My conversation with Dr Nabil Lawandy, the chief executive of Spectra Systems Corp (LON:SPSY), starts with a question.
I ask what motivates a person with tenure at one of America’s most prestigious seats of learning to give up that life security for the rough and tumble world of business?
“Conviction,” is the one-word reply from the former Brown University professor, who taught engineering and physics and graduated 19 PhD students. “A lot of conviction.”
He tells me academics have brilliant ideas, but often lack the drive, or nerve or both, to take them from the lab and into the real world.
Not so Lawandy. Since 1999 he has started three companies and helped raise over US$80mln in investment capital.
In Spectra, a specialist in advanced security materials and technology used in paper and plastic money, he has created and shaped a company trusted by central banks.
Its customers take the long view, so commercial relationships, though hard-won, can be measured in decades rather than months. “We're going past 20 years with some of them,” says Lawandy.
Stable and resilient
The financial upshot is a stable, resilient business with impressive profit margins that is supremely cash generative.
And all of this done with a workforce of just 28 people – most of them based in Providence, Rhode Island, though it has made two small acquisitions in Vancouver.
Looking ahead, Spectra has (at least) three big potential growth opportunities.
There’s the roll-out of a third generation of banknote sensors along with the commercialisation of the world’s first secure and machine–readable polymer substrate for the rapidly growing segment of polymer banknotes.
And then there’s a brand protection smartphone-based product aimed at the massive Chinese tobacco market.
Each on its own has the ability to move the commercial dial.
While Spectra has expanded into adjacent areas such as product authentication, secure gaming, quality control and technology development, Lawandy points out banknotes are still “a good half of our revenue”.
Top-notch client-base
It has two G7 countries as customers and supplies mainly covert technologies for paper and polymer banknotes.
The key to picking up sophisticated counterfeit currency is incredibly accurate sensors used in bank machines that count notes at a rate of 40 per second.
Lawandy says the rollout of a third suite of sensors to an unnamed central bank could be worth US$42-$50mln in additional revenues with deliveries beginning in 2023.
This would be a significant potential kicker for a business that is predicted to turn over US$16.5mln this year.
Innovations such as banknote cleaning and disinfecting could, and probably will drive top and bottom-line growth going forward – particularly in the current environment.
Moving up the value chain
But there is one advance, mentioned in the last interims, that catapults Spectra up the value chain.
It is a machine-readable substrate called Fusion with covert taggants invisible to the naked eye that makes polymer notes difficult to forge but easy for banks to identify.
Many of the industry’s larger players have tried but have thus far failed at matching Spectra’s achievement.
Lawandy says he put together a “crack team of chemists, physicists and engineers” to come up with the patented solution.
Where the company is currently paid “$1 to $2 per 1,000 banknotes, its security materials, the polymer itself is worth $20 per 1,000”, reveals the Spectra CEO.
“So, I said we should leverage this by becoming suppliers of secure polymer,” he explains.
In September’s interim result statement, the company said the new covert technology could increase authentication revenues “by an order of magnitude”.
The opportunity to formally pitch the new product to a large number of central banks will likely present itself in February 2022 at a rescheduled industry conference. In the meantime, aggressive marketing efforts are underway with “direct target central banks”, Lawandy says.
China – smoking hot opportunity?
Away from banknotes, Spectra has introduced an authentication product called TruBrand to the Chinese tobacco market that allows retailers to distinguish between branded and counterfeit packets of cigarettes using nothing more than a smartphone.
An initial 6mln-unit trial has the potential to morph into something more substantial. “To change the million in the number of packs to billion would be a game-changer,” Lawandy says.
This is not a fanciful leap given the Chinese smoke around 220bn packs a year and counterfeiting is rife.
TruBrand is part of the company’s TruTrack ultra-reliable physical authentication offering that could be used across a range of industries.
Long-term fundamentals
Assessing Spectra’s long-term fundamentals, Lawandy bristles at the notion the cashless society will negate the need for physical cash.
Yes, the trend in developed society looks unstoppable – but it will be many decades before it becomes the global norm.
Lawandy points out that 31% of the world remains unbanked (and therefore requires physical currency). Even the US has tens of millions of people still who always will rely on notes and coins for their day-to-day existence.
“Furthermore, COVID-19 resulting in more jobless people has further enhanced the need for banknotes,” Lawandy adds. “Basically, the argument is pretty simple: no bank account, no digital anything; you need cash.”
WH Ireland is predicting the company will post revenues of US$16.5mln this year, which translates to pre-tax profits of US$6.1mln.
The company’s broker, in its latest research note, reckons by the end of this year Spectra will be sitting on US$17.2mln of cash.
The analysts also say there’s a “wealth of initiatives and opportunities” that will provide the business with plenty of forward financial momentum.
Plenty of value kickers
Along with those mentioned above, potential other value kickers include an increase in sales of optical materials for K-cups used with a popular American coffee machine.
And then there are the results from a Coronavirus (COVID-19) study of its Aeris banknote cleaning system; not forgetting its lottery and gaming services.
Using a sum-of-the-parts valuation, WH Ireland reckons Spectra’s shares are worth 240p each, which represents a 42% premium to the current price.
That is remarkable when you remember the stock was changing hands for 17p in early 2016.
The WH Ireland price target also serves as a significant vote of confidence in the company, management and the small but effective team at Spectra.
“We’ve got some great customers, some of the largest orders in our history and a robust banknotes business that continues to grow,” Lawandy observes. And that’s before some of the big growth initiatives start to kick in.