Invisio: Less Money in the Jarhead Jar
Redeye Research Note 2021/01/12
The 2019 procurement with USMC (US Marine Corps) had a substantial, theoretical maximum value of several hundred SEK millions. Invisio now says it expects US Marines to instead procure simpler hearing protection without radio communication, i.e. it seems that the marines will not receive radios. Invisio does not offer these types of non-advanced solutions. First off, this is therefore not a loss to direct competition. So, what is going on? In our view, there is a major need for radio communication in order to reach situational awareness and tactical advantages. Not to mention the huge savings in costs for hearing injuries. This is no different for US Marines. Marines have the same problems as US Army, or the US Navy etc. However, US is unwilling to commit the budget money necessary for USMC. The USMC budget for fiscal year 2021 is e.g. 5% lower than 2020. We believe this will change, not in the near term, although some time in the future, meaning marines eventually will receive the same protection as the others in the US armed forces.
On a more positive note, Racal Acoustics that is about to be acquired by Invisio (following US approval), has received a relatively large contract of USD 4.7m from Denmark. The size in itself, in absolute figures, is not what gets us excited, but rather the contract size in relation to the relatively small Danish addressable market for armoured vehicles.
We want to highlight that Invisio is not allowed to have any contact with Racal before the deal is fully closed, meaning it is not able to comment. We hope to receive more information after the closing of the acquisition, perhaps in the Q4 report, in about a month.
The Danish Ministry of Defence Acquisition and Logistics Organization said that RA4000 was the only solution that could satisfy the comprehensive requirements. This leads us to believe that the new RA4000 Magna is a highly competitive and unique product. Moreover, we are positively surprised by the pricing. Racal says it was specifically selected to meet the needs of Leopard and CV90 heavy armoured vehicle crews, i.e. tanks. There is nothing in this statement suggesting that the contract also includes other types of armoured vehicles, but even if it would, we believe the revenue per tank or per crew member would still be pretty high. We hope to get more information around the contract and the revenue model when the acquisition is finalized.
We had expected some US Marines revenue in our estimates, although we had a very conservative view of the roll-out pace. Moreover, we expect several other customers and products to contribute to the strong, accelerating growth. At this point in time, we are therefore not changing the estimates or our valuation as the case is intact when it comes to Invisio’s position etc., but we will try to research if there is a risk for meaningful budget cuts in other armies, and if the market growth could be negatively affected.
While institutions historically have been buying every dip, we find it probable that the reaction on US Marines (currently -12%) could cause negative stock momentum, which could be a great buying opportunity in the longer perspective. Indeed, we do not expect the stock to reach our new base case of SEK 280 anytime soon.