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Date : 07/05/2021

Ava Risk Group

ASX :

AVA

Market Cap : $100.27 Million

Watch

52 Week Range : $0.12 - $0.785

Share Price : $0.41

The lack of new contract is posing quite a high degree of risk on the share price, and given the performance of the tech sector, we recommend long-term investors to “Watch”.

Company Analysis

AVA Risk Group is a market leader of risk management services and technologies that features a range of solutions including intrusion detection and location for perimeters, pipelines and data networks, biometrics, card access control and locking as well as secure international logistics, storage of high value assets and risk consultancy services.

AVA operates through three segments: Future Fibre Technologies (FFT), BQT Solutions, and AVA Global Logistics.

Source: AVA

Future Fibre Technologies (FFT)

FFT designs, manufactures, and distributes fibre optic intrusion detection systems that can be used to secure high value assets and critical infrastructure. These advanced security systems are mainly used to detect and locate perimeter intrusions, data network tapping and tampering and in oil and gas pipelines. With most of their customers in the Transport, Government, Military, Oil and Gas and Utility sector, the company has deployed more than 2,500 systems across 70 countries.

AVA is going to extend its remote installation, commissioning, monitoring, and upgrading solutions to produce recurring revenues from FY2021.

In the half year result, FFT comprises 36% of revenue of AVA’s group and has a gross margin of around 65%-80%.

IMOD

FFT’s large scale supply of SecureLink technology to protect more than 40,000km of data communication cables for the Indian Ministry of Defence (IMOD) was a significant deal announced back in 2018. FFT has partnered with its in-country Indian manufacturing partner called SFO Technologies Pvt. Ltd. and the total value of the contract is estimated at $11.9m. A total of A$12.5m has been recognised from this contract and the revenue will continue to be recognised till the end of FY2021.

FOSS 5.0

FOSS 5.0 is a software platform that will be integrated with machine learning and innovative data capture tools to continuously improve event classification and reduce nuisance alarms. With growing labeled fibre optic sensing events, FOSS variants will be able to continuously be retrained to recognize new events as they are identified by FFT systems installed globally. In the H1FY21 update, the first shipments of FOSS platform were delivered, and it will be offered on a Software–as–a–Service (SAAS) model to customers.

AURA IQ

Aura IQ monitors conveyor health through world-leading fibre optic technology, advanced signal processing algorithms, predictive analytics and cloud-based analysis, reporting and alerts resulting in enhanced safety, confidence and performance. FFT’s Aura platform is being used by technology partners for new applications such as to monitor power cables under the streets in major cities and across rivers. It has been developed in partnership with the mining industries leading research organization, Mining3. During the year FY20, the company conducted a number of Proof of Value (POV) trials around the globe, which has indicated an estimated addressable market of over $300mn. The company estimates sales interest in this new solution in FY20.

Aura IQ is still in early stages, but the company has indicated there has already been significant interest with a diverse portfolio of rollout opportunities spread across six regions, 21 countries and five industry sectors, totalling over $50mn+ in potential total contract value.

BQT

BQT Solutions PTY LTD is a specialist in the development, manufacture and supply of high quality, high security card and biometric readers, electromechanical locks and related electronic security products. BQT Solutions provides a wide range of both off-the-shelf solutions and purpose tailored solutions and works with major system integrators, security consultants and end users to develop tailored access control solutions to fulfil a range of access control requirements. BQT’s working relationship with government departments in Australia and securing a $3.4mn of orders from the Department of Defence are the key highlights. BQT is AVA’s smallest revenue generation segment i.e. around 12%-13%.

In FY20, the technology division contributed over $21mn due to the strong advantage in product range and blue-chip customer base.

AVA Global Logistics

AVA Global Logistics provides international secure logistics of high value cargo on a fully insured door-to-door basis which includes armoured vehicle collection and delivery at origin and destination, secure storage, commercial and chartered air and sea freight and customs brokerage services.

AVA Global Logistics is the highest generating segment for the group and it accounted for 51% of the group’s revenue in H1FY21. This segment has a low gross margin as compared to other segments i.e. between 21-35%.

Despite the reduction in airfreight capacity around the world due to COVID-19, AVA Global’s FY2020 revenues were up by $9.2mn as compared to the previous year and FY2020 gross margins also improved by 6% to 27% compared with FY2019. Ava Global had announced that its Services Division had been awarded a 12-month contract with a Central Bank for the secure transportation of banknotes which will generate estimated annual revenue of $2.1mn.

Company Updates

AVA experienced a strong quarter due to the licensing contribution from IMOD contract and BQT’S Department of Defence contract. The group delivered strong revenue growth with a large qualified sales pipeline and addressable client spend. AVA’s stock price went up 30% after the release of H1FY21 results. Despite any price sensitive announcements and positive half-year earnings, the stock price continues to fall and is currently trading at $0.41. This performance coincides with a general underperformance of the technology sector in 2021.


Source: Tradingview.com

  • Despite the COVID-19 delays to underlying Technology sales, H1FY2021 sales revenue was up 70% at $35mn, over the same period last year.
  • EBITDA increased by 450% to $12mn as compared to last year.
  • The service segment contributed approximately $18.4mn revenue in H1FY2021 and the technology division contributed approximately $16.6mn
  • The gross margins for the service division were maintained at 34% in H1FY21 and EBITDA exceeded $3.5mn
  • The EBITDA for the technology division stood at $8.5mn in H1FY21.
  • All business units were profitable for the half year.
  • The company has net cash of $13.4mn as of 31st December 2020.
  • AURA IQ completed 3 POV trials and has another 7 POV deployments underway.
  • Sales revenue recognised by the IMOD contract in FY2020 stood at A$4.8mn and A$7.7mn in H1FY20.
  • The company has secured a contract exceeding $1.40m to install its Aura Ai sensing technology at certain rail centres in South America.
  • Future Fibre Technologies, has been awarded a multi-base Air Force contract for its Aura Ai sensing product and will install the sensing technology to 15 major air bases, located within a large Asian country.

Industry Analysis

The demand for cybersecurity is growing, with Australia spending approximately $5.6bn in 2020 and this is expected to increase to $7.6bn by 2024. The Australian demand for cyber security will continue to grow by 8% every year. COVID-19 has put security threats between nations back into the spotlight and the growing global security concerns are driving the increase in demand and rapid adoption of high security technology, secure remote diagnostics and support capabilities, and utilisation of the AVA’s high security logistics.

The largest product segment in Australia’s cyber security market is ‘Systems security’ ($1.5bn), followed by ‘Software and platform security’ ($1.3bn). The government and defence sectors are the largest customers of cyber providers and account for approximately 30% of the total revenue. With AVA’s BQT segment incorporating more than 12,000 high security systems across defence facilities and bases and with their major customers in government and defence sectors, the company is well positioned to take advantage of this.

Investment Thesis

AVA Group has delivered a positive financial result and a platform for continued growth and expansion. AVA Global has been continuing the trend of strong YoY growth for the past few years. They have consistently increased their customer base, sales pipeline and with their recent contracts, and the company is growing at a CAGR of 38% since FY2017. Chart

It is important to note that the revenues from the IMOD contract contributed $7.7 million for H1 FY21 (22%) and there is not much more left in the contract to be recognised as revenue. There is the maintenance contract worth $4.8 million, but there is no indication if this will be recognised upfront or over time and when exactly this will occur.

AVA’s growth majorly relies on installation of brand-new security systems from new customers as once these systems are installed, they do not have to be re-installed again. This leaves the company with only additional maintenance cost or replacing the existing system to generate their recurring revenue. Therefore, the foresight into future revenue growth is not very clear. In order to keep growing and maintain a healthy growth rate, AVA will have to first snap up a big contract to replace the revenues that were coming in from IMOD and will need to also receive new big money contracts to carry forward the 38% CAGR it has been growing until now.

The management has also not provided earnings or revenue guidance for the full year, making it further unclear as to what lies ahead with respect to replacing the IMOD contract which is ending soon.

Looking at the valuations, this challenge looks to have been priced into the revenue multiples. AVA also just turned a profit in FY2020, and while it is too early to comment on how their EBITDA margins will look in 5 years’ time, a lot of it also depends on the size of the contracts it enters. Therefore, it is a little too premature to look at the valuation multiples based on its earnings. The current 1.3x EV/EBITDA multiple based on our forecasted FY2021 estimate seems to be about the right price considering the headwinds in the business.

Chart

AVA Group is a debt free company with net cash of $13.4mn as on 31st December 2020 which shows an immense financial strength. Their assets are made up of $13 million in cash, $13 million in receivables, and $11 million from intangible assets given the M&A deals that they have done in the past. While this may look to have inflated their balance sheet, it is really the liabilities that tell the whole story. AVA has no debt or lease payments.

The liquidity ratios ease any concerns about the assets being inflated. The current ratio is 3.81x and their quick ratio is 3.8x – both very healthy metrics that suggest the company is highly liquid.

Technical Analysis

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Trend

AVA went through a wild roller-coaster ride throughout 2020 and the first half of 2021. Since the COVID-19 market sell-off of March and April 2020, AVA surged from its all-time low at A$ 8 cents per share to above A$ 75 cents per share, up 875% in just about 6 months. However, the bullish momentum did not last long, and AVA lost its velocity and plunge by more than 50%. Throughout the first half of 2021, AVA remained trapped in a steep descending channel with a continuous decline in volume. Key support levels appeared to be very weak with the share price now pointing rapidly toward the next potential support of A$ 35 cents per share. We have recognised a high probability for AVA to consolidate in the A$ 25 cents and 35 cents per share range, about -15% below the current market price.

Key price levels

AVA recently went through the 50% retracement level from 2020-21 swing high and is on the way to the potential support level of A$ 35 cents per share. The share price might consolidate in this area for the next 30 days waiting for a catalyst to either drive the price back above the A$ 50 cents per share or keep falling below A$ 30 cents. AVA prospective rebound might happen around 35 cents per share, supported by the 61.8% Fibonacci retracement and the mid-term ascending trendline.

Volume and momentum

Volume considerably decreases since the last 200-day with the 20-day volume average down by -42%. The price action remains bearish in the near term, evolving in a range between A$ 35 cents and 44 cents per share.

Trade consideration

  • We recommend for the moment to stay aside from trading AVA as the stock is currently in a sell-off spiral which will potentially push the price down to A$ 35 cents and eventually A$ 25 cents per share in the next couple of weeks. A buy can be considered upon a consolidation that may likely occur around the A$ 25 cents and 31.5 cents per share.
  • Primary target price above $A 50 cents per share
  • Secondary target price at $A 62.5 cents per share
  • Consider reducing exposure below A$ 25 cents
  • It is recommended exiting the trade below A$ 19 cents

Chart Description automatically generated with low confidence

Recommendation

AVA Risk Group has been growing well in the past few years. However, their largest contract is expiring soon, and a replacement has not been sourced yet. Structural tailwinds are good with government spending bid to increase in this sector. Given how tech stocks are performing and the lack of new contract posing quite a high degree of risk on the share price, we recommend long-term investors to “Watch”.

 

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