| Smallcap Discoveries
2019 Q1 Roundup: AEP RW URL RIW XBC HTL CTZ LTE PTE
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| | Get comfortable, we’ve got a lot to cover today! Over the last month, we got earnings updates from nearly every company we cover. Today we’ll analyze the results, discuss what they mean and ultimately answer the burning question: are we buying, selling or holding on the news? PS - looking for the play-by-play analysis? The SCD forum is THE place for immediate reactions to all market-moving news. If you are not signed up for the forum, click here to go the sign up page. Fill out the requested information and create your account. Within 24 hours, we'll verify your current SCD subscription, authorize your access, and send you an email notice saying you're approved. Alright, let’s get into it.
Atlas Engineered Products (AEP.V) |
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| Atlas Engineered Products (AEP.V / AEUPF:PINK) released Q1 financials at the end of May. AEP, you’ll recall, designs and manufacturers wood trusses and other engineered wood products used in the construction industry. Core to their strategy is to acquire profitable, well-established operations and scale them with their expertise and operational practices. The big story here has been new CEO Dirk Maritz leading change at Atlas with a “pants on fire” urgency. Here are the pillars of his strategy: - Drive organic revenue growth in all operating markets
- Lower operating costs through procurement scale and shared resources
- Broaden product offering beyond trusses
- Acquire profit accretive businesses & expand AEP’s geographic footprint
We can see the strategy playing out nicely in the latest set of numbers:
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| | The company has done a solid job on pillars 1 and 4. They drove double-digit organic growth at the core Nanaimo operation. And they’ve more than doubled the business through M&A. Now all eyes are on pillar 2: driving scale and efficiencies in the acquired businesses. The core Nanaimo business delivered an incredible (for this industry) 37% gross margin in Q1. But across the acquired businesses, margins were a fraction of that (8%). If Atlas can get the acquired businesses to margins on par with Nanaimo, that’s worth over $4.5 million in profits annually, or $0.08 per share. And it would send EBITDA margins well beyond the ~15% we’ve seen historically. Improvements will take time and not all of AEP’s sites may have the margin potential of Nanaimo. But we’re seeing more and more progress by the day. AEP recently reported capital investments have doubled their Satellite plant’s capacity. And they’ve signed a new lumber supply agreement which will deliver 15% in cost savings per facility, worth $750,000 - $1,000,000 in annual cash flow. AEP’s stated goal is to reach a $45-55 million revenue run-rate at 10-15% EBITDA margins in 2019. Let’s say they end this year at the mid-point of these targets. That would put AEP’s valuation at a paltry 0.3X revenues and 2.5X EBITDA. Housing market concerns aside, you could easily argue a valuation twice current levels. Bottom Line: While the market is clearly pricing in a worst-case Canadian housing slowdown, we’re letting AEP’s financials be our guide. We think Dirk and his team have turned a corner and we’ve been adding to AEP on these results.
Renoworks (RW.V) |
| | Renoworks Software (RW.V / ROWKF:PINK) also released Q1 results at the end of May. RW, you’ll recall, makes visualization technology for the home remodeling industry. Their tech lets homeowners visually preview products on a digital rendering of their home. It was RW’s best Q1 ever: - Q1 revenue of $1,062,000, up 37% year-over-year
- Design services revenue of $319,000, up 41% year-over-year (this is RW’s fastest growing segment)
- Net loss of $117,000, improved from a $311,000 loss in Q1 last year.
And on top of these solid financial results, we have RW’s partnership with industry-leader Geomni. Together, they are going to market with technology that will allow contractors to virtually bid on a remodeling job – all they need is the customer’s address. It’s considered the holy grail of this industry and RW is right in the sweet spot. But their valuation hardly shows it. US-based start-up HOVER is pursuing the same goal with inferior technology and just landed a US$25M investment from VC Menlo Partners. HOVER has US$4.2M in estimated revenue and is almost surely burning more cash than RW yet trades at a valuation 10 times that of RW. Bottom Line: We continue to think RW is undervalued, especially accounting for peer valuations and the blue-sky opportunity with Geomni. We’re adding on weakness.
NameSilo (URL:CSE) |
| | NameSilo (URL:CSE / URLOF:PINK) is out with Q1 results. We view this as their first “clean” reported quarter since the transformative acquisition of NameSilo LLC in August of last year. NameSilo, through their operating subsidiary NameSilo LLC, provides domain name registration and management services. By positioning themselves as a reliable, low-cost provider, they’ve risen to become one of the fastest growing registrars in the world.
But before we get into the numbers… a quick disclaimer: our editor and owner at Smallcap Discoveries, Paul Andreola, is CEO, President, Director, and a significant shareholder of NameSilo. Okay now to the results: - Revenues up 160% to $6,487,000 from $2,498,000 in Q1 last year
- Gross margin of 11.8%
- Positive Adjusted EBITDA of $242,000
- Operating cash flow of $2,111,000
The first thing to note is the growth rate of this business. It is one of the fastest growing registrars in the world – and you can see it in the revenue trajectory: |
| | The second thing to note is the cash generation. We’ve highlighted before a key part of NameSilo’s business model is that they collect cash up-front, even though they must recognize revenues over the life of the contract – and this can be anywhere from 1 to 10 years. So while EBITDA was just a few hundred thousand, cash generation was almost 10x that at over $2 million. This is important to consider when assessing NameSilo’s ability to service their debt (they have $11 million in debt coming due later this month). Here’s another nugget from the MD&A: “The net rebate for 2019 Q1 has not been received and is expected to be received subsequent to March 31, 2019. These rebates are credits offered by registries for the domain registrations and renewals and relate to future performance obligations of the Company. As such, they are amortized over life of the domain names and offset against the cost of sales.” What this means is Q1 margins and profits should have been even higher and we’ll see the rebate pick up in Q2. Now going forward, we’re laser-focused on 2 key metrics: - Domain name growth: this is the leading indicator that drives value in this business. Each month, NameSilo ranks among the Top 3 fastest growing registrars in the world. We’ll want to see that continue – and hopefully, see URL land the #1 spot this year.
- Ancillary services adoption: these value-added services, like email and hosting, just launched at the end of April. These offerings are standard in the industry because they carry margins many times higher than domain name sales – from 45% for hosting up to 90+% for email. We’ll continue to watch up-take which could drive EBITDA higher with any success.
Bottom Line: As one of the fastest growing companies in a rapidly consolidating industry, we’re comfortable holding NameSilo as one of our largest positions and looking to add on weakness.
RIWI Corp (RIW:CSE) |
| | Our newest position, RIWI Corp (RIW:CSE / RWCRF:PINK), reported their Q1 2019 results back in May. RIWI, you’ll recall, leverages a proprietary web-based survey platform to gather data, track global trends, and deliver predictive analytics to clients. Q2 revenues were $674,000, up 89% from $356,000 in Q1 last year. The company kept expense growth flat and delivered another profitable quarter with $236,000 in net income. As we covered in our last dispatch on RIWI, we were encouraged to see: - 3 consecutive quarters of growth and profitability
- Renewed bullish outlook
- Potential bonus from the US government shutdown which could push revenue from Q1 to later this year
Contracts wins are what drives this business – and they’re biggest catalysts we look for. Fortunately, just this week we got a US$780,000 contract expansion from a G7 agency. Bottom Line: We continue to see big potential in this company and will look to add to our positions when we see favorable prices and liquidity.
Xebec Adsorption (XBC.V) |
| | Another of our new positions, Xebec Adsorption (XBC.V / XEBEF:PINK) came out with market-moving financials. XBC, you’ll recall, provides gas generation, purification and filtration solutions for the industrial and renewable energy markets. Their solutions allow customers to meet regulatory requirements and join the global effort to reduce carbon emissions. This quarter was a breakout for XBC: - Q1 revenues up 206% year-over-year to $9.8 million from $3.2 million last year
- Gross margins increased to 34% from 24% in Q1 last year
- EBITDA swung to positive $1.1 million from a $0.9 million loss last year
- Healthy backlog of $71.9M
For years, CEO Kurt Sorschak told the street a wave of renewable energy investment was coming – and that his company was uniquely positioned to capture it. But no one listened and the stock languished. He caught our ear though and we started a position around $0.60 last year. Now since then, XBC has proven 1) they can land big projects and 2) they can execute on this growing book of business, translating bookings to revenues and profits. Bottom Line: This is a company at a clear inflection point. With an optimistic outlook and a $10 million bought deal financing to support growth, the future looks bright for XBC. We’re holding here and will look to add on weakness.
Viemed (VMD.TO) |
| | Viemed (VMD.TO / VIEMF:PINK) announced their Q1 results in early May. VMD, you’ll recall, provides in-home respiratory equipment (ventilators) and services to patients with COPD. These patients are end-of-life, and VMD’s services help them live more comfortably – and longer. Viemed delivered Q1 2019 revenues of $20.4M and EBITDA of $4.8M. That translates to revenue growth of 45% year-over-year and EBITDA growth of 32%. Sequentially, revenues grew 11% over Q4 18. The market cheered the strong results – along with the equally strong guidance. VMD now expects Q2 revenues of $22.2 - $22.8M and higher margins next quarter. At the mid-point, that’s 45% growth year-over-year and a 10% increase sequentially. Bottom Line: We first purchased shares back in early 2018 at $2.29 after they were spun out of Patient Home Monitoring. Once on their own, they showed the market what they could do. And these guys just keep executing – delivering solid growth and profitability and opportunistically buying back shares. We continue to hold as this team executes quarter-after-quarter.
Hamilton Thorne (HTL.V) |
| | Hamilton Thorne (HTL.V / HTLZF:PINK) announced Q1 results in mid-May. HTL, you’ll recall, makes equipment and consumables for the in-vitro fertilization (IVF) industry. IVF is the miracle science that allows fertility-challenged couples to have kids. It was another set of solid financials: - Q1 revenues grew 7% to $7.6 million (up 13% in “constant currency”)
- EBITDA hit $1.5 million (up 1% y/y, +4% in constant currency).
- Operating cash flow of $1.5 million, up 94% year-over-year.
Here were CEO David Wolf’s comments on the results: “This was a strong start to the year for Hamilton Thorne,” stated David Wolf, President and Chief Executive Officer. “We made substantial progress on several of our business goals, including booking our first two large lab buildouts in the US and substantially increasing cell culture media sales in our established markets worldwide. We also had strong growth in our image analysis product line, our branded pipettes, and our toxicology testing consumables. Sales of our laser products declined in the first quarter, partially as a result of the introduction of our next generation LYKOS DTSTM product.” Remember lasers are HTL’s largest business line – and these are big ticket items (up to $50,000 per system). We suspect laser sales weighed on results and dragged down organic growth this quarter. The good news is growth should accelerate as customers adopt the next-gen systems. And beyond that, HTL is making progress growing their consumables business with products like cell culture media. Progress here will make sales less “lumpy” going forward and should support a higher valuation multiple. So while organic growth may have been light this quarter, remember this is a management team with a proven ability to drive value through acquisitions – both small and large. And with $14.4 million in dry powder on the balance sheet, we could see another transformative acquisition later this year. That’s a major catalyst we’ll be watching for. Bottom Line: We continue to see HTL trading at a fair price for a quality business and top-notch management team. We continue to hold a small position – not cheap enough to buy more, but no signals to sell either except to free up cash for better risk/reward opportunities.
Namsys (CTZ.V) |
| | Namsys (CTZ.V / NMYSF:PINK) reported fiscal Q1 results at the end of March. Namsys, you’ll recall, sells currency tracking software. Their software powers “smart safes,” where physical currency can be deposited and instantly tracked and transferred digitally. Q1 revenues were $902,000, up 12% year-over-year. Operating profits were $404,000, up 20% year-over-year. Namsys remains almost crazy profitable with a 45% operating margin. Once again, we have a positive outlook from management. Here’s CEO Barry Sparks on the results: “The Management challenge for the Namsys Team continues to be growing distribution. Management are working diligently to assist existing distributors expand the use of our products in their networks and at the same time initiating new distributors, offering our products through their networks. New Cirreon applications for broadly based financial institution activities are in the process of being rolled out by our distributors. The addition of these products will be reflected in future quarterly results. Based upon the success in the marketplace of the Cirreon products in addition to a satisfied base of CC32 licence holders, it remains our belief that the Company will continue to make strides in achieving greater revenue and higher profits in 2019 and beyond.” This company keeps chugging along, riding the wave of cash storage digitization with their niche offering:
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| | Bottom Line: Cash machines that dominate a niche make our favorite investments. We think we’ve found a great little undiscovered company here with CTZ and we’re happy to hold this as a “coffee can stock.” We also believe some small institutional players are beginning to build positions in the stock and that it could get re-rated higher quickly.
Lite Access (LTE) |
| | Lite Access Technologies (LTE.V / LTCCF:PINK) announced fiscal Q2 results just this week. LTE, you’ll recall, leverages innovative fiber installation technology to lay fiber-optic cable cheaper and faster than conventional methods. Here were the headline numbers: - Q2 2019 revenue up 86% to $2.8 million, compared to $1.5 million for Q2 2018
- Gross margins of 22% compared to -51% in Q2 2018
- EBITDA of $(713,000) compared to ($1,727,000) in the year-ago period
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| | Revenues declined 60% sequentially. EBITDA swung from positive to negative. The only silver lining is gross margins stayed at decent levels and the EBITDA loss was far less than we saw in 2018 when revenues were back at these levels. Operational discipline has helped even as revenue growth continues to disappoint. You’ll remember last quarter when LTE released seemingly blowout results, the stock barely moved. Here’s what we said about that in our last update: “Our guess is the market wants to see another quarter to confirm this wasn’t an outlier. And we know Gigaclear, who accounts for nearly 50% of LTE’s revenues, has had organizational issues which has delayed LTE’s ability to receive new work. So while Q1 had the benefit at operating near full ramp, we expect Q2 will see headwinds.” The market appears to have got this one right. Both Western Canada (which had been a pleasant surprise up until now) and the UK both took a major dive this quarter, which management attributes to: “temporarily reduced works from customers and weather-related challenges during the winter period.” Bottom Line: LTE touts a “dual-market” strategy – but they MUST show the market they can keep BOTH markets healthy and growing. And for the UK, that means diversifying away from Gigaclear with at least one other major contract. Until that happens, we’re staying away from the company even at depressed prices.
Pioneering Technology (PTE.V) |
| | Revenues declined 60% sequentially. EBITDA swung from positive to negative. The only silver lining is gross margins stayed at decent levels and the EBITDA loss was far less than we saw in 2018 when revenues were back at these levels. Operational discipline has helped even as revenue growth continues to disappoint. You’ll remember last quarter when LTE released seemingly blowout results, the stock barely moved. Here’s what we said about that in our last update: “Our guess is the market wants to see another quarter to confirm this wasn’t an outlier. And we know Gigaclear, who accounts for nearly 50% of LTE’s revenues, has had organizational issues which has delayed LTE’s ability to receive new work. So while Q1 had the benefit at operating near full ramp, we expect Q2 will see headwinds.” The market appears to have got this one right. Both Western Canada (which had been a pleasant surprise up until now) and the UK both took a major dive this quarter, which management attributes to: “temporarily reduced works from customers and weather-related challenges during the winter period.” Bottom Line: LTE touts a “dual-market” strategy – but they MUST show the market they can keep BOTH markets healthy and growing. And for the UK, that means diversifying away from Gigaclear with at least one other major contract. Until that happens, we’re staying away from the company even at depressed prices.
Pioneering Technology (PTE.V) |
| | It now looks like PTE was a “one-hit wonder” after landing the large hotel chain which drove massive growth a little over a year ago. PTE has been unable to secure other large accounts or capitalize on new regulations which have mandated fire-prevention technology in all new stoves. And after Pioneering terminated 3 executives earlier this year caught in a scheme to steal the company’s customers, it looks like that could have been merely a distraction rather than the root cause of PTE’s challenges. Bottom Line: As we said in our last update on PTE, we’re watching for either a rebound in financial performance or an opportunity to exit our position at acceptable prices. But to be honest, the latter is looking like a more likely scenario at this point. |
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Wrap up Phew, that’s it for today. Over the next month, we are expecting results from a few other key positions – most notably, IPA. We’ll be back for the play-by-play once those numbers are released. To your wealth, Paul & Brandon Disclosure: Paul, Brandon, and Keith are long AEP.V, RW.V, URL:CSE, HTL.V, CTZ.V, LTE.V, XBC.V, RIW:CSE, VMD.TO, and PTE.V |
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