(TSX-V:EUO) () has three wholly owned Israeli subsidiaries with technologies in the energy security, verification and authentication sectors, two of which are already bringing in revenues, rendering the company substantially undervalued by anyone’s standards when looking at its current market cap and cash flow.
The company is forecasting approximately $8 million in revenue this year just based on existing contracts alone, and has around $2 million in cash. Its market cap, however, is just under $10 million, with chief executive Bruce Rowlands leading an effort to unlock the value that already exists in its business.
Eurocontrol’s three subsidiaries all relate to one another, with all three offering authentication, verification and certification technologies. The company’s primary business is Global Fluids International (GFI), which has a four-part proprietary fuel marking system – known as Petromark ™ -- for governments and oil companies looking to counteract the illicit trade of hydrocarbons.
The proprietary technology identifies fuel that has been tampered with, for example diluted with lower grade fuel, propane, water or even urine --- something that is quite common in developing nations, leading to damaged engine parts, illegal imports and significant government losses in tax revenue. Petromark ™ minimizes tax revenue lost for governments and oil companies, an important tool when annual global losses from the illicit trade of fuels is estimated at over US$200 billion per year.
“The historical standard for marking hydrocarbons is the use of coloured dyes, which are easily imitated and even more easily removed from fuel,” says Rowlands.
The company’s Petromark ™ system, which was controlled by Israel-based GFI and acquired by Eurocontrol in 2006, is a proprietary technology that was developed by the Israeli government research labs at Soreq, certainly a bonus given Israel’s experience in anti-terrorism and defense tactics and developing covert technologies.
The four-part system comprises marker, injection, detection and monitoring components. The first step is to choose the unique marker that cannot be copied or removed (which is done by GFI’s specialist team), then inject the marker at the terminal or pipeline. This is followed up with a mobile detection analyzer, as well as with the automatic transmission of results in real time to a central monitoring and control centre. GFI is not typicallythe operator of the fuel marking programs, but the product is supported with training and service programs.
“We position ourselves as a technology provider. Once we set up the marking program, we are the ongoing supplier of the liquid chemical marker, which accounts for our recurring revenue model”
The Petromark ™ technology is the only one in the world that has an ISO 17025 accreditation, meaning it is of sufficient forensic quality to be admissible into a court of law for evidence. “It is the only fully covert marking system, where full final forensic results are produced in the field where the test is conducted,” says the chief executive.
“Other systems take the sample to the lab, but our mobile analyzers are made specifically for our application, based on light spectrometry technology, offering results within five minutes in the field,” he adds.
Indeed, the mobile detectors can also test at gas station pumps, in tanker-trucks, sea vessel storage tanks or underground tanks or pipelines.
The second subsidiary, known as Xenemetrix and acquired in October 2010, is the manufacturer of the analyzers Eurocontrol uses in GFI’s Petromark system. The Israeli business is a designer, manufacturer and marketer of energy dispersive X-ray Fluorescence (EDXRF) systems and components used in a wide range of industries, including forensics, in-situ fraud prevention, petrochemicals, minerals, and homeland security.
“This acquisition was one part vertical integration and one part diversification,” says Rowlands, with Xenemetrix controlling the production of an important part of the Petromark fuel marking system.
“Both of these operating subsidiaries generate revenue, with total company revenue comprised 75% from fuel marking, and 25% from the sale of ED-XRF spectrometers.”
Of Eurocontrol’s $6.5 million in revenue last year, the chief executive said the 75% fuel marking portion is recurring revenue, with the company forecasting approximately $8 million in 2014 if all it does is its “existing fuel marking contracts.”
With the addition of at least two new marking programs, its annualized revenue run rate could be pushed to $20 million by year-end, Rowlands suggests. Its clients are currently all government customers, meaning there is no uncertainty on receiving payment.
The company’s third subsidiary is XwinSys, a start-up business acquired in May 2012 and whose goal is to be a leading designer, manufacturer and marketer of Xenemetrix’s ED-XRF combined with image processing technology for use in the semiconductor industry.
The semiconductor industry, sized at $300 billion, deals with micro and nano electronics packaged in a chip which has become ubiquitous in applications such as computers, smart devices and transportation. The metal connectors in semiconductor devices have traditionally been made of tin and lead, the latter of which the industry has stopped using due to toxicity, instead using silver.
This, says Rowlands, has changed the ability to accurately control the connectors, which have to be “very specific in metallurgical content as well as size, shape and density.” XwinSys’ technologies work hand-in-hand to solve these problems, with the 2D and 3D image processing technology from Israel-based Brossh Inspection Systems used to surface scan the wafers and electronic boards used in semiconductors, while the EDXRF technology is used for elemental analysis of the materials.
“We combined two existing technologies to produce a standalone verification system for semiconductors,” stresses Rowlands. “The invention is in the combination and hybridization.”
The chief executive says Eurocontrol is currently working on engineering the two technologies together, with a beta version now being tested in Israel. Eurocontrol currently spends about 10% of revenue in research and development.
Based on high level company estimates, each of the hundreds of fabricators of semiconductors in the world could require up to 5 to 10 XwinSys’verification systems, for approximately $1 million apiece.
With revenue coming in from GFI and Xenemetrix, Eurocontrol is already cash positive, meaning it is generating cash and doesn’t have to raise funds.
But Eurocontrol is undervalued, says Rowlands, when considering its forecasted revenue this year and current cash position, meaning its hands are tied in terms of acquisitions until its share price can move to a worthy price.
“If you take our market cap and minus the cash, we have less value than the revenue we will generate this year. We should have a $30 million market cap,” Rowlands emphasizes.
And the business seems to only just be getting started, with fuel adulteration a timely and growing issue in emerging countries. Factors encouraging this illegal practice include the existence of different tax levels leading to monetary benefits, different pricing mechanism for fuels and adulterants, lack of consumer awareness, as well as access to mechanisms and instruments for spot-checking the quality of fuels.
Besides economic losses and the deterioration of engines, the problem also contributes to increased carbon dioxide and monoxide emissions.
Rowlands sees significant opportunities for expansion of the company’s fuel marking process in Eastern Europe. But the technology attracts a wide range of interest.
“There isn’t a government on the planet that is not addicted to hydrocarbon taxation flow. The payback is significant and we get results.”
“Anybody trying to replicate what we have would have to find another protocol other than ED-XRF to do the monitoring, but these complicated technologies don’t produce the results we produce.
“We have best of breed technologies in all three of our subsidiaries,” the chief executive concludes.