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Sabien Technology (SNT) – Pilot Programme showing promise.
A broker note from Stockdale Securities.
The key elements of the interims in our view are that 30 UK pilots have been agreed for this heating season and that the sales pipeline has increased to £6.4m from the last-reported £5.8m. As anticipated the adj. LBT increased to £1.0m in the first half due to the extra costs incurred in increasing the pilot programme. It is encouraging that the company still anticipates meeting expectations for FY2016. With no changes in our forecast of the move towards profitability in FY2017 we reiterate our 50p DCF-derived TP and Buy.
New “free” pilot strategy implemented
Up until last summer Sabien charged c.£20k to run pilots for a potential customers. These involved fitting an M2G device on to at least three of their boilers to demonstrate a 10-25% reduction in gas usage via a report including substantial data analysis. While the proposition should have been compelling it inevitably led to delays as the charge meant that public sector clients typically needed to undergo a tender process first. To take advantage of the substantial level of interest it has built in its boiler optimisation technology and counteract the inertia due to the £20k charge Sabien now includes the cost of the pilot into a roll-out. Importantly, the qualification criteria remain – chiefly a minimum spend of £0.25m, good asset log data and the client’s willingness to devote some of its engineering resource to the pilot programme. To increase the number of pilots it is capable of running, Sabien has increased its headcount by 50% to 24 and has secured 30 UK pilots of its up to 35 pilots in total targeted for FY2016.
Increased sales pipeline
The main reason for introducing the more aggressive piloting strategy was to stimulate a meaningful increase in the sales pipeline. We forecast this to grow from the £6.4m reported in the interim results to £10.8m for the beginning of FY2017. We have used the historical rate of 87% of M2G pilots converting into the sales pipeline and then 69% to an estate-wide roll-out. We have then based our headline forecasts for the sales pipeline and sales on the minimum £0.25m spend. If the historical average of £0.4m spend per client were realised, then profitability would be achieved in FY2017. The company has set itself a five-year target of a sales pipeline of £25m.
DCF valuation captures benefits of the new strategy
In addition to the sales pipeline target of £25m, management also set a five-year revenue target of £8m and EBITDA margin of 25%. With no meaningful profitability forecasts in the next two financial years in our base case forecasts we continue to use a DCF analysis to derive our target price. Our 50p DCF per share assumes a WACC of 12% and a 2% long-term growth rate, both of which are conservative in our view. While we consider FY2016 to be “a year of investment” we are most encouraged by the recent £0.3m order and hope to see news of further orders and building sales pipeline start to drive the share price higher.
Link here to full broker note –Sabien-Tech_Stockdale090216
Brand CEO Alan Green talks Sabien Technology (SNT), Edenville Energy (EDR) & Andalas Energy (ADL) on VOX Markets podcast
The interview is 20 minutes 30 seconds in. Click here to listen.
The interview is 26 minutes 40 seconds in. Link here to listen.
A report by market analyst Jon Levinson.
Sabien Technology owns a clever device “M2G” that increases the efficiency of any commercial boiler. It can be retro–‐fixed and pays for itself within two years and in energy efficiency a three–‐year payment is considered commercially attractive. Around 70% of customers need to try the device before buying, so last year free pilots (trials) were offered which has substantially increased the sales pipeline.
Until June 2015, potential customers paid for pilots. This policy elongated the sales cycle, which can take anything up to two years and income was reliant on orders being closed from a small number of pilots. This has led to lumpy orders and a greater potential for contract delays upsetting market expectations.
The Trading Update on the 2 June 2016 underlined this problem as Sabien reduced expectations for the June 2016 year-end to a loss of £1.7m from a forecast loss of £1.3m on reduced sales to around to £0.9m as administration costs increased before sales and thus depressing the share price.
The jury is out on whether the Free Pilot Policy, which was initiated last June, will accelerate sales growth and fundamentally change the business and earnings profile. There has been a significant increase in the number of pilots from 8 to 34. The unknown factor is the timing of converting the sales pipeline, currently at £11.4m, reported on 2 June 2016, into orders. Over the next four months, before reporting final there will be a heightened sense of order anticipation.
Sabien’s pilot policy is at a ‘white–knuckle’ stage. We can only guess at the conversion rate and the timescale of conversion of the Pipeline into firm orders. Even making moderate assumptions, the order book in the UK alone could build substantially to an aggregated gross profit of £16m–‐£24m in five years.
The execution risk is mitigated by the management team’s expertise of delivering, measuring and verifying pilots as well as the debt free balance sheet. A further factor is that the device sells for less than £2,000 fully fixed. This will hopefully allow an increasing number of multi‐site customers to roll out the implementation of this money saving and CO2 friendly technology at an easy-to-budget rate.
A report on Energy Efficiency (EEVS.CO.UK, June 2016), showed a decline in sales of large capital projects and that supplier confidence had fallen to an all—time low. This is partly a result of the Government’s management of energy efficiency policy. It also stated that an EU exit would most likely lead to a number of legislative drivers and incentives being removed. Consequently ‘Remaining’ may be a benefit to the sector.
The darkest hour is just before the dawn. From this depressed price, if the increased pipeline is converted, the shares have potential. We are convinced that the ‘brave’ Free Pilot policy is more likely to lead to a stepped increase in sales than a crash-landing!
Link here for the full report Sabien-Technology-Report-06-16