5 Reasons to add Strat-Aero #AERO to your Watchlist

Back

5 Reasons to add Strat-Aero #AERO to your Watchlist

The content of this blog (or content associated with it) is not intended as investment advice. I do hold a position in the company mentioned below. Please do your own research.

Strat-Aero #AERO

Share Price: 0.083p

Market Capilatisation: £1.63m

What Do They Do?

Strat Aero is an international aerospace services company focused on providing professional services using Unmanned Aerial Vehicle (UAV) technology, covering all aspects of the value chain including consulting, training, aerial services and data analytics.

Strat-Aero have 2 core areas: Survey & Inspection Services and Commercial UAS Training & Education.

 

5 Reasons to add Strat-Aero #AERO to your Watchlist

 

1. CASH

When researching relatively newly listed, developing, micro cap companies, there is no factor more important than cash.

If they don’t have cash in the bank, then their share price will be continually dogged by private investor thoughts they they need to raise money, via an equity placing, usually at a discount to the current share price.

Thankfully this isn’t an issue for Strat-Aero.

On 24th January the raised £380,000(before expenses) at 0.1p and on 14th February they raised an additional £1.15m (before expenses) at 0.1p with a placing a director subscription.

There’s 5 points worth noting:

  1. These raises were done a few months ago, so any short term placees looking for a quick trade have probably done it.
  2. Both these raises were above the current share price, of 0.083p, so any remaining placees are unlikely to sell at this level.
  3. In both RNS, the CEO Ian McClure underlined the, management’s strategy to become cash flow positive by the end of the year 2017″.
  4. It’s been stated that the use of these funds will, “further expansion can be funded by the reinvestment of internally generated cash flows, as we focus on scaling up the business to take advantage of the huge opportunity we have identified in the fast-growing UAV sector.”   
  5. Directors took part in the 2nd fundraise contributing £250,000 of the £1.15m. 

Strat-Aero also have a Loan Facility for £300,000 in which interest will be charged at a rate of 8%.

This is an extened loan facility which was extended for a period of 12 months from 1st March 2017 with an option for the Company to extend this to a second year.

So I’d assume Strat-Aero will not need to raise funds in the short to mid term, especially as they’re targeting cash flow positivity by the end of 2017 and have also undertaken a cost cutting strategy, that focuses on Aero’s two core divisions: Survey & Inspection Services and Commercial UAS Training & Education.

 

2. MARKET CAPITALISATION

I’ve often said, it’s a lot easier for a company with a £5m market cap to double in size, than for a £100m market cap to do the same, especially if the small company has had a dire previous year, littered with legacy issues, which look to be behind it.

At 0.083p, the market cap of Strat-Aero is £1.63m. As far as listed companies are concerned this is a truly micro capitalisation. It’s also surprising considering they have around £1m in cash, a loan facility for £300,000 and the rapidly growing sector they’re in.

This means, excluding cash the business is valued at £630,000. If you take into account guidance revenue for the full year 2016, will be approximately $810,000 and they’re are also aiming to be cash flow postive be year 2017, then I believe they are undervalued.

Why is Strat-Aero So Unervalued?

Strat-Aero came to the market, with a lot of hype surrounding them, due to the sector they’re in. Unmaned Aerial Vehicles (UAV’s), was proclaimed as the next big, red hot, sexy sector.

Their shares opened at 9p, on 17th November 2014, with a market capitalisation of £6.5m and on the first day of dealings the share price took off immediately, shooting up 66% to 15p. It closed they day at 13.5p. A very impressive 50% rise.

The hype slowly gave way to reality, when it emerged revenue generation would be a lot slower to materiliase, than most people assumed.

Add to this, issues surrounding the acquition of a Texas based UAV company Aero Kinetics, on 11th November 2015, which frankly, couldn’t have gone worse.

It resulted in Strat-Aero filing a legal action, “against Mr W. Hulsey Smith, the vendor of Aero Kinetics on counts of fraud and breach of contract.  Strat Aero has also terminated the services of Mr W. Hulsey Smith, Chairman and CEO of Strat Aero’s subsidiary Aero Kinetics with immediate effect.”

In the same RNS, Strat-Aero also announced, “the resignation of Mr Tony Dunleavy (the then CEO of AERO) who has stepped down from the Board to pursue other interests, with immediate effect”.

These issues above also created their own set of problems. Needless to say it cost Strat-Aero a lot of time and money plus reputational damage.

A new CEO, Iain MClure was appointed and on 29th November 2016, Strat Aero announced, “the settlement of all litigation and claims arising from its dispute with Mr W. Hulsey Smith, the Chief Executive Officer of Aero Kinetics” and “Under the terms of the settlement, Strat Aero disclaims any allegations of fraud against Mr. Smith”.

Importantly, “Both parties have agreed to dismiss all pending litigation between them which is subject to certain procedural formalities”

The combination of the hype fuelled overvaluation at lauch and the legal issues it encountered, means Strat-Aero’s share price hit an all time low of 0.07p on 22nd May 2017.

Currently with cash, revenue, a refocus on their core areas plus a cost cutting strategy, I’d say 0.07p could be the bottom.

 

3. THE MARKET FOR DRONE IS BIG AND GROWING RAPIDLY

Unmaned Aerial Vehicles (UAV’s), is still a big, red hot, sexy sector.

A report in May from consulting firm PricewaterhouseCoopers estimated the drone market could be worth $127.3bn (£88bn) and the UK is destined to play a major part in that.

Until recently, television and film work accounted for 75 per cent of UK commercial drone activity, according to Arpas, the trade association. Nowadays, property and construction are the biggest sectors, with drones being used to inspect buildings, wind turbines and pipelines, for land surveying and mapping, and for agriculture and video filming.

Below are some of the sectors where drones are being used and their value in $billions.

Infrastructure is, one of two core areas, where Strat-Aero’s focus lies, (Survey & Inspection Services) the other being, Commercial UAS Training & Education.

Survey & Inspection Services

In September 2016 AERO announced that its wholly-owned subsidiary, Geocurve, was, “awarded a further contract to provide aerial inspection and level survey services for the Environment Agency’s Thames Estuary Asset Management 2100 (TEAM2100) programme.”

This contract, “could deliver in the region of £1m in revenue to Strat Aero over the next 18 months, and £2.5m over the duration of the whole programme”.

Geocurves work with the Environment Agency’s Thames Estuary Asset Management 2100 (TEAM2100) has recently won them 2 awards:

The Innovation award at ‘Project Excellence Awards’ at Flood & Coast 2017

The Field Data Collection Award at the Customer Success Awards at Esri UK’s Annual Conference.

 

Commercial UAS Training & Education

On 23rd August 2016, announced that, the UK’s Civil Aviation Authority (‘CAA’) has granted Strat Aero National Qualified Entity (‘NQE’) status”.

“This is an important development in the commercialisation of Strat Aero’s training programmes as in order to apply for a UAV pilot’s licence, individuals need to show that they trained at an NQE certified centre. 

The Board believe that the grant of NQE status is an endorsement of the Company’s training programmes and confirms the quality of Strat Aero’s suite of commercial teaching courseware. In order to apply for a UAV pilot’s licence, individuals need to show that they trained at an NQE certified centre. 

The Board believe that the grant of NQE status is an endorsement of the Company’s training programmes and confirms the quality of Strat Aero’s suite of commercial teaching courseware.”

On 24th August, they announced it had entered, “into a Master Franchise Agreement with the Limkokwing University of Creative Technology (‘LKW’), an international technology university, to roll out UAV training services.”

“Initially launching in LKW’s prestigious Cyberjaya campus outside Kuala Lumpur in Malaysia, Strat Aero and LKW plan to roll-out the Strat Aero UAV training solutions to other LKW campuses over the next two years, with a particular focus on Africa.” 

These 2 sectors not only allows Strat Aero to get a slice of the biggest and fastest growing sector, the infrastructure side of UAV’s but also grab a portion of the other growing areas such as, “Urban Planning & Design, Construction Management, Digital Film & Television, Creative Multimedia and Events Management – industry sectors that will increasingly take advantage of UAV technology.”

 

4. MANAGEMENT

On 1st April 2016, Iain McLure took over as CEO.

Iain holds 5% of the company’s shares, so you could say his interests are aligned with shareholders and he has spearheaded a cost cutting programme, which involves forcusing the companies energies and resources on the two areas, he believes will achieve the best return for the company: Survey & Inspection Services and Commercial UAS Training & Education.

On numerous occassions, including in the recednt trading update on 3rd April, Iain has stated that the company intend, “to achieve breakeven at the operating profit level in the near term”.

What is defined as “near term”?

In January he stated, “Reducing the Company’s cash burn run rate remains a top priority within the Group with the goal ultimately that Strat Aero will become cash generative by the end of the financial year ending 31 December 2017.”

Mr McLure has held a number of senior management roles throughout his career, including CEO of Spring Global Mail, one of the leaders in the cross-border logistics and postal services market.

He has over 20 years’ hands-on experience of international, multi-discipline management. Between 1995 and 2013, he was CEO of Spring Global Mail, which was originally established in 2000 as a joint venture between TNT, Royal Mail and Singapore Post but is now a wholly owned subsidiary of TNT.

Spring Global Mail specialises in cross-border international mail, parcel and return services for businesses including the Royal Mail with a particular focus on e-commerce, direct marketing and reverse logistics business, handling major blue chip multi-national clients like Vodafone and Office Depot. Prior to Spring Global, Iain was Commercial Director at Royal Mail International.

 

5. THE CHART

(click to enlarge)

As I mentioned above, the share price recently hit an all time low of 0.07p on 10th May. It retested this again on the 19th and bounced, the next day, to 0.08.

The relative strength index was also oversold hitting 11.89 but it has now rebounded and is heading towards that all important 50. Should it get above this level then momentum should push the share price further north.

The share price is currently sitting on the 20 day moving average, so a close above this would also provide some momentum. On a weekly chart the share price is still majorly oversold with the RSI at 28.8. Another positive sign would be for it to get above 30.

Strat-Aero’s share price has been hit hard in the last year but the reasons for this fall, namely the overvalued initial listing, slow revenue recognition and legal issues, with the acquisition of Aero Kinetics, are largely behind it.

They have cash and a loan facility so the need to raise money, does not appear to be an issue.

The new CEO Iain McLure, has refocused the business on 2 core areas and has stated they intend to, “become cash flow positive by the end of the year 2017”. This will, I assume, be achievable by building on the success they’ve had so far, with the Environment Agency’s Thames Estuary Asset Management 2100 (TEAM2100), which saw their work receive 2 awards and their training programme which has received National Qualified Entity status from UK’s Civil Aviation Authority.

Currently the market capitalisation of Strat-Aero is £1.63m and yet they have £1m in cash plus a loan facility. They’ve provided guidance towards $810,000 revenue for 2016 but their loss will be around US$3.5 million. Some of this will be due to the Aero Kinetics, acquisition debacle but going forward into 2017, losses will have to be greatly reduced in order to achieve cash flow positivity.

Hopefully, we will get an update on how the business is performing, in the final results for 2016, which should be released around the end of June. I do not think we will see a smooth take off for the share price, in the next few months. Hopefully a few more positive updates, throughout this year, will help get it firmly off the runway.

To add Strat-Aero (AERO) to your watchlist, click here and tap the, “Follow” button.

The content of this podcast (or content associated with it) is not intended as investment advice and people featured may hold positions in the companies they talk about. Please do your own research.

my-previous-blog-posts


To subscribe to my blog click here

3 Overlooked Penny Stocks with Potential

 

3 Risky Micro-Caps with Multi-Bagger Potential

Our 3rd Trade in our, “£1,000 to £100,000 in 50 Trades or Less” Experiment

angs-small
To read my blog post on Angus Energy #ANGS click here

3 reason to add Angus Energy #ANGS to your Watchlist

 

ars-small
To read my blog post on Asiamet Resources #ARS click here

 

boom-small
To read my blog post on #audioBoom #BOOM click here

To read my updated blog on audioBoom including the iHeartMedia agreement click here

2 Overlooked Companies, That Could Be About to Release Signficant News

 

evr-holdings-logo-small
To read my blog post on EVR Holdings #EVRH click here

To read my follow up article on #EVR Holdings click here

3 reasons to put Harvest Minerals on your Watchlist

 

To read my blog on Horizonte Minerals click here

 

koov-small
To read my blog post on Koovs #KOOV click here

 

5 Reasons to Put Lombard Risk Management #LRM to your Watchlist

 


To read my blog post on Motif Bio click here

 

5 Reasons to add MySQUAR #MYSQ to your Watchlist

 

pvr-small
To read my blog post on Providence Resources #PVR click here

3 Reasons to put Providence Resources #PVR on your Watchlist [UPDATE]

 

5 Reasons to put Savannah Petroeum #SAVP on your Watchlist

 

tlou-small
To read my blog post on #TLOU Energy click here

To read, “5 Reasons I bought more Shares in Tlou Energy This Week” click here

11 Quick Reasons to add Tlou Energy #TLOU to your Watchlist

 

5 Reasons to put The People’s Operator #TPOP on your Watchlist

 

4 Reasons to add Westminster Group #WSG to your Watchlist

 

upl-small
To read my blog post on Upland Resources #UPL click here

To read my follow up article on Upland Resources: The Sensible and Sexy Asset Strategy, click here

2 Overlooked Companies, That Could Be About to Release Signficant News

 

3 reasons to add Versarien to your Watchlist

 

yolo-small
To read my blog post on Yolo Leisure and Technology #YOLO click here
To read my blog post on Yolo’s Electric Jukebox Investment click here

Vox App Image
How to get company RNS releases sent straight to the front screen of your smartphone, as soon as they release them (for free) in 3 easy steps.

1. Download the Vox Markets app by clicking here (for either iPhone or Android).
2. Search for a company you want to receive the RNS’s from.
3. Click, “Follow” on that company’s page.

If you find this podcast useful please could you give it a 5 star rating and review on iTunes by clicking here and I’ll return the favour by giving you a mention on the podcast!

The content of this podcast (or content associated with it) is not intended as investment advice and people featured may hold positions in the companies they talk about. Please do your own research.