In the world of investment there are no sure-fire winners - just oversold stocks where the risks are limited.
Transense Technologies PLC (LON:TRT) fits into this ‘oversold’ category.
Its market capitalisation is currently £5.4mln and it had around £4.6mln in cash at the time of the last results.
Stripping out the cash you come up with an enterprise value of less than £1mln.
In other words the market is saying Transense’s technology, protected by 38 patents, is worth less than £1mln.
Moreover, investors currently rate the chance of commercial success at zero.
As we will see later, the outlook is a little rosier than the share price suggests.
Reasons to be cheerful
Transense’s surface acoustic wave (SAW) technology is finally gaining some traction commercially.
The firm is working with a roster of blue-chip partners, including giants such as General Motors, GE, Bosch and BHP Billiton.
In fact, its wireless and battery-less torque sensor has been incorporated into products now being marketed by a large, unnamed European manufacturer.
Meanwhile, in selling its IntelliSAW business to American manufacturer Emerson, it raked in £3.5mln ($5mln).
The cash, along with the proceeds from a modest City fundraiser, will see Transense through to profitability.
As well as providing a balance sheet boost, the Emerson transaction delivered something a little less tangible but equally important.
It gave third-party validation of SAWsene, sensors that measure torque and temperature, or pressure and temperature.
In the automotive sector, a huge market but a slow burner, SAWsense can be deployed to measure the rotational force generated by the drivetrain of a vehicle.
The data generated might eventually help motorists and manufacturers pre-empt breakdowns, but could also aid fuel efficiency.
Transense is already working with three major car manufacturers, including GM and the super-car maker McLaren, while there is ‘continuing interest’ from Japan.
Gaining traction in the industrial sector
In the industrial sector its wireless and batteryless sensor is used in large pieces of capital equipment found, for example in very large pumping stations and could also be deployed to monitor the condition of wind turbines.
Transense technology is now embedded into industrial equipment being marketed by a large European engineering firm.
Chief executive Graham Story isn’t allowed to name the company, though he says it is a Europe-based multi-national and a competitor to GE, another of Transense’s partners.
While waiting for the automotive and industrial sectors to bloom into commercial life, Transense developed iTrack initially as a stop-gap revenue and profit generator.
Used by the mining industry, iTrack was designed to monitor the health of tyres in large dump trucks that cost US$35,000 each to replace.
But it has spawned a much wider array of data than first anticipated – information that can help with vehicle maintenance and route management.
As mentioned above, the mining application was supposed to tide the company over until the full commercial roll-out of the torque sensors in the automotive and industrial sectors.
But a downturn in the natural resources sector meant that mining firms weren’t willing to commit to the capital investment required for iTrack.
Becoming a data miner?
So, Transense has re-worked its strategy and reckons leasing the equipment to companies is the way forward.
Longer term it wants to become a pure-play data specialist, providing information that will make a real impact on the productivity of a mine, saving diggers tens of millions a year.
iTrack and the company’s Translogik tyre inspections probes business will likely be the main revenue generators in the next couple of years.
The company’s broker finnCap is predicting Transense will post sales of £2.1mln this year, rising to £3.3mln next, at which point the firm is expected to be close to break-even.
At the same time, the automotive sector finally seems to be tuning into the merits of SAWsense, while activity from industrial customers is starting crystallise into products with the Transense technology inside.
Storey says the car makers that are serious about taking SAWsense and that the next year to 18 months is likely to see some meaningful developments.
Meanwhile, interest from potential industrial customers could very quickly crystallise into a solid pipeline of new business, analysts reckon.
Room for growth
City broker finnCap reckons Transense is worth 2.7p a share, which is around two-and-a-half times the current price.
That valuation is based on some very conservative assumptions.
“Some significant customer contracts are pending and we foresee significant upside when the minerals sector starts to recover,” says finnCap number cruncher David Buxton.
“Things are becoming quite interesting,” adds CEO Storey.