Description

 

Advanced Vision Technology Ltd. (AVT) manufactures and distributes bundled visual inspection machines and software used in the printing industry.  It is a $70m market-cap company with shares trading on the German stock exchange, the Deutsche Börse, under ticker VSJ (Bloomberg: VSJ GR, Reuters: AVTE.DE, Yahoo!Finance: VSJ.DE).

 

AVT is a growth stock trading at a deep value price. With $7.00/share in cash and marketable securities, at a current price of $15.50 (€11.94) we are paying $8.50 for a company that generated a $1.13 of EPS in 2006, and will likely generate at least $1.30 of EPS in 2007 with management guidance for top line growth of 15% annually. Assuming that interest income generated about $0.20 of AT earnings, that works out to less then 9x 2006 EPS and 7x 2007E EPS excluding cash. 

 

Company Description:

 

AVT’s machines detect printing errors much faster than the human eye, preventing waste of raw materials and ensuring quality control.  The company went public much too early at the peak of the frothy 2000 IPO market.  Since then, the company has developed a global footprint with offices in Israel, United States (33% of sales), Europe (41% of sales), and China.  AVT has over 1,300 platforms installed worldwide and is the global leader in vision inspection technology.

 

Historically, customer adoption of Machine Vision Technology (MVT) in the printing industry has been slow; current estimated industry penetration for MVT remains less than 10%.  However, based upon discussions with industry experts and visits with existing MVT users, we believe the printing industry is ripe for further MVT integration.  With an average unit price of $100k, the purchase of an AVT machine is subject to customers’ capital spending budgets, which have been on the decline in the printing industry for a number of years.  During this period; however, AVT has managed to grow steadily while educating the market of the benefits of MVT.  As an illustration of the compelling economic argument for adoption, conversations with customers indicated a payback on their investment in AVT occurring in less than six months.

 

AVT is the recognized MVT market leader in the printing industry with approx. 50% market share. AVT’s largest competitor is BST Promark (a division of the publicly traded German company Elexis AG) with approx. 15% market share. Other competitors include CC1 and ISRA vision. From our discussions with industry experts, we’ve learned that AVT is considered to be the leader of innovations in the industry, and the only one that currently offers a complete MVT solution to customers. However, as with all technology-oriented companies, there remains the risk that emerging technologies could undermine AVT’s position.  We believe that AVT can exploit its current advantages to benefit from accelerated industry adoption of MVT. 

 

In addition to growth within their existing packaging and label product lines, the company recently initiated marketing of a new sheet-fed product line targeting a separate and distinct segment of the printing industry. AVT recorded their first sales within the new product line in Q3 2006. While we do not expect the sheet-fed product line to have a meaningful impact on the financials in 2007, we believe that it can become a significant growth driver for the company in 2008.

 

AVT benefits from favorable market and company specific characteristics which should provide a sustainable competitive advantage and mitigate pricing pressures:

-         A low penetration product with demonstrated value to the customer (6 month ROI). With less than 10% penetration rate, the market for MVT is in its early stages. The value proposition is strong enough to warrant market adoption in the near term.

-         A clear market leader with approx. 50% market share. We expect to see a “land grab” phase for market share as penetration increase. While we do not expect AVT to retain abnormally high market share, we believe the company will continue to see significant (double-digit) growth for the foreseeable future.

-         A wide moat in the form of specialized niche market and a technological edge. AVT is considered to have the best and most complete product offering in the market. It also has a strong technological edge in the form of significant R&D spending and a strong, highly skilled, tech development team.

-         A rock solid balance sheet, giving the company the flexibility to address new technologies or penetrate adjacent niche markets.

-         Taxes: as an Israeli exporter, AVT enjoys an “Approved Enterprise” status under the Israeli tax law, The Company expects to be exempt from corporate taxes for the next 2 years, and is expecting a low effective tax rate of 5%-15% for the foreseeable future.

 

Valuation:

 

As market adoption of MVT expands, we expect to benefit from both improved earnings and multiple expansion.

 

We believe that the growth profile for the company warrants a P/E multiple of 15x on the base business. With a 2007E pro-forma EPS of $1.33 and expected $7.7/per share in cash by year-end the stock should trade at $27.7, implying over a 75% premium to the current price.

 

We were surprised to find that two sell-side analysts covering the company in Europe neglect to take the significant net cash position into account in their valuations. 

 

We believe that this stock is largely overlooked by the investment community. It’s a micro-cap company headquartered in Israel and trading on the German stock exchange.

 

This is hardly ideal in terms of exposure to investors. Despite these factors we’ve found the company highly accessible:

 

The company’s fillings are U.S. GAAP compliant and with more than 1/3 of revenues coming from the U.S., channel checks and market analysis are relatively straightforward. The average daily volume is just over $100,000, surprisingly robust for a small company. Additionally, the company has a respectable institutional investor base (including Fidelity which holds approx. 13% of the share O/S).

 

 

 

 

 

 

 

Catalyst

- Continued strong earnings results.

- New segments and products: The Company is exploring entering additional segments within the printing niche, such as RFID tag inspection, which could potentially create additional growth drivers.

- Buy-out: The large cash horde makes AVT a potential buy-out target.

- Acquisitions or special dividend/ share buybacks: Management has a reputation of being cautious with its M&A activity. We believe that in the near future they will either: i) use the cash to make prudent acquisition/s or ii) return the cash to investors.

- Potential listing on a U.S. or U.K. stock exchange.