We recently hosted OMNIQ’s management for investor meetings and a group call and came away feeling optimistic on the Company’s trajectory. The Company is not immune to the current macro challenges, but we believe it remains positioned to show significant top and bottom line momentum this year and next. We are especially encouraged by the Company noting current backlog is equal to total revenue for 2021. We think investors continue to overlook the greenfield revenue opportunities and the potential model transformation as the AI revenue stream grows. With shares trading at only 0.4x EV/`22 Rev, we believe there is room for significant multiple expansion as investors begin to better appreciate the top line momentum and potential earnings leverage in the model. We are reiterating our Buy rating and $13 price target (1.0x EV/`22 Rev).
- • Municipality Pipeline Expanding – OMNIQ continues to see strong momentum in winning municipalities. Last week, the Company announced it will be supplying an additional city in Georgia with AI capabilities to identify expired registrations and uninsured drivers. We think the Company has won seven more deals similar to this one. Further, management noted the Company is in discussions with 27 additional cities. While other competitors have approached the uninsured driver market at the state level (e.g., Rekor in OK), the Company expects to continue targeting municipalities where adoption can be quicker.
- • Public Safety Opportunity – We think the public safety market represents a greenfield opportunity and believe approaching cities from this angle offers a compelling selling point. For example, the Company’s solutions can be used for law enforcement vehicle recognition, AMBER alerting, licensing and registration compliance, and uninsured vehicle recognition. Management noted the Company is approaching this market through a revenue share model where it would take a percentage of the issued citation. This percentage will vary by customer, but we estimate the Company on average can capture 20% of the citation value. We look for the recent shift away from the “defund the police” movement and an increasing focus on public safety to help provide tailwinds for OMNIQ’s solutions. Additionally, management indicated they are not seeing any significant impact from budgetary pressures.
- • AI Revenue Ramp Set To Continue – We believe AI revenue should continue to grow this year which should drive meaningful improvement in the model. We estimate AI solutions comprise around 10% of total revenue today but could be above 20% exiting this year. The 3-year target model is for recurring revenue to be 50%-60%. We look for overall gross margin to be lifted higher as this revenue stream ramps.
- • Dangot Business – We believe traction in the Dangot business has continued to progress to plan. Management highlighted continued success in the smart kiosk market. Further, they noted how the Company is able to generate recurring revenue within this business. We continue to like the acquisition as it added scale, expanded the product portfolio, and created cross-selling opportunities. We believe investors will start to see some of these benefits this year.
- • Covid And The Supply Chain – While OMNIQ has not been completely immune to the challenges in the macro environment, we do not anticipate these headwinds to have a significant impact on the AI momentum. Management indicated the largest challenge today is the speed of installations. However, we believe this friction will continue to lessen throughout the year.
INVESTMENT THESIS & VALUATION
We believe OMNIQ is transforming itself from a hardware-centric company to one positioned to drive sustained, meaningful top line growth, recurring revenue and margin expansion, and improving earnings leverage as it attacks multiple, greenfield opportunities in the object identification market. With a TAM the Company estimates will grow from $28B in 2019 to $62B in 2025, we believe the size of this market creates a rising tide lifting all boats. However, the appointment of Shai Lustgarten as CEO in 2017, a strategic shift toward the AI/machine-learning portfolio, an established and growing customer list, the recent acquisition of Dangot Computers, and the solutions’ broad applicability across numerous markets, gives us confidence OMNIQ can see outsized traction in this space.
Our $13 price target is based on a 1.0x EV/Rev multiple using our 2022 revenue estimate of $103.2M.
We believe an investment in OMNIQ involves the following risks.
- • Competition – The Company faces a high level of competition from numerous other companies, some of which have both much larger scale and resources than it. The ability of the Company to keep pace with the technical innovations of the industry is imperative for it to be successful.
- • Business Can Be Lumpy – The Company’s order patterns can be lumpy and vary quarter to quarter. This lumpiness, along with the timing of when orders flow to the P&L, can create volatility in quarterly results.
- • ALPR Market Growth – The Company’s future growth is predicated on the continued growth of the automatic license plate recognition (ALPR) market. If growth within this market stalls the Company’s future expectations may not be met.
- • Lack Of Profitability – The Company has incurred significant losses in the past. If the Company continues to incur such losses it will likely put a strain on its balance sheet. This could negatively impact customers’ desire to work with the Company in the future.
- • Dependency On Government Agencies’ Budgets – The Company’s ability to win contracts from government agencies is largely dependent on these customers’ annual budgets. Any significant budget changes or reductions of funds would likely have a negative impact on the Company’s ability to grow. The Company is competing for allocations from these limited budgets.
OMNIQ Corporation Page 3 of 5 Institutional Equity Research Jaeson Schmidt | 612-260-6170 | Jaeson.Schmidt@lakestreetcm.com
- • Supply Chain – The current challenges throughout the supply chain create additional risk to being able to meet growth estimates. If the Company is unable to secure components and deliver product to its customers this has the potential to impact both near-term and long-term customer relationships.
- • Integration Risk – The Company’s recent acquisition of Dangot Computers Ltd. creates the potential for integration risk as it combines the two businesses.
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