Eurocontrol Technics Ord EUCTF

RE:The (widely misunderstood) 5% Royalty

[shawshank]

kidl2 wrote: I’m sure I wasn’t the only one who was a little “confused” by the somewhat low royalty rate vis-a-vis the annual guarantee of $1.5 Mil which translates to minimum sales of $30 Mil requiring a 5-fold increase based on current sales ($8 Mil less `25% Xenemetrix). Certainly not inconceivable given SICPA’s “might” but still a pretty tall order especially short term.
 
Well, as it turns out, the order isn’t nearly as tall as it appears to be once we pay attention to this line in the NR:
“5-per-cent royalty payment on all future GFI contracts, inclusive of both marker and logistics”
 
“Logistics” refers to the on-location services of adding and monitoring the “marker”. This service is NOT part of current contracts as it’s supplied by 3^rd parties and thus NOT reflected in EUO’s (GFI’s) current revenues but WILL BE part of future contracts thanks to SICPA’s already existing infrastructure (3,000 employees in 200 countries).
 
Here comes the best part ... Logistics services typically run 2 to 3 times GFI’s current contract value and can go as high as 5 times depending on type of product marked, size or country etc.
 
So, if we apply a conservative factor of 2.5, GFI’s “real” current contract value is not some $6 Mil. It’s actually somewhere around $21 Mil (for the purpose of projecting future contract value).

The contract value is actually $9million vs $6million vis a vis "guaranteed minimum" $1.5million times 6yrs duration. I personally believed at the time of the announcement the upside to the royalty deal could/would far exceed the upfront $16million-based on the fact of SICPA already doing business within the tag and track sector albeit not in Petrofuel monitoring and authentication...but in other sectors representing its interests as per its own website disclosure in "over 200 countries worldwide" and because we are dealing in GFI and Petromark entirely with GO and GA's (government organizations and government agencies) as Rowlands comments the sales cycle to contract status to be procureed is a lengthy one because GFI's footprint and therefore EUO's is a much much smaller one.

It just stands to reason and is pure business and common sense.

In regards to logistics and its influence on the revenue flow in a order of magnitude manner I made a note of the NR language where it states specifically if I can recall off the top of my head..."it is expected the two sides will negotiate a deal" in the body of the release in the commentary section-that means as you know there is some discussion ongoing in regards to the full scope regarding renumeration and participation for Eurcontrol with SICPA in this deal-and that's what LOI or letters of intent are...an agreement in principle and a DI...a definiitive agreement  with the final and full terms and conditions acceptable to both parties put into the legal and binding language and made public.


Because this agreement with SICPA was announced as a LOI I personally in my experience with LOI (which at one point following the collapse of the markets in 99/00 were frowned upon by exchanges to be put out by companies for a long period of time) did not expect Rowlands to expand in the NR put out to any meaningfull decree or degree because he can't...neither can SICPA or possible endanger the closing process to becoming a DI moving forward.

But as the deadline for the deal is appx 2 plus weeks from now and a special shareholder vote undertaken there will be a little more visibility laid out as what we have now has been interpetitive by many.

But once this thing closes as a DI-you will see Rowland and 3rd party analyst and writers break down this deal line by line item and its virtues and IMO this deal when taken into account its entire scope-vs extrapolations of what is available currently which is limited and will remain limited till the LOI becomes DI status-is a massive win for EUO and EUO shareholders.

I was hoping to have some time to call EUO this week-and it looks to be more like next week as the timeline in being able to do so and hope to get Rowlands in some dialogue including on the tenant of the company entering into a share repurchase program with a % of the proceeds of the upfront capital-which is just a no brainer...and all good companies respectfull of shareholder value undertake without hestitation with any surplus of cash on hand not related to operational need or self sustaining.
 

Eurocontrol is neither of these currently BUT its Royalty stream will IMO be more then suffice or Rowlands would have never ever entered into the SICPA agreement.

Regards
 

SS

 
Not suggesting that the current contracts will be re-written but it sheds a completely different light on future contract values and the $30 Mil required for the minimum royalty goes from “lofty” to “low hanging fruit”.
 
Happy trading, investing, whatever ...
 
PS: This little bit of due diligence was a co-production. Many thanks to R and A.