Total Telcom Inc. – update at Q1 2021

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.

Total Telcom Inc. – update at fiscal year end 2020

Total Telcom full year financials were released in late October of 2020, so with that in mind, it’s probably a good time for a quick recap. For readers that are interested in the prior analysis of TTZ, that post can be found here. For those folks in the “speed reading” category, suffice to say that Total, via its wholly owned subsidiary (ROM Communications), is a developer of remote asset monitoring and tracking services throughout North America. Specifically, they specialize in low cost (but high tech) mobile monitoring solutions in extreme conditions. Their involvement in the “Best in the Desert” racing circuit is one of the examples of where Total has created a “tracking solution” for a specific niche of users, who rely on it not only for race tracking, but also for safety. If it ever becomes necessary to find a crashed or stalled vehicle, accuracy is paramount – nobody wants to wait around in the 120 degree desert heat.

Like most companies, Total has taken a “COVID” hit, as businesses in every segment were impacted by either full shutdowns, or at the very least, a slow down in business. So while the year hasn’t been a total write off for Total, suffice to say that hopefully, 2021 will be better. Consistent with prior posts, the usual greenamber and red format is used to indicate areas which are thought to be bullish, neutral, or bearish.

The chart is still flatThe Total chart has been skipping along a bottom for some time. At the current price ($0.11), we view this as an attractive entry point to accumulate shares cheaply. The money will likely be “dead money” for some time, but the chart suggests that unless there is some extreme event that is yet to happen, the current price is probably suggestive of a technical bottom. It is worth noting that while Total did experience a “COVID dip”, it was not as extreme as those of many other companies. As one can see from the chart, there is a lot more potential towards the upside (~ $0.40) versus the downside (~ $0.07). With that thought in mind, that brings us to the financials, which further validate this idea.

Still cash rich, still debt free. Overall cash is essentially unchanged, at $0.057/share, whereas overall assets have increased by approximately $600,000, some of which is due to the change in accounting for leases (IFRS 16) and capitalized Product Development costs. There is a small amount of longer term liabilities now on the balance sheet, but part of this is due to the IFRS 16 change, and a smaller component is a “Canada Emergency Business Account (CEBA) loan”, which bears no interest, and if repaid by December 31 2022, 25% of the face value will be forgiven. Given the non-interest bearing status, the forgiveness clause, and the amount of cash on hand, we have not classified this as “real” long term debt.

In any case, the balance sheet is solid, and depending on how much of a “value investing” purist one is , the book value of Total falls somewhere between $0.07/share (if capitalized Product Development is excluded) and $0.11/share (if it is included). Regardless, the balance sheet confirms that a worst case scenario price is probably in the $0.07 range, barring any unforeseen catastrophes.

In the year of COVID, Revenues and gross margins are up. Given that this occurred in one of the worst years on record (on many counts), this is no small feat. While the increase in revenues (+4.7%) and gross margins (+6.0%) aren’t world beating, they are significant given the backdrop of COVID. In addition to this, it would appear that Total also managed to significantly decrease G&A costs, which is a bit of an illusion. As per the MD&A, this drop in expenses is also the result of the change in accounting for leases, so now costs that were once classified as rent expense are captured in Amortization of right of use asset and Interest on lease liability. In any case, considering the overall business atmosphere during 2020, the income statement outperformed expectations.

Total posted it’s 2nd best year in a decade for cash flow. Regardless of how one defines cash flow, Total did well both before working capital changes ($550,000, or $0.022/share) and after working capital changes ($460,000, or $0.018/share). This is impressive given that this is the 2nd best year for cash flow in over 10 years, and it was achieved while a pandemic was ongoing. At the current price, this suggests that Total is trading around 5x to 6x cash flow, in a year that likely saw compression of overall sales. Like the income statement, the cash flow statement doesn’t raise any red flags.

Insider ownership remains steady. No surprises here. Insider ownership has remained static, with three insiders owning almost 30%.

  • Neil Magrath, CEO: 3.0 MM shares, or 12% of total shares outstanding
  • Scott Allen, CFO: 1.99 MM shares, or 7.9% of total shares outstanding
  • David Hammermeister, Director: 2.46 MM shares, or 9.8% of total shares outstanding

The public relations story remains quiet. Many would argue that this is a bit of a mixed bag, as lack of promotion also means less price movement, which is exactly what we see in the chart. If a potential investor is looking for something that will “take off tomorrow”, then Total is not the place to be – perhaps something like BRTL or PYR offer more “press release” sizzle. Total has traditionally shunned extraneous press, preferring to focus on operations. So, for an investor who is long (such as myself), then one might make the case that lack of promotion has kept the price depressed. On the other hand, if an investor is looking to acquire shares at a reasonable price (also like myself), then this lack of PR is, as Martha Stewart might say, a “good thing”. In the event that sales increase, or an unforeseen catalyst arrives, the current lack of attention will shift quickly, which means that net buying activity would move the shares north – quickly.

The opportunity summarized. Like many of my holdings, Total will require patience, as I tend to favor stories “before they happen” rather than “when they are happening“. If an investor has a longer time horizon, then the opportunity could be summed as follows:

  • The valuation is cheap on many levels. With the exception of tangible book value ($0.07/share), the valuation is still very reasonable. At the current price, Total is trading at 8.5x earnings, 5x – 6x operating cash flow, and currently at an EV/EBITDA ratio of less than 3x. All of these ratios say “inexpensive”.
  • The company has managed to increase sales in a very challenging year. The fact that Total increased revenues and gross margins in 2020 suggests that the full year could have been much better. While there may still be a hangover from 2020, there is also the possibility that 2021 will see pent up demand for products that were not purchased in 2020.
  • There is no insolvency or financing risk. The company is debt free, and has no need for dilute by raising capital, so someone who goes long today isn’t at risk of insolvency or dilution.
  • Significant insider ownership means costs should stay tight. There is little risk that “runaway” costs will eat up cash. Given the significant insider holdings, there is clear alignment between management and shareholders.
  • Double digit revenue growth since 2015. The company has experienced significant revenue growth while maintaining strong gross margins. While they did pull back in 2019, they resumed growth in 2020. If they can continue even modest revenue growth, the market will eventually notice.

I am long on Total (TTZ), and continue to purchase at opportunistic prices. For those that have questions or comments, I can be reached at mark@grey-swan.com.

Total Telcom – a micro-cap opportunity

Rom communication screenshot.PNG

You are probably looking at the above picture, wondering if I’ve gotten confused and started writing about the wrong company. Well, sometimes opportunities aren’t clearly marked like stop signs at an intersection. Total Telcom (TTZ – TSX Venture) is one of those opportunities. The company itself is so small, and so “underpromoted” that I actually couldn’t find a reasonably sized company logo on the web, so I went with the logo of their operating subsidiary. So, if a picture is worth a 1,000 words, this one says one thing – they are worried about getting stuff done and making money, not how shiny their website looks.

Full disclosure – I am long on Total shares: Before discussing the company itself, I believe it’s only fair that you should know that I hold shares of Total. The cynics among you have now made the observation that “this guy is just promoting this thing so he can sell to the sheep”. Without a doubt, this is an endemic problem in the small cap market. However, if we look at a 3 year chart of TTZ, you can see that if I do indeed hold TTZ, I may have bought at prices well below todays price – or well above. The short answer is that while I am indeed long on TTZ, I think there’s more value to be had than the current price today, which is bouncing around $0.15 as you read this.

TTZ 3yr chart at Oct 29 2018.PNG

What does Total Telcom do ? Traditionally, Total specialized in  (and continues to specialize in) two way communication in very harsh & remote environments. We are all very familiar with instantaneous communication in this era, but in some places (the middle of the Atlantic ocean, the Mojave desert – you get my drift), this isn’t the case. If I break my ankle while falling down the stairs in my home, I can reach into my pocket and dial 911, and fairly soon someone will come and get me. On the other hand, if I am on top of some remote mountain and the same happens, things can get ugly quickly. This is where Total comes in.

For those of you that are already back country types, you are probably saying that there are already products and competitors in this market place, and you are right. One name that springs to mind immediately is Garmin. However, Total, has been aware of this for a while, and with this in mind has sought out very specialized niches where it can excel. In 2015, Total started providing communication equipment & services to the Baja racing circuit, and is now entrenched as the provider of communications for those races. Additionally, Total has recently found it’s way into a brand new business line – wireless heater controllers, which are used to remotely control secondary heaters for industrial equipment such as heavy haul trucks. The combination of growth in both of these segments and a pristine balance sheet creates a compelling story – the details of which I’ll now launch into. For those of you that are new here, I use a green, redor amber format to indicate whether a particular factor is good, bad, or neutral. Here we go….

The chart isn’t necessarily screaming “buy me”:  Looking at the 3  year chart (above), you can clearly see that Total has come off a significant high. Normally, I look for what I call a “saucer bottom” which suggests to me that interest is low. In this case, the situation isn’t as clear cut as I might like it to be. However, I believe the fundamental factors that I’ll discuss will provide more impetus for the share price to at least stay flat or move higher, rather than crater catastrophically. In the meantime, I’ll suggest that while the chart isn’t a falling knife, it provides an “ok” signal at best.

No debt & lots of cash.  Not much explanation needed here. Total has about $0.06 per share in cash, no debt to speak of other than normal payables, and is worth about $0.085 per share on a book value basis. While Total would not be considered “deep value”, the balance sheet is pristine and presents no risk of insolvency.

Total yr end 2018 bal sheet

Cash flow positive. Normally, with many of the companies I research, they are either coming out of a prolonged downturn (Titan Logix) or management has stumbled (Pioneering Technologies), which means they are usually burning cash. Not the case here – Total has been cash flow positive for the last 2 years, regardless of whether one looks at cash flow before or after working capital changes. Not only is cash flow positive, it has grown by 44% (cash flow before changes in working capital) or 61% (cash flow after working capital changes), depending on which cash flow metric you prefer.

Total yr end 2018 cashf flow.PNG

Clean earnings. Unlike some companies I have written about, the income statement for Total is dead simple, and does not suggest that anything is particularly funky. The only items of particular interest are the sudden drop in R&D expense, which is explained in the notes to the financial statement, and the anemic revenue growth, which I address later.Total yr end 2018 inc st

In previous years, the R&D expense did not meet the guidelines for capitalization, whereas for 2018  it did. The net effect is a drop in R&D expense and capitalized product development costs appearing on the balance sheet. Some of you may make the astute observation that if one were not to capitalize the R&D costs, it would have been included as an expense, and therefore would have severely impacted earnings. While this is correct, I tend to keep a closer eye on cash flow, which is more representative of business health, as opposed to earnings, which are subject to the occasional “massaging of numbers”. As indicated earlier, despite the cash payment for $312,000 of R&D costs, Total still exited the year with more cash than it started with, despite almost no revenue growth – which brings me to my next point.

Flat revenuesNormally I don’t specifically address revenues, unless I believe there is something of particular interest worth mentioning. In this case, there is, and the way one views it is highly dependent on whether or not you are a “glass half full” kind of person or a “glass half empty” kind of person. Hence the peculiar coloring of this section – half amber, half green.

Revenues grew by a measly 2.2%, which doesn’t exactly create excitement. With that in mind, I took a closer look at the notes to the financials, and came up with a few interesting tidbits. First, the bad news: 

TTZ full yr MDA rev decline

This is analogous to a distance runner beating his prior years time in the Boston Marathon, despite the fact that he or she was hungover and was wearing flip flops. Perhaps it’s not that extreme, but the fact remains that Total exceeded prior years sales and cash flow numbers and kept costs in line, while one major customer basically “went away” and another emerging sector was met with supply constraints beyond their control. So, despite the fact that they were not firing on all cylinders, Total still managed to do better than last year. Now the good news:

TTZ full yr MDA breakeven

The fact that the company is entirely self funding based on recurring revenues means that any incremental revenues from hardware sales (or further growth in existing sectors) filters right down to the bottom line, which is music to a shareholders ears.

So, even though revenue growth is flat, it is still a story that has good news buried in it. I will leave it up to you as to whether this is a good news story, or just a neutral story at best.

High Insider ownership. Three insiders own approximately 29% of the total shares outstanding, as follows:

  • Neil Magrath, CEO:                                  3,045,606 shares, or about 12.2 % 
  • Scott Allen, CFO:                                       1,986,475 shares, or about  7.95%
  • David Hammermeister, Director:         2,259,133 shares, or about 9.05%

Other insiders also have ownership stakes, but these three are the largest, and the fact that the CEO and CFO both own such significant amounts indicates that management is clearly aligned with outside shareholders, so the insider story is clearly a “green light”.

No analyst coverage or institutional ownershipGiven that Total generates enough cash to fund operations, and the fact that management is incredibly quiet, the company is virtually unknown by both investment bankers and the general public, as it hasn’t needed to raise capital. In the interim, this means that the shares shouldn’t be pushed to ridiculous heights anytime soon, nor should there be a mass selloff (see:RHT) if things go sideways. Assuming that Total continues to generate profits, the market will eventually re-price the company given their cash flow generation ability and the cash heavy balance sheet.

No self promotion. Total has issued precious few press releases over the years, and the bulk of them relate to standard news items, such as quarterly earnings. If anything, they could be accused of not promoting the company enough. In any case, lack of self promotion means that the share price hasn’t been artificially propped up by the overly optimistic words of management.

No share buyback – but total shares have been static. If a company is buying back shares, this section would typically get a “green light”, and if a company has seen total shares expand slowly over time, then I might suggest that an “amber light” is more appropriate. In this case, the fact that shares outstanding have increased by only 1% over the last decade suggests to me that Total is keeping a tight lid on things, so this section is green.

Easily understood business. I have to admit that while I could easily understand the value proposition for their two-way communication segment, I was at first a bit unclear about the wireless heater controller segment – I wasn’t quite sure why anyone would want a wireless heater controller, which prompted me to ask some questions.

For those of you that are also wondering exactly why one might want a wireless heater controller, the explanation is pretty simple, and should have been intuitive for me. I live in a part of Canada that gets fairly cold in the winter, so many people end up running their vehicles in order to warm them up before they get on the road. Because they are running the engine, this creates extra emissions, wastes gas, and poses a theft risk. A small secondary heater, equipped with a wireless controller, allows people to warm up a vehicle remotely (whether it’s a semi tractor or a pick up truck) without running the engine,  such that the interior of the vehicle is warm, the windshield is free of frost, the engine oil is warm, emissions are significantly reduced, and money is saved because the engine isn’t burning gas or diesel. Once I heard this, the value proposition became clear. I have gone outside (more than once) in -35 degree weather simply to start a car and scrape the windshield – and it sucks.

Potentially disruptive technologyBoth of the business lines occupy very specific niches, but I’m not sure these are “disruptive technologies”. The products offer significant improvements, but I can’t say that they impact the existing status quo the same way streaming video eventually killed Blockbuster.

Current valuation is attractive.  All of the above factors paint a good picture. However, valuation is usually where the rubber hits the road. At any time of the day, you can go to the market and buy Facebook, Google, and Amazon – all of them very good companies, but also very expensive. While I’m not here to argue the merits of the various FANG stocks, the point is that it’s easy to buy something “good”, it’s not always easy to pay a price that doesn’t break your wallet.

Currently, the price of Total is trending somewhere around $0.14 – $0.17, with recent price action likely falling at the lower end. In order to discuss valuation, we will use an average price of $0.155, and based on the most recent financials, this suggests various valuation metrics:

  • Book value: At a book value of $0.085, this suggests we are trading at 1.8x book value. Not cheap, but not extravagant either.
  • PE multiple: With EPS coming in at $0.019, this suggests a multiple of 8.15x, which I would argue is attractive.
  • EV/EBITDA multiple: Because Total has lots of cash and no debt, their EV/EBITDA multiple is a very attractive 5.1x, given an Enterprise value of $2.36 MM and EBITDA of ~ $461,000.
  • Cash flow yield: Assuming that we use the lower of the two  cash flow values ($592,313, or $0.024/share), this gives us a very respectable cash flow yield of 15.5%.

With the exception of book value, all of these multiples suggest that the current valuation of Total is reasonable, and even better, that reverting to a more average multiple could provide a bump in price.

With that in mind, we took a look at the price of Total during the period from May 29 2018, when 9 month financial were released, to October 24 2018, the day before full year financials were released. We use this period because it (a) provides us with 9 months of financial data, which is the next best thing to a full year, and (b) it eliminates the higher prices of Q1 which would skew the ratios upwards. During this period, Total traded between $0.12 and $0.215. If we apply the average multiples during this period for Book value, PE, EV/EBITDA, and Cash flow yield we get the following:

  • Book value: Applying the average multiple of 2.08x to book value of $0.085 gives us a price of $0.175, a 13% gain over our hypothetical price of $0.155.
  • PE multiple: Applying the average multiple of 12.96x to earnings of  $0.019 gives us a price of $0.245, a gain of 58%.
  • EV/EBITDA multiple: Applying the average EV/EBITDA multiple of 7.83x to EBITDA gives us a price of $0.205, a gain of 32%.
  • Cash flow yield: Applying the average cash flow yield of 11.12% to cash flow of $0.024/share gives us a price of $0.215, a gain of 39%.

So, for those of you that are “short term traders” , there is a potential opportunity as Total reverts back to a more normalized valuation. For others, you might have a longer hold period in mind, which is where I believe the real opportunity is.

The current price isn’t suggesting any growth. Back in Q4 of 2017 and Q1 of 2018, the share price of Total was well beyond where it is today, precisely because of this reason – because too much growth was built into the share price. As such, the share price traded as high as $0.55, only to come back down to earth.

This is not to say that that, in the future, the price could trade beyond these levels. However, at that time, someone decided to “pay early” for significant revenue and earnings growth that has yet to occur. By comparison, todays share price suggests little or no growth. With that in mind, what sort of real revenue growth would be needed to move the share price ? This is where I believe things get interesting.

One of the nice things about a company like Total is their remarkable consistency, which makes it easier to model future outcomes. Consider the following:

  • Revenue growth: From 2015 to 2018, they have managed to double revenue from ~ $800,000 to $1.78 MM today. We forecast various levels of growth from 5% to 35%.
  • Cost of goods: Since 2015, it has remained virtually static, ranging between 40% – 43%. We use an average of 42% for our forecast.
  • G&A: Despite the fact that revenues have doubled, G&A has only grown by about 8% over 2015 levels. We have increased G&A costs by 2.5% for our forecast.
  • R&D:  Because of the capitalization of R&D costs in 2018, this item has seen the most variability. We have used the average of R&D costs from 2015-2018.
  • Amortization: Although it has virtually no effect on the forecasted outcome, we have used the average amortization cost from 2015-2018.
  • Finance income / FX gains (losses): We exclude these, as we are trying to isolate growth in earnings from the core operations.
  • Taxes: Because Total has significant tax pools, earnings are tax exempt.

Using these parameters to forecast what the next fiscal year might look like gives us the following outcomes:

TTZ 2019 growth forecast

The key point to takeaway from all of this is that a significantly higher share price isn’t that difficult to achieve. Currently, the valuation of Total is arguably at the lower end of the spectrum, as it trades at ~ 8.5x earnings. Even with nominal growth in revenues and a more “normalized” earnings multiple, returns on todays share price can exceed 50% or more.  If one is more bullish, and assumes that Total can grow revenues a bit faster, one can see returns well in excess of 100%. On the other hand, if earnings stay flat, then the downside is likely limited to the low teens, given that the company has a hard book value of $0.085, and insolvency (barring an unforeseen disaster) is out of the question.

As I indicated previously, I am already long on Total shares, and have been a recent buyer at these levels.  I believe the risk / reward tradeoff is compelling, and that total returns over the long term could exceed 15%-20% annually. Of course, these are only my thoughts & opinions – if you have questions or comments, I can always be reached at mark@grey-swan.com.