STRUCTURAL MONITORING SYSTEMS PLC Equity Capital Markets
Company Update | March 2016
March 2016 | ||
GICS Sector | Tech, Hardware & Equip | |
Shares on Issue (m)* | 101,798,032 | |
Share Price ($) | 1.53 | |
52 Week High/Low | 1.98 / 0.34 | |
Market Cap ($m) | 155 | |
Cash ($m)* | 4.2 | |
Debt ($m) | - | |
We have clearance, clarence. Roger, roger. What's our vector, victor ?
In December 2015, Structural Monitoring Systems' (SMN) Comparative Vacuum Monitoring (CVM) technology became the first and only approved technology in the world for monitoring aircraft cracking and related structural fatigue. SMN claimed a position within the aviation industry as the leader in structural health monitoring.
This milestone was critical as it enhanced the potential acceptance of CVM into commercial maintenance programs and Delta and SMS indicated that they plan to continue to lead the industry in this endeavour.
In February 2016, SMS also entered into a world-first military helicopter in-flight pilot programme with an unnamed sovereign defence force. The ultimate aim of the programme is to have CVM sensors applied to a fleet of military Apache AH-64 attack helicopters, following an initial pilot programme, which is currently underway. The programme compliments the on-going Sikorsky helicopter programme, confirming that SMS is well placed to take advantage of structural health monitoring in both the military and civilian rotorcraft industries.
Highlights
- Boeing/FAA approval of CVM Technology: Global Alternative Means of Compliance ("AMOC") status was granted by Boeing/FAA in late December 2015.
- World-leading inaugural helicopter programme: Installation and testing of newly designed CVM sensors on specifically constructed test specimens currently underway.
- Apache in-flight pilot programme: Commencement of in-flight pilot programme, installing and testing CVM sensors on two Apache helicopters.
- Strategic placement to prominent Australian institutional funds management group: $3.7m raised through placement of 2,642,857 shares at $1.40 per share to $1bn funds management group and Drake Private Investments.
- Solidification as industry leader: Subsequent approvals within the aviation industry will be fast tracked, further increasing barriers to entry.
DIRECTORS | |
Toby Chandler | Managing Director |
David Veitch | Non-Exec Director |
Andrew Chilcott | Non-Exec Director |
Michael Reveley | Exec Director |
MAJOR SHAREHOLDERS |
Drake Private Investments LLC 20.77% |
AEM Corp 5.80%
Mclarty Family Trust 5.61%
Toby Chandler 4.64%
ABN Amro Clearing Sydney
Nominees Pty Ltd 3.53%
FINANCIALS | |||
FY15 | FY14 | FY13 | |
EBITDA ($m) | -0.93 | -0.75 | -0.91 |
EPS (¢) | -0.01 | -0.01 | -0..01 |
P/B | 250.2 | N/A | 274.5 |
Total 40.35%
MAC EQUITY PARTNERS
Recent visit of SMN Directors to Delta in Atlanta
Bryant Mclarty, Managing Director bmclarty@macequity.com.au Josh Chadwick, Analyst jchadwick@macequity.com.au
2016 will prove to be a pivotal year for SMS, as the company looks to capitalise on the recent Boeing/FAA approval by signing binding licensing agreements with the biggest airlines and aircraft manufacturers in the world.
A meeting of SMS, Boeing and the FAA in December 2015, confirmed that SMS CVM technology was to be granted the Statement of Compliance with Airworthiness Standards through the FAA Form 8100-9.
This documentary milestone confirms Global Alternative Means of Compliance ("AMOC") status for CVM technology. Commercial approval of CVM technology signals a turning point in the history and direction of SMS. SMS can now confidently turn its attention to securing licensing agreements with both airlines and aircraft manufacturers. It is anticipated that current dialogue with a number of significant industry participants will materialise into binding licensing agreements within the near future.
As alluded to in the recent conference call on 27th November 2015, current management, having achieved a number of important milestones since 2011, understand that to create further value for shareholders, leading industry figures who specialise in commercialisation and marketing within the airline industry will need to be elected to the board. This will be an important transition for the company as it moves from a technology commercialisation stage to the full commercial roll out, marketing and sale of CVM technology.
when directly approached by a highly prominent Australian institutional funds management group wanting a position in SMS. With the participation of long time investor Drake Private Investments, capital was raised at $1.40, with a 3:4 three-year option at a $2.25 strike price. SMS has made it clear that the funds will be used solely for potential strategic purposes, and to provide a material level of readily available liquidity. The funds will not be used to meet the day-to-day operational requirements of the company; these costs are already funded by a revenue neutral to revenue positive burn rate. It bodes well for current shareholders, that a $1bn management fund is willing to invest in SMS for the long- term at $1.40. It is a credit to management's ability to have a prestigious fund take shares at a minimal discount to the 10- day volume weighted average share price.
SMS has now received approval from Boeing and the FAA, principally through the in-flight programme that was conducted with Delta Airlines. SMS management has developed a very close working relationship with both Boeing and Delta Airlines. These relationships are incredibly valuable to SMS shareholders, principally because discussions surrounding licensing agreements are likely already taking place. Secondly, because the commercial approval and close working relationships, strengthens barriers to entry into the aviation health monitoring industry. Prospective health monitoring companies will find it very difficult to compete with SMS, because of their significant first mover advantage, reinforced by commercial approval and developed relationships with a number of airlines and airline manufacturers.
About the company
Structural Monitoring Systems ('SMS') is an Australian holding company that has spent almost two decades developing its patented CVMTM technology used to detect and monitor metal fatigue. The technology, now commercially approved, has very strong earnings potential as the key to cost- savings and increased asset utilisation in markets that rely heavily on structural integrity maintenance, ranging from aviation to infrastructure. The company's main operations are in the aerospace market where the value of cost savings and increased utilisation are anticipated to be the greatest.
In May 2015, the Company signed a non-disclosure agreement with The Sikorsky Aircraft Corporation ("Sikorsky"), a pre-eminent helicopter OEM, to allow for a validation program for CVM to address health and usage monitoring on rotor-aircraft. To date rotorcraft "health" monitoring has primarily focused on vibration monitoring of mechanical drivetrain components. SMS, Sikorsky and Sandia Laboratories have collaborated to select a "hotspot" application on a Sikorsky rotorcraft. The team has worked together to design and manufacture a sensor to monitor fatigue cracking in the "hotspot" area.
The FAA Airworthiness Assurance Centre within Sandia Laboratories, under the direction of Dr Dennis Roach has now installed the newly designed CVM sensors on specifically constructed test specimens. Monitoring of both crack promulgation and durability of the sensor is currently underway.
The "hotspot" area being tested has a very frequent inspection requirement involving considerable man-hours and an intrusive dismantling process to gain access for visual inspection. The ultimate objective of the fleet wide application of CVM technology is to monitor this known "hotspot" area remotely via the use of CVM sensors. Given that there are over 2,000 Apache AH-64 helicopters in operation around the world, SMS' technology has the ability to dramatically reduce the cost and time involved in mandatory inspection, as well as increasing asset life.
Together with the Sikorsky programme, the Apache in- flight pilot programme provides SMS with an ideal platform in which to install, assess and progress the expanded use of CVM technology within the rotorcraft industry. The Company's significant first mover advantage in both military and civilian applications confirms that SMS is ideally placed to benefit from the commercialisation and acceptance of CVM technology within the burgeoning rotorcraft industry.
Dr Dennis Roach commented: "This important programme is intended to begin the key process of
incorporating on-board structural health monitoring sensors into routine use on rotorcraft."
On completion of the programme, sufficient data and installation methods should be available to include CVM technology into rotorcraft OEM Standard Practice Manuals or modifications of Service Bulletins. SMS will then be in a position to take commercial advantage of the rotorcraft structural health monitoring industry, by entering into binding licensing agreements with defence forces around the world and rotorcraft manufacturers.
SMS has partnered with one of the worlds sovereign defence forces to install a specialised sensor on military Apache AH- 64 attack helicopters.
Providing support to the programme is SMS manufacturing/engineering partners, Aerodyne Electronics Manufacturing Corporation (AEM). AEM has developed a highly innovative sensor design to monitor the hard to reach 90-degree application area. The pilot programme is anticipated to be completed within 8-12 weeks (starting the beginning of March), upon which time CVM sensors will then be installed across an entire fleet of Apache AH-64 attack helicopters.
Apache AH-64 helicopter
This section attempts to unlock the underlying potential of CVM within the aviation industry, by estimating the savings the technology can provide for aircraft operators. SMS is in the enviable position of being able to select the most desired revenue model that will best suit the company when contracting with aircraft manufacturers and airlines.
Aircraft Manufacturers
Having been awarded commercial approval from Boeing/FAA, SMS can now begin to contract with manufacturers to use sensors in the design and building of new aircraft. Unlike the model we describe for airlines, which captures a percentage of cost savings, the benefit for a manufacturer materialises in the increase in saleable value of an aircraft with CVM sensors pre- installed. The revenue model used for aircraft manufacturers can capture this increase in value by either:
charging the manufacturer per sensor used; or
licensing CVM technology to the manufacturer under a fixed and/or variable annuity model.
We believe a fixed annuity licensing model is better suited to the company's structure, is more efficient and most importantly locks in revenues year on year for the duration of the agreement.
Airlines
We build a model of the savings that CVM would bring to the normal operations of an airline company, now that CVM technology is commercially approved for use on Boeing 737 aircraft. Consider the following example; for a Boeing 737- 800:
The plane has a capacity between of 150 - 215 economy passengers.
The company operating the plane runs at an average of 85% of capacity.
The plane operates a three-hour flight, three to four times per day with average revenues per ticket of $300. This is an average utilisation of between 9-12 hours/day; the industry average is closer to 9 hours.
The company's gross margin is between 30-50%. We disregard the fixed costs of the plane and costs not associated with extra flying time as they are sunk costs. The company has a tax rate of 30% on marginal profits.
- Based on these assumptions, the cost of grounding a plane for one hour in terms of foregone profit is between $500 and $1,400.
Furthermore, the scheduled maintenance for the average 737-800 is as follows:
Table 1: Plane Check Frequency for a 737-8001
Amount of Time | A-Check | B-Check | C-Check | D-Check |
Between Checks | 500 FH = 42 days | N/A | 4-6,000 FH = 0.9-1.4 years | 96-144 Months |
Taken Per Check | 10 Hours | 10-24 Hours | 3 days-1 week | 1 month |
Average Hours/Year | 86.90 | - | 93.91 | 72 |
Average Hours of Overlap | 5.31 | - | 9.39 | 0 |
Total Hours/Year | 81.60 | - | 84.52 | 72 |
Because a B-check covers A checks, C checks cover B and A checks etc., overlaps in maintenance inspections occur that are accounted for. This gives us an average of 240 hours that planes are grounded for maintenance checks per year.
The company is confident that CVM would save two days or 48 hours (20%) of downtime per plane per year as time taken to open, examine and close sections to check the aircraft structure are saved. Given the cost of grounding a plane for one hour is between $500-$1400 in lost profit, this makes for savings of $24,000-$67,000 per plane per year, in indirect costs alone. David Piotrowski (Principal Engineer at Delta) suggested that the potential savings expressed in terms of foregone revenue are 'multi-millions of dollars'.
To calculate the savings from direct costs, assume two NDT technicians work at the same time on one plane at a rate of
$100/hour. Furthermore, the cost to rent a hangar is
$5000/day or $200/hour2. 48 fewer maintenance hours saves an additional $19,200 per plane per year. In the recent investor call, David Piotrowski suggested that as many as 100 man hours can be used to access a section of an aircraft that takes only 10 minutes to inspect; and another 100 hours to close. Therefore we assume these forecasts to be conservative.
The savings of CVM technology do not stop there; suppose for a cargo plane the addition of CVM sensors meant welds and other structural supports no longer need be over- engineered; and parts could be made from composite rather than metallic materials. This would save weight (either increasing loads or reducing fuel consumption) as well as reducing manufacturing costs of planes themselves.
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Structural Monitoring Systems plc issued this content on 08 April 2016 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 08 April 2016 00:57:29 UTC
Original Document: http://www.smsystems.com.au/_content/documents/943.pdf
