Transense Technologies [LON:TRT] the Bicester-based, AIM-listed manufacturer of advanced wireless and passive vibration sensory equipment used in the aerospace, mining, motor and industrial sectors, senses a strong year ahead as secures a number of licensing and distribution deals in the first half of the year.

The company in many ways provides the cog that makes the engine work efficiently, which in IndyCar and Formula One Racing – an area where Transense is working with McLaren – can mean the difference between a champagne-drenched podium finish and filling up the back of the grid. The Oxfordshire company’s technology will be found in the harshest of environments, in a key sensory system deployed by General Electric in Black Hawk and Apache attack helicopters at the sharp end of conflict zones worldwide.

The company has been in business since 1991 and listed on AIM eight years later. Initially a science and technology endeavour, developing acoustic sensor technology Nigel Rogers, executive chairman explained that the business grew through key acquisitions, and through subsequent licencing agreements and partnerships into a resilient and profitable company with global, blue-chip clients providing innovative solutions to the transportation industry and industrial sector

Rogers said that Transense products could soon be found in the deepest of mines – places where it is too dangerous for people to work – helping drive automated mining equipment delving for minerals beyond the 4km barrier where it’s just too unforgiving for humans.

The key product in Transense’s arsenal is its patented Surface Acoustic Wave (SAW) sensor technology which is used by its customers to improve the power, performance, and efficiency of their equipment.  SAW is a wireless, passive, non-contact sensing system consisting of two main components: SAW sensory elements are connected to antennas and an electronic interrogation unit called a reader. The reader launches an interrogation signal which is picked up by the sensor’s antenna, which works as a passive back-scatterer reflecting the interrogation signal back to the reader. The backscattered signal reflects the frequency of oscillation affected by a physical measured quantity, or measurand.

The reader analyses the received back-scattered signal and calculates the value of the physical measurand. When the strain is applied or the temperature of the substrate changes, the physical dimensions of the substrate and the SAW velocity also change. This makes the resonant frequency sensitive to strain and temperature and allows the SAW resonator to be used as a strain and temperature sensing element. The critical component of the product, the Inter-Digital Transducer is so small can fit on the end of your finger, but its size belies its power.

The technology has been designed to measure torque, temperature, and pressure, wirelessly, without the need for batteries. As the technology is battery- and wire-free it can be used in applications that traditional sensors cannot, such as on rotating engine shafts or in environments where access to the sensors is difficult or potentially hazardous. The company has developed two distinct sensors, one measuring pressure and temperature and the other one measuring torque and temperature. Both sensors are self-contained and autonomous being supplied with the proprietary requisite electronics to interrogate the signals sent out every tens of millions of seconds that allows the engineer managing the equipment to make adjustments – albeit minute – to capture the optimal torque and manage the variables that affect the engine’s performance.

The company is developing partnerships for SAW with various high-end clients in the automotive, aerospace, industrial and marine engineering sectors. However, given the way that new electric vehicles are designed, with a focus on heat efficiency and torque, one of the most exciting future applications for SAW is in EVs.

Another key part of Transense’s business is Translogik, a tyre pressure monitoring business unit. This division focuses on probes that measure tyre tread depth and pressure, as well as temperature data collection tools for truck and bus tyre inspections, RFID (Radio Frequency Identification) tags, patches and UHF readers. The product portfolio has been designed principally for fleet management companies in conjunction with the major global tyre manufacturers such as Bridgestone, Goodyear, Continental and fleet management software companies.

Transense acquired Trent Electronics in 2008 for GBP50,000. Trent was doing interesting but not ground-breaking work developing tyre pressure monitors – the same products it was selling 25 years ago are still popular tools in the automotive industry today.

Rogers said: “We bought Translogik as a cash-positive, cash-generative business that could provide a steady stream of revenue into the company whilst we invested in the R&D needed to help bring SAW into commercial production…”

However, Translogik became Transense’s Ace in Hole, as from its platform the company developed its third business unit, iTrack. iTrack offers a tyre pressure management system (TPMS) that offers real-time tyre tread depth and pressure field inspection kits. That product evolved into an application that is now used in the mining industry that monitors the performance of the tyres used by the big yellow trucks used for moving and transporting spoil from mine sites. The correct maintenance of tyres can help miners save money by keeping their vehicles operating in harsh conditions, save money of fuel consumption, keep operators safe and keep projects on schedule.

In August 2019, Transense signed a joint collaboration agreement with tyre manufacturer, Bridgestone to use iTrack with its industrial off-the-road product range. The collaboration evolved into an exclusive worldwide licence with Transense for the iTrack technology for a decade. The terms of the licence pay Transense a quarterly royalty payment based upon the number and classification of vehicles upon which the iTrack technology is deployed over ten years period, including those trucks trialling the system. At the end of the ten-year period, ATMS will have the option to purchase the iTrack technology for a nominal cash sum.

In effect, said Rogers, this will see GBP20m of tax-free revenue come into Transense over the next 10 years. In terms of taxation, Transense has accumulated over GBP23m of tax losses that are available to offset against future profits of the same trade, so the company is not expected to pay mainstream corporation tax for the foreseeable future.

“This will give us a bit of breathing room, where were not furiously chasing sales, and allow us time to develop SAW’s commercial applications and find new partners and licensees,” said Rogers, “…in the past 10- to 15-years we had to be repeatedly returning to shareholders for more capital to develop SAW. But now we have some capacity to do focussed development work, and even give back some money to shareholders.”

The company also reported it had completed share buybacks of GBP0.30m, something it hadn’t undertaken in FY21 and had distributable reserves at year end of GBP1.2m, against GBP0.63m the year previously.

Transense launched a share buy-back programme in February 2022 and bought GBP300,000 of shares at an average of 70p. This was fully funded from cash flow. Subsequently the company announced a 2023 buy-back programme, proposing to buy up to GBP150,000 more of shares prior to its AGM, and a further GBP500,000 post-AGM subject to approval, which again will be fully funded by cash flow with headroom

The shares closed trading on 13th October at 76.5p and have offered a -3.48% year-to-date return, a -25.2% one-year return with its shares ranging between 47.1p and 124.5p over a 52-week period giving the company a market capitalisation of GBP12.4m.

The key to the company’s future profitability is refining its SAW technology for a mass-market. At the moment the product is used in high-end applications, with expensive machinery where individual component costs are not critical to the overall cost of the machinery. However, on a more mass-market basis, the cost per unit of the component can affect the overall cost of the finished product.

“There’s a sweet-spot there somewhere [for SAW] and we think its in the 10,000 to 100,000/USD10 to USD 100 range in terms of volume and price and we’re trying to refine our product to hit that spot,” said Rogers.

He explained that the company was exploring a wide range of marketing platforms. “YouTube is really helping us. Instead of going out to chase customers, we’ve made a series of YouTube videos and now we get customers coming to us asking whether our solutions can help with their businesses. We first pre-qualify them through our projects team, check they have the finances necessary and then start to work in development with them.”

He continued: “The annualised rate of iTrack royalty income now exceeds GBP2m, which more than covers the fixed overhead costs of the company, and Translogik probes revenues are approaching GBP1m per annum with ample scope for further growth.  We are now also achieving real traction with SAW technology across our target industry sectors, illustrated most recently with the collaboration with Meggitt in aerospace, supported by a growing pipeline of new potential customer engagements.”

Rogers concluded: “The directors are confident that the company’s business model is resilient, that further increases in profitability and cash flow are deliverable, and that the long-term prospects for the company continue to build.”

Ian Jermin, an analyst for Allenby Capital, which has Transense under coverage said: “We are leaving our forecasts for FY23 and FY24 unchanged at this stage and anticipate a significant increase in profits and cash generation in both years and an unusually low risk profile in the current macro-economic environment given the security of iTrack royalty income.”

He continued: “We believe that Transense shares are significantly undervalued and our NPV of future cash flows support this proposition before considering the earnings streams from the Translogik probes business and the potentially significant future contributions from SAW. Consequently, we continue to believe that forecast profits and cash flow can support a share price of 150p.”

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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