Addvalue - DBS Research 2017-05-23: Small Mid Caps Radar Explorations

Addvalue - DBS Vickers 2017-05-23: Small Mid Caps Radar Explorations ADDVALUE TECHNOLOGIES LTD A31.SI

Addvalue - Small Mid Caps Radar Explorations

  • Addvalue, which provides one-stop mobile satellite broadband communication terminals and solutions, is expected to turnaround from losses in the last few years, with the launch of improved products targeting a niche market.
  • The addition of a new business, the world’s first Inter-Satellite Data Relay System (IDRS), would be a game changer and big boost to Addvalue’s earnings when commercialisation starts, likely in the next two to three years. Furthermore, Addvalue can also derive recurring income from airtime revenue for this new product. 
  • Near term, securing contracts from government agencies and other industrial players would be a catalyst for the stock. 
  • Addvalue could also be a potential takeover target, especially with the commercialisation of the IDRS terminal. It has already been approached by a few parties.

Provides one-stop mobile satellite broadband communication terminals and solutions 

  • Established since 1994 and listed on the mainboard of SGX in 2000, Addvalue provides one-stop mobile satellite broadband communication terminals and solutions for a variety of voice and IP-based data applications. 
  • Addvalue’s mobile satellite terminals support coverage provided by mobile satellite communication operators such as Inmarsat and Thuraya.

Launched improved-version of maritime communication system, targeting niche market. 

  • Currently, one of Addvalue’s source of income is from the sale of communication terminals targeting small fishing vessels. Its strategy is to target a niche market, instead of dealing directly with the bigger boys. 
  • Late last year, Addvalue launched an improved version of a maritime product, iFleetOne, catering to the needs of small and mid-sized fishing and leisure vessels. Positioning as a low cost, high volume product, this device has built-in Wi-Fi, which makes it cost effective, and allows users to maintain connections via smart phones, tablets or laptops, to use applications such as weather chart updates and fish catch reporting data.

New Machine-to-Machine (M2M) terminals 

  • In response to the burgeoning market demands for surveillance products utilising the Internet-of-Things (IoT) tools, Addvalue also aims to launch new M2M products.

Adding a new leg – Inter-Satellite Data Relay System (IDRS) 

  • Addvalue has developed a communication terminal that allows 24/7, continuous monitoring and control of the Low Earth Orbit (LEO) satellite by communication with a Geostationary (GEO) satellite, using Inmersat’s satellite system. Addvalue has been testing this system for a few years and is now trying to commercialise this new technology.
  • The LEO satellite orbits over 1000 miles above the earth’s surface while the GEO satellite is another type of satellite system that is much bigger and sits much further up, over 22,000 miles, above the earth. GEO satellites cover large geographical areas but there is considerable time delay in the signal as it is far from the earth. LEO provides better signal strength but is only visible for about 15 to 20 minutes from a particular area as it is fast-moving and circles around the earth as often as once every 90 minutes. 
  • GEO satellite, on the other hand, appears stationary from the ground as they orbit at the same speed as the earth.

IDRS terminal addresses current challenges faced by LEO satellite operations 

  • Addvalue’s IDRS is an innovative new service that addresses a long standing constraint on the operation of LEO satellites.
  • Currently, communications with LEO satellites is only available when the satellite is within sight of an earth station. Further, this limited connectivity is available only on a rigid time schedule based on the particular LEO satellite orbit and the geographic placement of the earth stations. 
  • With the IDRS system placed on LEO satellites, LEO satellites would be able to have continuous communication with Inmersat’s GEO satellites, and have their signals relayed to the earth stations.

Airtime agreement with Inmersat provides recurring income for Addvalue 

  • A Memorandum of Understanding with Inmarsat had been entered into to allow Addvalue to offer air time services on an exclusive basis. Satellites using Inmersat’s system would need to pay for airtime. 
  • As an exclusive distributor, Addvalue will get a cut from the airtime sales. Thus, Addvalue would be able to derive recurring income during the contract period, which typically could last from five to seven years.

Sizeable potential market for IDRS terminals 

  • Addvalue has already been engaging with potential customers including Airbus Defence and Space and other satellite manufacturers and operators. Each terminal costs about US$500,000 and the customer is also likely to buy airtime.

Plans to segregate its IDRS business from other businesses 

  • There are plans to streamline and rationalise the group’s businesses, so as to segregate its IDRS business (which is expected to carry air time revenue in time to come) from the group’s other existing businesses. Addvalue is planning to separately list its wholly-owned subsidiary unit, Addvalue Solutions Pte Ltd (Singapore), on the SGX.

War chest of S$13.1m to accelerate growth plans and commercialisation of the IDRS system 

  • Through a combination of equity and debt, Addvalue has recently raised S$13.1m to accelerate its growth plans and commercialisation of the world’s first IDRS services. 
  • The injection of fresh capital will strengthen the group’s balance sheet, improve cash flow and optimise overall cost of capital.

Expect improvement in profitability 

  • Addvalue has been reporting net losses in the past few years.
  • For 9-month ended 31 Dec 2016, Addvalue reported a net loss of US$1.2m on turnover of US$9.4m. The loss was mainly due to the continued amortization of a unit that is in the process of being sold. 
  • With the launch of new products targeting the niche market, Addvalue could soon turnaround from losses in the last few years.

Potential takeover target 

  • Addvalue has been approached by a few parties with regards to taking a significant stake in the group that could result in a change of control. One of them is an offer by a Chinese party to acquire its wholly-owned subsidiary, Addvalue Communications for S$308m cash.

Key Risks 

Delay / failure in the launch of the IDRS system 

  • Addvalue has spent a few years developing the IDRS system and is now close to commercialisation. Delay or failure to launch this product could affect profitability.

Unable to secure customers 

  • A successful launch of the IDRS system is able to generate revenue if it can sign up customers. Securing new customers could be challenging, especially for a new product.

Unable to secure grants to cover high R&D expenses 

  • Ongoing development expenditure could be high as Addvalue needs to continue to develop its proprietary products, including new spin-off products. In the past, Addvalue has received grants to cover part of the high R&D expenses.

Target Price: N/A

Ling Lee Keng DBS Vickers | 2017-05-23
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