Small Caps | Jul 12 2016
-Key product for IoT growth
-Large revenue opportunity
-Acquires JCT Healthcare
By Eva Brocklehurst
Having listed on ASX in April, XPED ((XPE)) is a semi conductor company with a product that has the potential to become an essential part of wireless communications protocols. The technology is used to solve the communication problem derived from the use of different computer languages.
The problem with machine-to-machine communications is that manufacturers have a preference to incorporate their own languages and protocols. With more and more devices connected to the internet there is a need for common languages and access protocols across a substantial part of the network.
XPED's technology – Auto Discover Remote Control or ADRC – uses several protocols and, regardless of brand or product type, enables seamless wireless communications between multiple devices through a single touch. Examples include a connection between a smart phone and smart TV, or an industrial battery sensor in a data centre and the tablet of a mobile maintenance engineer.
The product is part of the rapid growth area of the Internet of Things (IoT), driven by applications in both the consumer and industrial arena, including smart cities, health care, transport and smart buildings and infrastructure. XPED's technology brings substantially improved functionality and cost savings, the broker observes.
TMT Analytics notes the potential of XPED's technology is underscored by a collaboration agreement signed with Intel and a licence agreement with Telink Semiconductor. In addition, the broker expects XPED to sign a commercial IP (internet protocol) licensing agreement with Intel in the near term.
Telink Semiconductor is based in Shanghai and is growing fast on the back of some high profile customers, the analysts note. The company is producing chips for the IoT and XPED signed an agreement in May to integrate its ADRC technology into one of Telink's existing chip designs. TMT Analytics believes this relationship has the potential to expedite XPED's commercial roll-out.
Cisco estimates the number of connected devices on the internet will total 50bn by 2020, with the industry growing at a compound 33%. TMT Analytics expects XPED to address the market using its asset-light business model and through selling IP to semiconductor manufacturers and consumer electronics companies.
In June, the company acquired JCT Healthcare, which provides communications solutions to health care facilities. In the broker's view, combining such products with future ADRC-enabled devices such as monitors and sensors, provides a very substantial growth opportunity in remote health care monitoring over the IoT.
Given a relatively short commercialisation record, TMT Analytics is being conservative in its estimates, assuming five semiconductor customers will adopt the technology in the next 18 months. Still, given the size of the global IoT market, there is potential for strong upside to these numbers if XPED can obtain some of the larger names as its customers, such as Cisco, Qualcom, STMicro, Texas Instruments, Sony, Samsung and Panasonic.
The broker considers the consumer segment remains the largest revenue opportunity within the IoT space, growing to an estimated US$398bn market in 2020, or 40% of the addressable IoT market. The infrastructure and smart cities opportunities are envisaged at US$210m and US$270m respectively, or nearly 50% of the IoT market.
The broker initiates coverage on the stock with a Buy rating and 24c target, using a discounted cash flow valuation with a discount of 12%. XPED is expected to start generating revenue from 2017 onwards, ramping up gradually in the first few years. The broker believes a higher rate of return is required from an investment in the stock to account for the uncertainties surrounding customer uptake, sales volumes and royalties. Hence the discount of 12%.
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