There was a short report issued on SES imagotag on June 22nd, causing the share price to plummet 60%. We think this presents a good buying opportunity and are long SES imagotag.
For background, SES imagotag has both Deloitte and KPMG auditing their books over the last 6 years (France requires that public companies are jointly audited). This is not to say that makes SES infallible, but we think it’s relevant as companies with misleading financial statements/fraudulent generally are audited by no-name firms coupled with frequent auditor changes.
We address some of the points raised in the report below.
#1 BOE and SES circular revenues
Aside from SES stating that revenues from BOE have no bearing on their consolidated revenues nor EBITDA, if one were to assume that these circular revenues flow through right to the bottom line and have no COGS associated with them( as the author of the report did), this would mean that SES gross margins would amount to 13.5% in 2022 (subtracting the entirety of the 48mm in revenue). This is significantly lower than historical long-term gross margins of 21% and lower than peers such as Pricer. We don’t believe this describes the fundamentals of the business given their manufacturing partnership with BOE.
Another point of consideration is that assuming BOE is funneling money into SES to inflate revenue/earnings and that insiders are cognizant of this- then why would management increase their shareholdings over the last couple of years? SESIM is a public limited company owned by SES management and it acquired $20mm worth of shares at 80 euros per share in 2022 (through a private placement with BOE). SESIM also bought an additional $3mm worth of shares at 106 euros per share in January 2023 and currently SESIM owns 12% of SES imagotag. On top of this, Thierry Gadou’s personal share ownership has not decreased over the last 4 years, staying flat at 250k shares or $20mm.
#2 Walmart and SES
SES and Walmart have done business over the last 11 years spanning several countries. The contract with Walmart is not a large one-off business transaction, but one that is fundamentally tied to their retail business. It is hard to imagine SES knowingly entered into a contract that will lose them potentially roughly $1.30 dollar per ESL or in aggregate, $750mm dollars. The author arrived at this figure using several general numbers such as assuming $3B for the entirety of the contract and 120k skus per store for every Walmart store in the US. The author points out that Walmart does not have any mention of SES imagotag on their site as a signal of the low importance of this deal to Walmart, however there are press statements with Walmart executives like the one shown below that belie this opinion.
Press statements that quote Walmart personnel are on the SES website like the ones shown below.
“As we continue to innovate, it is important that we develop strategic relationships to make sure we are staying out in front of the latest technology. With SES imagotag’s digital solutions, we will be able to offer best-in-class technology to improve our customer experience. We are encouraged by what we’ve seen so far in this pilot and we’re excited to bring the next evolution of digital shelf display to more stores in 2022. “ – John Crecelius, Senior Vice President, Merchant Transformation, Next Generation and Last Mile Delivery Product, Walmart U.S.
“Changing price shelf labels in stores is time intensive for our associates. We’ve been testing digital solutions that will help us manage these price changes electronically, allowing associates more time to do what matters most – helping our customers. We’re seeing positive results and are expanding the rollout of these electronic shelf labels.” said Bala Prasanna, vice president, Walmart U.S.
#3 SES Engineer Headcount
The short report made it sound as if SES employs no engineers, however a cursory look at LinkedIn shows the SES employs about 100 engineers.
#4 SES relationship with BOE
We believe SES has benefited tremendously from its BOE partnership (and vice versa) giving them an exclusive supply to low cost ESLs. It is what allowed SES to grow revenue significantly while peers such as Pricer struggled with a myriad of supply chain issues (from 2020 to 2022, Pricer grew revenues 29% while SES grew more than 100%). It is a mutually beneficial arrangement as SES imagotag focuses on core competencies such as improving ESL hardware, developing other services such as Captana and Rail, software offerings etc while outsourcing manufacturing to BOE. We do not believe once the contract expires, BOE will turn around and close off SES as it would lose a significant western partner. Along with the hardware and software development SES has done, it has a large sales force driving these large contracts with mass market retailers. It can take up to 3-4 years for a contract to be struck. It would be a considerable effort for BOE to replicate this, and given geopolitical tensions, it would likely struggle. BOE and SES is a partnership that we believe will endure.
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