Atomos: Adding to the IP

About the author:

James Barker
Author name:
By James Barker
Job title:
Analyst
Date posted:
13 December 2019, 4:22 PM
Sectors Covered:
Retail, Technology and Telecommunications

  • Following the recent A$22m capital raise and acquisition of Timecode Systems (TCS), we resume coverage of AMS with an Add rating (Morgans clients can login to view detailed reports and price targets).
  • TCS provides AMS with strategic IP (multi-cam syncing and wireless), which can be implemented into future product releases, supporting further product launches/ demand. With sales continuing to exceed AMS’ supply, cA$15m of funds raised will be used to invest in its supply chain (primarily inventory). A further A$5m has been flagged for additional acquisitive/organic opportunities.
  • Clearly, AMS’ products continue to gain traction in a growing industry. We continue to see medium-term upside to forecasts through a number of catalysts, including stronger-than-forecast product traction, further expansion of distribution channels, additional partnerships, and other strategic acquisitions.

Announces acquisition of Timecode Systems and capital raising

AMS has announced the acquisition of Timecode Systems (TCS), a UK domiciled company with strategic IP which will be implemented into AMS product over time. TCS has developed technology that enables video/audio to be ‘synced’ at the point of capture.

This enables what has historically been an expensive/time consuming experience to be commercialised for mass-market use.

We understand TCS generated £1.2m (~A$2m) of revenue and a loss at EBITDA in FY19. AMS will pay upfront consideration of A$18m (~A$6m cash + ~A$12m scrip).

This technology will be implemented into AMS’ future product (timecode syncing and wireless capabilities).

BS bolstered to ensure product supply can meet demand

In conjunction with the acquisition, AMS has raised ~A$15m to bolster its balance sheet to provide operational flexibility.

AMS flagged that A$5m of funds will be put towards shifting its freight arrangements from air to sea-based. Given additional lead times for product delivery, this will impact working capital but is expected to realise a A$1-2m opex saving.

AMS will use an additional A$5m to create an inventory buffer for finished product. Previously, AMS manufactured on a just-in-time basis, which meant that selling out of particular product lines impacted its ability to satisfy product demand (i.e. lost revenue).

A further A$5m of funds raised has been earmarked to ‘take advantage of market development opportunities’ for organic/acquisitive growth.

Mapping out our forecasts

AMS did not provide guidance at its AGM (as expected), but did note it anticipates ‘solid growth in sales and earnings’.

AMS also noted it is ‘generally tracking in-line with expectations’. We expect the phase ‘generally’ relates to the one-month delay of its Neon range, which is due to start shipping in coming weeks.

We do not see this as a meaningful issue change, noting that product sales missed in 1H are expected to be made up in the 2H.

Additionally, given the sell-out of a number of key products (Ninja V; Shinobi), we expect any lost Neon sales can be made up in other areas.

Following the incorporation of these announcements, we make negligible changes to revenue forecasts (38% growth in FY20), while our EBITDA reduces slightly (cA$0.5m) following the acquisition of TCS (loss-making) and slightly higher cost base assumptions.

Add maintained

Following the above changes and the incorporation of a DCF valuation, our target price increases (Morgans clients can login to view detailed reports and price targets).

We maintain our Add recommendation. AMS’s strong top-line momentum in conjunction with a scalable fixed cost base should see strong operating leverage and potentially medium-term upside to our forecasts.

Key upside catalysts: further acquisitions, stronger-than-expected product releases, expansion of distribution channels, and additional partnership agreements.

Key risks: product obsolescence, loss of distributors/relationships, working capital requirements, supply chain; and competition.

More information

Morgans clients can login to view our detailed report and share price target for Atomos (AMS). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: Analyst owns shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

 

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