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21 Nov 18. Screening for profitable growth. Sedgefield-based Kromek (KMK:25p), a radiation detection technology company focused on the medical, security and nuclear markets, has announced yet another contract win and one that has major significance. The company has been awarded a ground breaking five-year supply contract worth a minimum of $7.8m (£6m) by an existing OEM customer, a leading company in x-ray imaging systems, for its next generation baggage security screening detectors. Kromek’s proprietary cadmium zinc telluride (CZT) technology is designed to enhance the detection of an extensive range of threat materials and will be installed within the client’s existing baggage screening units to improve their accuracy and efficiency. The contract starts immediately and is unlikely to be the last as the need to improve border security could easily persuade rivals to adopt the cutting edge technology too, a point made by analysts Paul Hill and Andy Edmond at Equity Development.
The contract takes the total awards won by Kromek to around $20m over the past nine months. It also comes at a time when there is a strong tailwind driving the $2bn global security screening market in air transportation, ports, borders and freight. Analyst Robin Byde at Cantor Fitzgerald rightly points out that annual growth of around 5 to 6 per cent in the security screening market is being driven by multiple factors including:
■ Evolving security risk environment with “smarter” devices and globalised threats.
■ Rising regulatory requirements, particularly in the USA, Europe and Asia.
■ Growing numbers of passengers and freight shipments. For instance, International Air Transport Association (IATA) forecasts a compound annual growth rate (CAPR) of 4.9 per cent in passenger numbers to 2040 and CAGR of 2.3 per cent in air cargo shipments in the same period.
■ Globalisation of trade and increasing recognition of the need for more scanning of shipments at airport, ports and borders generally.
■ Move to reintroduce border controls in some countries and regions.
Arnab Basu, chief executive of Kromek, believes this is a significant, long-term contract in the security screening market for his company. I agree as it continues a trend of multi-year contracts Kromek has been signing as customers move away from legacy systems and embrace CZT detection technology.
Moreover, the security screening contract de-risks analysts’ estimates for the financial year to end April 2019. Analysts at both Cantor Fitzgerald and Equity Development predict that Kromek is on track to lift annual revenues by more than a quarter to £15m and more than treble underlying cash profits to £1.65m. The growing contract momentum also de-risks expectations of cash profits almost doubling to £3.1m on revenues of £18.8m in the 2019/20 financial year.
It’s worth noting that analysts forecasts don’t factor in the blue sky opportunity Kromek has with its ‘dirty bomb’ detectors (10 times faster at detecting gamma and neutron radiation, and at a tenth of the cost of conventional detectors) which could be rolled out across 20-plus cities in the US if Kromek secures a slice of an $8.2bn US government contract. Each city contract could be worth $10m in revenue alone to Kromek, highlighting the substantial profit potential. The company’s technology is already proving popular with the US Department of Homeland Security (to develop CZT detector modules for commercial off-the-shelf detectors for advanced X-ray systems in passenger baggage screening), and the Defence Threat Reduction Agency (for the development of the next generation of handheld nuclear radiation detectors).
In medical imaging, Kromek’s patented CZT-based radiation detection technologies are already used by 11 OEM customers across single photon emission computed tomography (SPECT), BMD (to treat osteoporosis) and gamma probes (used for radio-guided surgery). The detectors are capable of diagnosing and monitoring conditions like Parkinson’s disease and making early diagnosis of cancer too. That’s worth noting if major OEM competitors to market leader GE Healthcare (which has been stealing a march on its rivals) decide to contract Kromek as a CZT supplier for their own CZT-SPECT medical imaging cameras. Kromek is one of the few independent, end-to-end CZT manufacturers with the required design, engineering and technological skills to produce sufficient commercial quantities of the material, and has capacity to scale up production from its state-of-the-art facility in Pittsburgh, Pennsylvania.
The point being that net of a £7.7m cash pile on Kromek’s balance sheet, the company’s enterprise value of £57m equates to 18 times cash profit estimates for the 2019/20 financial year. If a major medical imaging, dirty bomb detector or security baggage screening contract is landed, as I suspect it will be, then that multiple will fall sharply given that Kromek is highly operationally geared so an increasing proportion of incremental sales drop to the bottom line. I would also flag up that well over half of Kromek’s sales are in US dollars, a point worth noting in light of ongoing sterling weakness so there is a positive translational currency tailwind on the company’s international sales. Since the start of Kromek’s 2019/20 financial year in April, sterling has fallen by 11 per cent from £1:US$1.44 to £1:US$1.28, thus making US sales far more valuable.
So, although Kromek’s shares are unchanged on the 25p level at which I initiated coverage (‘Follow the smart money’, 27 Feb 2017), albeit the share subsequently hit 37p before profit-taking took hold, and have moved sideways since the company last announced a spate of contract wins when I last covered the investment case (‘Kromek’s contracts building up’, 20 August 2018), I maintain the view that a return to those share price highs is a distinct possibility if the contract momentum continues to build. Buy. (Source: Investors Chronicle)
22 Nov 18. QinetiQ acquires 85% shares of Inzpire Group. UK-based defence technology company QinetiQ Group has acquired 85% of shares of operational training provider Inzpire Group. As part of the transaction terms announced on 22 October, QinetiQ has completed its strategic£23.5m investment in Inzpire. In addition, QinetiQ is entitled to acquire the remaining 15% of Inzpire’s shares after two years. Inzpire operates as a major supplier of training and mission systems for military customers in the UK and across the globe. Approximately three-quarters of the company’s revenue is generated from airborne training and evaluation services, primarily for the British Royal Air Force (RAF).
The remaining company revenue comes from the sale of a number of aviation mission system products, ranging from standalone tablets to full mission support systems integrated with aircraft avionics. The acquisition will help QinetiQ increase its defence operational training capabilities, in addition to supporting the company’s mission systems expertise with a portfolio of disruptive products and providing significant international potential. Inzpire founders Hugh Griffiths and Mark Boyes will continue to serve the company in their current roles as the chief executive officer and chief technology officer respectively. Strengthened by the support of QinetiQ, the Inzpire founders intend to retain operational independence of the company and sustain its continued growth both nationally and internationally. In October, QinetiQ Group successfully completed the acquisition of EIS Aircraft Operations for a total cost of €70m on a cash-free, debt-free basis. (Source: airforce-technology.com)
21 Nov 18. UK’s Babcock shares slump after one-off charge, nuclear outlook cut. British engineer Babcock (BAB.L) will take a charge of £120m to shrink parts of its business after it warned that income from nuclear decommissioning would fall sharply next year, sending its shares tumbling. Babcock, a key partner of Britain’s Ministry of Defence (MoD), has come under intense scrutiny in recent weeks after an anonymous research group questioned the management of its business, meaning its results had been highly anticipated. On Wednesday the group said the exceptional charge would cover the closure of a shipyard and the restructuring of its Oil and Gas business, including the sale of helicopters facing less demand for transporting workers to offshore platforms. Analysts said the first-half results were broadly in line with forecasts but the cut to future revenue and profit from decommissioning Magnox nuclear sites led to 2019/20 downgrades. Its shares were down 10 percent, taking the stock down 36 percent since June and to its lowest level in seven years. (Source: Reuters)
21 Nov 18. Babcock sees review of returns policy once in right shape – CEO. British engineering and defence services firm Babcock (BAB.L) expects to review shareholder returns policy once it is in the right shape, Chief Executive Archie Bethel told analysts on Wednesday.
“We recognise the same as everyone else how low the shares are being valued. It’s difficult for us to really understand why that is the case because we have pretty much (grown) the business year-on-year for the last 15 years,” Bethel said after first-half results.
The group was focusing on “getting into the right shape and degearing and as we do that … I’m pretty sure we will be seriously reviewing shareholder return policy,” he said. (Source: Reuters)
21 Nov 18. ThyssenKrupp expects 2019 profit to rise ‘significantly.’ ThyssenKrupp said full year net profit in 2019 should rise “significantly” even as the group spends nearly €1bn to split itself in two by 2020. The German steel and industrial goods group reported Wednesday that net income for its fiscal 2018 year was €60m, versus €271m a year earlier, as flagged by two profit warnings issues since July. Adjusted EBIT – the figure analysts focus on – was €1.55bn, down from €1.72bn. Before the profit warnings analysts had expected around €2bn. Guido Kerkhoff, chief executive since July, called the past year “turbulent and challenging” as the group “initiated one of the biggest realignments” in its 200-year history. He implied the slate is now clean, pledging: “We are fully committed to our performance targets. Measures to achieve them have been agreed with the business areas. This will raise the performance of ThyssenKrupp as a whole.” ThyssenKrupp said it will cost a “high three-digit million euro range” to split the company into two structures. This will “weigh heavily on net income and free cash flow,” but such expenses “will be clearly outweighed by earnings improvements.” The group aims to have the separation formally approved at the annual shareholders meeting in January 2010. The two companies will operating “largely as separate enterprises as of October 1, 2019.” Two management teams will be decided in spring of next year. (Source: FT.com)
20 Nov 18. Khashoggi killing complicates Saudi rescue bid for South African arms firm. Loss-making South African arms maker Denel has a problem as it fights to survive. Its potential saviour is Saudi Arabia, now drawing fierce criticism following the killing of journalist Jamal Khashoggi. But after being mismanaged for years and tainted by a far-reaching influence-peddling scandal, state-owned Denel now needs the kind of help that the deep-pocketed Saudis can provide. Reuters analysed five years of South African arms export data, spoke to former and current Denel employees and obtained internal Denel presentations on plans to rescue the company.
What emerged is that Saudi Arabia and its allies account for almost half of South Africa’s recent arms exports and a significant portion of future orders. So rejecting Riyadh’s $1bn offer could severely hamper efforts to save Denel, which relies on foreign sales for more than 60 percent of its revenue. Saudi Arabia is seeking a broad partnership with Denel that would include acquisition of the company’s minority stake in a joint venture with Germany’s Rheinmetall.
The Saudis – on a drive to build a domestic arms industry as traditional suppliers worry about its human rights record – are keen to close the deal by the end of next month. A source with knowledge of its offer said the kingdom could take its business elsewhere if that does not happen.
Some Denel employees are also keen on a tie-up, seeing it as the only way to rescue the firm, which is struggling to pay salaries. But some South African officials are concerned about doing business with Saudi Arabia.
“Denel depends on the deal. The entire industry depends on the deal,” said Helmoed Heitman, a defence analyst. “I think it’s 50/50. The pragmatists want to go in, but the Khashoggi thing is bad PR.”
With President Cyril Ramaphosa and the ruling African National Congress facing an election next year, the deal promises to become a political issue.
South Africa’s main opposition party, the Democratic Alliance, says the Saudi offer should be rejected.
“Putting our state defence firm at the disposal of a murderous despot would make the whole nation complicit in the human rights atrocities of the regime of Saudi Crown Prince Mohammed bin Salman,” said DA lawmaker Stevens Mokgalapa.
“That there are negotiations to consider this at all is an indictment of the approach of the Ramaphosa government to international human rights violations.”
Saudi Arabia denies that the crown prince ordered Khashoggi’s killing.
APARTHEID INDUSTRY
Denel owes its existence to South Africa’s own dark past.
Its direct forebear, Armscor, was forced to produce nearly all of its own defence and security hardware in response to sanctions on the apartheid government.
It’s that expertise that is now so attractive to Saudi Arabia as it seeks to build its own industry, Andreas Schwer, head of the Saudi state defence company, SAMI, told Reuters.
“South Africa is very integrated in their capabilities because they had to become quite independent,” he said last month. “We believe South Africa can offer us more than just products. They can help us on this journey.”
Denel – formed in 1992 – only started to turn a regular profit from 2011 after being restructured several times. But its financial position remained weak as it used profits from some divisions to subsidise others.
In 2016 senior management became embroiled in a corruption scandal involving friends of former president Jacob Zuma, the Gupta brothers. In response, banks pulled lending. The company recorded a 1.7bn rand ($122m) loss – its first in eight years – in the financial year that ended in March.
Denel’s new management is working on a turnaround plan to secure new funding and exit some loss-making business units, like satellite development and its Pretoria Metal Pressings foundry, a presentation seen by Reuters showed. It also wants to cut its salary bill by 20 percent and achieve cost savings of between 157m and 608m rand in each of the next five years, the presentation showed. But it missed out on additional state funds in last month’s budget, and labour unions reject wage cuts. A cash crunch has become so dire that the company cannot provide toilet paper to some employees, and production lines sometimes stand idle as payments to suppliers fall behind.
Members of the National Union of Metalworkers of South Africa, which represents a quarter of Denel’s 4,000-strong workforce, marched to the public enterprises ministry this month to demand a 7 bn rand ($500 m) bailout. Insiders say even that would be little more than a stopgap.
“The machine has stopped,” a former Denel executive told Reuters. “I can’t see how Denel can pull itself up by its bootstraps without an equity partner.”
‘OUR COMMON RELIGION’
Ramaphosa appeared open to bringing in a partner to bolster Denel when he acknowledged the Saudi bid earlier this month.
Foreign Minister Lindiwe Sisulu said any deliberations over a potential deal would be based on South Africa’s values.
“Our common religion is human rights. We have suffered too long to ever veer away from that religious belief,” she told journalists last month.
But Khashoggi’s death has created a dilemma.
Asked about the killing, Ramaphosa told reporters: “We are hoping that they will deal with the matter speedily so that the truth will come out.”
The United States has announced sanctions against those believed to have been directly involved. Germany is halting arms exports to Saudi Arabia until it explains the killing.
It’s the kind of backlash that Riyadh – under fire since 2015 over its war against in Yemen – has long feared and it explains why the government is building its own arms industry. It’s also why it has turned to South Africa.
“South Africa’s export policy was always stable and robust … and we need very reliable partners on the political side, on the export policy side. Partners who do not change their minds,” SAMI CEO Schwer said before Khashoggi’s murder.
In 2013, South African sales to coalition allies Saudi Arabia and the United Arab Emirates made up around 9 percent of total arms exports, a Reuters analysis of data shows.
Since the Yemen war began, South Africa has sold the two countries military hardware – armoured vehicles, sniper rifles, bombs, mortars and surveillance equipment – worth 4.6bn rand, or 44 percent of total arms exports.
But what might have appeared a natural arrangement to save Denel now appears fraught.
Despite apparent government enthusiasm to do business with Saudi Arabia and Denel’s pressing need for financial rescue, not everyone is open to the kingdom’s overtures.
Responding to Reuters publication of details of the Saudi bid, Denel chairperson Monhla Hlahla rejected out of hand a sell-off of Denel’s stake in Rheinmetall Denel Munition.
“The board of Denel is selling neither Denel, or RDM. I want to be clear about that,” she told a local television network.
News of the Saudi overtures has also provoked an outcry on South African social media, but a senior ANC source said the government would not be rushed into a decision.
“It’s a strategic asset, so I would be wary about dealing with any foreign country, be that the Saudis or anyone else,” the source said.
But despite Ramaphosa’s assertion that Saudi Arabia was only one of several suitors, no others have come forward publicly.
“A bn dollars over two or three years would turn around Denel,” said Heitman, the defence analyst. “The longer we wait, the less Denel is worth. People will leave and that’s where the value lies.” (Source: Reuters)
20 Nov 18. QinetiQ’s single source drag to ease in 2020. A mixed outcome for QinetiQ (QQ.) at the half-year mark, achieved against continuing constraints on Ministry of Defence (MoD) spending, and prior to the additional £1bn commitment outlined by the government in the recent Autumn Budget. Adjusted operating profit was flat once you disregard £6.5m in non-recurring items at the 2017 half-year, while a 9 per cent increase in organic orders is set against an 8 per cent fall in the funded order backlog to £1.88bn.
So, despite the challenging backdrop, the defence contractor has continued to secure new business, including a $95m (£74m) Battlefield and Tactical Communications & Information Systems (BATCIS) contract with the MoD. The group continues to diversify its revenue streams, as shown by a $44m US robotics deal won over the first-half, which means that the proportion of oversea contracts has risen to 31 per cent from 26 per cent. In the medium term, management wants this to reach 50 per cent.
Broker Barclays forecasts adjusted full-year earnings per share of 17.4p for the March 2019 year-end, down from 19.2p in FY2018.
IC View
Visibility remains a plus point, with 90 per cent of revenue for FY2019 currently under contract, and although margins continue to be constricted by well flagged single source regulatory changes, these are expected to dissipate from FY2020 onwards (75 per cent of EMEA Services revenue is derived from single source contracts). Much attention will focus on the outcome of renegotiations with the MoD in relation to their long-term partnering agreement (LTPA), which recently yielded an exclusive engineering deal. A solid out-turn, but a forward rating of 16 times forecast earnings suggests the market is up to speed. Hold. Last IC View: Hold, 252.8p, May 24 2018. (Source: Investors Chronicle)
20 Nov 18. The contract momentum at Pennant (PEN:130p), an Aim-traded supplier of training and support products and services that train and assist engineers in the defence and civilian sectors, shows no sign of abating. At the start of October, the company landed a £10.2m contract to supply training aids (mainly off the shelf equipment) to a Middle Eastern customer. The majority of revenue will be recognised in the 2019 financial year, which means that over 90 per cent of house broker WH Ireland’s revenue estimate is already covered. The news gets better as the Canadian government has just awarded the company a new consulting services contract for the use of Pennant’s OmegaPS suite of software that provides analytics around logistics support and asset life cycles and is the product of choice for The Canadian Department for National Defence.
The contract is for an initial two-year term with an option to extend it until November 2023. The value of the two-year framework agreement is C$11.9m (£7m), rising to C$30m (£17.7m) if extended for five years, representing a 50 per cent increase on the previous contract Pennant was awarded.
In addition, Pennant has secured an initial order (undisclosed value at this stage) from a new customer (a prime rail car builder) for the provision of technical documentation services, an area in which the company has extensive experience and developed a well-established reputation.
Moreover, Pennant is making “good progress in negotiations relating to a potential contract for the design, build and delivery of training equipment for which it has been down-selected”. It is anticipated that the (undisclosed) customer will formally award the contract either later this year or in the first half of 2019. The potential value of the contingent contract is £25m to £30m, deliverable over 2019, 2020 and 2021. If landed this would almost double Pennant’s order book to £70m. It’s worth noting that analysts have not factored in any contribution from this massive contingent contract in their conservative looking 2019 pre-tax profits and EPS estimates of £3.65m and 10p, respectively, based on annual revenues of £21.3m.
The contract momentum is unlikely to slow anytime soon given that industry drivers are very supportive. These include a move by defence forces and other organisations towards outsourcing training services, including updating their training devices; the use of ‘real’ equipment for training has safety implications, is expensive and often impractical, thus supporting demand for Pennant’s training aids; and new capital equipment platforms for land, naval, air and rail are becoming ever more sophisticated, thus increasing the requirement for training.
So, with Pennant’s cash-rich balance sheet providing the funding to deliver on the raft of contract wins, and the shares rated on a 2019 forward PE ratio of 13 and earnings upgrades highly likely, then I remain very positive on the investment case. I first suggested buying the shares, at 109p, in my August Alpha Report (‘Pennant International: Poised for a return to growth’, 13 Aug 2018), and maintain my 180p target price. Buy. (Source: Investors Chronicle)
20 Nov 18. China’s CSIC looks to speed up restructuring. The China Shipbuilding Industry Corporation (CSIC) has outlined plans to accelerate restructuring to spur innovation and efficiencies in major programmes including the construction of aircraft carriers for the People’s Liberation Army Navy (PLAN). CSIC said on 18 November that its restructuring efforts are being influenced by Chinese President Xi Jinping’s focus on achieving national capability development through the civil-military integration (CMI) programme. CMI encourages state-owned defence corporations such as CSIC to develop through dual-use technologies and also to strengthen through corporate restructuring, private-sector investment, and engagement with financial mechanisms such as share listings.
CSIC’s chairman Hu Wenming said in a statement that in response to President Xi’s call for deeper CMI implementation CSIC “should strengthen its strategic positioning and accelerate industrial integration”. (Source: IHS Jane’s)
20 Nov 18. Elbit Systems Ltd. (NASDAQ: ESLT and TASE: ESLT), (the “Company”) the international high technology company, reported today its consolidated results for the quarter ended September 30, 2018.
Backlog of orders at $8.1bn; Revenues at $895m;
Non-GAAP net income of $70m; GAAP net income of $64m; Non-GAAP net EPS of $1.63; GAAP net EPS of $1.50
Bezhalel (Butzi) Machlis, President and CEO of Elbit Systems, commented: “We reported a solid level of revenue in the quarter, growing by 12% over last year to almost $900 m. At the same time, we were able to show growth in backlog. This demonstrates that our business remains strong, in line with our strategy of consistently expanding our addressable markets through internal development of defense related products and solutions, as well as acquisitions of synergistic businesses.”
Third quarter 2018 results:
Revenues in the third quarter of 2018 were $895.2m, as compared to $800.7m in the third quarter of 2017.
Non-GAAP (*) gross profit amounted to $260.7m (29.1% of revenues) in the third quarter of 2018, as compared to $256.3m (32.0% of revenues) in the third quarter of 2017. GAAP gross profit in the third quarter of 2018 was $255.9m (28.6% of revenues), as compared to $251.0m (31.3% of revenues) in the third quarter of 2017.
Research and development expenses, net were $69.6m (7.8% of revenues) in the third quarter of 2018, as compared to $67.1m (8.4% of revenues) in the third quarter of 2017.
Marketing and selling expenses, net were $69.4m (7.8% of revenues) in the third quarter of 2018, as compared to $66.9m (8.4% of revenues) in the third quarter of 2017.
General and administrative expenses, net were $37.8m (4.2% of revenues) in the third quarter of 2018, as compared to $34.8m (4.3% of revenues) in the third quarter of 2017.
Non-GAAP(*) operating income was $85.7m (9.6% of revenues) in the third quarter of 2018, as compared to $89.2m (11.1% of revenues) in the third quarter of 2017. GAAP operating income in the third quarter of 2018 was $79.1m (8.8% of revenues), as compared to $82.2m (10.3% of revenues) in the third quarter of 2017.
Financial expenses, net were $8.1m in the third quarter of 2018, as compared to $9.3m in the third quarter of 2017.
Taxes on income were $8.9m (effective tax rate of 12.6%) in the third quarter of 2018, as compared to $14.6m (effective tax rate of 20.0%) in the third quarter of 2017. The effective tax rate is affected by the mix of the tax rates in the various jurisdictions in which the Company’s entities generate taxable income.
Equity in net earnings of affiliated companies and partnerships was $2.7m (0.3% of revenues) in the third quarter of 2018, as compared to $3.5m (0.4% of revenues) in the third quarter of 2017.
Net income attributable to non-controlling interests was $0.7m in the third quarter of 2018, as compared to $0.3m in the third quarter of 2017.
Non-GAAP(*) net income attributable to the Company’s shareholders in the third quarter of 2018 was $69.8 m (7.8% of revenues), as compared to $67.3 m (8.4% of revenues) in the third quarter of 2017. GAAP net income attributable to the Company’s shareholders in the third quarter of 2018 was $64.1m (7.2% of revenues), as compared to $61.5m (7.7% of revenues) in the third quarter of 2017.
Non-GAAP(*) diluted net earnings per share attributable to the Company’s shareholders were $1.63 for the third quarter of 2018, as compared to $1.57 for the third quarter of 2017. GAAP diluted earnings per share in the third quarter of 2018 were $1.50, as compared to $1.44 for the third quarter of 2017.
The Company’s backlog of orders for the quarter ended September 30, 2018 totaled $8,108m as compared to $7,641 m as of September 30, 2017. Approximately 72% of the current backlog is attributable to orders from outside Israel. Approximately 45% of the current backlog is scheduled to be performed during 2018 and 2019.
Operating cash flow used in the nine months ended September 30, 2018 was $20.3m, as compared to $140.0m used in the nine months ended September 30, 2017.
19 Nov 18. Element acquires UK-based aerospace direct lightning test specialist. Element Materials Technology (Element) has announced that it has acquired Cobham Technical Services Lightning Testing & Consultancy, a lightning test and consultancy specialist, from Chelton Limited.
Located in Abingdon, UK, the test facility provides comprehensive lightning testing services and consultancy to the aerospace and defense sectors and is the only commercial laboratory in the country with the capability to test aero-structures for the effects of direct lightning strikes (DO160/ED14 Section 23 testing).
Its fully-equipped lightning simulation laboratory also specializes in testing for indirect effects on electrical equipment and systems, and high voltage testing of antennas and windscreens of up to 500kV. Its team of eleven highly specialized experts provide consultancy on all stages of aircraft lightning protection design and certification.
Rick Sluiters, EVP Aerospace at Element, commented: “We are delighted to welcome Cobham Technical Services Lightning Testing & Consultancy, a recognized leader in the lightning test and consultancy business, to Element.
“This acquisition adds direct lighting testing to our capabilities, which means that we are now able to offer the full-suite of DO160 services, enabling time-to-market advantages through shorter testing turnaround times – saving our customers time and money.”
Element is one of the largest independent providers of product qualification testing services to the global aerospace sector. With more than 80 years of sector experience in both commercial and military aircraft and more than 3,000 technicians, engineers and scientists, located in the USA, UK, Europe and China, the Group works in close partnership with all of the aerospace primes and their supply chain partners to help them to develop better components, products and systems to support their drive to produce lighter, more fuel efficient aircraft.
18 Nov 18. Chinese surveillance group faces crippling US ban. Reliance on American chips leaves facial recognition camera maker Hikvision vulnerable. The facial recognition cameras that track Muslims coming in and out of hundreds mosques in the western Chinese region of Xinjiang owe a debt to American innovation: their computer chips were designed in Silicon Valley. The maker of the cameras, Hikvision, is one of the world’s biggest CCTV companies, selling video surveillance throughout China and across the globe. But despite its devices playing a key part in what human rights campaigners describe as the systematic repression of Xinjiang’s 11m Muslim Uighurs, Hikvision has avoided a ban on importing US components. That is despite China Electronics Technology Group (CETC), its parent company and a state defence contractor, being slapped with just such a ban this year. The US is now considering sanctions against companies and Chinese officials over Beijing’s detention of thousands of ethnic Uighurs and other Muslim minorities in internment camps, The New York Times reported last month, citing American officials. Washington has already banned government agencies from buying Hikvision products, and concerns among investors about an import ban on US components have contributed to a 37 per cent drop in the company’s share price from its high earlier this year. Such a move could be crippling. The core components behind Hikvision’s most cutting-edge products — everything from the sophisticated chips that power its popular “smart” cameras to the hardware that stores high-definition footage — come from US companies. Hikvision’s AI ambitions would be severely stunted without GPUs from Nvidia and Intel Charles Rollet, IPVM The supply chains illustrate just how heavily intertwined sourcing for the Chinese and US tech sectors are, creating potentially disastrous consequences for Chinese companies unable to immediately replace high-tech components as the trade war between the two countries simmers. “Components from western companies are pretty important to Hikvision’s overall supply chain. At the very least, a US government export ban would cause a major disruption,” said Charles Rollet, an analyst at IPVM, a video surveillance research company. Globally, Hikvision is known for its high-end cameras, some equipped with facial recognition, a function that relies on powerful graphics and computer chips to analyse surveillance footage. Only a handful of companies are capable of making these type of chips on a commercial scale. One of them is Intel and its subsidiary Movidius, which provide computer processing chips (CPUs) as well as graphics chips (GPUs) for Hikvision’s line of Machine Vision cameras and related systems hardware launched last year. Intel said its “vision products are used by our customers worldwide, including in China, for a broad variety of computer vision applications”. Nvidia, another American tech multinational, supplies Hikvision with its Jetson AGX “supercomputer” system, a set of deep-learning GPUs that provide the computing power behind Hikvision’s urban surveillance systems. Recommended FT Magazine Inside China’s surveillance state Ambarella, a California-based semiconductor company, makes powerful “computer vision” camera chips for a wide variety of Hikvision systems, and derives approximately 10 per cent of its $310m in annual revenue from them, according to Morgan Stanley. “Hikvision is an important customer,” said Ambarella in a statement, noting that it was a Cayman Island company with major offices in both China and the US while its manufacturing was outsourced to companies such as Samsung. “We can’t control resale when a product is placed in the stream of commerce . . . As a result, we don’t always have full visibility into how application developers choose to use our GPUs,” said an Nvidia company spokesperson, adding that Nvidia sold chips in full compliance with US export restrictions. As Hikvision cameras have become increasingly powerful, their demand for larger memory capacity has grown, too. Since 2005 the Chinese company has worked with American data storage group Seagate to design and manufacture custom storage solutions for the digital and network video recorders widely used in any Hikvision surveillance system. Seagate did not respond to requests for comment. “Hikvision is constantly promoting efforts to bring more artificial intelligence to their products using tech like facial recognition, etc. The company’s AI ambitions would be severely stunted without GPUs from Nvidia and Intel,” Mr Rollet said. Chinese chips have to be better on cost or quality by an order of magnitude to displace incumbents, and few have been able to offer that Dan Wang, Gavekal Dragonomics The Chinese company has in the past denied claims that it is dependent on US suppliers. “In the surveillance industry, the components we need are much less than those needed for smartphones or telecom equipment. We think we should be OK if we cannot buy anything from the US,” Huang Fanghong, Hikvision’s vice-president, reassured investors during an earnings call this April. Hikvision declined a request for comment. China is spending billions of dollars on building four massive chip plants across the country in an effort to become globally competitive in semiconductors by 2025. Chinese chip design companies, such as the telecoms company Huawei’s HiSilicon, have also emerged to create in-house computer chips in consumer devices. But all the four factories being built specialise in memory chips, not the kind of processors used in Hikvision systems. Moreover, analysts said Chinese chip set brands would have to invest years of time and money not only in research and development but also in accumulating manufacturing experience to pull off what is one of the most complex engineering tasks in the world. “Chinese chips have to be better on cost or quality by an order of magnitude to displace incumbents, and few have been able to offer that. It would be especially difficult to displace Intel and Nvidia, which have ecosystems of developers building off their architectures,” said Dan Wang, technology analyst at Gavekal Dragonomics, a Beijing research firm. The gap between Chinese capabilities in CPU and GPU design and manufacture has allowed foreign suppliers to remain dominant, despite the fact that Hikvision and Chinese companies such as Huawei have been working on AI chips for years. “I know that Hikvision have [been] working on their [own] chip, but through all years, we continued to be their supplier,” Fermi Wang, Ambarella’s chief executive, said on an August investor call, explaining why Chinese chip developers would have a difficult time replacing foreign suppliers. “I think that the [computer vision chip] will create a bar for us to provide us our barriers of entry for a while.” Recommended US China chip wars For Hikvision, the clock is ticking. In October, the US slapped Chinese state-backed chipmaker Fujian Jinhua with an export ban, citing national security reasons, dealing a harsh blow to a company heavily dependent on American chipmaking equipment. Meanwhile, a temporary export ban imposed in April almost crippled the Chinese telecoms company ZTE, which was forced to cease operations only weeks later. Formerly a research institute of CETC, a state enterprise that provides hardware to China’s military, Hikvision was spun off as a separate company in 2001 and listed on the Shenzhen exchange in 2010. It remains 42 per cent owned by CETC affiliates, according to corporate documents. But state support — once a guarantor of commercial success — has now become a stumbling block for the ambitious surveillance company. In its most recent earnings report this October, Hikvision posted its slowest quarterly growth in eight years, despite the fact that its government subsidies rose more than 30 per cent in the first nine months of the year. (Source: FT.com)
19 Nov 18. Babcock says cash cost of shoring up balance sheet not material. British engineering firm Babcock (BAB.L) said on Monday the net cash cost of strengthening its business would not be material, as it sought to allay doubts about its financial health for the second time in a week. Babcock reiterated that it was exiting a series of low-margin businesses to strengthen its balance sheet. “Whilst the exact impact of these actions has yet to be determined by the Board, we do not expect the net cash costs to be material,” it said. Doubts over its financial health pushed its shares 4 percent lower last week despite a statement insisting that full-year cash generation was as expected. (Source: Reuters)
15 Nov 18. wolfSSL, a leading provider of TLS cryptography, this week announced the establishment of its subsidiary, wolfSSL Japan G.K.. For the first corporate entity of wolfSSL outside of USA, it appointed Yoko Suga as the president and Takashi Kojo as Chief Manager of Engineering. wolfSSL focuses on providing lightweight and embedded security solutions with an emphasis on speed, size, portability, features and standards compliance. wolfSSL is the first and only to offer a commercial release of TLS 1.3 in the world as of today. Having the headquarters in Edmonds, WA, wolfSSL has been chosen by more than 1,000 OEM customers since its foundation in 2004.
“Japan is an extremely important region for us,” said Larry Stefonic, Co-Founder and CEO of wolfSSL. “wolfSSL has been selected by quality conscious IoT device manufacturers in the region. This subsidiary’s primary goal is to deliver a professional level of service and commercial support to accommodate increasing needs from domestic embedded device manufacturers.”
“wolfSSL is committed to providing the best tested library for securing our customers’ products,” said Todd Ouska, Co-Founder and CTO of wolfSSL. “We have been learning a lot from our customers in Japan while enhancing and improving our products over 7 years. wolfSSL continues to put effort 2 into making high quality products as well as providing expert consulting work with our extended engineering team branch in Japan.”
15 Nov 18. VITEC, a worldwide leader in advanced video encoding and streaming solutions, today announced that it has acquired Telairity, a provider of H.264 encoding workflow solutions to broadcasters worldwide.
“The strategic acquisition of Telairity further strengthens VITEC’s position in the broadcast market,” said Mark D’Addio, VITEC’s senior vice president, sales and marketing. “VITEC’s HEVC technology and streaming expertise address a growing need for broadcasters to reduce bandwidth requirements while maximizing video quality.”
Matt McKee, formerly at Telairity, has joined VITEC as director of broadcast sales. He added, “Telairity customers have been asking for a compelling reason to upgrade their broadcast links. VITEC HEVC solutions offer the highest levels of network efficiency, video quality, and reliability especially for Digital Satellite News Gathering (DSNG) and contribution applications.”
VITEC HEVC technology and solutions make it more efficient than ever to deliver the highest- quality IPTV streams over satellite links, private networks, and the internet. Powered by VITEC HEVC GEN2+, an all-hardware compression chip, MGW Ace Encoder sets new industry standards in video quality, bit rate, and latency. This revolutionary encoder provides best-in class HEVC video quality up to 4:2:2 10-bit and an encoding latency down to 10ms in ultra low latency (ULL) mode for an impressive 65ms glass-to-glass latency.
VITEC is a leading worldwide end-to-end video streaming solutions provider for broadcast, military and government, enterprise, sports and entertainment venues, and houses of worship. Combining broadcasting with live streaming capabilities, VITEC’s H.265 (HEVC) and H.264 offering is the most extensive in the market with encoding and decoding appliances, IPTV solutions for desktops and mobile devices, and PCI cards with SDK for integration projects. VITEC’s intuitive digital video solutions can be tailored to each customer’s unique market needs, delivering easy-to-use technology that ensures high-quality, low-latency HD video, capturing live and recorded events for seamless distribution in a multitude of formats anytime, anywhere, to any device.
Since 1988, VITEC has been a pioneer in the design and manufacture of hardware and software for video encoding, decoding, transcoding, recording, conversion, archiving, and streaming over IP. In keeping with the company’s tradition of innovation, VITEC is the first company to bring bandwidth-efficient HEVC compression technology into the field with portable streaming appliances.
15 Nov 18. Dell paves way for return to market with sweetened deal for tracking stock. Headline bid valued raised to $120 per share in cash to win over shareholders. Holders of tracking shares have been reluctant to accept the originally proposed buyback offer. Dell sweetened a bid to buy back shares tied to its stake in rapidly growing software group VMware to $23.9bn after it reached a deal with some shareholders who had initially opposed its offer, paving the way for the PC maker’s return to the US stock market. Shareholders in DVMT, which track’s the company’s holdings of VMware, have been reluctant to accept a $21.7bn buyback offer originally proposed in July where they would swap their holdings in the stock for cash and shares in a newly relisted Dell. But after weeks of negotiations with Dodge & Cox, Elliott Management, Canyon Partners and Mason Capital, which hold 17 per cent of DVMT shares, Dell agreed to raise the headline value of its bid from $109 per share to $120 per share in cash or 1.5 to 1.8 in new shares in Dell. The cash component will be capped to $14bn — up from $9bn in the July offer. Once the cash part of the offer is exhausted, which implies that not all shareholders will be able to accept the $120 per share in cash, investors will be given Dell stock. Given that Dell is not currently trading on the stock market, the PC maker has agreed to allow the market to determine its fair value — a key change from the previous deal that had been strongly wanted by shareholders. The new exchange ratio for the stock component will be determined based on the average trading price of the shares during the 17-day period ending on the election deadline, which will be the eighth trading day after shareholders have approved the transaction. At the moment a vote to approve the deal is scheduled for December 11 but that date could be amended. Jesse Cohn, a partner at Elliott, which had strongly opposed Dell’s original offer, said that under the new terms the proposed acquisition of the tracking stock would give shareholders greater value. “We believe this transaction represents a favourable outcome for all Class V stockholders, who will receive greater value certainty through the increased cash component and downside protection on the value of the Class C common stock,” said Mr Cohn. “By simplifying Dell’s capital structure, this transaction provides a clear path for Class V stockholders to participate alongside Michael Dell and Silver Lake in what we believe will be substantial stockholder value creation at Dell Technologies over the long term.” With the backing of key investors, including the tacit support of larger institutional investors such as BlackRock, the PC maker’s founder Michael Dell and his private equity partner Silver Lake will now be able to return Dell to the public markets, five years after they took it private. This comes after the company had engaged for months in a bitter public fight with several hedge fund investors, including Elliott and Carl Icahn, who accused Mr Dell and Silver Lake of short-changing investors in the tracking stock. On Wednesday evening Mr Icahn, who was not involved in the current negotiations with Dell, said that DVMT investors should request at least three board members to keep Mr Dell and Silver Lake under cheque once the deal was completed. Under the terms of the agreed deal DVMT shareholders will be able to elect one director starting at the 2020 annual meeting. Dell has received financial commitments from Barclays, BofA Merrill Lynch, Citi, Credit Suisse, Deutsche Bank Securities, Goldman Sachs, JPMorgan Chase, Morgan Stanley, RBC Capital Markets and UBS to provide up to $5bn in debt to pay for the higher offer. (Source: FT.com)
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Odyssey is an independent corporate finance firm which advises on acquisitions, business sales, management buy-outs and raising finance, typically in the £5m to £100m range. We have extensive experience in the niche manufacturing sector with our most recent completed deal being the sale of MacNeillie to Babcock Plc. Details can be seen at: http://www.odysseycf.com/case-study-macneillie/
As a result of this and related projects we have developed relationships with buyers and funders looking to acquire or invest in the sector. We would be happy to share further insights into the sector and to carry out reviews of businesses whose shareholders are considering an exit, acquisition or fundraise.
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