Finance & Investment ClubTechnology SectorSummer 2012

Senior Analyst: Esther Tay

Radio frequency identification (RFID)

 

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Overview

The RFID Sub-Sector

Increasing demand for modernizing

RFID applications

Significant support from

mandates and regulations

Rapid growth of RFID usage in

emerging markets

Growing need for firms to improve

operational efficiency

 

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Industry Definition – Radio Frequency Identification (RFID)Firms in this industry provide real-time analytical solutions using

RFID technology to identify, track, and manage critical assets, supply chain logistics and business transactions

These companies serve the retail, manufacturing, transportation, security, electronics, telecommunications, laboratory/healthcare, industries and governments worldwide

Scansource, Inc. (NASDAQ: SCSC)

Zebra Technologies Corp. (NASDAQ: ZBRA)

Brady Corp. (NYSE: BRC)

Progress Software Corp. (NASDAQ: PRGS)

Intermec, Inc. (NYSE: IN)

Avery Dennison Corporation (NYSE: AVY)

 

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RFID Sector Industry Breakdown by Market Cap

Technology$125,079.5B

(100%)

Wireless communications$38,968.5B(31.15%)

RFID companies$3,814.9B(3.05%)

Focus RFID companies$9.1B

(0.007%)

Breakdown by 2011 Revenue

AVY49%

BRC11%IN

7%PRGS

4%

SCSC22%

ZBRA8%

AVY 6.026 B

BRC 1.340 B

IN 0.848 B

PRGS 0.534 B

SCSC 2.667 B

ZBRA 0.983 B

 

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Tags55.7%

Middle-ware and Software

24.9%

Readers19.4%

RFID Industry Model

RFID Middle and Software• Links and allows communication between RFID hardware and business

solutions • Processes tag data from the reader and filters duplicated tag information

RFID Readers• Handheld readers • UHF readers • RFID readers with embedded middleware • 99.9% read rate accuracy

Source: Frost and Sullivan, 2009

RFID Tags • Active • Passive • Semi-passive• Printed RFID tags are expected

to open up new markets

RFID Hardware

Tag data

“Clean” data

Enterprise applications •Warehouse management systems • Enterprise resource planning systems • Manufacturing execution systems

Global RFID Market: Percent of Revenues by Product Type

 

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Correlation coefficient = -0.323 Companies’ operations are weakly correlated to the RFID industry’s expansion Shows that selected companies are able to retain their operating margins

despite new entrants into the RFID industry

Time Series Analysis of RFID Sub-Sector

2006 2007 2008 2009 2010 20110

1000

2000

3000

4000

5000

6000

Total RFID Market Revenues VS. companies’ EBITDA

Total RFID Market Revenues ($M) Total EDBITDA ($M)

CAGR: 12.78%

 

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Trends overview

Increasing demand for modernizing

RFID applications

Significant support from

mandates and regulations

Rapid growth of RFID usage in

emerging markets

Growing need for firms to improve

operational efficiency

 

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Increasing Demand for Modernizing RFID Applications

Source: ABI research, RFID Annual Market Overview

Application Group 2008 2009 2014 (est.) CAGR (08-

14)

Traditional 4,456.3 4,454.4 6,729.8 7.1%

Modernizing 906.0 1,094.1 2,472.8 18.2%

Total 5,362.3 5,548.5 9,202.6 9.4%

RFID Systems Revenue: Traditional vs. Modernizing Applications ($M)

Total RFID Systems Revenue for Modernizing Applications ($M)

Contactless payment– American Express, MasterCard, and Visa,

are fully committed to contactless rollouts after significant consumer validation

– Largest CAGR 23.7% from 2008-14

Item-level tracking – High relevance to consumer businesses– Improve accuracy of inventory checks– Riding on the growth of eCommerce

Asset management – The RFID market’s truly horizontal

application– Potential to gain traction across regional

and vertical markets

 

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Significant Support from Mandates and Regulations 96 different countries, including the U.S., are now

embedding RFID into passports to fight forgery

US Department of Defense– Finalized Defense Federal Acquisition Regulation

Supplement amendment for supplier contracts requires RFID tagging

– An estimated 60,000 suppliers will be impacted

Walmart Inc.– Published requirements for vendors to place RFID

tags on all shipments– It is expected that over 3,750 Wal-Mart stores will be

equipped with RFID capability for item-level tagging

Target Corporation – Set requirement for top suppliers to apply RFID tags

on pallets and cases beginning late spring 2005– Suppliers are required to use UHF rags based on

EPC for shipments sent to its 1,200 stores

Perceived RFID Benefits in Supply Chain

 

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Rapid Growth of RFID Usage in Emerging Markets

North America and Europe – High awareness of RFID – High volume deployments in progress

Asia– Fairly advanced in RFID deployments – Technology innovation in active tags – Growth in consumer markets and increase in

supply chain activities South America and Middle East

– Emerging awareness – High growth potential – Growing number of pilot projects

Africa – Low penetration of RFID– Prospects of greenfield opportunities

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

Global RFID Revenues

US EMEA APAC

CAGR: 19.0%

CAGR: 13.6%

CAGR: 13.7%

Global RFID Revenues ($ Millions)

Geographic Penetration of the RFID Market (2009)

 

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Growing Need for Firms to Improve Operational Efficiency

Business value of RFID technology 80% faster receipt of goods More than 99% chance of inventory

availability Inventory stock-taking can be completed

in minutes Multiple tag reads can be performed

simultaneously

Source:The challenges ahead of supply chains: McKinsey Global Survey results, Nov 2010

RFID technology directly addresses these two concerns in the long run

 

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RFID Industry RisksDemand-side risks Lack of end-user knowledge on RFID Lack of system integrator skills Budgetary constraints due to global recession Privacy and security concerns

Supply-side risks Vendors incur recurring costs to keep up with fast-moving RFID

technology innovation

 

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Key Financials

Ticker Symbol

Market Cap(B) % of 52 high Closing Price P/E EPS EV/ EBITDA Debt/ Equity Debt/ EBITDA LTM ROE (%)

AVY 3.18 98.96 31.37 15.76 1.99 7.18x 2.22 5.70x 11.50

BRC 1.49 71.34 20.39 19.19 1.48 6.61x 0.57 2.76x 0.001

IN 0.37 99.51 6.15 N/A -4.15 15.77x 3.49 10.93x N/A

PRGS 1.24 99.69 19.6 36.33 0.54 10.52x 0.36 1.87x 0.76

SCSC 0.84 99.25 30.55 11.49 2.66 6.81x 1.06 5.30x 9.64

ZBRA 1.93 99.76 37.32 15.24 2.45 8.49x 0.13 0.52x 17.20

High 3.18 99.76 37.32 36.33 2.66 15.77x 3.49 10.93x 17.20

Low 0.37 71.34 6.15 11.49 -4.15 6.61x 0.13 0.52x 0.001

Mean 1.51 94.75 24.23 19.60 0.83 9.23x 1.31 4.51x 7.82

Median 1.37 99.38 25.47 15.76 1.74 7.84x 0.82 4.03x 9.64

 

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RFID Industry Recommendation: POSITIVEThe RFID Subsector is still highly fragmented and survival of companies depend largely on the companies’ products

Revenue-side trends for the industry: Significant support from corporation mandates and government regulations provide a steady driving force for

the industry Operational savings from modernizing RFID applications in emerging markets and in the aftermath of the

economic crisis will boost growth in the industry

Cost-side trends for the industry: Increasing innovation is reducing the cost of producing and implementing RFID applications

Therefore, the RFID subsector can be recommended as a BUY.

Thank you

 

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