CETX | The TYP

Cemtrex: High Growth Built Around AI surveillance And Industrial Services - update in light of recent PRs, Q4 report and growth prognoses

Cemtrex has two businesses: Vicon and AIS.

Expected CAGR of AI-based video surveillance is 25% for the sector, CETX’s Vicon business in FY2023 grew 46% to $34.7 million revenue, with 50% gross profits. For Q1 2024, revenue YoY grew 31%.
AIS gross profits for FY2023 grew to 34%, and operating income for FY 2023 grew fivefold. For Q1 2024, revenue grew 55%.
The YoY growth numbers are bringing the company on the verge of profitability. I expect profitability in 2024, possibly already in the current quarter (Q2 2024).
In two recent PR's, the company has recently expressed growth prognosis for both segments. Those have been integrated in an effort to asses potential revenue and gross profit growth.

INTRODUCTION

Cemtrex (CETX / CETXP) has been through a reform over the past couple of years.

The company has divested its environmental business, has acquired a new industrial services business AIS which it continues to expand through acquisitions, and has made its AI-based video surveillance business Vicon its profits powerhouse. Gross profits keep on growing in the latter segment and were at 50% for FY 2023 compared to 34% for the industrial services segment. For Q1 2024 (which in the case of Cemtrex is actually the last quarter of each calendar year, and also seasonally the weakest) growth for Vicon was 31% and 55% for AIS.

The 2023 numbers - the FY runs until September 30 of each year - show that revenues for the AIS segment increased by $3,803,076 or 18%, to $25,009,092 from $21,206,016 for the year ended September 30, 2022. This increase was mainly due to an increased demand for the segment’s products and services and $2,316,000 of additional revenue from the business related to the acquisition of Heisey Mechanical.

Whilst reporting this growth, the company further reported less operating expenses than the year before, namely $27.3 million in 2023 compared to $30.7 million in 2022.

The company’s valuation is well below cash level at this time. The company’s business trajectory shows that a drastic revaluation is in place. I make an exercise of future revenues coming from both segments, taking into account the company's latest prognosis on future growth for each of those segments, as mentioned in two recent PRs on big orders. Taking into account expected further growth, I believe Cemtrex could be a renaissance play based on its sustainable further growth in both of its segments.

CEMTREX: AIS AND VICON

Cemtrex has two businesses nowadays, AIS (Advanced Industrial Services) and Vicon. Some years ago, the company had an environmental business and an electronic manufacturing business which it both divested. The company has fully reformed, and while the AIS business is a stable business with recurring customers and low margins, Vicon is a AI-based video surveillance business which is booming.

The numbers in the above slide are last year’s. Cemtrex has just reported its unaudited year results for 2023 which provide a good comparison. This is Cemtrex’s stock price performance over the past year.

In FY 2022, CETX had revenue of $50.3 million.

In FY 2023, revenue increased to $59.7 million, a 33% increase.

In Q1 2024, revenue compared to the year before increased by 41% to $16.9 million.

There are about 1 million shares outstanding, with a float of 880k shares. There are also about 2.3 million preferred shares outstanding which used to be trading on the Nasdaq under CETXP, and give rise to a yearly dividend paid in preferred shares distributed bi-annually, and are now trading on the pink sheets.

Both the AIS business and the Vicon business are growth drivers.

Vicon – AI Video Surveillance

The Vicon brand provides end-to-end security technology solutions, through different types of video surveillance tools, whether or not cloud-based.

The award-winning Roughneck series is the company’s flagship product, and the company continues to upgrade its products. Apart from existing features such as object categorization, tracking, recording, forensic searching, recent upgrades were for example the introduction of AI-based insights and analytics, an AI-driven AI visual gun detection system and the launch of a new cloud security platform Anavio integrating video, access, and intercom powered by AI and face-based authentication.

Vicon’s customers can be governmental, private or mixed, and include for example countries or states for border control, schools, hospitals, airports, and correctional facilities.

AIS – The Growing Industrial Servicing Segment

In the past, the AIS business has delivered organic growth of about 5%. AIS has a stable recurring business with companies like Bell & Evans, PPG, Mars Chocolate, and others as clients.

AIS saw an 18% increase in revenues in FY 2023. The acquisition in 2023 of Heisey Mechanical for $2.4 million, adding approximately $11 million in revenue, marked a further expansion of Cemtrex's presence in the industrial services sector.

Recent guidance in a PR of January 31, 2024 announcing two deals worth $3.8 million, mentioned: "[...] we expect additional AIS orders ahead and increasing momentum, with the potential to reach 32% revenue growth in FY’24,” Cemtrex plans to acquire further businesses if the opportunity presents. That guidance will be used in an exercise to assess future revenue and profits below.

Cemtrex's long-term strategy revolves around a platform-centric approach, leveraging low valuation acquisitions to build and scale the business. The acquisitions create synergy, and the company aims to reduce debt through organic growth, paving the way for potential refinancing and restructuring.

The key growth factor here is twofold: with less and less skilled workers, higher prices can be asked, and the business can be scaled through smart acquisitions at low valuations. Low valuations could for example come from family businesses that are not continued due to younger family members not wanting to perform the same work as their parnents.

Gross profit for FY 2023 for the AIS segment grew to $25,009,092. Gross profit in the industrial services segment was $8,579,526 or 34% for FY 2023 as compared to 30% the previous year (10-K, page 26). Operating income went from $629,283 for FY 2022 to $ 3,104,124 for FY 2023, which is about a fivefold increase.

Gross profit for Q1 2024 was $7 million as compared to $5 million in Q1 2023. The stock sold off on what was actually a good quarter because operating income turned negative ($0.7 million) although that was much less than the quarter the year(s) before ($2 million) in the seasonally weakest quarter.

In the quarterly call, the goal to become profitable in 2024 was clearly expressed. Cemtrex is also working on some larger (+$10 million) deals which may come to fruition at a given point.

As mentioned, the company hopes to be able to grow the AIS revenue by 32% in FY 2024.

Assuming this is an exceptional growth for 34% and that the business would grow further by 15% in the years to follow, the following prognosis could be made.

This a moderate scenario. Cemtrex may exceed the prognosis set for 2024, and future years may show larger growth than 15%. It is likely for gross profits to increase as they did in 2023 as the business expands, synergies can be created and overhead can be reduced.

Vicon – the AI-driven Growth Story

AI has created a tremendous boom across different stocks over the course of 2023. Cemtrex’s stock has seen none of it, although its financial numbers would have actually warranted that. For some reason, the market has completely overlooked that part of the business.

Cemtrex reported unaudited financial data for its third quarter and full fiscal year 2023. Apart from the yearly increase in revenues by 33%, the Vicon business grew by 46% compared to a 20% growth for that part of the business the previous year.

During the quarterly call, Cemtrex added that whereas in previous years, the average order size would be $50,000, the past year that number was closer to $100,000. Revenue in the most profitable segment of the business growing almost half in one year is appealing for four reasons:

- it is much higher than historical growth for the sector, which was closer to 8% [slide 6];

- it is much higher than historical growth for Cemtrex;

- the Vicon business has almost 50% profit margin as compared to 43% last year (10-K, page 26);

- if Cemtrex would continue to grow as the AI video surveillance sector is expected to, namely at about 25% CAGR from $4.1 billion in 2022 to $23 billion in 2030, then we could be looking at transformative moment for the company;

- the company's latest prognosis as expressed in a recent PR is the following: " With Vicon’s 50 years expertise across these very security products and services, we believe additional orders will enable Vicon with the potential to grow 15-20% on average over the next few years."

Though profits have always been higher on the Vicon side, the company used to have about a 50/50 business split looking at revenue. If both businesses are split up, with $34.7 million coming from Vicon and $25 million from AIS, it is more like a 60/40 split. This could change dramatically in years to come. Based on either the expected CAGR for the AI surveillance sector for the coming ten years, or Cemtrex’s particular successes outperforming those numbers, I have run two calculations to see how this business could grow for the coming five years, the first in case of sustained growth at 17.5% and the other at 25%. The second analysis is made assuming the company underpromises to be able to overdeliver.

If one were to assume that profits for Vicon for 2023 were $17.35 million, one sees that, even two years from now, we could be looking at $20 million in additional gross profit in two years, and about $38-53 million over five years.

Interestingly, Cemtrex sees its story developing mostly from an international angle. During the latest quarterly call, when asked about how Cemtrex sees its business develop, the company considered that whereas most of the growth in 2023 came domestically for about 85%, they expect massive opportunity for growth over time coming from the growing middle class and the growing economies around the world such as Saudi Arabia, India, Indonesia, Malaysia, or other emerging economies to a 50-50 split of the amount of international versus domestic business. Assuming stable growing business domestically, such a split over time from 85%/15% to 50%/50% would mean equal numbers for the international growth. That is a very positive outlook, and underlines the growth potential this stock has.

I have combined the most moderate revenue and gross profit exercises for both businesses below.

The combination of both growing businesses makes a compelling story for Cemtrex. Gross Profit for FY 2023 was already $25,685,826 or 43% of revenues as compared to $16,565,928 or 37% of revenues for FY 2022.

Under the above moderate assumptions and in line with prognoses expressed by the company so far for both segments - AIS growth 34% for FY 2024, Vicon growth on average 15-20% - gross profits may be expected to be about $34 million for FY 2024 (a 34% increase) and would continue to grow further. FY 2024 appears to be a pivotal year, as it may also see Cemtrex turn growth into profitability, with an additional $8.4 million in gross profits.

Another growth driver could be the split of AIS and Vicon into two separate businesses; one could in any case understand why it would be useful for Cemtrex’s Vicon business to be renamed as Vicon on Nasdaq to raise awareness, and the company is allegedly playing with that idea. The P/E ratio for security and protection services is 17.4. I believe that the inclusion of the AIS business segment into Cemtrex blurs that because it has totally different profit margins. Assuming a valuation purely based on Vicon and the numbers above, a realistic market valuation of Vicon may over time easily be above $100 million. Earnings of $5.8 million x 17 would already lead to a $100 million market cap. As shown above, earnings could eventually be much higher.

Recent announcements: $3.8 million contracts AIS, $0.8 million order Vicon

On January 31, 2024, Cemtrex announced contracts for a value of $3.8 million on the side of its AIS business. At the 34% gross profit margin of FY 2023, this should lead to $1.3 million in gross profit from these two contracts alone.

On February 1, 2024, Cemtrex announced an additional order on the Vicon side of $0.8 million.

Profitability should be around the corner

When compared to their respective quarters in previous years, the reporting of Cemtrex over the past year show that profitability is imminent. If growth is projected over multiple years, the profitability trajectory should lead to a substantial revaluation of the stock, once earnings multiples should start dictating valuation.

Once the company turns profitable, valuation multiples should be applied. Currently the stock is trading below cash value.

Debt and Risks

Like previous years, Cemtrex has a high short-term debt repayment obligation, which I believe is in its last year. The company may be able to refinance it debt at more favorable or more spread-out conditions, which would have an immediate effect on earnings. Cemtrex’s loan strategy entails primarily focusing on growing earnings and cash flow to manage debt more effectively, limit equity issuance, and explore debt restructuring options with lenders who understand the company's growth potential. Once the debt is taken out, we could be looking at a clean balance sheet with the company reporting ever increasing profits.

The above thesis relies on sustained growth coming mostly from the Vicon segment. As with any thesis, it can be erroneous if, for example, the Vicon segment does not grow further or if, as a whole, the AI video surveillance business stops growing.

The business is diverse, and it is not excluded that no further growth is seen on the AIS side of the business next year.

There is also the risk of competition, though it appears that would need to come from existing players as the security solutions offered by Cemtrex do require a considerable investment in the development of hardware and software.

Conclusion

Over the past years, Cemtrex has been steadily building its two business segments, AIS and Vicon. Whereas AIS is a stable business with recurring customers which is doing fairly well, the Vicon segment is an eye-opener. The past year 2023 saw a 46% increase in revenues in that segment, with high profit margins, after a 20% growth in 2022. Though the sector grew at about 8% over the past years, expectations for AI surveillance for the coming years are much higher at almost 25%. Vicon profit margins were at 50% for FY 2023, whereas the AIS profit margins were at 34%.

The year 2023 has been the year for AI-related stocks, which is mostly based on future expected growth, but Cemtrex has seen none of it, though its business actually did grow. If that growth is to continue, and the company’s outlook indicates that it may do so primarily driven by international emerging markets, then profitability would soon follow. With a P/E of 17.4 for the security and protection services, it would be fair to say that the company should not be trading below cash value now, and surely not in the foreseeable future.

The company could reorganize its business and split off Vicon or rename the company to include Vicon much more visibly.

Based on prognoses recently expressed by the company, I see FY 2024 turning into a pivotal turnaround year, in which Cemtrex may add another $8.4 million in gross profits, with turnover increasing from $59.7 million to $73.77 million and gross profits reaching $34 million.

The company's current market cap warrants a much higher valuation.

I believe Cemtrex may offer good value, operating in niche markets, with both of them poised for sustainable growth.