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Cadmus, Ian Bailey

By Jenny Ruth

Wednesday 30th March 2005

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 Jenny Ruth
Cadmus Technology reported a 60% rise in sales to $9.2 million for the six months ended December and a net profit of $990,000 which included a $721,000 one-off gain from the sale of EFTPOS rental assets just before balance date. It compares with a $165,000 net loss in the previous first-half and a $490,000 loss in the year ended June 2004. In March, the company bought 49% of Product Rentals, the company to which it sold the rental assets and which is owned by Murray Henshall, for nearly 3.3 million shares. Two weeks earlier, it also bought the shares it didn't own in Production Manufacturing from Henshall for $25,000 in cash and just over three million shares. In January, Singapore-based CET Technologies, a subsidiary of Singapore Technologies Electronics, the largest engineering company listed on the Singapore Stock Exchange, exercised an option to take its stake to 9.9% from 7.4% previously, paying $1.13 million, or 18 cents each, for the additional shares. A day later it sold the stake to Temasek Holdings.

ShareChat: How does CET's sale of most of its stake to Temasek affect CET's dealings with Cadmus?

Cadmus Technology managing director Ian Bailey: It doesn't make any difference in actual fact. CET is owned by Temasek. CET went through an internal restructuring. All its investments were put into Temasek. We continue to work with them to look at developments in our region. Nothing really changes for us.


SC: What was the logic behind first selling your lease assets to Product Rentals and then buying a stake in Product Rentals?

IB: We put out a press release last week to cover why we've done it. If you look at the assets we sold, they were terminals. We sold them in the normal course of events to Product Rentals. Then they went out and purchased the lease books of a number of other parties. Once they reached critical mass, they became of interest to us. There are two parties who know where the terminals have gone, the dealer and the finance company. We've just purchased three or four dealerships. Now we have a significant holding in a finance company. We really see it as an opportunity to expand our business. We now have and end-to-end channel, design, manufacture, sell and finance. We control the full end-to-end product flow. When this EMV change comes up, we know where the terminals are in the market place that need to be changed. It's therefore assisting our sales.


SC: Why did the company buy the rest of Production Manufacturing?

IB: There's an increasing market. We're getting a larger market share. It seems we've got opportunities internationally that we're growing. Having some control over our manufacturing facility allows us to bring in more skills. It's how we can get the ability to obtain financial benefit from production when we place it with contract manufacturers. You can go offshore and get larger volumes through bigger contract manufacturers. We need to understand the manufacturing and engineering flows. We had Navman founder Peter Maire buy our shares last year (he owned 17.9% on February 1) and he's on the board. He's obviously got a wealth of knowledge and experience. At our AGM he spent quite a few minutes going over with the assembled people how he went about setting up that structure. He went from a $10 million company to a $250 million company in four years - I'm not suggesting that we will.


SC: What is the potential size of the Network Systems Division's earnings? How much does it contribute currently?

IB: We've been running some backroom processes since we were originally formed. It used to be loyalty programs, motor vehicle re-selling information. We established the division to pick up information from networks and our terminals and deliver it back to third party customers. We're doing it for taxi companies, Bartercard. It's a little difficult for us to put a value on it because it's quite commercially sensitive. We have to start with a relatively low base as a percentage of our total revenue but it's growing quite dramatically. If you look at the sort of things we're putting in place now, what we're trying to do is secure our revenue going forward.


SC: You commented in the first-half report that investment in people and infrastructure will impact on the second-half result. Does that mean the company will make a loss in the second half?

IB: That's a little difficult for me to comment on without putting out an announcement to the stock exchange. At our last AGM we asked if they preferred growth or a dividend and 90% of the people there said they would rather have growth. To do that we're investing in people and manufacturing. We've bought three or four key dealerships. We're building infrastructure with its own management team. Yes, it will have an impact but I can't comment on whether it will be negative or positive.


SC: Will the company need to raise further capital?

IB: As we stand today, we probably don't need to raise further capital. That could change, depending on acquisitions. As we grow there's always a need to look at the capital base of our business, what's our ratios. All the capital to date has been put into the business. We're not bleeding cash. In the last few years we've been cashflow positive. The capital's going into inventory and debtors which is all healthy growth for us.


SC: What are your plans in terms of maintaining the revenue growth in the long term ? i.e In five years time after all terminals have been replaced to comply with the new standards, are you expecting to down-scale Cadmus or do you have a strategy in place to keep sales up?

IB: We design, develop, manufacture and sell products. Whilst our competitors usually have a one-off sale to a customer and walk away from it, what we've got is the opportunity to keep selling to the same customer base. We set out to de-risk the business. That means we want to have ongoing revenue streams from a number of sources. We've got that now. About 70% to 75% of EFTPOS terminals in New Zealand are rented. By default, they will come up for renewal about every three years. That means we have built in revenue streams. We will roll the contracts over and go for another bite. By running the finance company, we can be quite creative. It also comes back to the networks systems division. That's also a renewable revenue stream. We're using the New Zealand market to build up ongoing revenue business. We then use the profits from that to build our international business. That puts us in quite a unique position. No one else has that in New Zealand.


SC: What percentage of new terminal sales is Cadmus currently capturing in New Zealand? What size is its market share in Australia?

IB: It's hard to say. If you asked al the distributors what their share was and added the percentages it would come to well over 100%. We've taken statistics from ETSL and ANZ EFTPOS switches and we know that we're increasing our market share. We used to have 10% and that went up to 15% or 20%. We now believe we've got well over 30%. We're pretty small in the Australian market. We're talking about a market of 400,000 or 500,000 terminals. We're very small in that market. We're focusing on niche markets, we're not going mass market. A good example of that is Bill Express and On Q. (Cadmus secured a $3 million contract in March to supply Australia-based On Q with new touch-screen terminals.)


SC: How is progress on selling your non-EMV compliant stock?

IB: That's just an ongoing process. Last year we wrote it down to zero so anything we get from that is all upside. We don't intend to scrap it. Bear in mind there's more coming out of the market all the time. Something like 30,000 terminals need to be replaced by the end of this year. We don't pay a lot for those to come back. It's now a matter of finding new homes for it. We have the opportunity to use it for non-EFTPOS payment applications - loyalty programs are a good example. EMV is all about using EFTPOS and credit cards.


SC: Last year Cadmus chairman Keith Phillips was part of Prime Minister Helen Clark's Business delegation to India. What, if any, contacts were developed that might benefit Cadmus and what role might India play in any future
contracts or sales?

IB: Significant contacts were developed when we were there. However, it's a very large market with over a billion people. Those sort of relationships take time to develop. What might come out of it, I can't tell you, but it's one of the largest markets in the world. Between India and China you have 30% or 40% of the world's population.


SC: When does the company intend to start paying dividends and how much?

IB: The market told us they would prefer us to grow. If you were a shareholder and your shares went from 15 cents to 30 or 40 cents, which what's recently happened, you would be pretty happy. You couldn't get that from a dividend.


SC: Your and John Nimmo's trust, your chairman and company secretary have all been selling shares lately. Isn't that a bad look?

IB: John and I are joint trustees of The Law Trust which was put together at the time of the initial listing when there were four or five companies put together under one umbrella. Cadmus, or High Tech Investments, didn't want to talk to a lot of parties, it only wanted to talk to one. John and I, as trustees of that structure, have been looking after it since that time. All the parties who are beneficiaries have their own objectives. It might be appropriate for us to remove ourselves from that trust now.


SC: How much do you and Nimmo own?

IB: We don't have a definitive figure because you have to take into account related parties as well. When it listed, the trust had over 50%. With share issues it's now gone down to 20%. There has to be a question whether the trust forms any value now.


SC: So you and Nimmo weren't the ones selling?

IB: No. With the chairman, it wasn't his shares he was selling. As an associated person, he had to be named (on the substantial shareholder notice).


SC: Any other comments:

IB: We tried to outline our strategy in that notice (on March 23). The strategy is one of saying we want to secure our Australian and New Zealand base. We want to secure ongoing revenues from those markets which then funds our international growth strategy. If something happens to the international strategy, we've still got a strong fundamental business.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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