update- looks attractive

Hi All,
For those not up to speed with QRS, here is a summary of the present state of affairs.

Arguably, the central weakness in the current global EDS (explosive detection system) infrastructure is its inability to rapidly, efficiently, and accurately detect plastic explosives. Over the last few months, the TSA (the US Transportation and Security Administration) has been testing 3 technology platforms (in 3 separate programmes at various US airports) to fill this important niche. These technology platforms are 1) QRS’ and Quantum Magnetics’ QR technology (combined with a CT scanner) 2) Smiths/TeraView’s Terahertz imaging, and 3) Smith’s and GE’s trace detection technology. The TSA has not made public when or in what form it will release the results of these tests, but I’d expect some kind of announcement with regard to at least some of these technologies early in the new year.

Of these 3 technologies, only the trace detection technology is market ready (cf Smith’s Ion scan and GE’s Ion track), with QRS/Rapiscan/L3/LM, and QM/Invision close to having market-ready QR products. By comparison, the Smith/TeraView prototype is still at a fairly early stage in its development cycle. The consensus view from EDS experts is that the QR/CT scanner promises to be the fastest and most reliable (and thus most cost effective) of the three platforms and is therefore likely to become the dominant EDS technology over the next few years.

However, because GE and Smiths Detection have market-ready trace detection products, and because the plastic explosive niche so urgently needs to be filled, GE and Smiths Detection are already receiving some sales orders (including from some Australian airports). As an indication of the global urgency at issue here, GE and Smiths have received these orders even before their products have received official TSA endorsement.

What QRS shareholders will (or should) be hoping for is that the market penetration of the Ion track technology over the next 6months is not so significant as steal some of the thunder from the first CT-QR product launch. (In this regard, it will be interesting to see if the walk-through Ion-track/scan units, which work only if people stand under the unit for 4 to 7 seconds to receive a puff of air, will produce unacceptable gateway bottlenecks at busy times). At this stage it looks like the first TSA endorsed QR product will be a desktop CT-QR luggage scanner, which should quickly be followed by a larger unit for checked baggage. By 2007, I would expect handheld QR wands as well as walk-through QR-CT units to be commonplace. These QR products are unlikely to be manufactured by QRS itself, but by its 3 licensing partners. (QRS has indicated it is willing to pursue production of certain stand-alone QR products, but I’m not expecting revenue on these units to be significant, at least not until QRS is sufficiently capitalized to produce units at a commercial scale). If sales of trace detection and terahertz products fall flat, QRS shareholders could also expect Smiths Detection to license QRS’s technology. But if this is going to happen, it wont happen for at least another 18months.

With regard to revenue/profit numbers over the next few years, Jerry and I have argued about this in the past at length (see our earlier posts). However, to be honest, there is simply too much guesswork to be done at present to make realistic forecasts (e.g we don’t even officially know the per unit royalty payment, and how do you factor in the potential of China??), and I don’t think I, nor any other analyst, would want to be held at present to any QRS forecast. However, (1) given the stage of development that QRS and its licensing partners are presently in, (2) given the expectation of positive news flow over the next 3-6 months, and (3) taking into account the new share issues and Jan 20c options, I think the stock presently represents excellent value for a medium term investment at around 18c, and would place a strong buy recommendation (for risk tolerant punters) at below 20c.