On January 28th, 2021, Armada released their Q2 financials. While earnings and cash flow were positive, the numbers definitely weren’t as strong as Q1. That being said, while Q2 results didn’t replicate Q1, Armada is still a micro-cap with potential. We still hold a fairly large position in Armada, and with that in mind, we walk through their Q2 number using our usual bullish, neutral, and bearish format.

The chart is still showing strength. On an overall basis, Armada shares continue to exhibit strength. Volume in and around the Q2 release was particularly strong, with Armada trading approximately 785,000 shares from January 28th to the end of February 1st, 2021. To put this into context, for the entire 2020 fiscal year (June 01 2019 – May 31 2020), Armada traded approximately 2.5 MM shares. In essence, about 30% of the total volume of fiscal 2020 changed hands in the three days around the Q2 release. While most of the market is still relatively unaware of Armada, someone was interested, and voted with their wallet(s) leading up to the Q2 release.

The balance sheet remains solid. The beauty of small companies is that the financial statements usually aren’t trying to throw any curveballs, which is true for Armada. The balance sheet has hardly changed when comparing Q2 vs Q1. Cash is up on a quarterly basis, and current assets are down by an immaterial amount. When adjusted for intangibles, total assets are up by ~ $140K when compared to Q1, and on the liability side, total liabilities are up on a quarterly basis by ~ $126K, all of which is a function of changes in lease liabilities. Other than that, the balance sheet has hardly moved, and on a YoY basis, there are no concerns. The company still has a very strong current ratio, and total liabilities are small when one considers they could almost be fully paid out by cash on hand.

Revenues and earnings are flat. While we were hoping for a repeat of Q1, it was not to be. Revenues and earnings were down on a quarterly basis, but both EBITDA and net earnings are improved when viewed on a YoY basis. It should be noted that these numbers are still reflective of a Canadian economy that is still in the midst of dealing with COVID induced lockdowns, so one might argue that these numbers are surprisingly strong. In any case, while the income statement doesn’t present any red flags, it is arguably neutral at this point. Given the very strong Q1 showing, Armada still has the remainder of the year left, and if even one of those quarters comes close to a repeat of Q1, it will significantly impact the full year results of Armada.

Cash flow is still solid, although not as strong as Q1. For whatever reason, it seems that the Armada cash flow statement requires a bit more detective work, as the value labelled as “Cash provided (used in) by operating activities” is actually the total change in cash flows due to working capital changes. The correct (after working capital changes) cash flow is shown below, and for both the 3 month and 6 month period, cash flow is solid at $0.01/share for 3 months and $0.02/share for 6 months. This suggests that full year cash flow could be somewhere between $0.02/share (if the remainder of the year is horrible) and $0.04/share, if Armada can produce similar 6 month results. Either way, this works out to a current cash flow yield of somewhere between 13% and 27%, using the current price of $0.15. Given that the Armada business model isn’t particularly capital intensive, this means the cash balance just keeps growing, which is fine by us.

Insiders continue to hold, and some have purchased. Insider holdings are essentially unchanged since our December 2020 post, with the three largest insiders (Matthews, Timoteo, and Oszlak) holding approximately 11.7 MM shares in aggregate. Additionally, as of early February, one insider (Rob Montemarano) made a relatively small purchase of ~ 30,000 shares at $0.135.

While insider holdings don’t occupy the same amount of “page space” in our discussions, they are key, in that significant insider ownership means that management has skin in the game. In turn, if they have skin in the game, they are less likely to engage in poor decision making – which is an excellent segue to perhaps the most pressing question: what is the deal with the dividend ?

Armada has instituted an annual dividend. The skeptics who are reading this are saying “that heading should be amber, or perhaps even red“, and the optimists are saying “that heading is just right”. As with all things, it’s always good to have an independent opinion. We think that the dividend policy is a positive development for Armada, and will walk through the reasons why.

First off, let’s unpack the language of the press release as it relates to the dividend:

An investor reading this hears two messages, specifically that “…Armada plans on upholding this annual dividend…”, and then “…..investors are cautioned that the declaration and payment of dividends is at the discretion of the board of directors of the company and any future declaration of dividends will depend on the company’s financial results…”

These two messages seem to run counter to one another, but the truth is that this language isn’t contradicting itself. The first part is very positive, as the explicit mention of “upholding this annual dividend” is there with purpose. If the intent was to pay a one time special dividend, the company would have stated that – very clearly. Additionally, the last part of the message (which seems to cast doubt) also sounds more ominous than it is. This language is typical, and the financial world is full of it. If you need confirmation thereof, just look at any quarterly press release by a dividend stalwart such as BCE. On any quarterly press release, a company such as BCE will likely have a full page of “Material risks”, the point of which is to communicate that (a) the future is uncertain, and (b) if the future is uncertain, dividends might also be uncertain. This is not to say that BCE is a “bad” company, but simply to demonstrate that statements such as this are everywhere. If an investor were to take each one of these as a statement of “material risk”, nobody would invest – ever.

The second thing about the dividend announcement is the fact that Armada has both been creating cash flow and is sitting on cash. With $669K in cash, the company could pay the dividend ($176K), pay off all current liabilities ($477K) and still have $16K of cash left over – even if not another dime of cash flowed in during the next 6 months. Folks, there isn’t a liquidity crisis here.

The last thing that gives us comfort is the fact that insiders own so much of the company, and not options, actual common shares. With 17.67 MM shares outstanding, insiders own 11.7 MM shares, or about 66%. Put yourself in their shoes and pretend that you and your partners own the majority stake in a company, which appears to be doing better. Would you suddenly embark on a wild decision making spree without sitting down and discussing business prospects at length ? While this isn’t impossible, most companies are not in the practice of shooting themselves in the foot, particularly if the insiders own so much and have been working with the company for so long.

Despite the dividend announcement, Armada remains relatively unknown. While there was a flurry of trading in the few days preceding the Q2 press release, recent volumes suggest that the broader market is still oblivious of the Armada story. We would be very surprised if any analyst types are following Armada, and we would suggest that the company remains too small for institutions, as they would regard it as “too risky” due to its size. What this means is that the price may yet flirt with prices at the lower bounds ($0.12 – $0.13), which may yet provide a “cheaper” entry for interested small investors.

While the price has moved up considerably from former lows, we believe Armada still has room to move upwards. It’s true that the “cheap prices” may be gone, but financial metrics still point to opportunity. Using Q2 numbers as a proxy for “go forward” results, the numbers suggest the following:

  • Book value: The average book value multiple for Armada (2010 – 2020) has been 3x, and this should be viewed in the context of a company that may not have been as focused as it is today. Currently, at todays price ($0.15), Armada is trading at ~ 2.9x book value, so it’s no longer trading below historic lows. With that in mind, given that Armada is not a “hard asset ” company, we would defer to other valuation metrics rather than using book value in isolation.
  • PE multiple: Armada has already earned $233K up to Q2. If it can get another $120K under its belt over the next two quarters, it will earn a total of (approximately) $353K for the full year, or $0.02/share. A goal of $120K over the next 6 months isn’t really that lofty, so we are suggesting this should be attainable. If Armada does indeed manage to achieve this target, it would be trading at 7.5x earnings, well under the 10x-11x market average.
  • EV/EBITDA multiple: If one uses the same assumption that Armada can earn another $120K in the next 6 months, it suggests that total EBITDA for the year could land around $425K, given that Armada has already earned $270K of EBITDA up to Q2. Since Armada is sitting on a relatively large pile of cash ($669K), their EV today is just under $2.0 MM, suggesting an EV/EBITDA multiple of 4.7x. Traditionally, 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, meaning that Armada still falls under its historical EV/EBITDA multiple.
  • Cash flow yield: As mentioned previously, we expect that Armada should be able to create between $0.02/share and $0.04/share of cash flow for the full year. Based on the current price of $0.15, this implies a still healthy cash flow yield between 13% and 26%.

The price of Armada is higher, but is well off it’s 52 week high.   In early January, Armada got as high as $0.20, so there is still upside. For any investors contemplating a purchase of Armada, we would keep the following in mind:

  • Trading has still been choppy: While there was a flurry of activity around the Q2 press release, recent trading has been at lower volumes. We would not make large purchases (or sales) “at market”, as these have the potential to significantly move the price.
  • The price will likely weaken after the dividend record date: We would not be surprised to see selling after April 30th 2021, as some investors will seek to crystallize any gains, and will already have qualified for the dividend.
  • The dividend does not pose a risk to solvency: As mentioned previously, unless an unforeseen catastrophe occurs, the implementation of the dividend does not imply solvency risk.
  • The book launch may yet result in increased revenues: We addressed the impact of the Armada e-book in our prior post, and given the very small amount of shares outstanding, incremental revenues from the book could provide a significant boost.
  • The dividend is a vote of confidence by management: Generally, companies initiate dividends when they are confident about the future. As stated previously, given the very large insider holdings, we find it unlikely that Armada would make a decision like this unless they have put significant thought into it.

We are long on Armada, with an average purchase price of ~ $0.115 CAD, and will continue to purchase at opportunistic prices. Readers with questions or comments can direct them to mark@grey-swan.com.

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