Jenny Ruth: Cadmus sets about building eftpos reach

A casual observer of Cadmus Technology might well dismiss it as yet another penny-dreadful wreck of a dotcom.

Its share price has never managed to climb back to its November 2000 issue price of 20 cents, even though the dotcom crash occurred a few months after it listed.

Because it listed through the shell of Heritage Gold, it was criticised as being yet another miner who saw better prospects in mining the then dotcom boom than in trying to mine gold.

Its chairman, Keith Phillips, used to be involved with another miner turned dotcom, IT Capital.

And its latest result for the year ended June was a net $490,000 loss while revenue fell 1 per cent to $13.2 million.

But there's a much more promising story going on than these numbers suggest.

For a start, despite the negative bottom line, the company's operations were cashflow positive to the tune of $1.2 million in the latest year. In the previous year, while it reported a net $406,000 profit, its cashflow was negative $231,000.

Some people have already recognised the company's promise.

In August last year, Singapore-based CET Technologies, a subsidiary of Singapore Technologies Electronics, the largest engineering company listed on the Singapore Stock Exchange, took a 9.9 per cent stake. That stake has since been diluted to 7.4 per cent by Cadmus issuing shares to fund the purchase of the company it had worked with to develop its eftpos machines, Aurium Systems.

CET chief executive Thiam Beng Lau now sits on the Cadmus board.

Bailey said CET had looked at developing its own eftpos technology but decided it was easier to buy into Cadmus.

And the shares have been rising since the middle of the year from below 10 cents to 19.2 cents, with the increase accelerating in August when Navman founder Peter Maire stood in the market to gain an 18.4 per cent stake. That makes him the second largest shareholder after a trust controlled by founders Ian Bailey and John Nimmo, which owns 27.5 per cent. Maire, who sold Navman last year for $108 million, has also joined the Cadmus board.

 

While it began life as a distributor of Australia-based Keycorp's eftpos equipment, Cadmus is now New Zealand's only manufacturer of eftpos machines and software.

Bailey said he realised the Keycorp products had deficiencies and so the company set about developing its own products by working with Aurium and in its joint venture with Trustpower, which developed the world's first in-home payment terminal for utility services. Cadmus bought Trustpower out of that joint venture in July last year.

Bailey said it was in the company's interests to buy Aurium while also keeping its personnel on board. Cadmus paid $300,000 in cash and issued 11 million new shares to Ross and Lynda Purdy, making them the fourth largest shareholder with just under 5 per cent, to pay for Aurium.

The purchase means Cadmus will no longer have to pay Aurium royalties for jointly-developed technology. Bailey said those royalties had been small but could have turned into millions of dollars.

Developing its own machines also allowed Cadmus to become an exporter. "We're not governed by geography. As an importer of someone else's products, you're limited to the geographic area you have the rights for," Bailey says.

The company exports to Australia, Malaysia and Singapore and is developing other prospects.

There are about 40 eftpos manufacturers around the world and Cadmus is ranked number 25 in terms of units sold with its ranking improving.

The underlying market for eftpos machines is considerable. In 2001, there were 7.2 million units sold worldwide. "We're quite happy to have a modest share of that. It would still be extremely good for this organisation," Bailey says.

But in the shorter term, there's a much bigger opportunity on the horizon.

In August last year, the company achieved compliance with the latest EMV (Europay, Mastercard and Visa) smartcard certification standards. At the time, less than 10 per cent of eftpos machine vendors had achieved such compliance.

It is that certification and the phasing out of the magnetic strip technology used on credit and debit cards which explains Cadmus' latest bottom line loss and its future prospects.

The reason for the bottom line loss was that the company completely wrote off all its non-EMV compliant stock. That doesn't necessarily mean this equipment is worthless. Although it can't be sold in New Zealand any more, there are places overseas where it can be sold.

"There are some markets out there. They're not huge, but we have a product at very low cost because we've already written it off," Bailey says.

In New Zealand, ETSL, this country's largest processor of eftpos transactions, and the banks have required that all new terminal sales be EMV compliant from August this year and that all existing terminals will need to be replaced during the next few years.

That's 100,000 terminals in New Zealand alone (Bailey says Cadmus machines account for about 15 per cent or 20 per cent of installed machines and for about 30 per cent of new terminal sales each month). The same thing is occurring globally, accounting for more than 35 million terminals.

"It's about how do we get a small chunk of a large market," Bailey says.

That's where having CET as a shareholder comes in handy. In April this year, Cadmus won an order for 5000 machines from CityCab, one of Singapore's major taxi fleet operators.

Cadmus already supplies between 50 per cent and 60 per cent of local taxis with terminals.

Cadmus won't make much, if any, profit from this order. Bailey says its importance is in giving the company a foothold in the Singapore market, which should lead to more sales.

"We get all the certifications and approvals necessary to sell into that market. What's the cost if you didn't do it and how hard would it be to get into that market without it?"

More recently, Cadmus has been buying eftpos distributors.

"It was about increasing our reach in the market place. In the next two or three years, there's going to be major growth with the replacement of all those terminals."

Cadmus shareholders have made it clear they want the company to put its money into growth, not into paying dividends. But will Cadmus need more capital?

"At the moment, we don't. We have funding lines available from our bank which we haven't utilised."