It seems just like yesterday when the fiscal year update for Total was published, and not two weeks later, we get to do it all over again. Such is the life of someone who is a slave to routine – but I digress.

Given that the ink on the full year update has hardly dried, this update will be relatively short. However, as they say, good things come in small packages, and the package of Q1 appears to be just that. Without further ado, we will get right into it. Key sections continue to be highlighted in green, amber, or red to signal issues that are bullish, neutral, or bearish.

The chart still looks flat – depending on the time frame. Trading in Total has been choppy over the last 12 months, and there were times that it could go days without trading at all, but this has changed since the last update. From mid- October onwards, Total has traded approximately 1.6 MM shares. This may not sound like a lot, but to put this into context, over the last 12 months, the entire volume of Total shares that traded was approximately 3.3 MM shares. So, about 50% of the total volume over the last 12 months has been concentrated over the last 60 days. Given that Total is still “unknown” to say the least, this would seem to suggest that those close to the company have been busy. This increase in activity is a good sign, and the price may be at a point where the chart starts looking decidedly different. At this point, the chart is still “skipping along the bottom”, but this could change in the relatively near future.

The balance sheet is boring – but better. Trust me, it is hard to come up with new and novel ways of saying “this balance sheet is essentially risk free”. Nonetheless, despite lacking creativity, it’s nice to see that the balance sheet is solid, and is actually better than it was at the fiscal year end. The cash balance has increased, and there’s no real debt, as the $40,000 COVID loan is both interest free and eligible for partial forgiveness. Simply put, as of September 30th 2020, Total has $3.95 in current assets for every $1.00 of total liabilities. At June 30th, this ratio stood at $3.55 / $1.00. To be blunt, there’s not much to talk about here, other than it’s just better. The main thing worth mentioning is the fact that there’s more cash – which means Total had a profitable quarter.

The company is on track for its 2nd best year in a decade. Revenue is up 16% YoY and COGS (as a % of sales) is unchanged, which means gross margins are also up 16% – you have to like consistency. Other cash costs are essentially flat, which in turn means that EBITDA, at $168,532, is up 25% over the same quarter last year ($134,560). Net earnings are actually a little lower on a YoY basis, but this is almost entirely attributable to movement in foreign exchange. Excluding FX, income from operations is up a solid 28%. All in all, there is nothing to complain about here – the company is starting off fiscal 2021 on solid footing. If Total can continue to execute at approximately the same level, it will be just shy of its best year (2018), when it recorded $476,000 in net income, and would be on track to hit $0.017/share in earnings. At the current price of $0.125, this implies a PE of 7.3, which is still inexpensive, and means there is 35% – 50% upside to a “market average” PE of 10 or 11.

With solid earnings comes solid cash flow. In the movies they say “with great power comes great responsibility”, but it’s kind of hard to insert that line here, so my version will have to do. Whatever the case, the story is the same – nothing earth shattering, just solid execution. Cash flow from operations is essentially the same as last year, due (again) to the the flip-flop of FX – last year was a gain, this year is a loss. Even so, at $160,000 for the quarter, this implies full year operating cash flow of $640,000. Viewed another way, an investor (today) at $0.125/share is getting a return of $0.025/share from operating cash flow, a cash flow yield of 20%. Again, this is if Total can execute at the same level, and doesn’t require an increase in revenues. If the following quarters see increased revenues, then this story will get better.

No changes in insider ownership or significant media releases. Given that there hasn’t been any movement on either of these fronts, we might as well kill two birds with one headline. Insider holdings haven’t changed (details can be found in the prior post), and true to typical form, Total has continued to keep a low profile, with only “bare bones” press releases. On that note, it was interesting to see that the original release of financials (on November 27th 2020) didn’t actually include the financial statements – a bit of an oversight. Someone must have noticed, as full financials appeared on SEDAR on the 30th.

The opportunity is essentially unchanged – with a new twist. Rather than repeat the same key points, interested (or new) readers can visit the prior post. However, there is one change worth mentioning, and that’s the fact that the dust has finally settled on the U.S. Presidential election. While this might seem like a fairly unrelated event, a snippet of the MD&A stands out when it makes the following statement:

A shorter translation might be “The Donald repealed a lot of environmental regulations, and Joe is likely going to bring some of those back”. In short, while this comment has been bouncing around the MD&A for some time (along with other comments about growth in new markets), it was previously discounted given that the political situation in the U.S. was still up in the air. With the dust finally settling on this, it means that a segment of the Total revenue stream that has been in hibernation for a few years is likely to come back.

In closing, Total is on solid footing for fiscal 2021, and if it can simply execute at the same level, the market should eventually re-price it to a more “normalized” valuation ( ~ $0.20). If Total can manage to increase revenues and maintain the existing cost structure, there is the distinct possibility that increased market awareness could push the shares well beyond the $0.20 level, as they traded north of $0.40 in 2017.

As always, for those with questions or comments, I can be reached at mark@grey-swan.com.

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