STOCKHOUSE REPORT ON IDS Intelligent Detection Systems, Inc. (TSE:ISD)
October 29, 1999
StockHouse News Desk
By Chaya Cooperberg (ccooperberg@stockhouse.com)
Recovering IDS Poised To Come Through With Earnings
Starting out in a promising way two years ago, IDS
Intelligent Detection Systems has seen some major
turmoil in its stock price, reflecting some disappointments
along the way. But with the stock bottoming earlier this
year and more than doubling since April, the company,
which will soon announce quarterly earnings, may be
starting to make progress in shifting investor attention to
its potential in no less than seven different markets. The
company also has plans for a Nasdaq listing.
After going public in December 1997, the future of IDS Intelligent Detection Systems [T.ISD] seemed marked for greatness. The
company possessed a patented technology unseen anywhere else in the market. Called GC/IMS, it could detect minute particles of
any organic material in about six seconds flat. It offered seemingly limitless applications, and when CEO Dr. Mariusz Rybak
purchased the company (then called CPAD) in 1995, he targeted the technology beyond its original purpose of countering terrorism
by detecting bombs and explosives, into the medical and industrial process sectors.
Today, IDS has branched out even more, thanks to an aggressive acquisition strategy, and is well on track to more than double its
1999 revenues over last year. It is even turning a healthy profit. Trading at about seven times projected earnings, it has a market cap
one analyst calls "ridiculously" undervalued for a company with seven active business units, with as many different market spaces,
and a clean balance sheet. Dr. Rybak says the only reason IDS isn't being recognized in the investment community is because it is
a "challenge for investors to analyze a company with such a diversified portfolio of businesses." However, events in the company's
not-too-distant past allude to a very different plausible explanation.
Originally priced at $4.75 a share, for a total take of $15 million, the company raised another $22 million in March 1998, through
special warrants. The stock hit a high of $8 around April before its fall from grace. Two things happened around that time to drive IDS
down. First, it acquired a company called Scintrex, and second, it strongly suggested it had bagged a huge deal, which then fell
through.
Strategically, the Scintrex acquisition was an excellent move by IDS. At the time, IDS was developing a hand-held bomb and
explosives detection device. Doing its due diligence on the marketplace, the company discovered a direct Canadian competitor,
developing a similar hand-held product, which it called EVD-3000. Scintrex was a small company, but had already built up a solid
industry reputation, as well as a chain of distribution, for its line of products in the geophysical and nuclear services products
sectors. The merger was a complimentary and necessary one, and has made IDS [T.ISD] a market leader in security devices, but
the manner in which it was done turned the stock cold. Scintrex was not receptive to IDS' overtures, so Dr. Rybak initiated a hostile
takeover, not usually seen in the tame Canadian tech sector, and acquired 100% of the outstanding shares. Bay Street was not
amused, its polite rules having been unabashedly broken, and Dr. Rybak earned the nickname "The Barracuda" for his brazen
management style.
The Street was, around the same time, punishing the company for its claims to a huge contract, that would have pushed revenues
and earnings to impressive heights. Details are sketchy, but the contract for IDS' bomb detection systems was to have been with the
Federal Aviation Administration in the US, and supposedly worth about $40 to $50 million. The deal fell through, leaving IDS with
limited hopes for immediate revenue-certainly none on the scale it had been suggesting.
Tenaciously, IDS has come off its lows, which was $1.25 at one record point last December, to reach nearly $4 in the summer of
1999, after strong second quarter results. Now hovering around the $3 mark, IDS could very well be on the comeback trail. "The
market has a long memory," says Groome Capital analyst Andre Mousseau, but positive year-end numbers might redeem the
company. "I think Dr. Rybak's been promising big numbers for a while, and this is going to be when they actually meet them."
Mousseau is projecting earnings of 40 cents per share for the year ending December 31, a figure Dr. Rybak says he is comfortable
with. Earnings for the six months to date total 24 cents, and third quarter results are scheduled to be out Monday, November 1 after
the market close. "My analysis shows Q4 is going to be stronger than Q3," says Mousseau. He expects EPS of six or seven cents
to be announced for the period.
Based on just its existing business, the company is a great play right now, according to Mousseau's research. He has a 12-18
month target of $6 on the stock. The analyst hesitates to speculate on many of the upcoming products and plans the company talks
of, because he might be accused of "being promotional, falling for stories, or not doing my homework." But Mousseau can't disguise
his excitement about IDS' potential. "There's just so much hidden value in this company," he enthuses. "Once all of its initiatives are
completed, and once their various lines of business really get going full speed, the stock has unbelievable upside."
How IDS Breaks Down Into Seven Business Units
"All of these companies could stand on their own, and probably the market cap of (each of) them
would be comparable to ours." - Dr. Mariusz Rybak
Analytical and Security
The flagship division of IDS, it provided the company with 47% of its revenue in the first half of
1999. It uses GC/IMS, as well as technology inherited from Scintrex, to develop devices that can
detect explosives and illegal drugs. A unique product, the Large Vehicle Detection System, which
can scan a vehicle for explosives in 45 seconds, was the largest single contributor to 1999
revenues so far.
IDS Power Control Systems
This division supplies control instruments for nuclear reactors and power plants. It recently
scored $1 million in new orders to supply Ontario Power Generation with two products.
Scintrex Earth Science Instrumentation
Provides geophysical instruments to natural resource exploration market. Its products are used
for imaging in oil and gas, mineral and groundwater exploration. Freshly on board this division
is Micro-g, IDS' newest acquisition. According to CEO Dr. Rybak, the Scintrex
geophysical-related divisions will be spun off and taken public within the next 6 to 9 months.
Survey and Exploration Technology
This division uses the products developed by Scintrex Earth Science Instrumentation, to provide
contract mapping and surveying services. Or as the company phrases it, "provides more precise
pictures of the ground structure in a mountainous region of Kalimantan."
Integration, Engineering And Consulting (IEC)
This division contributes only a small portion to IDS' revenues, but gives the company a high
profile. It is a systems integrator, serving mainly the Canadian government. Groome Capital
analyst Andre Mousseau expects revenues to grow $1.5 million in 1999, from $0.6 million in 1998,
and to reach $2.3 million in 2000.
Chemicorp, Inc.
Acquired in January 1999, IDS owns 70% of this company that develops industrial process
controls based on the core GC/IMS technology. This division has patented a water treatment
process that has not been commercialized yet. According to Dr. Rybak, it will be officially
announced in the next year.
Caduceon
Created by IDS, Caduceon develops point of health care applications using GC/IMS technology.
IDS plans to unveil a prototype for a portable breath analysis device at the Ontario Hospital
Show on November 22 in Toronto. If the response is positive, IDS may spin this division off and
take it public by as early as next year.
With so many lines of business forming the company, it stands to reason there are many developments to look forward to. The most
recent announcement concerns an acquisition done on the Scintrex side, of a company called Micro-g Solutions, a manufacturer of
high-end geophysical equipment, to join the Scintrex Earth Science Division. The acquisition was financed purely through
paper-Micro-g was paid in shares of Scintrex. This deal is part of a larger trend to be borne out in the months to come, according to
Dr. Rybak. IDS is looking for several more geophysical-oriented takeover targets, to combine under the Scintrex umbrella. The plan is
to spin the division off and take it public, a process Dr. Rybak estimates will take six to nine months. His goals for the IPO aren't
lofty-$10 million is all he hopes to raise-because there's enough capital to run the consolidated entity. "I would rather run the
business first, get the add-on value, get the benefits of merger and acquisition, and then maybe raise money again," he explains. The
second round of financing would be in 24 months, he predicts, and would involve a larger sum of cash.
Earlier this month, IDS [T.ISD] announced what Rybak considers "the most exciting initiative happening" for the company right now.
In development with the Sun-Netscape Alliance, IDS will be launching two e-commerce portals to target the global mining and
geophysical markets. The sites will be designed to bring together the fragmented community of companies to trade mining and
geophysical data and equipment. The international industry is one worth about $300 billion per year, and Dr. Rybak puts the number
of related companies in Canada at about 600. He is hoping to entice 35% of the Canadian market, which represents revenues around
$2 billion a year, to sell goods and services on the unique portal. Rybak says he already has a few letters of intent, even though the
site won't be officially launched for another three months, although, he believes it might be ready sooner. He won't project how much
the e-commerce portion could add to IDS's revenue, but says the company will cash in on the commissions from sales, for a take
between 5 and 10%. This, Rybak points out, is well below the standard intermediary's commission of about 25%. The portal will stay
under IDS' control, and despite its geophysical component, won't become part of Scintrex's operations.
"This has huge blue sky potential," says Andre Mousseau. "This thing could be a money maker in its first year." According to his
internal analysis, it wouldn't be unrealistic to expect the e-commerce operations to be cash flowing $10 million in three years. The
geophysical market is one particularly suited to a business-to-business e-commerce medium, Mousseau says, and IDS can create
enormous value for itself just by leveraging its existing assets in this way.
The company is also continuing to leverage its existing technology. IDS created a division called Caduceon to develop applications
for GC/IMS in the point-of-care health technology sector. On November 22, Caduceon will reveal a prototype at the Ontario Hospital
Show in Toronto, which is already meeting doses of skepticism in the industry. Using a completely non-invasive breath sample, the
product would be able to detect diseases. The technology for the product is based almost entirely on GC/IMS, which leads Dr.
Rybak to believe FDA approval would come quickly, say between 9 and 12 months, once the product reaches that stage. IDS
[T.ISD] doesn't plan to sell the device, but rather to supply hospitals with the equipment, and charge on a per-use basis. Dr. Rybak
warns that first profits from the product won't be seen for at least 18 months.
"Caduceon is in a billion dollar plus market that they can be poised to take a significant piece of in two years," says Mousseau.
Investors have already approached offering funding, but the company wants to first wait for the results from the show and gauge the
level of market acceptance. If the response is positive, Dr. Rybak says Caduceon is another candidate for an IPO, perhaps as early
as the beginning of next year.
"It would only make sense," says Mousseau in support of the idea, "because clinical trials in the US, especially, costs money and
there's no point in penalizing the rest of IDS now that it's finally cash flowing positive."
IDS is definitely intent on maintaining the pretty financial portrait they've painted thus far. The company is striving to meet the
requirements for a listing on the Nasdaq big board. It makes sense, in a way, with 95% of its business coming from outside of
Canada, and the lack of support shown by the investment community here. But, as Mousseau warns, it might not add that much
value to the company, and it comes with the downside of heavy scrutiny, and harsh punishment for missed estimates.
Still, Dr. Rybak says that there is market interest south of the border, as evidenced by the 20% of equity owned by US shareholders.
Now in the process of filing its 20-F, Dr. Rybak says the company meets almost all the requirements, with its $68 million in assets
and exploding revenue. The only missing requirement, in fact, is the lacking in IDS' share price. This is the one thing beyond Dr.
Rybak's far-flung control, leaving him no choice but to wait patiently. "We strongly believe the fundamentals of the company,
definitely on earnings, will prove to the shareholders that we are on a good track," he says resignedly, "and the stock will correct one
day on its own."
The question of whether the market is ready to reward IDS for its leading products, stronger financials and promising initiatives,
looms like a heavy cloud over the company's potentially sunny future. With no more major analyst coverage on the near horizon, and
a shadowed past, IDS can only hope investors will give it a fresh chance. |
