Hi Dome,
thanks for your reply. I agree that the takeover wasn't handled in an optimal manner (by all sides). However, I think that FFT management have probably (and rightly) concluded that the current (but temporary) loose ends and uncertainty created by a the takeover is a worthwhile price to pay for securing control of MSP at a low price. I think pre-takeover FFT shareholders should be happy with the outcome of the takeover – despite this short term uncertainty. While obviously not reflected in the FFT share price at present, the takeover has created significant value for pre-takeover FFT shareholders with minimal dilution.
I don't know how many shareholders are left on the MSP register, but if it is less than 150, then FFT management can move to delist MSP at any time now. I think FFT would be highly motivated to do this (if they are legally able – and I'm not saying they are) because it would significantly reduce costs. So there is considerable additional risk in buying into MSP right now for arbitrage. Prior to the close of the offer, MSP was a genuine short term arbitrage play under 3c, but that no longer holds as MSP now carries delisting risk.
If there are more than 150 shareholders on the MSP register, then FFT would ordinarily need to wait 6 months from the date of the closure of the previous offer before making a new offer (i.e., they can make a new offer anytime after June 21, 2018). Under this scenario, MSP punters could potentially see considerable upside from current levels (=MSP at 1.8c) if the 4Cs move to cashflow positive (I think the March quarter will be). However, since FFT only need another 3% to get to 90% and compulsory acquisition of MSP, I don't think a new scrip offer in 6 months will need to imply much of a premium to the prevailing MSP share price to get over the line. I also imagine that current MSP shareholders would be motivated to sell quickly into any price rise because of the bird in the hand principle.
I don't see FFT buying the last 3% of MSP on market as it would be an inefficient use of cash.
In my opinion, the current MSP share price has nothing to do with the value of AVA and BQT and everything to do with fear of delisting and complete shareholder uncertainty re the remaining 3%.
The key reasons why I like FFT at current prices are as follows:
(1) Despite the suboptimal handling of the takeover, the relevant key players who are now associated with FFT are, in my opinion, smart and have considerable skin in the game.
(2) The current FFT shareprice is primarily a function of the uncertainty created by the MSP takover and lack of quality, detailed newsflow in general – but I think this is temporary
(3) AVA's busisness model is unique/the first of its kind in its industry, and, at present, it is capitalising on its first mover advantage to gain share from the market dominating incumbents. I think the timing and haste of the takeover indicates that key FFT insiders know that AVA's business model is proving to be successful (perhaps more successful than they expected when AVA was first launched). I expect AVA will continue to grow strongly for a few years yet – reliable, annualised AVA revenue could easily reach $20m in a year and $30m in 2 years. And AVA margins will only improve from here.
(4) FFT really only has two genuine competitors in the fibre optic perimeter sensor space – a private US/Japanese company called Fibre SensSys, and a listed (loss making) Israeli company called Magal-S3. Magal has advantages in terms of political connections (especially in Israel and the US – which can influence decisions made by system integrators) and marketing (which it spends an enormous amount on) and presently generates 3 to 4 times FFT's revenue (albeit also selling many lower margin peripherals in video security). It is my understanding that FFT has never had a failure of any of its products in the field. This fact, combined with the geographical breadth of its contract wins, the number of repeat orders from existing customers, and the fact that it spends relatively little on marketing and lobbying, tells me that FFT is technologically superior to its competitors.
(5) With the exception of oil/gas pipelines, the macro indicators tell me that all of the markets that FFT is exposed to are growing strongly. Indeed, some markets, such as network/data systems security, are very likely to grow exponentially over coming years. As I said in my previous post, while I'm not expecting much from the December 4C, I think FFT is operating in the kinds of market sectors that give it every chance of surprising to the upside.
(6) A number of potential US perimeter and data/network security contracts are being held up by the current FY18 US federal budget impasse. I expect this budget impasse to be resolved sooner rather than later.
(7) To state the obvious, investors discount bottom line uncertainty heavily, but pay a premium for predictability. I see FFT currently transitioning from a lumpy, unpredicatble, new-contract-win-dependent business model, towards a more reliable, predictable, recurring revenue business model. The MSP takeover was an important first step in this transition – but I also expect to see FFT focus more on possible annual license fee contracts, annual software sales, more regular and more sophisticated (=higher revenue/margin) training programs/employee refresher programs that (could potentially) involve training-specific software and hardware sales, and perhaps more sophisticated/complex (=higher revenue/margin) maintenance programs (potentially also involving some 3rd party peripherals linked to FFT CAMS). If this transition is completed profitably, given the current very low base, I see FFTs share price soaring. More specifically, if FFT can establish a $2-3m EBITDA base this year, and if the market comes to expect decent, multi-year bottom line growth, FFT should command a market cap of $100m+.
(8) Summarizing: With $6m+ in cash (MSP+FFT), no debt, AVA growth, FFT increasing recurring revenue streams, FFT operating in high growth sectors, the US govt soon to start spending again on security infrastructure, a public FY18 EBITDA and cashflow positive forecast, and a fully diluted market cap of only $25m (assumes 100% of MSP), I think upside risk from here far exceeds downside risk.
(20min delay)