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Structural Monitoring Systems
(ASX: SMN)
Australia
An Aerospace Monitoring System Provider
Structural Monitoring Systems (ASX: SMN) is an Australian company
operating in the aerospace maintenance, repair and overhaul (MRO) industry.
The company focuses on the development and commercialization of
aerospace structural health monitoring systems, which are used for rapid
checking of fatigue critical locations in aircraft that are hard to access and
incur significant maintenance costs and aircraft down-time. Broadly, the
company’s product portfolio comprises products based on its leading edge
Comparative Vacuum Monitoring (CVMTM) technology that functions on the
principal of differential pressures to detect cracks in structures. SMS has
developed effective low-cost sensors for periodic and continuous monitoring
of commercial and military aircraft. Recently, the company achieved
accreditations from Boeing and Airbus, the two largest aircraft manufacturers
in the world, and also the Australia Defense Force (ADF) to install CVMTM
technology sensors on their aircraft.
• The company’s technology has been accredited for use in both the civil
and military aircraft maintenance sectors. SMS has received approvals
from the ADF and large aircraft manufacturers such as Airbus and
Boeing to install products based on CVMTM technology in their
aircraft. The company has also similar development arrangement with
Bombardier and Embraer. In addition, SMS has developed strategic
relations with defense organizations in military aerospace covering the
UK, Europe, the U.S. and China. The first fleet of military applications
(considered a major opportunity for SMS) is expected in 2008.
Recognition and product validation from these organizations is
expected to give the company a competitive edge.
• SMS developed its core patented technology platform CVMTM inhouse.
The company owns and controls the technology on a global
scale. Products based on the CVMTM technology provide simple, lowcost
monitoring set-ups, which are easy to install and durable. SMS is
the first company to develop sensors that replace manual Non-
Destructive Testing (NDT) inspections for aircraft strucrure; it was
recently awarded the Sandia National Laboratories award by the U.S.
Government for the maiden installation of these sensors on a
commercial aircraft. The company has also secured patents for CVMTM
in the U.S. and filed applications in 24 countries.
• SMS is also expected to benefit from dynamic macroeconomic factors.
The aerospace industry is witnessing robust growth due to
globalization. Consequently, the associated MRO industry is
anticipated to follow a similar pattern. Moreover, as the number of
aircraft fleet and their average age increases, the need for maintenance
is expected to rise.
• SMS has developed accredited monitoring technology for the
aerospace industry and plans to enter other industries, going forward.
The company is developing rationale and strategy in a bid to enter the
U.S. bridge monitoring market using its patented CVMTM technology
to detect cracks in aging steel bridges. Approximately 33.5% of U.S.
bridges are steel structures and require rehabilitation, amounting to a
repair liability of around US$ 400 bn for the U.S. surface transport
system.
Our target price and target market cap are aiming
at a 24–48 month investment period. For details,
please see financial forecasts and analysis.
http://www.smsystems.com.au
May 1, 2008
Initiation of Coverage
Equity Research
Analyst: Rishi Narang
(212) 513-1203
[email protected]
www.khandakerpartners.com
Price (A$)
04/30/2008 0.11
Price Target * 0.50
52 week high 0.22
52 week low 0.08
Shares Outstanding (millions)
Basic Shares 254.02
Options & Warrants 0.00
Fully Diluted 254.02
Capitalization (million A$)
Current Market Cap 27.9
Target Market Cap* 127.65
Key Financial Ratios
Price/Equity (2008E) 11.57
Price/Sales (2008E) 46.57
Price/Book value (2008E) 11.57
© Khandaker Partners. All rights reserved. The information and data contained herein is not warranted or represented to be accurate and complete.
This report is intended for U.S. residents and for information purposes only and should not be considered as advice or solicitation to buy or sell any
Security.
Investment Summary
We are initiating coverage on Structural Monitoring Systems (ASX: SMN). The company’s market capitalization is expected
to be A$127.65 million, with a corresponding target stock price of A$0.50 over a 24–48 month horizon.
SMS is an Australia-based public company engaged in the development and commercialization of innovative technologybased
products for monitoring fatigue critical structures. The company’s patented CVMTM technology provides real time and
periodic monitoring facilities for checking the structural integrity of aircraft and civil infrastructure including steel bridges in
the USA which presents a major opportunity. SMS has developed simple and cost effective Structural Health Monitoring
(SHM) systems to monitor fatigue cracking due to operational stress on a periodic/continuous basis. The company has
developed sensors (based on CVMTM) that are used along with monitoring units and software systems to provide information
about the structure’s integrity. CVMTM technology has been developed in-house and SMS has acquired relevant world wide
patents for the technology to downturn any duplication in the market.
The CVMTM technology is has achieved a first mover advantage by being the first sensor based structural monitoring system
to replace traditional NDT available in both the civil and military aerospace market sectors. It significantly reduces the cost
and time associated with the mandatory structural maintenance inspection of an aircraft. In addition, it is easy to install,
lightweight and durable. Sensors can be installed in areas that are hard to access to improve accuracy and reduce the cost of
regular maintenance inspections. Therefore, they provide increased operational availability. Owing to its simple working
principle, the sensors avoid the complicated processing of outputs as in other inspection techniques, and has achieved
customer acceptance by a number of major US airlines who have requested that Boeing approve the use of CVM™ systems
as an alternative means of compliance for existing mandated high cost inspections.
The company’s near-term objectives include installation of CVMTM monitoring devices on the Boeing fleets of two U.S.
airlines in 2008. SMS also intends to negotiate technology access license and incorporate CVMTM technology structural
health monitoring products in the newly-built Airbus aircraft and get the technology qualified for further retrofit applications
by collaborating with other manufacturers. On the military aerospace front, SMS is close to commencing the installation of
CVMTM systems on U.S. and U.K. and European military aircraft fleets. This move is expected to open up the lucrative
global military aerospace market to SMS. Going forward, the company intends to broaden the military air force customer
base through focused evaluation and fatigue test programs.
SMS won several significant evaluation contracts. Recently, the company received accreditation from Airbus, the largest
commercial aircraft manufacturer in Europe, to incorporate the CVMTM technology in its aircraft. The CVMTM technology
has been included in Boeing’s NDT manual for use on Boeing aircraft. CVMTM has also received approval from the Director
General of Technical Airworthiness (DGTA) for use in the Australian Defense Forces (ADF) aircraft. In addition, the
company has received primary orders from military organizations in the U.S., China, the UK and Poland to incorporate the
CVMTM technology. Rising demand for this technology coupled with large orders are expected to enhance the company’s
market share, going forward.
Going forward, the growth in the aerospace industry is expected to support the company’s overall growth. The maintenance,
repair and overhauling (MRO) industry is expected to be worth US$62 billion in 2017 compared to US$41 billion in 2007. In
addition, due to the rise in globalization, the number of commercial aircraft is expected to grow from the current 17,800 to
27,000 in 2017. This could enable maintenance companies to realize incremental revenues on a year-on-year basis. As a
result, these companies are expected to record higher growth.
Having successfully validated its CVM TM technology for retrofit to existing aircraft, SMS plans to supplement the core
technology by developing other innovative variants of the technology which can be included into new build aircraft
structures to optimise design and reduce weight and hence provide a long-term growth path.
Furthermore, having acquired valuable experience and authentication in the aerospace industry, SMS intends to exploit the
potential of monitoring systems in other sectors such as the U.S. Bridge Monitoring Sector. In recent years, the concern over
the national surface transportation system has considerably increased in the U.S. The transportation systems require
extensive repairing and rehabilitation once they are over their projected average age. In 2000, the U.S. Federal Highway
Administration (FHWA) reported that 165,218 bridges or nearly 28% of the total national bridge inventory is in need of
rehabilitation. Of these, around 83,630 are structurally deficient based on the FHWA guidelines. The U.S. Federal
government has estimated the average cost of maintenance for the deficient bridges to be around $2.6 million per bridge,
© Khandaker Partners. All rights reserved. The information and data contained herein is not warranted or represented to be accurate and complete.
This report is intended for U.S. residents and for information purposes only and should not be considered as advice or solicitation to buy or sell any
Security.
making the total budget exposure for more than US$384 billion. Thus, the bridge maintenance industry has developed into a
huge and lucrative industry. SMS intends to tap the fast growing market and deploy its patented CVMTM technology to detect
cracks in aging steel bridge structures and national surface transport systems.
We valued SMS using the discounted cash flow (DCF) analysis, wherein future cash flows were assumed up to 2013. We
forecasted the company’s revenues to realize healthy growth as the company has got product approvals from several
organizations and in addition, the global aerospace industry is expected to grow robustly in the future. Furthermore, the
recent product approval for CVMTM from Airbus is expected to generate positive earnings for the company 2008 onwards.
Future cash flows were discounted using a cost of equity of 10%. The DCF analysis yielded a target price of A$0.50 per
share as compared to the current stock price of A$0.11 per share.