GFAI - Contemplating A Position In Guardforce AI? Here's What You Need To Know

2023-06-06 18:30:18 ET

Summary

• Guardforce AI, an integrated security solutions provider, is looking to expand its AI and robotics offerings, but currently, it is a drop in the ocean.
• The company's largest revenue contributor, secured logistics (90% of group sales), has been witnessing declining growth, and this translates to low P/S multiples.
• We touch upon a few more stock-related risks that investors should be mindful of.

Introduction

Guardforce AI ( GFAI ) is a Thailand-based integrated security solutions provider (40 years of experience in this field), that made its debut on the bourses around 20 months ago. We are not sufficiently moved by this stock, but if you're contemplating a position, here are a few considerations that may abet your decision-making process.

Business-Related Considerations

Whilst GFAI wants to position itself as a comprehensive security service entity that protects all sorts of high-value assets, of both public and private sector organizations (see image below for key clients), its roots lie in the field of cash solutions, cash handling, and cash logistics. Beyond the cash expertise, GFAI also offers plain vanilla services such as security alarm systems installations, smart shop management systems (for retailers), and other information security offerings (such as web, mobile, API penetration test, network infrastructure test, etc.)

In the next stage of its growth cycle (and what we imagine would ostensibly attract investors to this story), GFAI wants to leverage its foundation, and inculcate AI and robotics offerings, thus offering multiple revenue streams for its existing client base.

Management believes there's great scope for AI & RaaS (Robot-as-a-Service) acceptance in entry-level servicing jobs in the hospitality, entertainment, tourism, and real estate industry which is characterized by labor shortages, high labor costs, and non-standardized servicing levels. If RaaS can gain traction, then it also helps shift the texture of revenue to a recurring-rev-based model, which would be taken more favorably. GFAI is also rather enthused about its " AIoT " Robot advertising model, but if it is only winning contracts with lengths of less than 6 months, that's clearly nothing to shout home about.

Even though some investors may be excited about the prospects of RaaS penetration across various industries (the services robotics market is expected to grow at a CAGR of 15% ), they need to consider that currently, the GFAI story is primarily being driven by what's happening on the traditional side of the portfolio; For context, out of the $35.5m of pro forma revenue generated last year, less than 3% came from Robotics and AI, with the rest coming from traditional avenues such as secured logistics, general security, and information security. Given the huge tilt, don't expect a drastic shift in the revenue mix any time soon.

Worryingly, GFAI's largest contributor to group revenue-secured logistics (~90% of group revenue) has been witnessing declining revenue growth (down by 10% YoY in FY22, but largely on account of the trajectory of the Thai baht; nonetheless, even on an FX-adjusted basis, revenues were still trending lower YoY).

Management attributes this weakness to COVID disruptions and shutdown of certain customer facilities, but even if one were to assume a bounce back in the periods ahead, it's hard to imagine this business putting up growth rates that could whet your appetite; for context, Freedonia Group believes that the traditional security services market will likely only grow at 4% through FY26. In fact, YCharts revenue estimates for GFAI point to a figure of $37m for FY23, implying annual revenue growth of 4%.

Stock-Related Considerations

In light of GFAI's low growth cadence, it is no surprise to discover that the stock is currently priced at a lowly price-to-sales multiple of less than 1x; to be more specific, based on the FY23 estimates, you're looking at a multiple of 0.63x, a 27% premium over the stock's trading history average multiple (0.495x).

Also note that since its listing debut in late Sep 2021, the GFAI stock has been a source of wealth destruction; admittedly, most micro-caps have had a rough 1-2 years (the iShares Micro-Cap ETF is down by -27% since GFAI's listing date), but GFAI has fared a lot worse, losing -97% of its market-cap since its debut.

It isn't just the degree of losses that is a concern, it's also fair to say that GFAI isn't a stock meant for the faint-hearted, as its volatility profile has gone through the roof over time. On an annualized basis, the standard deviation of its monthly returns currently trades at levels of over 83% (this is a lingering issue, as across its entire trading history, the average standard deviation of the GFAI stock has been quite high at 51%).

Owners of the GFAI stock will also likely have to deal with plenty of dilution challenges. No matter how attractive the end markets look, at the end of the day, you're looking at a young industrial company that will guzzle a lot of cash during this stage of the lifecycle. For context between FY21 and FY22, the cash on books slumped by 48% and currently only account for 13% of the asset base at $8.2m (note that this figure also includes restricted cash, which leaves them hamstrung even further). To boost its capital resources, you'll see GFAI come up with public offerings every now and then (for instance, in the first week of May, they tapped the markets and raised ~ $9m , followed by another offering 10 days later for $14m ). In effect, investors should be prepared to deal with significant shifts in the outstanding shares (the image below gives you a sense of the ferocity of the growth seen here).

Nonetheless, given this long-standing trend of price erosion, the heightened volatility profile, and the dilution risks, some of you may be hesitant to get on board with GFAI, but we also recognize there could be a fair few, wondering if this is an opportune time to consider a position from a trading perspective.

To the latter cohort, we'd say that the stock has been leaving price imprints in the shape of a falling wedge, and since May there appears to be a flattening out of the price action. Meanwhile, the average true range ((ATR)) of GFAI's weekly prices too appeared to have declined in recent periods, If, you're contemplating a long position using the two boundaries as guideposts, we think the risk-reward looks favorable from a technical angle.

Having said that, investors should also be aware of the fact that this is a company that has often found it challenging to comply with Nasdaq listing agreements, and earlier this year, they were also forced to do a 1-40 reverse stock split, which certainly does not reflect well from a trading and liquidity angle.

Besides, as noted earlier in the article, the narrative is currently largely driven by plain vanilla offerings in security services, and this does not look to be in a great place. All in all, we're not sufficiently convinced that GFAI is compelling enough to be pursued at this juncture.

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