Starcom (STAR) – Track and trace technology in a global market
Starcom plc provides wireless solutions for remote tracking, monitoring, and protection of assets, shipping and freight, and people. It provides a service that is needed on an ongoing basis and so the future business will be built on recurring revenues – some Starcom units bring in $3 of revenue per month. A several thousand unit order may provide an initial lump sum of capital but the real value is the service Starcom continually provides so that cash keeps coming into its coffers (latest share price 2.075p, market cap £6 million).
The founders’ previous company Pilat Media was tipped in the IC and eventually bought out for $103 million; they are doing the same with Starcom and after years of development and dilution are finally reaching the growth stage. Historically, Starcom’s customer base has been built on hundreds of small companies in developing countries but they are now focusing on winning major ‘blue chip’ European clients as detailed in the RNS here. Since this announcement, their collaboration partner has increased its order size by 20%, and has been revealed to be Bosch.
Revenue increased 61% from $1.9 million to $3.1 million, and gross margin rose to 40% from the FY17 margin of 38%. I expect this to increase in the future as the business rolls out the recurring revenue platform. It is important to note that reliance on the low margin Helios product is reduced as a percentage of revenue as it is the high margin recurring revenue stream that will build the company. The company has potential to grow with contract length extensions and also territory and size extensions – their technology provides a necessary solution and so it is not unlikely that orders will be repeated like many have been already.
Potential UN contract and drivers
Starcom is already working with the UN as a vehicle tracker provider and since then they have bought more orders twice. These were only small contracts but recently Starcom is in the final two for a multi-million £ tender due shortly. I met the board in September and they said the UN continuously requests new information, and they are being taken very seriously. Although they may not win the contract it is a testament to their world leading technology that they are being taken seriously by some of the biggest companies in the world.
New legislation is coming in that will fuel product demand regarding high value products where constant monitoring and security of the supply chain is paramount. For example, the FDA have introduced new food and perishables regulation, new regulation on lithium batteries, air cargo, and new pharmacy transport regulation too.
Kylos Air allows for the tracking / close monitoring of high value air cargo (such as electronics equipment), temperature sensitive products (such as pharmaceuticals), and products which could be shock sensitive or where a constant record of the delivery chain is vital. The units switch into “Airplane Mode” while in the air, but communicate the moment the cargo exits the aircraft, helping minimise the time that the cargo is not being tracked. The versatility of this product can be seen in the recent Strategic Supply and Support Agreement with Xplosive Solutions SA to sell 1,500 Kylos Forever units to protect livestock. The product will also be sold via Vodacom SA – owned by Vodafone Group plc – one of the biggest telcos in the world.
The Tetis tracks where a container is but also visibility, temperature, and light. Light mainly because people break in through the roof of the container and light disturbance will show instantly a break-in and trigger an alarm. This technology can be used on rail, freight, and shipping.
Maersk developed a product of their own for containers which shows a clear need for the technology. This led to the major European industrial group Bosch contacting Starcom (and not the other way round). Starcom have been approached by several large firms such as CropX and SATO Solutions. There is the potential for Starcom units to be installed into their entire fleet of containers which is of a considerable size and should achieve a reduction in their insurance premiums.
Offers the most sophisticated system of its kind for real-time fleet management and for protection of both the vehicle and the driver. The UN have placed several deals and as Starcom are in the final three for a multi-million £ tender this would re-rate the company on this one contract alone. This will also be the product that will be fitted into the major producer of specialised bikes (initial orders have been received) that was mentioned in the Interim Results.
This is a high-security padlock and electronic alarm system. Starcom partnered with Mul-T-Lock – owned by world’s largest lock manufacturer Assa Abloy – to provide the updated version of Watchlock. Assa Abloy was late last year in providing its parts for manufacture, so one of Starcom’s contracts was pushed into the next financial year. To mitigate this, Starcom has now taken production in-house.
In my opinion Starcom has significant scope for a re-rate given the profit potential, the recent placing to provide working capital for the contract fulfillment, and the improving quality and growth of the business. Dilutive equity fundraising for R&D has been painful, but is slowly bearing fruit. The company is not yet profitable and must be considered speculative.
At the time of publication, the author holds a long position in this company from the recent placing at 2p per share.