Shares of Avigilon Corporation (TSX: AVO) are trading at a healthy forward P/E of 18x, which is reasonable given its strong future prospects
SmallCapPower | September 26, 2017: Avigilon Corporation (TSX: AVO), a provider of security solutions to the global market, is uniquely positioned in the growing video surveillance and security market. Avigilon has relied on consistent product innovation as a driver of growth. Since inception, the Company has developed various patents as part of its product development to date. Currently, Avigilon owns over 760 global patents, which we view as an arsenal for high-margin royalty generating assets. Avigilon is pursuing the licensing of these patents and currently has a licensing revenue stream, but it is not significant yet. Management believes that licensing revenue will be more meaningful to Avigilon in the coming years.
Investment Thesis
- Video surveillance and electronic access control are large and growing
- Extensive portfolio of Patents and Royalties
- Rapid revenue growth and proven track record of profitable growth
Video surveillance and electronic access control are large and growing
Global markets for video surveillance and electronic access control are large and growing. As per the data released by HIS, for 2017, the size of the video surveillance market is estimated to be US$16.2 billion and the size of the electronic access control market is estimated to be US$4.1 billion, for a total aggregate market of US$20.3 billion. By the end of 2021, the video surveillance market is forecasted to grow to approximately US$21.1 billion and the electronic access control market to approximately US$5.2 billion, for a total aggregate market of US$26.3 billion. We strongly believe that the target market will keep growing because security is a must everywhere.
Security needs are everywhere
Extensive portfolio of Patents and Royalties
Avigilon continues to develop intellectual property in sensors, storage, video analytics, and data management technologies to further improve its products. Additionally, Avigilon generates revenue from the Avigilon Patent License Program, which provides high-margin recurring royalties. The Company is currently licensing its patents to industry majors, which include Bosch, Pelco, Sony, March Networks, UDP Technology and Sensormatic. As of June 30, 2017, Avigilon held 760 patent assets (inclusive of design rights) globally.
Rapid revenue growth and proven track record of profitable growth
Since 2008, Avigilon’s revenues have experienced a compound annual growth rate (CAGR) of approximately 71%. Along with the tremendous topline growth, the Company has managed to grow its EBITDA, mainly because of the healthy gross margins. Avigilon is able to attain relatively high gross margins due to the integration between the hardware and software components of various Avigilon security systems.
Financial Analysis
Avigilon posted double-digit revenue growth of 16% in the quarter ending June 30, 2017. Key performance indicator for the quarter was the increase in the EBITDA margin from 9% to 17%. After a couple of years of downward pressure on margins, it looks like the Company is finally showing signs of strengthening. The bulk of the margin improvement came from reduced operating expenses, as management continued to work on improving efficiency.
Outlook
By late 2016, Avigilon shares had dropped nearly 75% from its glory days in early 2014 when they were trading at $33 per share (all-time high). Since then, the Company’s stock price has shown positive momentum with 90% YoY growth. Currently Avigilon is trading at a healthy forward P/E of 18x, which is reasonable given its strong future prospects including expected double-digit EPS growth, growing market demand, enormous patent assets, and margin improvements. But investors should also consider the competitive global markets for video surveillance and electronic access control, which may put pressure on Avigilon for a price cut in the future. Also, a number of key competitors have larger financial resources, which leaves Avigilon at a slight disadvantage. Overall, though, Avigilon is on track for regaining its glory days.
Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in the company mentioned above.
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