Total Telcom has been in and out of our Cheapies with a Chance list for several years. We also highlighted it in our Takeover Target lists in December 2022. After further digging we decided now was the right time to take a meaningful position in the company.
In a lot of ways this is the prefect little stock. The company is growing and profitable. Revenues are up over 30% in the last reporting period. The company maintains healthy gross margins (57%) and profit margins (25.5%).
The company, for its size, has a very healthy balance sheet with almost 50% of its market cap in cash and cash equivalents. It has a low share count and founders and insiders own a meaningful stake in the company. In our last call with the CEO and founder Neil Magrath, he stated that his retirement is dependant on the company being successful.
The company is an innovator and has successfully launched several products and is busy developing additional niche products that should help add new revenue streams and additional recurring data revenue. It operates in several niche industries, keeping big competitors away, which allows them to dominate their space and keep higher margins.
The company’s core technology is a platform technology which allows the company to better take advantage of new products and services and allows for stronger recurring data fees. A significant portion of their revenue is recurring in nature and allows for good revenue visibility and business planning. The more hardware they sell the more recurring communication revenue they’ll receive.
On December 15, 2022, the company announced that it had launched a new product for the recreational vehicle market. In the press release the company stated: “Total Telcom Inc.'s wholly owned subsidiary, ROM Communications Inc., has completed the design and development and is currently in production of a purpose-built advanced recreational vehicle (RV) heating/water control system.”
They went on to say: “The controller was developed over the last 18 months and will be phased in starting Jan. 1, 2023. New controller revenues are expected to exceed $1 million annually plus complementary sales of satellite modems and data plans. ROM is currently processing its first order worth $240,000 for immediate delivery.”
TTZ did roughly $2.1 million in sales in the last 12 months and $678,000 in the quarter ending December 31. Adding at least $1 million in revenues or $250,000 per quarter would increase annual sales by at least 50% and quarterly sales to roughly $928,000 if they are correct in their estimates. By our calculations this would result in $3.7 million in sales and about $1.1 million in operating profit or $0.042 per share.
Very few investors have ever heard of Total Telcom. It’s far too small for large or institutional investors. They have terrible investor presence and may have one of the least investor friendly websites I have ever seen. All of which can be easily corrected with a little bit of effort. For now, this is one of our great advantages as buyers.
With almost $2 million in cash, very negligible debt of $40k and Friday’s close of $0.23 we get an enterprise value of about $4 million. Based on my calculations the stock is trading at an estimated 3.6 times next year’s EV/operating earnings. Far too cheap for a company that has growing recurring and platform hardware revenues.
As far as risks go I would think there is the chance that the company doesn’t meet its forecast revenues but that would more negate the upside than bring downside. There is always the risk that their products face new competition but I do think this is somewhat limited because of the niche nature of their markets. I view risks more along the lines of standard business execution risks however the company has managed to achieve profitability every year since 2017 so they clearly know how to make a profit.
I doubt a company like this could be built for anywhere close to the current market cap of only $6 million. But if they can generate the revenues they forecast and can launch additional products as they have been able to do with their recent launches, a company like this could easily warrant a PE of at least 15 times, or $0.63+ on their forecast revenues, and with their valuable core technology, a takeout could come at an even higher price. I feel at current prices we have a fantastic risk/reward scenario with a meaningful margin of safety.
This is a company that I would buy outright if I could get it anywhere near current prices.
To your wealth,
Paul and Trevor
