XTD enters the Growth portfolio
SIMON DUMARESQ22 FEBRUARY 2016
Summary: XTD ticks a number of boxes regarding what we look for in high growth small caps – it is a scalable business that is using its digital screens across train stations in Melbourne and Brisbane as a showcase for future international expansion. Of particular interest is the Contact Light technology (of which XTD has 52 per cent ownership), which allows for communication between the screens and commuter’s mobile phones to build viewer profiles and engage with consumers by sending messages and live content directly to their devices. With advertising rates looking to increase in the coming years, the company is well placed for growth.
Key take-out: We will initiate a six per cent position in XTD to the Growth First model portfolio. Our valuation is $0.36 (shares currently trading at $0.29). XTD is a buy.
Key beneficiaries: General investors.
Category: Shares
XTD offers a number of the key qualities that we look for in high growth emerging small cap stocks:
• Exposure to growing industries with a positive structure (out-of-home digital advertising and mobile internet usage
• A business model with competitive advantages
- An incentivised management team with interests aligned to minority shareholders
- Share price justified by earnings from existing operations and cash flow positive
- Multiple growth opportunities that are not reflected in the share price'
- Australian operations a showcase for the prospect of becoming a global business
- A scalable business that can ramp up revenues with minimal additional costs
- Exposure to a disruptive technology (in this case Contact Light) with patent protection pending
- Near term share price catalysts
- With an approximate $30 million market cap, the stock is too small for most institutional investors, and is only beginning to gain attention from brokers
The business operates in the structurally growing out-of-home advertising industry, with strong demand for the digitising of static billboards/screens – its share price is backed by earnings from the domestic cross track digital media system, with large upside potential from overseas contracts. Further, its 52 per cent owned “Contact Light” disruptive technology is attempting to revolutionise the industry by enabling data communication between the digital screens and nearby mobiles.
XTD’s cross-track digital media system includes the ownership of the concessions for 32 large LED screens in Melbourne rail stations and a further 12 in Brisbane. The large-format high definition digital media screens complement static cross-track advertising displays and engage rail commuters with clear video images and high definition sound installations. It’s a stand-alone digital media channel that doesn’t use or interfere with any of the existing station controls or monitoring equipment.
The system has been designed with the capability to be easily installed into most train networks around the world. This includes both underground and open air locations. With Melbourne and Brisbane successfully up and running, the system can be utilised as a shop front to display its capabilities. Management is unlikely to target other domestic cross track locations such as Perth or Adelaide, as there are far more commercial opportunities available overseas.
XTD views itself as a tech partner for the OOH industry, rather than a competitor to companies such as APO, OML and QMS. This partnership with metro rail operators and out-of-home advertising sellers is bringing the partners new, previously unattainable revenue streams. In Australia the media partner is APN Outdoor. APN advertises XTD’s Cross track system as part of its Eastern Seaboard media package, which includes Melbourne, Brisbane and separately owned Sydney digital screens.
For its efforts, APN Outdoor (APO) collects 30 per cent of revenue, the media buyer gets 2.5 per cent, the rail operator 18 per cent, and XTD 49.5 per cent. The Melbourne operations began in October 2014, and the Brisbane operations began in June 2015. Both of these seven year concessions are likely to be extended.
Competitive Advantages
For the cross track system, in terms of Intellectual Property (IP), and barriers to entry, there is nothing that completely removes the risk of new entrants. However, there are a number of elements that as a minimum would take time for a competitor to setup. For example, development of the data transfer system, and the ability to recognise when a train is approaching independently of any of the rail operation/information systems. When it’s detected that a train is approaching, the XTD cross track system is switched off, reducing the risk of a train driver missing a red (stop) or green (go) signal.
These cross track contracts take time to setup. It is an optional add-on offering for a rail operation, and as such it is a slow process to move through the trial phase and obtain the required signatures. XTD is building an early mover advantage, and assuming they deliver during the initial contract timeframe, the rail operators are unlikely to want to absorb the cost and effort of changing providers.
At this stage there is not really any direct competitors providing high quality digital cross track media systems. In Hong Kong there is a less sophisticated TV system. In the US, there are no digital cross track networks, and rather an abundance of static posters. In London and Austria there are low quality cross track projector systems, but again they are not really direct competitors.
XTD’s job is to maintain the hardware, ensuring reliability of keeping it running and updating. XTD don’t do any of the selling for the Melbourne/Brisbane system, with APN Outdoor currently responsible for both the advertising and content. The rail operators are attracted to the revenue opportunity, but in addition are particularly focused on the quality of content and its ability to be useful or entertaining for commuters.
Contact Light has significant potential IP, with a patent filed for the communication between outdoor digital screens and mobile. The chairman of XTD, Frank Hurley, is also chief executive of a large patent attorney firm.
Overseas Contracts opportunities (Asia, UK, US)
Any overseas concessions are expected to be with a similar revenue split between the local version of APN Outdoor, the media buyer and rail operators. The business is very scalable with minimal additional costs required for overseas contracts. For example, if XTD is successful with a South East Asian contract, the additional cost requirement is likely to be just one location manager.
A large amount of group costs over the past 6-12 months have been travel expenses, providing evidence of the company’s priority in winning overseas work.
Rail operator MTM in Melbourne is owned by MTR, which is the Hong Kong business that operates rail in locations such as Hong Kong, Beijing, Stockholm and London. Given MTM/MTR are happy with XTD’s initial work in Melbourne, XTD are looking to leverage the relationship by rolling out the XtrackTV system in other MTR locations. Additionally, XTD has ongoing discussions with a number of other rail operators.
The cross track capital requirements can be estimated on a per screen basis. Domestically the initial capital cost was $5.3m, equating to an approximate fully installed cost of $120,000 per screen. In South East Asia, due to the cheaper labour costs would mean the capital cost per screen would be likely to be under $100k. With a South East Asian deal likely to be approximately 50-60 screens, and rolled out in stages, XTD could cover this capital cost through existing cash and its $4m debt facility.
If XTD was to win further overseas deals then it would likely require an equity raising, however the value creation from those potential deals would far outweigh the cost of dilution from raising capital.
Contact Light
The contact light technology begun in November 2014, and was spun out in October 2015 with XTD retaining a 52 per cent ownership. The minority shareholders are XTD chief executive Steven Wildisen together with the other early XTD investors and the employees of Contact Light.
Although Contact Light is a complementary fit to the XtrackTV system, there are a number of benefits from separating the technology. Firstly, the funding requirements cloud the costs and profitability of the cross track digital system. The start-up, disruptive nature of the technology attracts a different investor to the core XTD business. Further, there will be greater potential to develop customer relationships with APO, OML, QMS etc.
There are multiple angles to the Contact Light opportunity with the objective of useful and targeted engagement with mobile devices. This provides an excellent opportunity for advertisers to have access to audience data that the rail operators currently are unable to collect.
The camera’s in the large screen build a profile of the audience, for example collecting information such as male/female, child or adult and how long they are in front of the screen for.
The screens contain beacons which is an electronic product that looks for mobile addresses. The next step is to offer a product that lets people engage with the screen on the mobiles after opting in. The key to this is advertisers providing relevant campaigns that will achieve a high rate of engagement.
The data collection tool of the audience can be utilised for both the cross track systems and other digital (and static) outdoor media systems.
The revenue opportunity is to charge advertisers for mobile views, social media sharing and any purchases.
In January this year XTD announced the development of two trial Contact Light applications. The first is with Curtin University in WA, with the smartphone app called OTTO – It enables intra-campus transport tracking, and custom campus maps with levels of detail not seen in Google or Apple maps. Contact Light is in discussions with several other tertiary education institutions targeting a broad scale rollout in 2016.
The second is EMBARK, which has been launched in Queensland. This smartphone app allows commuters to plan their journeys across all forms of public transport, read the most in-demand editorial content for a variety of news sources and exclusively interact with content on a network of digital out of home screens installed by XTD in Brisbane’s busy commuter rail network. The interactions can be information or entertainment based as well as e-commerce.
APN has been awarded rights to the Australian Olympic team for the Olympic Games, including outdoor advertising and promotion. With XTD and APN's positive working relationship this may present an opportunity for XTD. Given the trials currently in place, and the potential catalyst of the Olympics, we should be in a better position to value Contact Light by the end of 2016. Currently it has an enterprise value of $10m.
Digitisation of Out-of-home Advertising
Followers of popular OOH media stocks - APN Outdoor (APO), ooH! Media (OML) and QMS will be well aware of the opportunity from the digitisation of outdoor advertising.
The driver of the shift is partly due to the decline in traditional media advertising. For TV, this is due to the consumer fragmentation with Netflix gaining in popularity, subscription services and other alternatives to free-to-air TV. For print media, it is the shift to online, and particularly mobile / tablets that has caused the decline.
Industry forecasts expect that by 2020 global advertising will adjust to be inline with the relative time consumers spend outdoors, viewing print and TV. This is very positive news for out-of-home industry as currently only 7 per cent of advertising is for OOH vs a much larger 33 per cent of consumer time.
Eureka Interactive
In July last year Alan Kohler interviewed
chief executive Steven Wildisen – view the video above – on the XTD opportunity as part of our
Eureka Interactive offering. The share price was 16 cents at the time, and the extensive interview provides further detail on the strategy and technology. Since this interview the company has launched Contact Light (October 27, 2015), and Melbourne and Brisbane digital screens performed above expectations. Management has also provided an update that winning contracts in the US and particularly New York is likely to be more difficult than first anticipated, and as such they are focused on other opportunities such as other South East Asian rail networks.
History of XTD
Current chief executive Steve Wildisen, non-executive chairman Frank Hurley and non-executive director Mark Niutta founded Lunalite in 2005. This was the beginning of today’s business, but back then they produced electronic illuminated products but particularly focused on selling it to the out-of-home advertising industry. They were manufacturing out of Batam (an island of Indonesia). The business started well, becoming the first company to produce animated bus shelters and billboards with animation. The product was exported to 22 countries, with companies such as APN Outdoor, Adshel, JCDecaux reselling it.
But it was an expensive product, that was complimentary rather than essential for the out-of-home advertising industry. As a result the business was under severe during the GFC with demand declining significantly. The team learnt from the experience and decided to go into digital. They formed a relationship with YESCO Electronics who has recently been taken out by Samsung. YESCO remain the screen manufacturers now, and it was through this relationship that the team was introduced to groups such as Metro Trains Melbourne (MTM), and were eventually asked to work on the Cross Track Digital product.
• In October 2014, the company fully commissioned for service 32 XTD screens across three underground rail stations in Melbourne.
• On December 23 2014, XTD began trading on the ASX having successfully completed a fully subscribed $3m IPO.
• In June 2015, XTD commenced operations of a further 13 underground and open air screens with the Brisbane Metro Rail Network.
• In October 2015, the company completed a spin-out of digital software develop Contact Light. They raised $1.5m in initial capital with XTD retaining 52 per cent. The remainder is owned by the management team, and founders.
XtrackTV Australian Revenue Forecasts
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Column 1 |
Column 2 |
Column 3 |
Column 4 |
Column 5 |
Column 6 |
Column 7 |
Column 8 |
Column 9 |
Column 10 |
Column 11 |
| 1 |
|
|
1H16 |
2H16 |
FY16 |
1H17 |
2H17 |
FY17 |
1H18 |
2H18 |
FY18 |
| 2 |
|
|
|
|
|
|
|
|
|
|
|
| 3 |
Xtrack TV Aus (Melb, Bris)
|
|
|
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| 4 |
|
|
|
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|
| 5 |
per screen per week
|
$ |
395 |
513.5 |
|
667.6 |
767.7 |
|
882.8 |
971.1 |
|
| 6 |
% increase HOH
|
|
|
30% |
|
30% |
15% |
|
15% |
10% |
|
| 7 |
No of slots per screen
|
|
6 |
6 |
|
8 |
8 |
|
9 |
9 |
|
| 8 |
|
|
|
|
|
|
|
|
|
|
|
| 9 |
Melbourne Screens
|
|
32 |
32 |
32 |
32 |
32 |
32 |
32 |
32 |
32 |
| 10 |
|
|
|
|
|
|
|
|
|
|
|
| 11 |
Brisbane screens
|
|
13 |
13 |
13 |
13 |
13 |
13 |
13 |
13 |
13 |
| 12 |
|
|
|
|
|
|
|
|
|
|
|
| 13 |
Total screens
|
|
45 |
45 |
45 |
45 |
45 |
45 |
45 |
45 |
45 |
| 14 |
|
|
|
|
|
|
|
|
|
|
|
| 15 |
XTD Network
|
($m) |
2.45 |
3.19 |
5.64 |
5.53 |
6.36 |
11.88 |
8.22 |
9.05 |
17.27 |
| 16 |
|
|
|
|
|
|
|
|
|
|
|
| 17 |
APN revenue
|
30% |
0.74 |
0.96 |
1.69 |
1.66 |
1.91 |
3.57 |
2.47 |
2.71 |
5.18 |
| 18 |
Rail operator revenue
|
18% |
0.44 |
0.57 |
1.02 |
0.99 |
1.14 |
2.14 |
1.48 |
1.63 |
3.11 |
| 19 |
Media buyer revenue
|
2.5% |
0.06 |
0.08 |
0.14 |
0.14 |
0.16 |
0.30 |
0.21 |
0.23 |
0.43 |
| 20 |
|
|
|
|
|
|
|
|
|
|
|
| 21 |
XTD NET REVENUE
|
$m |
1.21 |
1.58 |
2.79 |
2.74 |
3.15 |
5.88 |
4.07 |
4.48 |
8.55 |
The increasing demand for digital out-of-home screens is likely to result in APN Outdoor continuing the trend of selling the space for higher rates. Currently the network includes a short loop of content, weather and 6 advert slots. This is forecast to increase to 7 in June, with an 8
th forecast for early FY17.
A 30 percent increase in advertising rates is expected in late March. A further 30 per cent increase in FY17, reducing to 10 per cent by FY19. Given the initial success of the network, we have also forecast for the 7-year concession to be extended.
The FY15 result including the listing and re-structure fees, as well as setup costs for Contact Light, and the interruption to revenue as APN established its Eastern seaboard network.
The South East Asian OOH market is not as developed as Australia, and as such we estimate a contract win could deliver 60 percent of the Australian advertising revenue, with an approximate 70 per cent capital cost due to the cheaper labour.
Valuation
There are multiple potential catalysts that will likely result in us having to upgrade our initial 36 cent valuation / target price.
In the Sum of Parts below, XtrackTV includes the cash flow valuation of Australian operations, and a 20 percent chance of winning the South East Asian contract. Management has guided that the chances of a South East Asian contract in the first half of 2016 is significantly higher than 20 percent, but our conservative assumption allows a chance to upgrade it they are successful.
If Contact Light continues to gain traction its valuation will be many multiples of what we assumed:
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
| 1 |
XtrackTV **
|
$m
|
39.55 |
|
| 2 |
cash
|
$m
|
1.5 |
|
| 3 |
52% of contact light
|
$m
|
5.2 |
|
| 4 |
|
$m
|
46.25 |
|
| 5 |
|
m
|
128.486 |
|
| 6 |
|
|
|
|
| 7 |
Target Price
|
|
$0.36 |
|
| 8 |
|
|
|
|
| 9 |
** Includes Australian XTD operations, and 20% chance of Sth East Asia |
|
|
|
Investment opportunity
Usually stocks with disruptive potential such as Contact Light, involve taking on significant risk as their outcome is either large upside or worth zero. In the case of XTD if Contact Light does fail for whatever reason, we are confident that the existing business and opportunities to expand the XTrackTV system provide enough opportunity for share price upside from current levels. As such we are comfortable with the start-up risk of Contact Light and have a buy recommendation with an initial 36 cent valuation / target price.
We will be adding a 6 per cent position to the Growth First model portfolio at the open price tomorrow morning.
