Balcatta is home to two of WA’s best-known technology stocks – ERG and Orbital Corporation – and the little-known SafeEffect Technologies. They all have a troubled past but Mark Beyer finds that recent developments at each company point to a varied future
Orbital Corporation has a long history of slipping briefly into profit, only to disappoint investors by falling back into the red again.
However, the engine technology company is hopeful that its recent $1.4 million half-year loss could halt the flow of red ink.
“Despite disappointing first-half results we are pleased that we have made considerable commercial progress during this period,” said chief executive Rod Houston, an Orbital veteran who took the top job last October.
“We are confident about our second-half prospects and anticipate a full-year profit.”
Dr Houston is wary about making longer term forecasts but the trends look positive.
“We’ve had a rough time and we’ve had to stick it out, but we’re feeling a lot more bullish and happy.”
He believes the international tightening of emissions standards remains a key business driver, despite delays in some countries in the adoption of new standards.
“The legislative environment is still there and our technology is still the benchmark,” Dr Houston told WA Business News.
Chairman Don Burke is also upbeat, saying the board is “extremely pleased” with the progress made by Dr Houston and his team.
The company’s confidence is shared by Patersons Securities analyst Robert Gee, who rates the stock a speculative buy.
Mr Gee believes upcoming product launches by Indian autorickshaw company Bajaj, and US snowmobile maker Polaris, which incorporate Orbital’s engine technology, could prove particularly lucrative.
“They could be earning $2 million to $3 million dollars in royalties from those companies by the end of 2007,” Mr Gee said.
“That’s all cash and it drops straight to the bottom line.”
Dr Houston believes investors are still “hung up” on the automotive sector, which for the best part of 30 years was the company’s principal goal.
The enormous earnings potential that could flow from a breakthrough in the automotive sector lay behind the $1 billion-plus valuation Orbital enjoyed in its heyday in the late 1980s and early 1990s under the leadership of company founder Ralph Sarich.
Dr Houston said Orbital had not given up on the automotive sector but added that the company could be profitable by servicing other sectors.
It generated $1.2 million in licence and royalty revenue in the half-year to December, mainly reflecting increased sales by Mercury and Tohatsu of marine engines incorporating its direct injection technology.
The European scooter market was expected to be a shining light, after top manufacturers such as Aprilia, Piaggio and Peugeot released models incorporating Orbital technology earlier this decade, but it has performed poorly.
Dr Houston said the overall market for small (less than 100cc engine capacity) scooters, which utilise Orbital technology, had shrunk substantially in size in response to new helmet and licensing laws, and a planned tightening of emissions standards had been delayed.
Despite these setbacks, he said Orbital was developing a lower-cost direct injection system for this market.
He added that emissions standards were not the sole driver of business growth, noting that Bajaj was motivated mainly by the 40 per cent gain in fuel economy from the use of Orbital technology.
Bajaj will apply Orbital technology to its three-wheel autorickshaws, more than 200,000 of which are sold a year.
Apart from its licensing and royalty income, Orbital is anticipating higher contract income from its engineering services business, which contributed $3.4 million in revenue in the December half-year.
It has secured $9 million worth of contracts since last July, an increase of 25 per cent compared with the previous corresponding period.
Its client mix is also changing, with traditional automotive customers cutting back their spending but new contracts being won in China and India.
The third leg of Orbital’s business – its manufacturing joint venture Synerject, which is owned 50:50 with Siemens VDO – is also expected to improve.
“We are excited by Synerject’s prospects,” said Dr Houston, who noted that Synerject has been profitable for the past three years.
It generated annual revenue of $US42 million ($55 million) last financial year and Orbital expects that to grow by 50 per cent following the acquisition this month of an electronic components factory in Delavan, in the US.
Payment for the Delavan factory consists of working capital, principally receivables and inventory, suggesting its profits are modest.
However, Orbital expects a substantial improvement in throughput and therefore margins over the medium term.
“The ensuing profit growth will be a significant addition to Orbital’s revenue streams,” Dr Houston said.
One of the key products manufactured at Delavan is the E-TEC direct injection system, which is used on certain Evinrude outboard marine engines and is the main competition in the marine sector for Orbital’s own direct injection fuel system (which is used on certain Mercury models).
Dr Houston said global company Bombardier, which owns Evinrude and formerly owned the Delavan factory, has switched over to the E-TEC system as its main product for two-stroke outboards.
This reduces the potential for Orbital to expand sales of its own technology.
However, the Delavan acquisition means that Orbital, via its exposure to Synerject’s earnings, will gain some benefit from manufacturers switching from its direct injection system to the E-TEC system.