Armada Data Corporation.

In the universe of “small companies”, Armada may take the crown for being the smallest market cap company covered here. With only 17.67 MM shares outstanding, and a (current) market price of $0.13, the market cap of just over $2.0 MM is by all measures small, if not microscopic. But as the saying goes, good things come in small packages, and the current Q1 financials for Armada suggest that while they are indeed small, they are off to a blistering start to fiscal 2021.

Who is Armada ? Armada, which is based in Mississauga Ontario, has been around as a public company since 1999, but only started reporting as Armada data (and using the name) since 2004. In its current form, the company website states that the company  “specializes in the collection, re-packaging and distribution of Canadian new car pricing data.“, so it truly is a data only company – but that wasn’t always the case. At one point, Armada had a significant interest in the operations of “Mr. Beer”, which was referred to as their “bottle brew division”. Needless to say, while the combination of these two was surely interesting, there were little or no synergies to be had by these two lines of business. The Mr. Beer division was shut down in January of 2015, and Armada embarked on a more focused business plan. As of December of 2020, they have a singular focus, the automotive data market.

The Armada chart is waking up. We have been long Armada shares since early 2018, with an initial purchase around $0.15, and eventually averaging down to around $0.115, which means we were “early to the party”. From 2018 through to most of 2020, the Armada investment was dead money. However, solid Q1 financials have brought some life back to the chart. The shares have come off their lows, and even at prices around $0.12 – $0.13, Armada shares are still fundamentally cheap.

The balance sheet is cash rich and debt free. Readers who visit often may say this is an oft repeated line, but that’s the way we like our companies. Armada is no different – cash is up both on a YoY and 3 month basis, as are current assets and total assets. While there is some Goodwill and Intangibles on the balance sheet, there hasn’t been “inflation” of these assets, and they comprise a fairly small part ( ~ 15%) of the total asset base. Additionally, both short term and total liabilities have fallen, and there is no long term debt to worry about. For those looking for “book value”, it should be noted that Armada isn’t a “deep value” play when viewed in a book value context, and this isn’t what we are looking for. As a “data services” company, the value of Armada lies in the ability to leverage soft assets, not in the “bedrock” value of hard assets. In any case, the balance sheet suggests that Armada won’t be faced with undue financial pressure any time soon. The fact that the retained earnings deficit continues to shrink is also good news – which brings us to the Income statement.

Revenues and earnings are up significantly. During the prior fiscal year, Armada achieved total revenues of $3.28 MM, so the fact that they hit over $1.0 MM in one quarter is significant. While costs have come up along with revenues, the growth in revenues YoY of + 29% outweighs the +19% growth in total costs, which means earnings are still up 130% YoY. It might be argued that some of this revenue may be attributable to pent up demand after a prolonged COVID lockdown, but even if that is the case, if Armada can bring in a grand total of $127,000 of net earnings for the remainder of the year, it will achieve total net income (for the fiscal year) of $353,000, or $0.02/share – which would be its highest net income recorded going back as far as 2011. In turn, if it achieves $0.02/share in net income, then it suggests an earnings multiple (today) of 6.5x. Essentially, a higher valuation is well within reach. If Armada achieves EPS of $0.02 and the multiple corrects to 10x – 11x, the upside today is still ~ 50%.

Cash flow is solid on all fronts. Despite some hiccups on labelling of the cash flow statement (see below), cash flow is solid both before and after changes in working capital. If one assumes that (a) Armada can repeat this over the next three quarters, and (b) one selects the lower of the two cash flows ($159,562, after changes in working capital), it would bring in $638,000 for the fiscal year, or about $0.036/share. At todays price of $0.12 – $0.13, this implies a very attractive cash flow yield of around 30%.

Insiders have held a significant position since the beginning. Insider holdings that stay consistent over the long haul indicate executives and management are committed to the long term success of the company, as they have maintained their “skin in the game”. Armada has a very strong insider following, as the three largest insiders hold approximately 11.74 MM shares, or about 66%.

• James Robert Matthews (CEO) – owns 3.55 MM shares (20%).
• Paul & Daniela Timoteo (former director & spouse) – in aggregate own 6.48 MM shares (37%). It should be noted that Paul Timoteo passed away in 2012, so my assumption is that the shares that were listed under his control (3.0 MM shares) are now controlled by his spouse.
• Eli Oszlak (VP & CTO) – Owns 1.7 MM shares (10%).

With this level of insider holdings, it suggests that there is clear alignment between the management/executives of Armada and the average shareholder.

No analyst coverage and no self promotion. We recognize that this is a two way street, in that attention moves the share price, and lack of attention doesn’t. However, we are approaching this from the lens of someone who might want to accumulate shares of Armada, not someone who already has them. Arguably, there has been an increased amount of attention focused on Armada recently, but this is entirely due to solid financial results. The amount of eyeballs that this company has drawn is still fairly small, so the shares are (at this point) by no means “overhyped”. Given the tiny market cap, we don’t expect any analyst coverage any time soon, so unless something unforeseen draws more eyes to the Armada story, it will continue to trade almost solely on the merits of financial performance.

No share issuance, and it’s unlikely there will be a capital raise. The company has not issued shares since 2013, and we believe it’s highly unlikely that there will be significant dilution any time soon. If the company continues to execute at the same level as its Q1 numbers, then there is no need to raise outside capital.

The product offering might not be “disruptive”, but some of it is very timely. Armada has been involved in the “digital” side of the car business for some time, as the CarCostCanada website has offered pricing information to consumers since 1999. But over the last year, consumer behavior has shifted even more to an online presence, as COVID imposed lockdowns and mandated social distancing has meant that even more consumers have gravitated to digital solutions. On the other side of the coin, dealers who traditionally conducted much of their business face to face are finding a growing volume of requests from consumers are coming via an electronic format – and they need to keep up. Armada issued a press release on October 30th 2020 about their agreement with ETA Response Inc., a technology company that specializes in managing the online relationship between consumers and companies, thereby ensuring that dealers adequately respond to customer requests and concerns. Incremental agreements such as this dovetail nicely with the Armada business model, and are the “right solution at the right time” given how COVID has forced changes in how both consumers and service providers interact.

In summary, the valuation is in a sweet spot – even if Q1 is anomalous. As mentioned previously, at the current price ($0.13), the shares are still inexpensive on several fronts. While Q1 may have benefitted from pent up COVID demand, the impacts of this quarter means that even if other quarters underperform (on a relative basis), the shares are still relatively inexpensive. For the sake of argument, let’s assume that Armada achieves at the following “underwhelming” level, as shown by the table below:

If Armada can achieve revenues over the next three quarters that are 30% lower, and is saddled with a much higher COGS%, it can still achieve EBITDA of just over $400,000 that is within earshot of its highest ever EBITDA ($465,000 in 2011). Additionally, at this muted performance, it would also achieve EPS of $0.02, which would be its best EPS since 2011. At the current price, the only thing Armada needs for a 50% return (from $0.13 to $0.20) is to hit mediocre targets, and a reversion to a market average 10x earnings multiple. Other valuation parameters suggest the same.

• Book value: Using data going back to 2010, Armada has traded at an average of 3x book value. At the current price ($0.13) and a tangible book value of $0.05/share, Armada is trading at 2.5x book value, slightly under its long term average. It should be noted that fiscal 2015 was excluded from this dataset, as Armada tangible equity was slightly negative that year.
• PE multiple: As already indicated, Armada needs to execute at a “mediocre” level, and the PE multiple needs to normalize to a market average 10x, which would provide 50% upside from todays price.
• EV/EBITDA multiple: Since 2010, the typical EV/EBITDA multiple for Armada has ranged from a low of 1.95x to a high of 9.6x, with the average falling around 6x. The current EV/EBITDA multiple, again assuming mediocre results for the remaining quarters, is 4.4x.
• Cash flow yield: Lastly, if one uses EBITDA as a proxy for cash flow, and Armada executes at the levels shown above, it will achieve $0.023/share in cash flow. This suggests a healthy current cash flow yield of 17.5%.

On the other hand, if Armada can execute at levels similar to Q1, then there is much more upside – but that remains to be seen.

At the current price, Armada provide low risk, small cap potential.  The reason investors look to small and micro cap companies is because they provide the potential for non-linear upside. As every small cap investor knows, it is extremely difficult to make the perfect pick with the perfect timing – but sometimes it is possible to make a very good pick which provides the possibility of abnormal (100% or more) upside, an even greater probability of more reasonable (but still attractive) upside (~50%), and a minimal risk of dilution or bankruptcy. With this in mind, the Armada opportunity can be summed up in the following bullet points:

• Trading may still be choppy in the short term: While liquidity has improved, trading will likely be choppy until another decent quarter comes out.
• The chart is looking attractive: From a technical perspective, the price appears to have turned the corner, with all MAVGs exhibiting a tell tale upward move.
• Investors needn’t worry about bankruptcy or dilution risk: Barring a direct hit by an asteroid, it is highly unlikely that bankruptcy/insolvency is an issue, and Armada has not demonstrated a propensity to dilute existing shareholders.
• COVID may be a partial impetus for improving results: The change in consumer behavior due to COVID may have juiced the recent Armada results, and if this is the case, the long term change in consumer behavior may continue to do so.
• As is the case with many small caps, try & bid at the lower end: Trading volume has picked up, but pricing will likely be volatile. Given this situation, one can bid at the lower end of the bid/ask spread rather than hitting the ask right away.
• Patient investors may see the greatest returns: If Armada continues to execute at Q1 levels, then potential EPS could be closer to $0.05/share, which suggests much more upside. If this is the case, then investors will have resist the urge to make the “easy 50%”.

I am long on Armada, with an average purchase price of ~ $0.115 CAD, and will continue to purchase at opportunistic prices.

As always, these are only my thoughts & opinions. If you have questions or comments, I can always be reached at mark@grey-swan.com.