or so.
As per my post today on another thread I am calculating sensor purchases at $50K USD per plane for airlines (I forgot to convert USD-AUD in post today) and am calculating USD/AUD at $1.40 AUD
I am assuming Delta outfits 80% of their fleet (random number to take into account older planes not worth outfitting, as well as aircraft not covered by directives etc)
So 867 x 0.8 = 694
694 x USD$50K = $34.7M
Delta have no doubt secured a pretty decent discount as per the announcement 17/8/17 and I am assigning that discount at 20%.
Therefore revenue is reduced to USD$27.766M = A$38.86M
From the Appendix 4C in December it appears based on the ramp up of licencing fees that they expect ROUGHLY 10% of an airline's fleet to be outfitted per year.
Therefore the sensor revenue for Delta:
2018/19: A$3.9M
2019/20: A$3.9M
2020/21: A$3.9M
After the successful roll out of sensors to the Delta Fleet I am assuming the other 3 largest North American airlines purchase sensors in H1 2019:
Also assuming 80% uptake:
750 x 0.8 = 600
600 x $USD50K = USD$30.00M = A$42.00M
Therefore sensor revenue for United Airlines:
2018/19: A$2.1M (1/2 year)
2019/20: A$4.2M
2020/21: A$4.2M
Next assumption: Following the top 4 US airlines, the next 6 largest airlines (by fleet size) sign up H2 2019:
(https://en.wikipedia.org/wiki/World's_largest_airlines)
Average fleet size:
Approx 420 over the next 6 largest (2520 total)
Also assuming 80% uptake:
2520 x 0.8 = 2016
2016 x $USD50K = USD$100.8M = A$142.12M
Therefore sensor revenue for next 6 largest airlines:
2019/20: A$14.21M
2020/21: A$14.21M
By 2019, we are looking at a combined 117 planes per month.
On further thought about this section, rather than using the USD$50K per plane that I am assuming for airline installations, I am using a more discounted USD$30K per plane due to the ongoing regular bulk nature of their purchases. As such:
So 117 planes by USD$30k gives USD$3.51M Per month, USD$42.12M per year = AUD$58.97
This will be assumed to commence in the 2019/20 year.
Licensing Revenue:
I can't remember where I got the information from, possibly this was just conjecture from discussion on HC around whether or not Delta would be paying a licence fee, however I have written off Delta's licence fee completely. Figures are from the revenue adoption cycle in the Appendix 4C - December Quarterly Report. Remaining airlines:
American Airlines, Southwest Airlines, United Airlines:
2018/19: USD$1.25M x 3 x 0.5 = USD$1.88M = A$2.63M (1/2 year)
2019/20: (USD$1.25M x 3 x 0.5) + (USD$2.0M x 3 x 0.5) = USD$1.88M + USD$3.00M = A$6.83M
2020/21: (USD$2.0M x 3 x 0.5) + (USD$3.25M x 3 x 0.5) = USD$3.00M + USD$4.88M = A$11.03M
Remaining 6 largest airlines:
2019/20: USD$1.25M x 6 = USD$7.5M = A$10.5M
2020/21: USD$2M x 6 = USD$12M = A$16.8M
Total Income:
Combining all income for the following years (all in AUD$) 2018/19:
AEM: $2.22M EBITDA
Sensor Revenue:
$3.9M + $2.69M + $2.01M + $2.10M = $10.7M
As per the recent announcement much of the cost of the SMN platform is already being born by AEM. We know this is a very high margin product so I am working on an 80% margin. In this I am including all expenses such as SMN staff, R&D etc.
Therefore total sensor EBITDA is $8.56M
Licencing Revenue:
$2.63M and assuming 90% margin (for staff etc) gives us:
Total licencing EBITDA is $2.37M
Grand total of $13.15 EBITDA and $9.2M after tax.
Estimated SP July 2019:
112M shares, EPS $0.082
Assuming high PE due to very high expected future growth and management statement that SMN will be one of the highest dividend paying stocks on the ASX, therefore PE of 50.
SP of $4.11
Dividend (80% payout ratio) 6.57c per share.
2019/20:
AEM: $2.44M EBITDA
Sensor Revenue:
$3.9M + $5.38M + $4.02M + $4.2M + $14.21 + $58.97 = $90.68M
As per the recent announcement much of the cost of the SMN platform is already being born by AEM. We know this is a very high margin product so I am working on an 80% margin. In this I am including all expenses such as SMN staff, R&D etc.
Grand total of $88.17 EBITDA and $61.72M after tax.
Estimated SP July 2020:
112M shares, EPS $0.551
Assuming a slightly lower PE still experiencing very high expected future growth and management statement that SMN will be one of the highest dividend paying stocks on the ASX, therefore PE of 30.
SP of $16.53
Dividend (80% payout ratio) 44.1c per share.
2020/21:
AEM: $2.69M EBITDA
Sensor Revenue:
$3.9M + $5.38M + $4.02M + $4.2M + $14.21 + $58.97 = $90.68M
As per the recent announcement much of the cost of the SMN platform is already being born by AEM. We know this is a very high margin product so I am working on an 80% margin. In this I am including all expenses such as SMN staff, R&D etc.
Grand total of $97.59 EBITDA and $68.31M after tax.
Estimated SP July 2021:
112M shares, EPS $0.61
Assuming a slightly lower PE still experiencing very high expected future growth and management statement that SMN will be one of the highest dividend paying stocks on the ASX, therefore PE of 30.
SP of $18.3
Dividend (80% payout ratio) 48.8c per share.
Just for shits and giggles:
Assuming by approx year 13 all airlines have reached their maximum revenue adoption cycle. Sensor revenue will have completely dried up as all airlines will be assumed to have outfitted all aircraft, and all new aircraft now have sensors installed.
Tier 1 airlines: 36
Tier 2 airlines: 50
Tier 3 airlines: 80
From: https://www.t2rl.net/airline/
Assuming 100% uptake for Tier 1 airlines, licencing fee is:
36 x USD$15M = USD$540M = A$756M
Assuming 70% uptake for Tier 2 airlines, licencing fee is:
50 x 0.7 x USD$10M = USD$350 = A$490M
Assuming 30% uptake for Tier 3 airlines, licencing fee is:
80 x 0.3 x USD$5M = USD$120M = A$168M
Licencing fee total of A$1.414B and with 90% margin: A$1.273B
Plus new airline sensor sales: A$58.97M with 80% margin: A$53.07M
Total EBITDA: A$1.326B
Profit after tax: A$928M
Estimated SP July 2031:
112M shares, EPS $8.29
Assuming a much lower PE due to stable earnings, and management statement that SMN will be one of the highest dividend paying stocks on the ASX, therefore PE of 15.
SP of $124.29
Dividend (80% payout ratio) $6.63 per share.
Assuming that all came to pass and we do NOT end up getting taken over too early and too cheaply as often happens with great aussie technology, my modest holdings would turn me into a multi-millionaire earning over $170k per year in dividends alone. Not a bad risk/reward IMHO!
Final thoughts:
I consider this to be fairly conservative (except maybe the "Just for shits and giggles" section at the end), particularly the 2020/21 financial year. The reason I feel this year in particular will see much more revenue than indicated, is that I believe we will have more airlines signing up than the top 10 Tier 1 airlines in the world (by fleet number) of the 36 Tier 1 airlines worldwide. Given I have only included the top 10 airlines by fleet size, this excludes airlines such as UPS Airlines and FEDEX Express, Emirates, Air France/KLM, Lufthansa etc. As I have mentioned before, because this technology SAVES the airlines money in the long term, I expect that MOST Tier 1 airlines will take up the technology fairly quickly once the ball gets rolling in order to avoid falling behind their competition.
Note I have also included no revenue from Tier 2 airlines. I am interested in the opinions of any experts in the airline industry who understand the dynamics of competition between Tier 1 and Tier 2/3 airlines, I would imagine some of them will also need to take up our technology in order to remain competitive with the bigger players as they are competing on the same routes. I would have thought this to be more true of Tier 2 airlines rather than Tier 3 airlines who are more likely to have a monopoly on unpopular routes and thus less incentive to install SHM. I kept the PE at 30 for the 2020/21 year due to the fact that I have included no income from the remaining Tier 1, or any Tier 2/3 airlines mainly to keep the calculations much simpler. I could easily see the SP being much higher than that suggested for 2020/21.
Please also note I have not included Delta commission on their sales in my calculations. The margins I have included as part of my calculations are intended to take all of this into account in one very simple (and probably very flawed) calculation. Given that the ramp up in expenses at AEM for increased sensor production is very cheap, most of the margin I have included will cover increased management wages (I expect their wages to increase substantially - this company has been running on the smell of an oily rag for years and so I see big pay rises coming), R&D, expansion of facilities, etc etc.
Just to repeat my spiel at the top, I am a rank amateur when it comes to fundamental analysis, and this work may contain numerous typos as I am transcribing from my spreadsheet late at night! Please DYOR!!
SMN Price at posting:
$1.00 Sentiment: Buy Disclosure: Held
(20min delay)