Market Update & Important Indicators
U.S. stocks fell on Monday afternoon as investors eyed a flare-up in tensions between Greece and its international creditors. The Dow Jones Industrial Average lost 95 points, or 0.5%, to 17,729, while the S&P 500 shed 9 points, or 0.4%, to 2,047. The declines come on the heels of a tumble in European markets, after Greek Prime Minister Alexis Tsipras unveiled plans Sunday to undo several austerity measures that were a condition of the country's international bailout. Concerns about weak growth overseas, the months-long slide in oil prices and the strength of the U.S. dollar have cast a shadow over fourth-quarter earnings season, buffeting stocks this year. Year to date, the S&P 500 is down 0.4%, following last year's 11% gain.
Greek markets tumbled on Monday after Prime Minister Alexis Tsipras stuck to his commitment that he would refuse to accept an extension of Greece's international bailout, heightening fears that the country could default on its debt, or exit the eurozone. The turmoil in Greece cast a shadow over markets elsewhere, with European stocks falling sharply. The moves came after Mr. Tsipras said Greece would seek a bridge loan until June, rather than seek the continuation of the aid program demanded by European partners, ahead of a crunch meeting with European finance ministers on Wednesday. Greek stocks sank, with Athens's main stock index closing 4.8% lower. Greek banks were once again the worst performers on the pan-European Stoxx 600. The Stoxx Europe 600 index fell 0.7% lower. Germany's DAX fell 1.7%, while Spain's IBEX 35 sank 2.0% and Italy's FTSE MIB slipped 1.9%.
Hong Kong shares fell Monday amid the latest signs that China's factories are struggling, while stocks in Japan edged higher as the U.S. dollar was close to unchanged. The Hang Seng Index finished down 0.6% at 24,521, after data over the weekend showed China exports posted a surprise drop in January on slack demand abroad and a strong currency at home. Imports also fell sharply partly because of weak local demand, giving the economy another big trade surplus for the month.
Copper closed 0.3% higher, although most other base metals were lower on the LME overnight. Brent crude gained 0.4% to $58.03/bbl, while gold climbed 0.5% to $1,239/oz.
Thought for the day
Orbital Corporation (OEC)
Market Cap $15.7m
Late last week Orbital (ASX:OEC) completed the $5m acquisition of a 50% stake in REMSAFE, a WA-based business that has developed a high voltage electrical isolation system that boosts safety, saves costs and improves productivity. This fits alongside the Company’s other growth initiatives, which include propulsion systems for unmanned aircraft, potential expansion into the Indian auto engineering sector, and continued growth in the Synerject JV.
OEC has a 30 year track record in engine innovation, with its patented technologies providing global opportunities. Although REMSAFE steps away from OEC’s traditional business, it fits the Company’s desire for growth, diversification and reduced risk. It was funded by a $7m issue of Convertible Notes in early February, and the market updates provided at the time gives us an ideal opportunity recap where the business stands today.
The following provides a brief overview of OEC’s five operating segments.
What does REMSAFE do?: Designed for use at hard rock mining operations, REMSAFE is a high voltage remote isolate system that quickly and safely de-energises material handling plants, such as conveyors, car dumpers and crushers. It replaces a time consuming process (40-90 minutes) where an electrician uses manually operated isolators with a much faster remote process (<3 minutes), boosting productivity, saving money and improving safety. REMSAFE is currently being used by BHP, RIO and FMG.
How does it work?: The system is made up of a number of components. Each installation requires a Master Control Station (MCS) and at least one Field Isolation Station (FIS). The REMSAFE JV sells the units outright to clients on the proposition that the reduced downtime can potentially save the operations millions of dollars each year.
What’s the potential?: REMSAFE is a recent innovation and so its market penetration to date is limited. However the JV has identified numerous opportunities in the WA mining market (for example OEC indicates that there are >300 conveyors that could use the product), but the potential extends to bulk materials handling plant globally. The provision of back-office support and funding by OEC will help the business chase these potential customers and markets.
What does Synerject do?: Located in Virginia, USA, the JV is a 30:70 partnership between OEC and Continental AG. It is the world’s largest supplier of Engine Management Systems (EMS) and fuel systems to the non-auto market. Products using Synerject’s EMS include high performance motorcycles, recreational vehicles and scooters.
What’s the potential?: Synerject’s revenue and NPAT was US$141.7m and US$9.9m respectively in FY14, delivering a A$3.3m profit to OEC (30% share). Synerject’s markets are expected to continue to show steady growth.
Interestingly, Continental purchased 12% of OEC for US$6m in March 2013, valuing OEC’s share of the business at the time at US$15m. This exceeds OEC’s current market cap of $16m, although OEC capital structure also includes funding via net debt of $3m (as at June 2014) and convertible notes of $7m (post the raise in February 2015).
What does System Sales do?: This wholly owned segment is a developer of engines, propulsion systems, EMS and fuel system components for OEMs. OEC’s expertise revolves around the engine “smarts”, not the engine “hardware”. It operates mainly in alternative fuel markets providing systems that range from heavy fuels for Unmanned Aircraft Systems (UAS) to LPG for motor vehicles.
What happened in FY14?: Revenue from this segment fell from $23.4m in FY13 to $14.1m in FY14 due to key customer Textron insourcing engine manufacturing. However OEC still retains the sale of FlexDI fuel systems to Textron, a patented technology that is also used by manufacturers such as Mercury Marine and Tohatsu (Optimax and TLDi outboards).
What’s the potential?: A major opportunity for OEC is sale of full propulsion systems to Insitu, a division of Boeing that specialises in unmanned aircraft systems (UAS). Insitu dominates this market, which at the smaller end (for Small Unmanned Aircraft Systems, or SUAS) is forecast to grow to exceed US$1b by 2016. OEC estimates that the propulsion systems for the SUAS make up ~9% of the aircraft’s content, implying a SUAS powerplant market approaching US$100m within a couple of years.
OEC has already delivered a ScanEagle UAS propulsion system to Insitu for testing. If the tests are successful during 2015, this could lead to a low volume production contract to be supplied from OEC’s Perth facilities, but this could potentially evolve into a higher volume production contract and necessitate new production facilities in time. It is not a given yet, but progress is encouraging.
Through this segment OEC provides engineering consulting services in engine design, development and supply of combustion systems, fuel and engine management systems, along with engine and vehicle testing and certification.
Royalties and Licenses
OEC earns royalties from products using its FlexDI systems and technology (in marine, scooter/motorcycle and SUAS markets).
OEC is at an interesting juncture. The recent acquisition of 50% of REMSAFE and the potential demand from Insitu for propulsion systems for the SUAS market provide attractive opportunities well worth monitoring through 2015. Further, OEC reports a possible JV in India for engineering and testing services that may provide further newsflow this year. Successful penetration into these new markets would diversify the business and should boost earnings, and comes at a time when the current market cap of $16m is arguably largely supported by the Synerject JV stake.
In This Issue
Recent Contacts & Presentations
Northern Star (NST), Doray Minerals (DRM), Troy Resources (TRY), Gold Road Resources (GOR), Saracen Mineral Holdings Limited (SAR), Beadell Resources Limited (BDR), Resolute Mining Limited (RSG), RTG Mining (RTG), Otto Energy Limited (OEL), Peninsula Energy Limited (PEN), Sandfire Resources NL (SFR), Atrum Coal (ATU), Empired (EPD), DTI Group (DTI), Austal (ASB), TFS Corporation (TFC), Pioneer Credit (PNC), IMF Bentham (IMF), Sino Gas & Energy (SEH), Orbital Corporation (OEC)