Centraxx Inc.
CNXX, OTC BB
Initiating as a Speculative Buy
Price: US$2.88
September 7, 1999
12 to 18 Month Target: US$5.30
Key Statistics
Market cap:
US$51.6 mil
Float:
2.7 mil
Shares O/S:
17.9 mil
Insiders:
54%
Shares FD:
19.3 mil
Debt:
0
Post merger range:
US$5.0/$2.75
Employees:
20
Fiscal Year Ending December 31
2000E
2001E
2002E
Sales (US$ mil)
10.3
52.0
92.3
Net income (US$ mil)
(6.2)
4.9
20.2
Basic EPS (US$)
(0.29)
0.22
0.91
· Established in 1997, Centraxx Inc. is a Las-Vegas, Nevada and Mississauga, Ontario based wireless data communications company that has developed a revolutionary patent-pending location technology.
· According to The Strategis Group, the rapidly emerging market for location technology products has an estimated potential of over US$8B annually in the US alone. Safety and security needs of society are on the rise and the market is expected to remain strong in the next several years.
· Centraxx is positioned to take advantage of these developments through the marketing of location products in such areas as vehicle tracking and monitoring, wireless E-911, fleet management, asset tracking, child and patient monitoring, etc.
· The Company's breakthrough technology utilizes radio frequency and a fixed network of autonomous stations to locate, track, and monitor a tagged object on a real time basis. Unlike existing technology, it does not rely on triangulation and is significantly more reliable, accurate, and affordable.
· The first application of the technology, a vehicle tracking and recovery system, provides excellent security that professional thieves are unlikely to bypass. Centraxx expects to sell the product for $129.95 and $4.95 per month for basic monitoring, making it the first mass marketable product of its kind in the world. Additional features such as roadside emergency notification and an Internet connection further differentiate the product and make it highly competitive.
· Centraxx's aggressive network deployment plans include Southern Ontario (early 2000), Southern California (mid-2000), Southern Florida (early 2001), Chicago, Detroit, New York City, and Dallas. Joint ventures will be established in Phoenix, Philadelphia, Houston, Oakland, and Denver in Q3/2000.
· Centraxx is very competitive on a price/performance basis. We believe that competition will intensify over time as technology develops, new players enter the market, and the industry consolidates.
· The risks with Centraxx include its capacity to roll out a successful network deployment and marketing strategy, the need for additional capital, rapidly developing technology, short operating history, low liquidity of the stock, and larger competitors with well-recognized brand names.
· We believe Centraxx is poised to experience significant growth, building on its leading edge technology, mass marketable products, and experienced management. We rate the stock a BUY and have a 12- to 18-month target price of $5.30 per share.
Company Description
Centraxx Inc. is a wireless data communications company specializing in the development and marketing of location technologies for the international marketplace. The Company's leading edge UNI-POINTTM technology is a low cost tracking, locating and monitoring system. It represents a significant breakthrough in location technology.
The patent-pending UNI-POINTTM system utilizes radio frequency and a land-based network of autonomous base stations to monitor the location of a tagged object on a real time basis. UNI-POINTTM is more reliable and less expensive than existing technology.
The Centraxx technology can be used in numerous applications, including fleet management, personal security, child monitoring, search and rescue, elderly care, and asset management. Initially, the Company will market a Vehicle Tracking & Recovery System (VTRS) with an optional Roadside and Emergency Notification Service. Centraxx expects to offer the product at a much lower price than existing products, making it the first vehicle locating system with mass-market appeal.
The Company plans to introduce the VTRS product in Southern Ontario in early 2000. This will be followed by an entry into Southern California in mid-2000 and South Florida in early 2001. To accelerate the establishment of a North American network, Centraxx intends to cover certain territories through joint ventures with local companies.
Centraxx is also developing a wireless Enhanced 911 (E-911) product for identifying the location of wireless callers. All wireless carriers in the US have to deploy E-911 systems in compliance with the Federal Communications Commission's (FCC) mandate.
Centraxx Inc. came into life through the reverse merger of Las Vegas, Nevada based Composite Design Inc. and Mississauga, Ontario based Centraxx Corp. in May 1999. Centraxx Corp. was founded in 1997 by two engineers and received significant financial and managerial support from Frankopan & Co., a merchant bank specializing in the financing and development of high technology companies. Frankopan has invested about US$3 million in the venture, bringing the company to its present stage of development. In August of this year, Frankopan committed another US$2 million to Centraxx.
The Market
The issues of safety and security of family and possessions, protection and recovery of consumer and commercial assets, and controlling criminal activity are major international concerns. According to The Strategis Group, a well-known telecommunications consulting firm based in Washington DC, the fast emerging market for location technology products has an estimated potential of over US$8 billion annually in the US alone. With its versatile UNI-POINTTM technology, Centraxx appears to be able to bring competitive solutions to this market.
An immediate market opportunity for Centraxx is the demand for an effective vehicle tracking and recovery system. Vehicle theft is an extremely severe problem internationally and is the most costly property crime in the US. In 1997, about 1.4 million cars were reported stolen in the US, with an estimated value of US$7.5 billion. Of the 140 million consumer and 5.7 million commercial vehicles only 400,000 have vehicle tracking systems. Research also indicates that over one-third of US car owners would like to purchase an affordable and effective vehicle tracking and recovery system.
Another significant opportunity is the FCC's 1996 timetable for the wireless communications industry to be E-911 compliant, i.e. to deploy technology for locating wireless 911 callers within a 410-foot radius with a 67% reliability factor by the year 2001, mainly to ensure assistance in emergencies. It is estimated that every day over 120,000 wireless 911 calls are made in the US with a large number of callers not being able to provide accurate location information. The Strategis Group estimates the market potential of wireless telecommunications location products to be US$2 billion.
Centraxx reports that its technology can be adapted to locate wireless telephones with a precision exceeding the FCC requirement for 2001 and meeting the proposed standard for 2005. The Company is likely to be the first in its industry to offer such a solution. E-911 is thus a potentially very important market for the company.
Vehicle Tracking and Recovery Technologies
Currently, there is no product on the market that stops experienced thieves from stealing vehicles. Alarms, steering wheel locks, kill switches and other products are useful for deterring joy-riders, but nothing more than minor inconveniences for professionals. Research indicates that professionals account for 80% of all stolen vehicles.
Presently, there are two types of location technology products on the market. Surface tracking systems utilize radio frequency and triangulation (three mobile tracking stations) to locate a tagged object. In dense urban areas triangulation is often interfered with and results in inaccurate tracking.
The other technology is based on the Global Positioning System (GPS) and uses a network of 24 satellites and a GPS receiver that requires clear view of at least three satellites to function. GPS signals can be easily jammed or interfered with. Both GPS and land-based systems are significantly more expensive and less reliable than Centraxx's VTRS that relies on a low cost network of autonomous base stations and encounters limited interference in urban and forested areas.
Centraxx's Technology and Products
Centraxx's UNI-POINTTM tracking and monitoring technology is a land-based radio frequency system. Unlike existing technology, it does not rely on triangulation and is significantly more reliable, accurate, and affordable.
The Vehicle Tracking & Recovery System, which is the first application of the UNI-POINTTM technology, consists of a base station, a small wireless tag, and a wireless key. The base station is fixed on a building or communications tower. The tag is hidden in the vehicle and is virtually impossible to detect and disable. The wireless key is carried on the vehicle driver's key chain.
When the car moves, the tag activates and, if it does not detect the wireless key in the car, treats the movement as likely theft, and an alert is transmitted to the Centraxx Monitoring Center in less than 30 seconds by the nearest base station. The Center immediately locates the vehicle with 10-meter accuracy, initiates minute-by-minute tracking, and notifies the police about the theft. The extremely short response time and high location accuracy compared with other current systems results in a much higher recovery rate and significantly less damage to the stolen car.
One of the many appealing features of the system is its self-arming capability. The driver does not have to remember to turn the system on when he leaves the car. Also, unlike the GPS-based technologies, the Centraxx system does not have exposed antennas that can be easily destroyed by thieves. UNI-POINTTM also works well in heavily forested and dense urban areas; within closed buildings; and in shipboard containers where most professionally stolen cars end up.
The technology operates in 900 MHz range and utilizes a special signal transmission protocol that dramatically increases the propagation quality of the signal. The communication between the base station and the tag is secure and very difficult to jam.
While other tracking systems range in price from US$600 to US$1800, Centraxx expects to retail its product for US$129.95 and US$4.95 per month for basic monitoring. At such an appealing price, the Company's Vehicle Tracking & Recovery System will be the first mass marketable product of its kind in the world.
For an additional US$6.00 per month Centraxx will offer a roadside emergency and notification service that allows drivers to summon help in the event of a car, health, or other trouble. This is an important service since over 50% of fatal automobile crashes involve single vehicles and most of them happen in rural areas. Another feature, the Internet capability, would allow users to track their tagged vehicle on a map using the Internet and a PIN number. These services further differentiate the product and make it highly competitive.
According to Centraxx, the UNI-POINTTM technology can be adapted to provide a wireless E-911 solution that can exceed the year 2001 FCC mandate. Two base stations and diangulation techniques will be utilized to locate and track wireless callers on a real-time basis. The Centraxx E-911 product will not require any changes to millions of wireless handsets or the cellular infrastructure currently in use.
Centraxx realizes that the smaller the tag, the more applications it may have. The Company expects to reduce the size of the tag to 1'' x 1'' x 2'' from current 4'' x 4'' x 3'' by the year 2000, and to the size of a micro chip in the year 2001. Tags of that size could be used to protect small items such as cameras, laptop and palm-size computers. In our opinion, the market potential of a microchip-size product is significant.
The UNI-POINTTM technology can find applications in vehicle fleet management; cargo tracking; personal safety; child, elderly and patient monitoring; search and rescue missions; and in various other areas. Insurance companies could greatly benefit from the use of the technology that could sharply reduce theft and loss claims.
Centraxx plans to outsource the manufacture of product components to a major manufacturing company. The final assembly and the assignment of codes will take place in the Company's Mississauga-based plant. Outsourcing will allow the Company to minimize product costs and meet the anticipated high demand.
Marketing Strategy
Centraxx will distribute its Vehicle Tracking & Recovery System through traditional as well as strategic distribution channels. Traditional channels include mass-market retailers, automotive after-market stores, car dealerships, wireless phone and audio/alarm stores, etc. Strategic channels include insurance companies and auto clubs. Centraxx will also engage in direct sales, licensing agreements, and strategic alliances.
Centraxx reports significant interest in its product from insurance companies and auto clubs. By some estimates, auto clubs perform over 80% of roadside assistance programs today. Insurance companies are motivated in the use of vehicle tracking systems, because they can reduce theft claims, which will result in lower premiums. Management says that it is in advanced negotiations with several major insurance companies to market its VTRS product to their policyholders. The insurer will likely pay for the system and service and offer it free-of-charge to certain policyholders.
The Company plans to introduce the VTRS product in Southern Ontario in early 2000. This will be followed by an expansion into Southern California in mid-2000 and Southern Florida in early 2001. The Company will then enter the Chicago, Detroit, New York and Dallas markets. In certain territories of North America Centraxx will proceed through joint ventures with local companies. Joint venture partners will cover a portion of the network deployment costs and engage in the marketing and selling of the Company's products and services.
In August of this year, Centraxx announced that it is accelerating its plans for the establishment of a North American network through joint ventures in a number of important US regions, including Phoenix, Philadelphia, Houston, Oakland, and Denver. These areas were chosen because of their well-developed wireless infrastructure, high population density, and a high rate of vehicle theft. Network deployment in these regions is planned to start in the third quarter of 2000.
Centraxx should be able to deploy a network of base stations in a large area in a very short period of time since it requires a relatively modest investment. For example, the establishment of the Southern Ontario network will cost about US$2.2 million and take about three months to complete. Only an additional US$6.1 million will be required to establish tracking networks in Southern California and Southern Florida. Centraxx is currently looking for financing to implement these projects.
Financials
Just like any other early-stage development company, Centraxx has a very short financial history. Unlike many such companies, however, Centraxx is emerging from the R&D stage with a healthy balance sheet. As at June 30, 1999 the Company had almost no debt (US$6,802). The Income statement for the first six months of F1999 ended June 30 shows no revenue and a total loss of US$0.88 million or US$0.06 per share which is mainly R&D costs. Management expects a loss of US$3.8 million or US$0.21 per share on negligible revenue in 1999.
Centraxx will start generating revenue from its first network in Southern Ontario in the spring of 2000. Initially, revenues will flow from tag sales, vehicle monitoring, and the roadside and emergency notification service. The Company expects revenues of US$10.3 million and a loss of US$6.2 million or US$0.29 per share in 2000. Large orders from insurance companies are anticipated in 2000. The Company should become profitable in 2001 as it gains market share and revenues reach a critical mass. Net earnings are projected at US$4.9 million or US$0.22 per share on revenues of US$52.0 million. The above estimates do not include possible sales of the E-911 product. We have assumed basic shares outstanding of 17.9 million in 1999, 21.2 million in 2000, and 22.2 million in 2001.
Centraxx's gross margins are expected to improve over time from about 37.5% in 2000 to 46.7% in 2001 as the customer base and high-margin monitoring revenues grow and additional products are introduced. These developments will leverage investment in the network. The margins on product sales and monitoring are expected to be 39.5% and 30.1% respectively in 2000 and 40.0% and 60.2% in 2001. Economies of scale may increase the gross margin on monitoring to 75% in 2002.
The above estimates assume a certain level of market penetration in select regions, which is presented in Table 1. It should be noted that although the projections are based on extensive market research, they are highly speculative, because of the Company's current stage of development and the uncertainty surrounding the acceptance of its technology and the market in general.
Table 1: Market Penetration, 2000-2002
Regions
2000
2001
2002
Southern Ontario
1.3%
3.9%
6.1%
Southern California
0.3%
1.5%
2.7%
Southern Florida
0%
1.4%
4.8%
Source: Centraxx Inc
.
Management
Michael Ivezic, interim President and a Director, is Managing Director of Frankopan & Co., the merchant bank that financed Centraxx. Mr. Ivezic has over 15 years of experience in raising capital and managing the start-up and growth phases of several companies.
Brian DeChamplain, Director, Executive Vice President, Chief Technology Officer, and a co-founder, has over 15 years of management and radio frequency electronic design experience in the communications, cable television, broadcast and consumer product industries. He holds several patents.
Frank Gerlach, P.Eng., Director, Vice President, Chief Engineer, and a co-founder, previously worked for Northern Telecom and Spar Aerospace. Mr. Gerlach has expertise in systems design, digital hardware and software design, and in project management.
Stewart Somers, Executive Vice President and CFO, has nearly 30 years of financial experience with several public and private companies. He is experienced in overseeing the finances of start-up companies as well as in investment banking and investor communications.
Michael St. Eve, Vice President Sales Network Development, has 25 years of radio communications industry experience and expertise in the management of sales of wireless products.
Bob Hill, Vice President Sales Strategic and Specialty Markets, has over 20 years of marketing and management experience with leading international consumer products companies.
Competition
Two prominent competitors in the vehicle tracking and recovery market are LoJack Corp. (LOJN) and the OnStar unit of General Motors (GM). LoJack's land-based system is used exclusively by law enforcement personnel and costs about US$600. General Motors' OnStar system is a GPS-based technology that is wirelessly connected with customer service representatives who provide services such as vehicle tracking and theft notification, roadside assistance, remote door unlocking, etc. The system can also be used as a cellular telephone. It costs about US$1,300 for the hardware and installation and $22.50/month for the service.
The Centraxx system has several significant competitive advantages over the tracking and recovery features of the above systems. It is more accurate, reliable, and significantly cheaper. The following is a brief discussion of the other advantages of the Centraxx system over LoJack's.
· Unlike the LoJack tag, the Centraxx tag is very difficult to detect once activated. Also, the signal from the Centraxx tag encounters relatively little interference in large urban areas where most vehicles are stolen.
· While Centraxx automatically locates a vehicle within 30 seconds after it is stolen, LoJack does not initiate tracking until after the owner of the car reports a theft. Centraxx guarantees recovery within 6 hours from the time the vehicle is stolen while LoJack guarantees recovery within 24 hours from the time the theft is reported.
· Centraxx expects that the use of its product will result in a much higher recovery rate than LoJack's. LoJack reports a 90% recovery rate and 80% damage reduction.
· Tracking with LoJack has to be done by three police cruisers which is subject to their availability. In contrast, Centraxx does not depend on today's overburdened law enforcement system; it tracks using a network of fixed base stations.
· Centraxx will provide optional roadside and emergency 911 notification features. LoJack does not offer such services.
In the market for E-911 solutions Centraxx has at least one competitor, Cell-Loc Inc. (CLQ) based in Calgary. While the Centraxx technology requires only two base stations to provide accurate location information, Cell-loc needs three and preferably four base stations. Cell-Loc recently announced the sale of its first two contracts worth C$0.7 million to wireless carriers.
There are many small players in the location technology market. Centraxx appears to be highly competitive on a price/performance basis in the market for vehicle tracking and recovery systems. We believe that competition will intensify over time as technology develops, new players enter the market, and the industry consolidates.
Risks
The most significant risk with Centraxx is perhaps its capacity to establish an extensive network of base stations and roll out an aggressive marketing program on a timely and cost-effective manner.
Although Centraxx has filed an application for a patent to protect its technology, there can be no assurance that the patent will be granted. Other companies may develop superior technology that could threaten the acceptance of Centraxx's technology or challenge its expected market share.
Centraxx will need additional financing for accomplishing its business plan. The Company may not be able to raise sufficient capital on favorable terms, especially in an inflationary or weak economic environment.
Other risks with Centraxx include short operating history, low liquidity of the stock, dilution, and larger competitors with well-recognized brand names.
The fact that the Company has completed the development of the technology and will shortly start marketing its first product significantly reduces risk.
Compared to LoJack, the technology risk with Centraxx is much lower thanks to the versatile nature of its UNI-POINTTM technology that may be utilized to develop numerous applications.
Valuation
We believe Centraxx is poised to grow significantly in the next few years. Its leading edge and highly competitive technology, healthy financials, experienced management, and the large and growing market are the building blocks of its success. The Company's competitors have grown substantially in the past, addressing the need for safety and security of people and possessions.
Centraxx's closest publicly traded competitor, LoJack Corp. (LOJN), is trading at 16.4 times trailing earnings and 1.7 times trailing sales. We believe that Centraxx deserves higher multiples since its Vehicle Tracking & Recovery System and technology in general are superior in many respects. Most importantly, while LoJack's technology is used exclusively in vehicle tracking, Centraxx's technology can be used to develop a vast variety of applications. Discounting for the uncertainty surrounding Centraxx's future and factoring in the Company's substantial growth potential as well as the possibility of higher valuations that the financial community will likely place on Centraxx once it appears in the spotlight with a hit product, an earnings multiple of 25 and a sales multiple of 2.2 appear to be justified. If Centraxx traded at 25 times its expected F2001 earnings of US$0.22 per share and 2.2 times its expected F2001 sales of US$2.34 per share, its shares would be worth about US$5.30. We would not be surprised if the stock passed this level in the next twelve to eighteen months.
We view the Centraxx stock as a speculative buy for high-risk investors with a mid to long term investment horizon.
Rampart Securities Inc.
Toronto
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Toronto, Ontario, Canada M5J 2P8
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Corporate Finance
Sean Shanahan
Vice Chairman
(416) 867-3567
Henry G. Cole
President
(416) 867-3788
Stephan Katmarian, CFA
Vice President*
(416) 867-3430
Vigen Ghazarian, M.Sc.
Analyst
(416) 867-6135
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* subject to regulatory approval
The opinions contained herein are those of Rampart Securities Inc., a wholly owned subsidiary of a publicly traded company Rampart Mercantile Inc., but this report should not be construed as an offer to sell or solicitation for or an offer to buy any securities. The statements and statistics contained herein have been prepared by sources we believe to be reliable, but we cannot represent that they are complete or accurate. Rampart Securities Inc., together with its directors, officers and employees, may from time to time have a position in Centraxx Inc. and may, as principal or agent, buy or sell such securities. Rampart Securities Inc. may from time to time perform investment banking services or other services (including underwriting) for Centraxx Inc.
Vigen Ghazarian, M.Sc.
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