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Date : 17/03/2021

Strategic Elements Limited

ASX :

SOR

Market Cap : $160.81 Million

Buy

52 Week Range : $0.035 - $0.97

Share Price : $0.47

Strategic Elements is a venture fund that owns 100% of highly innovative startups and technologies. They collaborate with some of the biggest minds in the country to take their portfolio companies from an idea/prototype to a disruptor. Being a venture fund, their investments are long-term and we issue a "Buy" recommendation for long-term investors.

Company Analysis

Strategic Elements Limited (ASX: SOR) is a Pooled Development Fund (PDF). They operate as a venture builder and they generate projects by combining teams of scientists and innovators in the technology and resource sectors. In a nutshell, Strategic Elements is a venture capitalist that is listed on the ASX. They invest in high growth companies and later flip them over for a profit. They have a very similar business model to Infratil, albeit their investments are in a very different sector. In order to succeed, the most important part of Strategic Elements will be their highly qualified management team whose primary task will be to develop the companies the firm invests in so that they can sell it for a profit in the future. Hence, their own team of scientists and innovators.

Strategic Elements invests in Australian small and medium size companies that can provide asymmetric upside potential – high-growth and high-risk start-ups. In order to provide an incentive for taking on the added risk, shareholders in a PDF company receive tax benefits on the capital gains and income that they generate from their investments. The only point of difference between a typical venture capital firm and SOR is that Strategic Elements owns 100% interest in a company as opposed to a minority stake. They are backed by the federal government as this business model is extremely critical to the development and nurturing of bleeding edge innovative start-ups in Australia. This backing gives SOR access to over $50 million worth of infrastructure and equipment, government grants, and R&D cash backs – all playing a vital role in reducing capital expenditure.


Source: Tradingview.com

There definitely were a few exciting announcements this year which resulted in the stock price surging in January. Strategic Elements are progressing on the pathway towards more research and development. They continue to expand the scope of what they are doing. Hence, the long-term story does look potentially good for SOR.

Venture funds do not try to hit every single ball out of the park. They diversify their portfolio just like everybody else. What they are trying to do is get exposure to a range of different innovative sectors and see which one of these will give them asymmetrical returns and cover the losses of the other investments.

After the stock ran very hard in January, it has pulled back to a more reasonable level. These early-stage companies are quite catalyst driven – they move upwards with positive news; they trend back downwards and find a fair level or go sideways until the next news comes out. It is likely we will continue to see this pattern as exciting news comes to the front. They have got an incredible funding and network. The universities that they are working with are top notch – giving them access to funding, research and development, and industry experts.

Investment Sectors

To determine if Strategic Elements has a good investment case, we need to look at their investments and their management’s capability to build those investments into a sale or a listing on the stock market. Other revenues that Strategic Elements will generate are the income that these investments will generate on an annual basis. However, given how early these companies are, the working capital and capital expenditure will be high and not hence, may not always result in net income.

Strategic Elements is invested and/or looking to invest in 4 main sectors. These sectors are setting megatrends globally and innovation is at the core of all of them.


Source: Strategic Elements

  • Robotics & Automation technology for mining, security, agriculture, and transport. Strategic Elements collaborates with Honeywell for Autonomous Security Vehicles – a fortune 100 company. They also work with UWA and CSIRO to bring in industry experts and researchers to work on their investments.
  • Self-charging Battery technology in collaboration with UNSW and CSIRO where they are using humidity in the air to generate electricity and storing them in small, thin, light weight, and flexible battery cells.
  • Transparent Flexible Memory technology, again working with UNSW, CSIRO, and VTT in Finland. This technology is being developed to enable flexible plastic and glass surfaces to store and process data instead of needing silicon chips.
  • Data Related technology has been deemed the next area that Strategic Elements in look to get in on either by an acquisition or development.

Stealth Technologies

Strategic Elements owns 100% of Stealth Technologies and they began the development of an automated robotics software and hardware platform that can be used to vehicles of multiple sizes and perform physical tasks.

The Autonomous Robotic Vehicle Platform (AxV) combines the capabilities of autonomous driving, computer vision, purpose-built robotics, and artificial intelligence. It has been built to operate in outdoor conditions that are extreme due to variable weather. The use case here is in security, defence, transport, resources, and agriculture. The first release of the AxV platform is an automated security vehicle for Perimeter Security. This is one area where disruption by virtue of robotics is imminent given how mature the industry is and the manual efforts that are required for the operations.

We all know the problems that exist in Perimeter Intrusion Detection Systems (PIDS). They require a lot of human resources and are often highly susceptible to human errors. The custom robotics that are built by Stealth Technologies will solve the problems in PIDS. Government regulations, pandemic and terrorist activities are providing lucrative growth opportunities. PIDS are an important part of an overall security solution, especially for critical locations. The Global Perimeter Security Market is forecast to be growing quickly reaching USD 282.26 Billion by 20251.


Source: Strategic Elements

Honeywell is an American conglomerate that excels in engineering across multiple sectors. They are a fortune 100 company and Strategic Elements have collaborated with them for the development of Stealth Technologies. Together, they are known to be working on building autonomous robotic vehicles for the Correctional Justice sector. The first run for this is being done for the WA Department of Justice for the Eastern Goldfields Regional Prison. The autonomous vehicle will complete 3x missions a day and report back in real time to Honeywell Security.

In addition to Honeywell, Strategic Elements has also collaborated with:

Planck AeroSystems – To allow autonomous drones to launch and land surveillance flights. Plank is a world leader in this space and their technology is being used by US DoD, Homeland Security, etc.

CSIRO – This collaboration allows for robot teaming and autonomy for robotic vehicles in places where GPS is denied. They allow robots to perceive, comprehend and reason about the surrounding environment.

University of Western Australia – This collaboration is in place to research for Renewable Energy Vehicle Project for autonomous electric vehicles. It is completely funded by the Australian Federal Government and the expert team comes with Professor Thomas Braunl – an excellent researcher with experience working with Daimler, BMW, etc in the automotive and robotics field.

Nanocubes Memory Ink

Again, this is a very fascinating technology that is being developed. The Nanocube Memory Ink is a liquid transparent ink containing billions of tiny nanometer scale cube-shaped particles. When printed on a surface and assembled with electrodes they operate as computer memory or RAM. This revolutionary ink is transparent and when printed on glass or plastics is entirely see-through.

This technology targets the global multi-billion dollar printed electronics market opportunity. It has the potential to enable massive amounts of data to be stored and retrieved in printed electronics circuits for compute and data storage requirements. The Nanocube Memory Ink was invented at the University of New South Wales by a team led by Professor Sean Li from the School of Materials Science and Engineering.

The research group of Professor Sean Li at UNSW has recently acquired advanced printing and slot die coating equipment – only the second installation of it globally. The equipment has unique functionality to combine slot die with printing to expand the capability in order to produce advanced electronic materials on industrial scale.

Other partners for development include – VTT Technical Research Centre in Finland, CSIRO, and PrintoCent. Printed, flexible and organic electronics is estimated to grow from $31.7 Billion in 2018 to $77.3 billion in 2029.

Self-Charging Battery Technology

Strategic Elements also have a self-charging battery that they are working on. The team of the leading scientists and experts come from UNSW and CSIRO. SOR is developing a battery technology that generates electricity from humidity (55-75%) in the air and self-charges within minutes. Self-charging feature removes the need for manual charging or wires for power. The battery cells are extremely thin and light, Lighter than a single raindrop and thinner than a human hair and they are being designed to be flexible and cheaply printed onto plastic.

Battery cells are being created with a printable ink that contains millions of sheets of a graphene oxide material that is a cheaper and more readily available derivative of graphene. Battery Ink materials are environmentally friendly, and the technology is being designed to be a hybrid electric generator. Initial market focus is on wearables and IOT related devices as they have lower power requirements. Development underway to enable batteries to be used in more complex devices with increased power.

The technology uses moisture from the air to generate an output of over four volts for five plus hours. Not only can it just use the moisture from the air, but it can also generate electricity from humidity on the skin surface so it is innovative, and this also does open up the use cases for technologies that could be connected or close to the skin (such as smart watches) and could actually leverage these self-charging capabilities.

Battery Ink cells have strong potential to provide a flexible, light, self-charging power source. The IOT battery market today is worth US$9.2 billion and expected to reach US$15.9 billion by 2025.

Financials

Strategic Elements have diversified next generation technologies in their portfolio. They are all in their prototype or infant stage and would require lots of time to start generating revenue. SOR does provide them with all the resources necessary – expertise from their collaborations that we have listed and of course funding from the federal government.

With revenues not coming in from any of their projects, we shall only be looking at capital expenditure and the strength of SOR’s balance sheet in the half-year result for FY2021.

  • Project development expenses were $387k
  • Payments to Suppliers and Employees stood at $989k
  • SOR raised equity during the period and hence at the end of the period, their cash balance was just over $6 million
  • The total loss for the period was $1.3 million – a decrease from the previous corresponding period, when the loss was $1.8 million
  • The Net Asset position is very strong at $5.9 million after accounting for short-term and long-term liabilities.

Outlook

  • The collaboration with Honeywell on the Eastern Goldfields Regional Prison is ongoing and SOR have announced that they are seeking a ‘land and expand’ strategy to other WA facilities. The site acceptance testing is expected to be completed in Q1 2021.
  • AxV Platform is being used in agriculture by collaborating with Australian Herbicide Resistance Initiative. This will enable applying autonomous technologies to farm weed management systems. The initial results from this project are also expected in Q1 2021.
  • The Autonomous Security Vehicles Program is being developed and tested for perimeter security use across a lot of sectors. SOR revealed that they are looking to enter into their first agreement in Q2 2021.
  • SOR is also in discussion with mining companies to use their AxV platform. They are seeking an initial agreement in Q2 2021.

Recommendation

Strategic Elements have a healthy balance sheet and an incredibly high-tech portfolio of companies that have the potential of causing disruption across several sectors. The fact they are backed by the federal government means that they will be constantly supported. Given how small they are, the stock will continue to react to positive news, correct itself and trade close to its fair value. To fully realise the potential of investing in SOR, investors should also be in it for the long-term as venture capital strategies and deals are very long-term plays. Investing in a pooled investment fund also has the added benefit of shareholder capital gains not being taxed. Thus, we issue a “speculative buy” on SOR for long-term investors.

 

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