SEEN offers an asymmetric return due to market mispricing of its DMS duopoly position; current valuation (~11x FCF) ignores explosive growth potential from regulatory mandates in Europe (now) and Japan/US (2030).

It is Seeing Machines. The ticker is Sen Trade in London.

The company we want to talk about today is Scene Machines. The ticker there is CE. It trades in London.

I started looking at this company uh you know randomly just appearing I don't think it was even one of my screeners. It appear over my desk and just started doing some research into it and I just thought that the yes ramp up I will explain that later was being completely mispriced by this by the market that has worked well.

It's been a 50% return since I entered into the company. I know I think we have a very good asymmetric return for the second leg of the thesis.

Sing machines is the leader of a two-player duopoly in what's called DMS technology. Basically DMS technology is a software that checks your face while you are driving or while you are doing other type of activity to ensure that you are uh looking at the at the road in order to avoid any type of accidents.

despite this seeming uh easy to replicate technology is very hard to do. There's only two players which are the only ones that have the best technology, they've been bo both have taken 20 years and hundreds of millions of dollars to develop this.

Like these companies have been listed for decades and they've been losing money for decades. They've spent I think Sing Machines has spent half a billion in research and development only over the last two decades.

So it's it's very expensive to develop this technology.

But what happens now in Europe, it's mandatory to have this technology, this product on every car. This means that these two companies and especially SIG machines will start to produce free cash flow.

But you know it's we my estimations is that full year 27 like their full year ends in June. So when I refer to full year is June 26 to June 27. Uh just just for context, I think they will make around 20 to 40 million in free cash flow.

We'll explain what why the the variation later. Market cap is 330. So on mid-range, it trades at around 11 times free cash flow.

Something that I can believe can grow high double digits. Why? First of all, there's a very high OPEX base around 55 million USD per year. Uh that's largely fixed. Extra rent revenues don't mean extra cost.

This means that with Europe with this regulation that's now mandated they have all the programs in place they should make free cash flow but when the next leg comes that's Japan and America that's probably around 2030 or or around that time every extra dollar of revenue will go straight to free cash flow instead of you know 70 extra on revenues from Europe only 20 free cash flow 70 extra from Japan and Americas is 70 extra in free cash flow that's massive and in between we subscription optionality from the fleet segment.

That's basically this technology applied to to fleets like truck uh track fleets uh Amazon also they have way more uh Caterpillar stuff like that. It also adds optionality because it's also very recurring.

Basically, this is a thesis where there's huge operational leverage at duopoly with what I believe is a very good uh competitive advantage and a hard to replicate technology and you know there are some risk u and there's some reasons why this is cheap we could say but we will dig into that this podcast.

high level thesis you've got this uh oligopoly basic duopoly trading at kind of let's call it 10 times your estimate of forward free cash flow and not only that but the free cash flow kind of explodes because it's all operating leverage and you've got just Europe alone's got the regulatory requirements kicking in and you know Japan I think it kicks in in Japan in 2029 is that right and maybe 29 or 2030

it sounds crazy. You're buying something before kind of 16 million cars are mandated to get it.

this technology outside of you know being a great thesis in my opinion it saves lots of lives like one of the main cost for if we look by insurance companies I think the insurance angle is very interesting in the long term this reduces like 90% the risk of a catastrophe when you are on the road uh both for for especially for truck drivers that reduces a lot the insurance cost of of of of cars

in Japan they are pushing this regulation into the 29 or 2030 I think mainly because there's an huge increase in accidents for people looking at their phones or being distracted on the road uh and that's an increasing uh that's increasing the amount of deaths we are seeing on the road and there's lots of associations pushing for that

you've got this company that's been in a duopoly with another company that's kind of winning it. You know, when it this is a niche market, yeah, they dominate, but I worry when you expand it to 16 billion vehicles and it's regulatory driven all of a sudden, like it's not like it required these guys who spent cumulatively 200 million in capex over kind of the past 10 years.

I mean, that's a lot of capex, but I I would almost guarantee the capex you spent 5 to 10 years ago is kind of wasted. Could I come up with a competing product for 40 or 50 million using state-of-the-art technology that comes in here when all of a sudden, hey, 16 million vehicles need it?

Or do one of the big manufacturers look at this and say, hey, I, you know, I I could outsource this when it was a niche thing on high-end vehicles or custom vehicles, but now that it's required, I'm just going to build this in house.

Or, you know, you mentioned Amazon as a customer. That's not on the the car car side, right? That's more on the fleet side, but I I look at that I say you get all the data happening inside a car, lots of machine learning, AI, lots of like I look at I say why would Amazon outsource this to someone instead of just like kind of building the product in house.

First of all, uh, Sing Machines and Smart Eye are already in those 16 million vehicles like we are we are already posts and those contracts with this, you know, you know, these vehicles last three to five years usually.

So on this first leg there's a low risk of replacement but there's you know as you said there's a real risk of once this once this solution goes into all vehicles uh some other player trying to take share uh over the long term I am expecting to a third or fourth player to appeal because this usually happens in the in the OEM sector

but some reasons why this is hard first of all there are many players that have already tried to get this solution right for example if you look at the cap table of uh Sing machines meets electric uh it's a client of uh Sing machines why uh because they couldn't develop their own solution they got great results and this is something that tends to happen

they got great results in we could say in lab test but when they took the solution to a naturalistic environment it worked really really badly because you know they train all of these with uh synthetic data that it's called basically you generate data and train it on it but that doesn't work well in a real life scenario

uh Sing machines initially developed this solution for the mining and tracking sector it it only later became relevant for the automotive as a whole we could say. So they they have billions of hours of footage of truck drivers and meaning mining employees using this technology.

Uh so that's extremely important. You have tons of footage of naturalistic data and that's why they have developed solution. If you compare uh with smart eye sync machines has much better accuracy. That's key in my opinion

they have a $55 million convertible that is due in October. You and I are talking August 25th, 2026. Right. So, they said I you can go read their earnings deck. I can't remember when their earnings deck was put out.

August 11th. And they said, "Hey, we're in late stages to renegotiate this thing. And if we don't like I believe the convertible loans with the customer and they're fully supportive so they'll and I hear all that but I've done markets a long time and for a company to let a $54 million I mean this is a 300 million mark cap company for a company to let a $54 million convertible loan get within two months of expiration is lunacy I'm going to say you know there's no company that would do that unless they were absolutely they absolutely could not roll that right and they're putting on a brave And I think you could say, "Hey, there was this huge inflection that they're in the middle of that really juices these results for them, right?

So they can do it." But I look at that balance sheet and I say, "Oh, you know, I I hear the explosive I hear the explosive nature. I hear all this." I look at the balance sheet and say, "This is the balance sheet of a company that's distressed or there there's kind of something I'm missing."

I think a lot of investors are waiting for the convertible to get refinanced before uh investing into this. You know, first a little bit of context. They started the refinancing period uh they started around April or May because the the timing was really bad for this convertible. basically they needed to report KPIs in order to show market lenders that you know say you know this ESL thing it's really happening because even in the surprise was not reflected