Titan released Q1 financials on January 20th, 2021, and despite being fairly unremarkable, the shares hit a 52 week high of $0.54 on the same day. Titan now appears to have exited “the basement”, and even though the energy markets aren’t exactly strong, Titan shares have seen an increase in trading volume over the last month. While Titan is definitely not as inexpensive as it was a month ago, we believe it should still trade beyond these levels, and with that in mind, we take a look at the Q1 results using our usual green, amber, and red format to highlight Titans bullish, neutral, and bearish points.

We have liftoff…. In our December update, we indicated that the chart was improving, and it has continued to do so. From the time of writing our December update, Titan has managed to rally another 25%, some of which can likely be attributed to general market optimism. When we summarized our December update, we also suggested that the “low hanging fruit” was in the $0.55 range, and recently (January 20th), Titan hit a 52 week high of $0.54. So, from a technical perspective, with the shorter term MAVGs having crossed over on reasonable volume, we are no longer plumbing the depths. Folks that favor the technical over the fundamental will now be looking more closely at Titan, as it will have provided the necessary validation for them to move money off the sidelines.

The quarter was bad. The balance sheet hardly changed. Make no mistake, the quarter was still ugly, as any improvements in the energy sector have not yet translated through to companies like Titan. However, if one looks at the balance sheet, you have to squint hard to see how this quarter impacted it. The short story is that there is virtually no change in the balance sheet. Cash holding are actually up, total assets have decreased by $286K, total liabilities have also decreased by $143K, and net tangible equity (excluding the value of intangibles) decreased by about $72K, which suggests an actual per share reduction in book value of less than $0.01/share. Tangible book value was $0.516/share, and as of November 30th it’s $0.513/share – not exactly the stuff of materiality. There isn’t much more to say, as the balance sheet continues to provide a solid foundation for Titan, and buyers of Titan today are still able to purchase the company at a discount to tangible book value, and the company is still sitting on $0.33/share in cash.

The income statement is much worse on a YoY basis. As mentioned previously, the quarter was ugly, and the numbers bear this out. Whereas a “normal” top line (in an already depressed market) would be about $1.4 MM, Q1 2021 was down about 40% from these levels, at $850K. These results, while clearly “bad”, are not surprising given that the energy sector is only recently seeing slow improvement. These results were also buffered due Titans participation in the CEWS program, which provided approximately $90K of relief. In any case, the income statement does not raise any eyebrows, and at a net loss of $142K ($0.005/share), the results, while poor, are well within expectations.

Cash flow from operations is still negative. Cash flow is negative both before (-182K) and after changes in working capital (-34K), but again, this is within expectations, given the current business environment. Overall, cash flow is actually positive, as Titan finance income totally offsets negative cash flows from operations. Perhaps of more interest is the fact that if Titan did not receive the ~ $90K CEWS benefit, finance income would still have offset the negative cash flows from operations, and Titan would still have increased its cash balance. Overall, the cash flow statement is solid, given the poor operating environment, and the fact that the company managed to be cash flow positive is a testament to their planning earlier in this commodity cycle.

Insider ownership is unchanged. As of January 21, 2021, the “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07” is still the largest shareholder, with 10.5 MM shares, or about 37%. Additionally, a review of SEDI information indicates that there has been no insider selling.

News continues to be sparse. As indicated in prior posts, the company has by no means “inflated” the share price via press releases, as given the thin following of the company, it’s likely a misplaced priority. While the shares have rallied (along with the rest of the market), we would hardly say the shares have been “talked up”. This means the shares, although more expensive today, are still on the cheaper side of things – for now.

We continue to hold Titan, and increased our position. In our fiscal year up update, we suggested that the price could see more weakness at the end of December due to tax loss selling, and while the shares got as low as $0.36, the overall trend was “onward and upward”. We managed to increase our position, but not quite as cheaply as we had hoped. In any case, we continue to hold a larger Titan position, as we believe that while the energy sector slowly improves, Titan is one of the best capitalized companies within the sector. Realistically, not much has changed since our December update, and for investors holding (or looking at purchasing) Titan, we would say this:

  • The chart is definitely looking better: From a technical perspective, the market is suggesting that better days are ahead. Investors who tend to allocate capital based on technical factors will likely look at Titan more favorably, which may explain the increase in volume and liquidity over the last month.
  • The commodity price is improving: The overall consensus is that demand (and prices) are slowly improving. Any improvement in the overall global economy will translate into increased activity levels in the energy sector, which will filter down to companies like Titan.
  • The number of active rigs continues to increase…slowly. Related to the above, the Canadian rig count continues to slowly increase, which also suggests business should improve for Titan.
  • Titans balance sheet continues to be solid: As stated before, where other companies are folding up or scrambling to stay afloat, Titan remains comfortably above water.
  • Titan continues the work to diversify their revenue stream: At this time, the bulk of Titans revenues are still driven by energy – but they realize this dependence can hurt, and continue to investigate other sectors where fluid hauling is commonplace.
  • The low hanging fruit may be gone soon: In our December update, we suggested that a simple reversion to more a more normalized price to book ratio would bring the shares up around the $0.55 range, which occurred on January 20th. Based on the solid balance sheet and technical strength, we expect the shares to continue their ascent.

Questions or comments ? Feel free to send them to mark@grey-swan.com. 

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