Analysts' ReportsVision Systems: A-Bio-ut TimeBy William...

Analysts' Reports
Vision Systems: A-Bio-ut Time
By William Spraggett, 25 Feb 2005

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Vision Systems Limited(VSL) Rating:BUY
Price:
1.13 @ 24/2/05 (+0.01) Av. Monthly Volume:
0.419 (m) Shareholder Benefits:
Yes
52 Week Range:
$0.75 - $1.59 Market Cap ($m):
199.1 Dividends Paid:
Apr, Sep
%Move Last 3mths:
-6.6% Sector Weight:
0.891%
Share Price Performance
4 wks 3 mths 1 yr
Vision Systems Limited -27.6% -6.6% 18.9%
S&P/ASX 200 Information Technology -7.8% -0.8% 25.2%
All Ordinaries Index -0.4% 4.9% 22.2%
Recent Share Price History




InvestorWeb ViewPoint



Expanding its global distribution network Rating Impact: Retain Buy


Faced with the difficulties of a downturn in the economy, Vision Systems Limited undertook an accelerated research and development program to position the company towards future growth. Having created its extensive product suite the company has ostensibly focussed its energys on expanding its global distribution network and associated customer base. This has seen a burgeoning marketing and sales budget, increased R&D amortisation and higher production costs as capacity is ramped up to meet demand (Vision BioSystems)

Adverse foreign exchange movements impacted the VFS result VSL reported a disappointing result announcing an adjusted net profit after tax of $4.3m, an 11.8% discount on the previous years result despite a 24.0% increase in sales. The lower result reflects a weaker period from Vision Fire & Security (VFS) owing to adverse foreign exchange movements (95% foreign revenues; 40% US, 55% UK and Europe) and larger than expected start-up and marketing costs (Vision BioSystems Sales & Marketing costs up 157%). Nonetheless, Vision BioSystems is expected to delivered strengthened sales (forecast between 46-47m - 59.8% increase on 1H05), capitalising on its new sales teams ( 28 person US and 12 person UK sales team) and the substantial Menarini network (contract signed in October). VFS will remain highly exposed to exchange rate fluctuation, however, given the strong response to VESDA and ADPRO is expected to deliver a reasonable result. Invetech, which had a stellar run in the 1H is expected to soften in the second half.

Vision BioSystems poised to deliver a stellar result Despite a disappointing result, VSL offers reasonable upside with Vision BioSystems poised to deliver a stellar result. Whilst VFS could dampen any prospective gains we believe the stock offers substantial upside should the company achieve the forecasted gains. The company is also expecting increased margin as start-up issues are erased and its products proliferate the market. The company's balance remains healthy and the weaker 1H05 free cash flow is expected to improve in the 2H05. We retain our Buy recommendation.




Earnings History & Forecasts

1H05 Result VSL's last recorded result, for the half year period to 31 December, was an adjusted Net Profit After Tax of $4.3m. This was down 11.8% on last year's result, with $4.8m earned for 1H04.

Important aspects of the result included:

a 24.0% increase in sales to $80.1m,
a 92.6% decrease to $0.467m in other revenues,
an 89.4% increase in net interest costs of $1.4m,
a 7.8% increase in depreciation and amortisation cost of $1.1m,
a fall in the EBLITDA margin at 6.3% against last year's 8.7%,
total assets increased by 2.6% to $301.5m,
net debt to equity of 11.4% against the previous corresponding period's 3.4%,
free cash-flow was weaker at $1.1m against $5.2m in 1H04.
Directors declared an unfranked interim dividend of 2.0¢ per share with a record date of 2 March 2005 and payment date of 16 March 2005. This was in line with the previous corresponding dividend.

Directors Summary (14-Feb-05)

Vision Systems achieved strong growth in sales for the half year to 31 December 2004. It continued to build its international sales and marketing networks and benefited from the initial market entry of several significant new products, particularly in the healthcare sector.

Sales grew 24% over the previous corresponding period to $80.1 million, gross margin was up 16% to $45.4 million, and EBITDARD (EBIT before depreciation, goodwill amortisation, and R&D charges) increased by 12% to $15.3 million.

At the operating level EBITA (earnings before interest, tax and goodwill amortisation) was down 8% reflecting increased sales and marketing spending ahead of planned sales growth, and higher R&D amortisation.

Following the significant investment in R&D over the previous three years, cash expenditure on R&D for the half year was down $3.4 million compared to the previous corresponding half year to $9.1 million. The resulting improvement in operating cash flow was offset by increased investment in inventory and working capital to support the strong growth in sales in Vision BioSystems. The company ended the period with cash of $17 million and debt of $43.2 million.

An interim dividend of 2.0¢ per share (unfranked) has been declared with a record date of 2 March 2005 and payment date of 16 March 2005.



Earnings (cents per share)

Dividends per share



Key Financials
02A 03A 04A 05F 06F
NPAT ($m) 12.12 12.85 10.79 11.20 13.50
Diluted EPS (cents per share) 7.67 7.83 6.29 8.00 9.00
EPS Growth N/A 2.09 -19.67 27.19 12.50
Price-Earnings Ratio 16.95 11.62 14.15 14.12 12.56
Dividend per share 3.90 4.00 4.20 4.00 4.00
Yield 3.00 4.40 4.72 3.54 3.54
Franking 0 0 0 0 0



Activities

Develops, creates and delivers high value technology-rich products Vision Systems Limited (VSL) develops, creates and delivers high value technology-rich products and services to large and growing international markets. The company operates three core business segments. Vision Fire & Security (VFS), Vision Biosystems (VBS) and Investech (INV)

Vision Fire & Security (VFS); a global leader in the provision of loss prevention technologies in high value industrial applications. It manufactures and markets very early warning fire detection systems under the VESDA brand and sophisticated video-based security systems under the ADPRO brand.

Vision Biosystems (VBS); which includes Novocastra laboratories, manufactures and markets automated instruments and bio chemical reagents for biopsy based detection of cancer in pathology laboratories around the world.

Investech (INV); the core product development engine of the group, is a provider of research and development services for both internal and external clients.




Sectoral Comparison

Valuation Ratios
Code Name Forecast PE Current PE Price to Cash Flow Price to Sales Price to NTA Price to Net Assets
VSL Vision Systems Limited 14.1 18.0 12.4 1.5 188.3 0.9

Yield Comparison
Code Name Yield Franking Dividend Cover
VSL Vision Systems Limited 3.5 0.0% 2.0

Operating Ratios
Code Name Earnings Growth Return on Equity Return on Assets Return on Funds Employed
VSL Vision Systems Limited 27.7 4.6 3.4 2.4

Leverage and Operating Margins
Code Name Net Debt to Equity Net Interest Cover EBLITDA Margin EBLIT Margin NPAT Margin
VSL Vision Systems Limited 11.4 4.8 10.5 6.9 8.0



SWOT Analysis

Strengths Weaknesses
Product Strength - VSL targets the data storage industry specifically, particularly in relation to the early detection of fire. It is envisaged that potentially there could be one of their detection units in each of the data storage boxes of the future. EMC Corp has shown initial interest in this regard and America Online is one of VSLs largest clients at present.
Growth Prospects - The fire and security products market is a $5 billion market with annual growth rates of more than 50%. This indicates that this segment should continue to provide a healthy environment for VSL, particularly given the post September 11 environment. R & D Expenditure - The business, requires continuous large amounts of capital outlays for R & D, which erodes profit margins and hence returns to shareholders.
Low Returns - Over the years, VSLs return on invested capital remained at a relatively low level of 5%p.a., compared to the competitors average of 10% - 12% p.a.

Opportunities Threats
Semiconductors - Changes in semiconductor manufacturing safety requirements have also called for VESDA to be installed inside specialist manufacturing equipment. The detector can prevent a very costly shutdown of the entire semiconductor fabrication facility.
Government budget - The recent announcement of a $2.9 billion government spending package aimed at fuelling the innovation economy in Australia is expected to create opportunities for VSL to assist small companies to exploit product and process technology.
Foreign Exchange - The weak US dollar has placed considerable pressure on overseas margins particularly in the US. The considerable size of the US market deficit will place impede a strengthening in the dollar.