Starcom back on track?

Just after Christmas last year investors got excited with tracking products business Starcom (STAR) as the firm announced a tie up with a Porsche dealership in Germany to supply one of its products. On the back of the deal the shares surged by 258%. But since then they have come back down to near all-time lows. While the company has had its fair share of issues over the past year I believe that the investment case is now worth revisiting.

The Business

Starcom develops and sells a range of wireless based products and services for the remote tracking, monitoring and protection of assets. Products typically take the form of a small hardware component, supported by software which enables customers to track, monitor and gain other information on valuable assets such as vehicles, containers and even people. Starcom operates via a network of global distributors, its products are made in Taiwan, and end customers include vehicle fleet operators, shipping companies and others. Key products include:

Helios – a GPS tracking device for vehicles, used for fleet management, security and driver safety. It enables operators to monitor and control excessive fuel usage and save operational costs. Recently launched is the new Helios Hybrid device, designed for remote locations without cellular coverage.

Tetis – used for dry and refrigerated containers, providing ongoing monitoring during its journey to the customer. Can provide information on aspects such as location, humidity, condition and temperature of the container.

Watchlock – a high security padlock and electronic alarm system with real-time alert and lock tracking. Starcom works on this product with Mul-T-Lock, subsidiary company of lock giant Assa- Abloy (owner of the Chubb and Yale brands). The New Watchlock is a model developed in partnership with Mul-T-Lock to reduce unit size and extend battery life and is expected to launch by Q1 next year.

Kylos Compact – a portable GPS tracker used for tracking merchandise assets, people and pets.

– Starcom Online – a web application providing recurring revenues for Starcom, also available on mobile devices, used for the real time tracking, management and monitoring of assets.

Helios

Issues

As mentioned above Starcom has had to deal with a number of issues in recent times. In March last year the firm was forced to warn on profits after the political issues in Ukraine caused a distributor to cancel orders. The accounts for 2014 wrote this off as a bad debt. Combined with products taking longer than expected to gain traction in the market, the company posted net losses for the year of $2.8 million. While the Ukraine related debt has been written off the customer is setting up business elsewhere and has promised to pay the bill eventually.

The 2014 results also saw Starcom restate its accounts following the decision to change the way it recognises certain revenues. Previously the company had booked in some of its sales on a “bill and hold” basis – this is where the seller does not deliver stock to the buyer but holds it back and records the related revenue. Unfortunately Starcom experienced that drawdowns by customers under these deals were relatively small so has now scrapped the bill and hold accounting for a more conservative policy. This had the effect of reducing revenues for 2013 by $3.17 million after the accounts were restated. While the markets tend to be suspicious of changes in accounting policies there is no suggestion of any funny business here as Starcom was able to satisfy the relevant criteria for such revenue recognition.

Delays in the drawdown of products obviously did not help Starcom’s cashflow and June this year saw the company raise £475,000 at a price of 4p per share. With this money largely spent October saw the firm organise a convertible loan “death spiral” facility with Yorkville Advisors. An initial tranche of $250,000 has been drawn down for working capital and marketing purposes, with up to $2 million available. This is an expensive deal, with a 10% implementation fee being paid on drawdowns, along with 7% interest. The company obviously recognises this and does not want to draw down further tranches unless it absolutely needs to. Yorkville has already converted just over $50,000 worth of the loan into shares at the discounted price of 2.1046p – it can convert the first $100,000 at 92.5% of the lowest share price during the 10 previous trading days, up to a maximum price of 4p, whichever is lower.

Now the good news

Numbers for the six months to June this year were more stable, with revenues relatively flat at $2.64 million. However, a fall in gross margins from 48% to 44% pushed gross profits down by 9% to $1.15 million. This was caused by price competition in the Helios car tracking market. But due to cost cutting measures the net loss for the period was reduced by 30% to $691,000. With Starcom having implemented further cuts (mainly in admin and R&D) total savings of approximately $530,000 are expected to be achieved in 2015.

Elsewhere, new products developed during 2014 are ready to market and are expected to drive revenue growth in the second half. The premium Helios Hybrid product should help gross margins to recover. With inventory levels remaining relatively high (following the return of stock associated with the bill and hold policy changes) stronger cash flow is also expected in the second half as levels are reduced.

Recent Developments

Further good progress has been made since the interims were announced in August. September saw Starcom finalise a small $91,000 contract for 100 of its Helios Hybrid tracking systems. The deal was won following an international tender against a number of competitors, demonstrating the firm’s competitive advantage.

Last month Starcom revealed that African distributor, Global Tracking Technology, won a deal to supply the Helios product to over 1,300 vehicles in Ethiopia for customer Ethio Telecom. The initial deal is worth $150,000 to Starcom over three years and the customer has said it intends to extend the project over another 3,000 fuel management systems.

Perhaps the most significant news came in mid-November when Starcom announced the formation of a joint venture with US data management technology business Sato Global Solutions.

Under the deal Sato will be the firm’s US distribution partner and will offer Starcom products combined with its own RFID technology. The joint-venture will also share technologies for new product development. This is a potential game changing deal for Starcom, with Sato being a huge global technology business. The holding company is listed in Tokyo and made revenues of $910 million in the last financial year. Crucially for Starcom, the business has access to a customer base which includes 500 large US based logistics companies. First revenues could start to come in at the start of 2016.

Assessment

With Starcom having previously disappointed the markets and it seeing working capital issues recently the shares are obviously not highly valued. The current mid-price of 2.5p capitalises the company at just £2.44 million. But most of the negative issues are now in the past and there is a lot to like about the business.

Starcom has a range of quality products which help clients to save money. Its technology has attracted several high profile global companies as business partners. Costs are falling and a range of new products are expected to boost sales in the near/medium-term. I also note that star small cap fund manager Gervais Williams increased his stake in the business from 5% to just over 12% in June and remains supportive. He is the largest holder behind management and founders of the business, who own just under 60% of the shares.

There are no forecasts currently on the market, so Starcom is difficult to value. But it would not take much of an increase in revenues for the company to be making a decent profit – something which could happen given the new products and deal with Sato. There could be short-term pressure on the share price from Yorkville selling – although the firm has agreed to restrict any sales to a maximum of 20% of daily volumes.

But for investors with a medium/long-term investment horizon Starcom shares look worthy of a risky speculative punt.

Richard Gill, CFA: