Foresight Auto — Update 13 December 2016

Foresight Auto — Update 13 December 2016

Foresight Auto

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Foresight Autonomous Holdings

Spending growing along with successes

Q316 results

Software & comp services

13 December 2016

Price*

NIS1.91

Market cap

NIS140m

*Priced as at 12 December 2016.

NIS3.8145/US$

Net cash (NISm) at 30 September 2016

18.1

Shares in issue

73.1m

Free float

44.5%

Code

FRST

Primary exchange

TASE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.4)

3.6

2.1

Rel (local)

(11.7)

1.7

6.1

52-week high/low

NIS2.5

NIS1.8

Business description

Foresight Autonomous (FRST) is a development-stage technology company in Israel developing ADAS systems based on technology developed by its parent company and the Israeli military. FRST also has a 32.0% stake in Rail Vision, which is looking to sell its first rail ADAS system in 2017.

Next events

FY16 results

March 2017

Analysts

Anna Bossong

+44 (0)20 3077 5737

Richard Jeans

+44 (0)20 3077 5700

Foresight has recently taken its marketing and R&D efforts up a notch, achieving a cooperation agreement with a top-3 Chinese OEM, an MOU with a leading French auto-parts supplier and successful tests of Rail Vision’s systems at Trenitalia. This was reflected in strong growth in R&D and marketing-related costs in Q3. Anticipating a continuation of this trend, we have increased our EPS loss forecasts for this year and next by 11% and 13%. Nevertheless, we note that a continuation of the marketing successes in recent months should further boost the group’s value proposition. We currently derive a DCF value of NIS3.11 per share.

Year end

Revenue (NISm)

EBITDA* (NISm)

PBT*
(NISm)

EPS*
(NIS)

DPS
(NIS)

P/E
(x)

12/16e

0.0

(8.5)

(9.6)

(0.13)

0.0

N/A

12/17e

0.0

(13.1)

(16.6)

(0.23)

0.0

N/A

12/18e

0.6

(15.5)

(17.8)

(0.24)

0.0

N/A

12/19e

6.1

(13.7)

(15.2)

(0.21)

0.0

N/A

Note: *EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

R&D costs higher with staff hires

Foresight’s Q3 results show a reduction in quarterly EBITDA loss to NIS3.5m after NIS3.7m in Q216, but a key driver was a reduction in ESOP payments. Normalised EBITDA losses rose from NIS1.9m in Q2 to NIS2.7m, with R&D spending rising 56% q-o-q, reflecting increased hiring aimed at achieving the targeted proof of concept milestones in 2017 and an increased marketing focus by management.

Marketing efforts are paying off

Foresight’s management has achieved a number of potentially very helpful agreements in its target industries since our launch of cover in September. A management visit to China resulted in an agreement with a top-three Chinese OEM, which includes cooperation on advancing its ADAS product in China and the potential for a $15m investment in the group. Other achievements include an MOU with a leading French auto-parts supplier to promote Foresight’s ADAS product and successful testing of Rail Vision’s systems at Italian rail operator Trenitalia.

Valuation: Reduced operating cash burn in Q3

Foresight slowed the level of operating cash burn to NIS2.0m ($0.5m) in Q3 from NIS2.4m ($0.6m) in both Q116 and Q216, with the help of favourable movements in working capital balances. The company finished the third quarter with NIS18.1m ($4.8m) cash, down NIS1.3m ($223k) on the previous quarter, reflecting the impact of the NIS2.3m ($0.6m) investment in Rail Vision offset by NIS3.2m ($0.8m) in new equity, part of a since completed NIS5.3m share issue. Management sees good prospects to achieve dual TASE/Nasdaq listing in Q117 with a private placement to potentially raise c $5m in the next three to four months. Our revised earnings forecasts have reduced our DCF valuation from NIS3.15 to NIS3.11 per share, with some of the negative impact of higher loss forecasts offset by recent dollar strength, which has boosted our long-term forecasts of shekel-denominated earnings.

Q316 results review

Foresight has had an active three months since we initiated coverage. The company has announced a major cooperation agreement with a top-three Chinese OEM, an MOU with a leading French auto-parts supplier and successful tests of Rail Vision’s systems at Trenitalia (see more information on this below).

Foresight’s costs in the third quarter reflect this activity. Expansion in the R&D team resulted in R&D expenses growing to NIS1.1m in Q316, up 56% on the Q216 level (see Exhibit 1). There was also an increase in marketing in commissions paid to consultants to help facilitate the Chinese deal and legal expenses arising from the initial acquisition of a 13.5% stake in Rail Vision (since increased to 32%). In total, management estimated approximately NIS400k of costs that it considers of a one-off nature arising from its activities in the third quarter (which we have nevertheless treated as normal under the methodology of our normalised earnings calculation).

In total, despite the higher operating costs, the quarterly EBITDA loss was reduced from the NIS3.7m in Q216 to NIS3.5m after employee share option scheme (ESOP) payments fell to NIS0.6m, after an abnormally high NIS1.2m in Q216, representing two quarters worth of payments. Stripping these and other abnormal items out, normalised EBITDA losses rose from NIS1.9m to NIS2.7m during the quarter.

Exhibit 1: Quarterly results summary

NIS000s

Q116

Q216

Q316

Revenue

0

0

0

R&D costs

(552)

(679)

(1,059)

Marketing and Sales

(215)

(192)

(205)

ESOP share-based payments (employees)

0

(1,163)

(637)

G&A

(1,065)

(2,656)

(2,105)

Other income

65

2

0

Share-based payments to consultants/listing costs

(37,566)

(197)

(145)

Total opex

(39,333)

(3,722)

(3,514)

Change (%)

N/A

N/A

N/A

EBITDA

(39,333)

(3,722)

(3,514)

EBITDA margin (%)

N/A

N/A

N/A

EBITDA normalised

(1,767)

(1,862)

(2,732)

EBITDA margin normalised (%)

0.0

0.0

0.0

Depreciation and amortisation

(2)

(4)

(12)

Operating profit reported

(39,335)

(3,726)

(3,526)

Finance income (expenses)

134

(357)

(280)

Equity accounted profit

0

0

0

Profit before tax

(39,201)

(4,083)

(3,806)

Tax

0

0

0

Net profit reported

(39,201)

(4,083)

(3,806)

Key cash flow/balance sheet data

Total operating cash flows

(2,370)

(2,356)

(2,043)

Monthly operating cash flow generation

(790)

(785)

(681)

Purchase of property, plant and equipment

0

(34)

(212)

Acquisition of equity investments

0

0

(2,265)

Total Investing cash flow

(18)

(34)

(2,477)

Share issue/(repurchase)

18,177

1,101

3,179

Net change in cash

20,681

(1,289)

(1,336)

Closing net debt/(cash)

(20,681)

(19,392)

(18,056)

Per share calculations

Reported profit (loss) per share ($)

(0.58)

(0.06)

(0.05)

Reported profit (loss) per share (diluted) ($)

(0.56)

(0.06)

(0.05)

Normalised profit (loss) per share (diluted) ($)

(0.02)

(0.03)

(0.04)

Normalised profit (loss) per share (diluted) ($)

(0.02)

(0.03)

(0.04)

DPS ($)

0.00

0.00

0.00

Shares at period end (m)

68.0

70.0

73.1

Source: Foresight Autonomous Holdings accounts, Edison Investment Research

Successful night tests of accident prevention system

On 16 November Foresight announced that it had successfully completed a series of night tests of its proprietary accident prevention system. The tests of night-time capabilities are important to Foresight, which is working to launch a proof of concept for infrared night-vision software by 2020.

The tests were undertaken with the system being required to:

Correctly identify obstacles, including pedestrians and cyclists, and

Alert the driver to various threats, including:

Insufficient following distance, taking into account the speed of the vehicle in front as well as the advanced driver assistance (ADAS) equipped vehicle,

Potential collisions with static or in-motion vehicles, and

Proximity to pedestrians and cyclists.

The company is also looking to test the system’s capabilities in extreme conditions such as extreme weather and glare, including sunrise and sunset.

Forecast revisions

In response to the increase in underlying costs in Q3, and our expectation that a rapid pace of development is likely to keep expenses related to this development at a higher than previously forecast level, we have increased our loss expectations for 2016-19 as summarise in Exhibit 2.

For 2016 the key changes are to R&D and marketing spend and payments to consultants. We have increased the first two by 7% (c NIS 0.3m) and increased share-based payments by NIS0.5m to reflect higher payments to consultants commencing in Q3.

For 2017 we have increased opex to reflect a higher base in 2016 and anticipated NIS0.5m costs related to the company’s planned Nasdaq listing, which management now believes is most likely to take place in Q117.

Exhibit 2: Summary forecast changes

 

EPS* (NIS)

PBT* (NISm)

EBITDA* (NISm)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

12/16e

(0.12)

(0.13)

11.0

(8.7)

(9.6)

11.0

(8.4)

(8.5)

1.4

12/17e

(0.20)

(0.23)

12.9

(14.7)

(16.6)

12.9

(11.3)

(13.1)

15.7

12/18e

(0.22)

(0.24)

11.2

(16.0)

(17.8)

11.2

(13.6)

(15.5)

13.4

12/19e

(0.18)

(0.21)

14.1

(13.3)

(15.2)

14.1

(11.8)

(13.7)

15.7

Source: Edison Investment Research. Note: Normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.


Valuation

As a result of the above-mentioned increases in our cost expectations, we have reduced our DCF valuation for Foresight by NIS0.04 per share to NIS3.11. We have used dollar based forecasts for sales going forward, in keeping with the common practice of pricing international contracts in dollars. As a result, the recent appreciation in the dollar against the Israel shekel since our last valuation on initiation, with a positive impact on higher later year cash inflows in Israeli shekels, has largely offset the negative impact of our increased forecast of near-term losses.

Exhibit 3: Foresight DCF valuation

NISm

2016e

2017e

2018e

2019e

2020e

2021e

2022e

2023e

2024e

2025e

2025e norm.

EBITDA*

(48.8)

(14.0)

(15.8)

(14.0)

12.4

36.9

35.9

52.1

68.3

89.7

89.7

EBITDA margin

N/A

N/A

N/A

N/A

28%

28%

28%

28%

28%

28%

28%

Change in working capital

(0.5)

0.0

0.0

(0.2)

(6.2)

(3.2)

(0.9)

(4.2)

(4.6)

(5.9)

(6.5)

Capex

(0.3)

(1.5)

(1.5)

(1.6)

(2.0)

(3.5)

(2.8)

(3.4)

(4.0)

(4.8

(6.5)

Tax

0.0

0.0

0.0

0.0

0.0

0.0

0.0

(12.9)

(16.9)

(22.2)

(22.2)

Other non-cash items

39.4

0.9

0.4

0.4

0.4

0.4

0.4

0.4

0.4

0.4

0.4

Free cash flow

(10.2)

(14.6)

(17.0)

(15.4)

4.6

30.5

32.6

32.0

43.3

57.2

54.9

Terminal value

 

 

 

 

 

 

 

 

 

471.3

 

Total cash flow

(10.2)

(14.6)

(17.0)

(15.4)

4.6

30.5

32.6

32.0

43.3

528.6

 

Sum of discounted CFs

162.4 

Net debt (cash) end 2015 

0.0

WACC 

15.0%

Adjusted net debt (cash)

(29.0) 

Adjustment for:  

 

Terminal growth rate

3.0%

Equity valuation

191.4 

Equity issues/merger funding 2016 YTD

(28.4)

Terminal value/EV

83%

Value of Rail Vision stake

41.8 

Theoretical cash in-the-money ESOP/warrant exercise

(0.5)

Terminal value 2025

471.3

Total group value

233.1 

Adjusted net debt (cash) 

(29.0)

Number of shares (diluted), m

74.9 

Value per share (NIS)

3.11 

Source: Edison Investment Research. Note: *Not normalised. Dollar earnings forecasts translated at rate of NIS3.811/US$.

Exhibit 4: Financial summary

NISm

2016e

2017e

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

0.0

0.0

0.6

6.1

EBITDA normalised

(8.5)

(13.1)

(15.5)

(13.7)

Normalised operating profit

(8.5)

(13.1)

(15.6)

(13.8)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(33.7)

0.0

0.0

0.0

Share-based payments

(7.6)

(0.9)

(0.4)

(0.4)

Reported operating profit

(49.9)

(14.0)

(15.9)

(14.2)

Net Interest

(0.8)

(0.1)

(0.5)

(1.3)

Joint ventures & associates (post tax)

(0.3)

(3.4)

(1.7)

0.0

Exceptionals

0.0

0.0

0.0

0.0

Profit before tax (norm)

(9.6)

(16.6)

(17.8)

(15.2)

Profit before tax (reported)

(51.0)

(17.5)

(18.2)

(15.5)

Reported tax

0.0

0.0

0.0

0.0

Profit after tax (norm)

(9.6)

(16.6)

(17.8)

(15.2)

Profit after tax (reported)

(51.0)

(17.5)

(18.2)

(15.5)

Minority interests

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

Net income (normalised)

(9.6)

(16.6)

(17.8)

(15.2)

Net income (reported)

(51.0)

(17.5)

(18.2)

(15.5)

Basic average number of shares outstanding (m)

73

73

73

73

EPS – basic normalised (NIS)

(0.13)

(0.23)

(0.24)

(0.21)

EPS – diluted normalised (NIS)

(0.13)

(0.23)

(0.24)

(0.21)

EPS – basic reported (NIS)

(0.70)

(0.24)

(0.25)

(0.21)

Dividend (NIS)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

N/A

N/A

905.6

EBITDA margin (%)

N/A

N/A

-2561.1

-224.8

Normalised operating margin (%)

N/A

N/A

-2575.9

-227.4

BALANCE SHEET

Fixed assets

5.9

3.9

3.6

5.1

Intangible assets

0.0

0.0

0.0

0.0

Tangible assets

0.6

2.0

3.5

4.9

Investments & other

5.3

1.9

0.2

0.2

Current assets

14.5

5.0

5.0

4.9

Stocks

0.0

0.0

0.0

0.0

Debtors

1.1

1.2

1.2

1.0

Cash & cash equivalents

13.3

3.8

3.8

3.8

Other

0.0

0.0

0.0

0.0

Current liabilities

(1.4)

(5.9)

(23.5)

(38.8)

Creditors

(1.4)

(1.4)

(1.4)

0.0

Tax and social security

0.0

0.0

0.0

0.0

Short-term borrowings

0.0

(4.5)

(22.1)

(38.8)

Other

0.0

0.0

0.0

0.0

Long-term liabilities

(1.4)

(1.4)

(1.4)

(1.4)

Long-term borrowings

0.0

0.0

0.0

0.0

Other long-term liabilities

(1.4)

(1.4)

(1.4)

(1.4)

Net assets

17.6

1.6

(16.2)

(30.3)

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

17.6

1.6

(16.2)

(30.3)

CASH FLOW

Operating cash flow before WC and tax

(8.5)

(13.1)

(15.5)

(13.7)

Working capital

(0.5)

(0.0)

(0.0)

(0.2)

Exceptional & other

(0.8)

0.0

0.0

0.0

Tax

0.0

0.0

0.0

0.0

Net operating cash flow

(9.9)

(13.1)

(15.5)

(13.8)

Capex

(0.3)

(1.5)

(1.5)

(1.6)

Acquisitions/disposals

(5.4)

0.0

0.0

0.0

Net interest

0.0

(0.1)

(0.5)

(1.3)

Equity financing

24.1

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Other

4.9

0.0

0.0

0.0

Net cash flow

13.3

(14.7)

(17.5)

(16.7)

Opening net debt/(cash)

0.0

(13.3)

0.7

18.2

FX

(0.1)

0.7

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.0

Closing net debt/(cash)

(13.3)

0.7

18.2

35.0

Source: Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

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Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

Research: Investment Companies

Witan Pacific Investment Trust — Update 12 December 2016

Witan Pacific Investment Trust

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