Much has been written about the fourth industrial revolution, robotics and robots. Here is a proxy play for that robotic future.
SINGAPORE (Jan 23): Frankfurt-listed Isra Vision (Isra) is a developer and manufacturer of software and systems for the image processing and machine vision industry. Isra markets its software worldwide, and operates two main segments: the surface vision segment which covers quality and surface inspection; while the industrial automation segment covers robot vision in automated production. Isra’s software and systems are used across multiple manufacturing industries, particularly the automotive industry through quality control, surface measurement, automated assembly and robot guidance. The performance of the company is very much tied to the performance of its customers, who are mainly premium automobile manufacturers and global players from a wide variety of industries, as they are part of the value chain.
For FY2019/2020, Isra was able to maintain a high level of profitability despite tough industry and economic conditions, which include delays in expected major orders, particularly from Europe and Asia in the fourth quarter. Ebitda also grew 6% y-o-y, and EBITDA margins also improved for this period from 32% to 34%. Isra’s operating cash flow and free cash flow by 29.7% and 4.0% respectively for the same period. Isra has a very strong financial foundation, and probably its best trait - its ability to remain profitable despite any industry condition over the past 15 years – with a positive and growing revenue, net profits, operating cash flow (OCF) and free cash flow (FCF).
In terms of yields, Isra’s yields are marginally more attractive compared to the benchmark German risk-free-rate (see chart 1). Isra’s balance sheet is also healthy, with comfortable liquidity and solvency ratios. The current ratio and quick ratio of Isra are 2.45 and 1.09 times respectively, above the benchmark of 1.0 times. Debt to equity is at 18.9%, while the interest coverage ratio is around 88 times. Between FY2009 and FY2019, the company’s economic moat and profitability, represented by margins, continued to expand, with gross margins improving from 51.6% to 57.1%, and operating margins rising from 15.9% to 22.0%. Compared to its global peers, Isra trades at a very small 4% premium for its P/E, but a very attractive 17% discount for its EV/ebitda. Also, Isra’s FCF margins, currently at 20.4%, dwarfs the industry average of –0.6%, most of which were similarly affected by industry headwinds.
Looking ahead, Isra Vision’s key strategy is to increase its global footprint. The specific measures of this strategy will mainly focus on India, Eastern Europe, Southeast Asia and Middle East and North Africa (MENA). Growth is expected through Isra’s portfolio expansion in the Smart Factory Automation sub-segment and intensified entry into new markets for networked automation, which should provide earnings visibility to the company over the next few months. Also, another key focus in the company strategy remains to complement organic growth with acquisitions and integration of innovative companies. For example, through Isra’s recent EUR5.2 million acquisition of Photonfocus AG in August 2019. Further acquisition targets from the areas of industrial automation, production analytics and sensory technology are currently being looked at by Isra specifically. Projects to strengthen regional business in Eastern Europe and Asia are also being examined. In short, the growth runway for Isra and ability to scale is bright, but the question is how much, even with worst-case scenario – unattractive industry-specific conditions.
We think the value of this resilient, fundamentally strong company is EUR43.43 ($65.1), which represents a gain of 15.4%. We also think this valuation can be achieved in the next 12 months. Analysts have a consensus buy call on the company, with a target price of EUR41.00, which represents an upside of 8.2%. This is a great stock for investors seeking growth companies with strong fundamentals. Since this is a growth stock, dividends are not the key focus for its investors. That may raise the risk profile somewhat as dividends are not likely to be part of total shareholder return.
