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Scout Security Limited - Working capital facility to smooth cash flow

Oct 2018

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Summary - Working capital facility to smooth cash flow

Scout Security (ASX:SCT) has provided an update to the market with respect to a new working capital facility. Highlights of that announcement include the following. 

  • A$500,000 working capital facility boosts Scout’s supply chain flexibility and provides greater capacity to pursue pipeline growth opportunities that are gaining significant momentum.
  • Securing additional funding is a critical step in Scout’s plans to expand growth opportunities.

Analyst comment: at the start of the year, we foreshadowed Scout’s requirement for a working capital facility and are pleased it is now in place. The facility will help ‘smooth’ fluctuations in the company’s cash balance that occur between product development and cash receipts. Such timing discrepancies can range from three to nine months, depending on the terms of the sales agreement/purchase order.   

Given that much of the latest purchase order from Zego (that is, 1,000 of the 1,735 units for September) will be delivered during the first half of 2019, we expect this facility to be utilised during the current quarter. We note too that this latest purchase order takes Zego beyond the lower end of the forecasted sales range (5,000 – 10,000 units for the calendar year).

Stanley Black and Decker (SBD): while sales from Zego, Amazon and other parties are important for Scout, the market awaits further information regarding the SBD partnership – in particular the initial purchase order, receipt of which is imminent.

SBD is a Fortune 500 company with a market capitalisation of around US$22 billion, and the second largest provider of commercial electronic security solutions worldwide, so it is quite conceivable that both the initial and future purchase orders/sales to SBD will far exceed any that Scout has fulfilled to date. Indeed, once these transpire a significant re-rating of Scout’s share price is likely. 

The information in this email should not be the only trigger for your investment decision. We strongly recommend you seek professional financial advice whenever making financial investment decisions.

Valuation: we maintain our valuation of Scout at $0.94 /share (share price $0.27/share), and will review this valuation as more information on the Scout/SBD partnership is released.