Investment Matters

Security matters

With the rise in income and wealth inequality globally, it is not surprising that demand for physical security and security systems has risen in step.

The Australian security industry generates around $6.3b in revenue annually.  Globally physical security is a >US$120b industry according to IHS Inc. and has been growing at nearly 10% p.a. for the past decade.

We view the growth of demand for security as linked to ageing (demographics) and wealth - both of which are set to continue to rise in coming years.

A fragmented industry

Interestingly, in Australia, physical security (be it guarding or monitoring premises) remains a fragmented industry.  Globally it's similar; no player accounts for more than 5% of the market.

In Australia, there is a range of players with 34 “Graded” control rooms operating across the country, but 6,500 businesses involved in physical security. The biggest components of the industry are guarding (making up ~26%), and private investigation services (also 26%), with monitoring making up 16%.  Some names which will be familiar to readers are Chubb, IDT, Signature Security and MSS Security.

Exposure in the equity model

Whilst the investment opportunities are limited (particularly in a scale sense) we have invested in two companies attached to this theme.

Firstly: Threat Protect Australia Limited (TPS.ASX).  Threat Protect is focused on growing its share of the alarm monitoring part of the industry (~$1b in revenue annually).  TPS has two of the 34 control rooms in Australia and has significant capacity to grow its number of lines (now at 38,000) over time - either through acquisition (of retailers and wholesalers, or other control rooms), or organic growth (which is currently running at ~10%p.a.).  Monitoring is a very attractive segment of the market in that it is usually contracted revenue (with contracts usually running at 5 years+), and is a very stable cash flow business.

Whilst today Threat Protect is a small business, it is very well managed and credentialed and has many opportunities to boost its scale over the coming years.  We see it as having excellent growth avenues and look forward to supporting it into being a strong mid cap company in due course.

Secondly: TZ Limited (TZL.ASX). Whilst straight physical security and monitoring demand will continue to increase (with population and wealth), the role that technology plays will also change given the rise in wireless and data technology.  We see security becoming “smarter” over time.

The unique (Australian designed and founded) locking technology at TZL will sit in a very strong global growth area, once it gets through the usual hurdles and foibles of being a smaller and growing new technology business.

The TZL business is engaged in the development of intelligent and smart device systems, using a locking device based off a unique smart alloy technology.  The lock system allows for much more information to be used than a standard locking system (room temperature, lock opening distance), with a lower draw on power as compared to an electric locking system.  It can be used alongside proprietary software systems to create a unique smart lock.  It is also able to be very small!

To date (and not withstanding an earlier chequered corporate history), the business has commercialised this technology primarily from selling larger contracts into data centre owners (like NextDC in Australia), and postal locker systems (like Singapore Post, Malaysia Post, and a large US logistics company).  Through this process, it has also moved into corporate lockers (for open plan large corporates – like Apple, CBA, GE).  It has also been endorsed by some of the biggest, blue-chip companies globally.  The real opportunity is to use this platform to move the locking system into wider applications around the world (like home security and monitoring).

From a pure growth potential perspective, TZL is the most exciting business that clients own today.  It is also the earliest stage, and at a level of being only just cash flow break even.  It will need to be well managed and governed to achieve the degree of success that is possible.

Conclusion

Whilst First Samuel does not invest by themes, we do like to invest where we can see strong growth over the medium to longer term.  The security area is one that we have followed for a long time and find attractive.  Whilst the opportunity does not exist (due to the limited company sizes) to invest material portions of our clients' wealth in this area, we have found two businesses that we believe can grow over time.