A new addition to the equity portfolio
TZ Limited has been added to clients' equity portfolios this week, with a weight of about 1%.
What is TZ Limited?
TZ is a world leader in smart digital locking, using a patented (180 patents) locking system developed in Australia over 15 years ago. TZ has taken this technology and applied it to two product areas – smart lockers (as increasingly being used by postal and courier companies), and data centre locks.
Both of these areas are driven by technological change, and we believe that TZ is set to continue strong (and increasingly profitable) growth as it rolls out in these product areas globally.
Smart lockers are an exciting area of growth - driven by increased online shopping spend, but with an issue in that it is estimated that ~40% of deliveries fail because people are not home. Smart lockers allow people to pick up their parcels at a time that suits them. TZ has been winning a number of contracts in this space. These contracts are also increasing in size - from initial trial sites, to wide spread roll-outs.
There are also many other applications for smart lockers, such as in the corporate environment, education providers and multi-residential buildings. TZ has won a number of individual contracts in the non-parcel delivery space, as well as entering sales / distribution / support agreements (such as with Ricoh, for corporate applications in North and South American markets).
The lock itself is a proprietary locking mechanism. It also interfaces securely to the internet, and contains smart software, thereby allowing remote locking, control and monitoring. Additionally, it contains environmental sensors.
What is the investment case?
TZ is a small cap, with a market capitalisation of about $50m.
TZ has exhibited strong sales and revenue growth, with a technology that has strong demand dynamics and global application. We expect TZ will deliver more positive contract wins, and continue to build its momentum over the rest of 2016 and into 2017. With a number of clients' equity portfolio's current investments coming to fruition (including Pacific Brands, Ausenco and Patties Foods all likely to be taken over and the Origin Notes likely to be redeemed) and thus building up cash, TZ Limited comes into the portfolio as a new investment for the coming 3+ years - with a capital growth orientation.
First Samuel obtained shares under a capital raising the company was conducting, which is required to fund a contract win with Malaysia Post. This contract sees Malaysia Post move from pilot phase (5 locker banks) to initial roll out stage (50 locker banks), before ultimately needing approximately 500 lockers to complete its network.
Given the company is now cash-flow positive, it is unlikely to need further significant equity funding going forward. We assess the business currently trading on a P/E of about 8 in 2018.