2018 in review….

Given that we are closing in on the end of the year, I thought I would publish a quick recap on those positions that I previously wrote about, namely:

  • Pioneering Technologies
  • Titan Logix
  • Reliq Health Technologies
  • Total Telcom

Unfortunately, like most of the Canadian small cap market, all of these are either in the toilet or treading water. However, each of these has its own particular story. Without further ado, I’ll launch into it….

 

PTE logo

Pioneering has been perhaps the biggest disappointment of 2018, as not only did it fail to meet revenue targets, it’s share price also cratered catastrophically. As of today (December 12th 2018), Pioneering is trading at $0.10, roughly a  90% drop from its price back in late 2017. The short & not-so-sweet reason for this skid is “over promise and under deliver”. Given the attention and buzz that was created around Pioneering in 2016 and 2017, investor expectations became inflated, and when increased sales didn’t show up, the bottom dropped out of the share price.

For those of you that have been following this story, this is all old news. The real question is “what now” ? Now that the market cap is a shadow of it’s former self, is this company on the scrap heap, or does it have a future ?

Clearly, if I knew the answer to this, I’d already be on my island somewhere. That being said, we can take a look at “what is” to determine “what might be”:

  • The balance sheet (as of June 2018) remains debt free, with $5.7 MM of cash and short term investments.
  • Assuming that sales are still slow to materialize, and cash is still being burned up at the same rate, PTE could be consuming between $225,000 and $360,000 per month, or cash burn of $1.575 MM to $2.52 MM for the 7 months from July – Dec 2018.
  • If this is indeed occurring, then cash and short term investments, as of December 2018,  could be as low as $3.2 MM to $4.1 MM.
  • This in turn means that net equity per share (using the fully diluted share count) could be as low as $0.13 to $0.15 per share, after adjusting for cash consumed.
  • If one eliminates all long term assets, then the Net-Net book value per share (using the fully diluted share count) falls between $0.11 and $0.12 per share.
  • Lastly, if one adjusts for potential cash consumed, the adjusted Enterprise value (using the fully diluted share count)  is between $2.35 MM and $3.25 MM.

So, at todays price of $0.10, you are actually buying Pioneering on a “net-net” basis. Is this a good deal ? It depends – if the Pioneering Smartburner is no longer useful, or has become obsolete, then the value of the company is questionable no matter how low the price gets. However, what if sales do (eventually) show up ? Or better yet, what sort of sales have to show up to make a difference ?

If we take a look at the most recent PTE financials (9 months ending June 2018), PTE recorded about $4.5 MM in total costs. Note that we are excluding any gains / losses due to the derivative liability, as this appears to have worked itself off the balance sheet. If we adjust this $4.5 MM for non-cash costs (stock based compensation, amortization and depreciation), it’s reduced to $3.5 MM of cash costs, which suggest that full 12 month costs should land somewhere in the $4.7 MM range, which we will simply round to $5.0 MM. We also know that PTE has managed to maintain gross margins at 50%, so in order to break even on a cash cost basis, PTE needs to see $10 MM in revenue.

Is $10 MM in revenue a pipe dream ? Well, we know that for fiscal 2017, PTE did indeed record $10 MM in revenue at a 50% gross margin, so the answer is “no, it’s not a dream” – they have done it once, and I find it hard to believe that in fiscal 2017 they sold to every possible customer in North America.

Perhaps the better question is why anyone would buy a Smartburner to begin with. Lord knows I wouldn’t – I have a gas stove, and I like instant heat. However, we need to separate the idea of who has the purse strings from what people want. You’ll recall that at some point in your distant past, your parents told you to wear a helmet when you were biking, skiing, or doing most anything that suggested the potential for injury. You, being the disobedient child that you were, likely fought this edict, until such time that your parents reminded you that “while you live in this house, you live by our rules”. They controlled the purse strings, and regardless of your thoughts, you complied. The same is true here – the people that are going to be cooking on a Smartburner sometime in the future won’t be doing so because they want to – they’ll do so because the owner of that home said so.  That owner believes that the “de-risking” of their rental unit is well worth the annoyance of getting used to a Smartburner, as tenants are now less able to burn down the house. With compliant UL858 stoves already in showrooms (I have seen them), the trend for safer coil top stoves is here to stay. Naysayers would suggest that if compliant stoves are on the market, the landlord will just buy one of those. Well, maybe – if you have the nicest landlord in the world. One thing about landlords is they like to control costs. The Association of Home Appliance Manufacturers (AHAM) suggests that a basic coil top stove lasts between 18 and 22 years. If I am a landlord, I’m not shelling out $400 for a new stove if I can make my existing stove (which has another 10 years of life) compliant for half that cost. While you might concede this point, you might also be saying that the vast majority of landlords simply won’t buy a Smartburner, because nobody says they have too – and you are right. Pioneering doesn’t need every coil top stove to be converted, they just need some. To be specific, with over 40 million rental households in the US, they just need a very small slice of some.

So, at the end of the day, I don’t believe Pioneering is heading for bankruptcy. I do believe it was overpromoted (which led to the run to $1.50), but the concept of kitchen fire safety, an aging population, and all those rental households in the US have not gone away. I believe that at the current price of $0.10, PTE may provide some significant upside (assuming sales materialize), and is suitable for very risk tolerant small cap investors. Of course, I may be wrong, and that may cause people to call me various names, some unflattering. That’s ok – I’ve been called many things, and have survived them all. I continue to be long, and have purchased at the current price.

 

Titan Logix

Some of the things I end up going long on gets lots of press – and others don’t. Titan falls into this category, as despite consistent improvement, it keeps skipping along at basically the same price.

Titan year end numbers, released on November 29th, revealed the following:

  • Revenue up 28% vs prior year.
  • Cost of goods down 3% vs prior year.
  • Gross margin up 90% vs prior year.
  • All other cash costs up 8% vs prior year.
  • EBITDA is still negative but is significantly improved at  -$0.256 MM vs -1.11 MM.
  • The company remains debt free.
  • Book value is $0.51/share, and net-net value is $0.35 per share.
  • Cash & short term investments of $8.27 MM, or $0.29 per share.

While it is true that Titan is still EBITDA negative and burned a whopping $500,000 over the course of the year, this has to be viewed in the context of a recovering energy market. As we all know, commodities are cyclical – when prices are lousy, producers stop drilling, consumers keep consuming, and eventually prices start recovering. Around that time, producers decide to start drilling again, but since bringing new production on isn’t like flicking on the light switch, there tends to be a bit of a lag, at which time price really starts recovering – not exactly rocket science.

So Titan is managing to actually increase revenues (and gross margins)  while keeping a lid on G&A costs – all in the context of an energy market that isn’t running on all cylinders. This begs the question – what will things look like once activity starts to pick up even more ?  While I don’t know the answer to that, I do know that Titan remains a low risk play on the energy sector and has significant upside potential. At this point, the market is valuing a debt free company at slightly more than the assets on the balance sheet, suggesting that any future cash flows will be worth the square root of zero – a proposition which I don’t believe. While I don’t know when the market will notice, I’m glad to wait and potentially pick up more as the price drifts through the low ~ $0.50 range.

 

RHT image

I had never actually intended to write about Reliq, but when they released their infamous “we have to restate revenues” press release, they provided a textbook case of a company that I try to avoid like the plague. Overvalued, overhyped, and with a balance sheet and an exploding share count that assault the senses.

To be fair, I should point out that I did indeed own Reliq at one point, as I indicated in my prior post.  However, once the valuation of Reliq started to get beyond what I could understand, I sold for a tidy profit. I will freely admit that the company has never been a favorite of mine, and because of this I cannot profess to have the depth of knowledge that I might have with other positions. That being said, Reliq hasn’t given investors much to be happy about recently, so if you are bullish on Reliq, I’m guessing you’ve done your homework, or you are simply comfortable with the implied risk.

All of that aside, the question as always is “what to do today” ? The share price is obviously much lower, so perhaps this represents a reasonable entry point.

Whenever I’m about to take a position such as this, I try to map out where things are today versus where they might go tomorrow, which is not unlike how I view my position in Pioneering Technologies. For Reliq, I took the time to map out the numbers, as shown below:

Reliq valuation at Dec 14 2018

This table shows us the value (in terms of Market Cap and Enterprise Value, or EV) as of the most recent financials, and what the EV of Reliq might be as of December 31st 2018 assuming a low cash burn rate of $427,000 per month, and what the EV might be assuming a high cash burn rate of $1.03 MM per month. Both of those cash burn rates tie back to the most recent financials, where it indicated that Reliq used $1.28 MM ($427,000 per month)  after changes in working capital, or $3.1 MM ($1.03 MM per month) if you exclude changes in working capital.

Some of you may have noticed that I tend to focus on the EV/EBITDA multiple as a general yardstick for valuing a company, as this metric rolls market cap, debt, and cash into one ball of wax. As investors, we are always on the lookout for value, and a company that has high EBITDA and a low Enterprise Value is a reflection of that.

In the case of Reliq, I have shown what the EV could look like as of December 31st, and what sort of EBITDA an investor needs to expect in order to justify some sort of reasonable valuation. For instance, if you believe that Reliq will continue to burn cash at the “low” rate, then estimated year end EV of $23 MM suggests that you need to see EBITDA (at some future point in time) of $2.3 MM in order to justify a EV/EBITDA multiple of 10x.

What we can see is that Reliq needs to book somewhere between $5.75 MM of EBITDA for less aggressive investors who are willing to pay 4x EBITDA, and $1.77 MM of EBITDA for those investors who are very aggressive and are willing to pay 14x EBITDA.  Which leads us to the question – is this possible ? The short answer is maybe – but I’m not holding my breath.

If one takes a quick look at the Reliq financials going back to the year ending June 2016, you can see two things pretty quickly. First , EBITDA has been negative for every year, and not a “little bit negative”, or “negative and trending up”. It has simply been negative every year, and has gotten worse each year. In fact, EBITDA in this last quarter at -3.1 MM is worse than each of the fiscal years ending June 2016, 2017, and 2018.

Secondly, one can see that the cash in the company coffers has arrived as a result of share issuance. So, if you work for one of the firms that underwrote one or more of those share offerings, I must commend you on a job well done, as you managed to raise no less than $18 MM since 2016.

So, while I generally don’t shy away from speculative companies, I will be keeping my distance from this one till further notice. Perhaps Reliq will turn things around – but they’ve got a deep hole to dig themselves out of before that happens.

 

Total telcom logo

 

Since my initial post on Total (November 02 2018), not much has really changed, so this will be perhaps my shortest “update”. Nonetheless, Total did issue Q1 financials on the 29th of November ,which were largely neutral:

  • Q1 revenues essentially flat at $346K vs $345K prior year .
  • Cost of goods up 12% vs prior year Q1.
  • Gross margins down 5% vs prior year Q1, at 53% vs 58%.
  • All other cash costs down 6% vs prior year Q1.
  • EBITDA down 11% at $72K vs $81K vs prior year
  • Net earnings of $50 K flat vs prior year Q1.
  • The company remains debt free.
  • Cash on hand of $1.4MM, or $0.057 per share.

As the cop on the street would say, “nothing to see here, move on”, which is what I expect most of the market did. However, there are a few points worth noting that are still interesting. Firstly, its only fairly recently that Total has managed to be EBITDA and cash flow positive (Q1 of 2015), and since hitting this milestone, this is the best Q1 TTZ has recorded since then:

TTZ comparative Q1 since 2015.PNG

With the exception of shares outstanding, which have risen by a measly 1% since 2015, every other metric is improved: the cash balance is consistently growing, and EBITDA, cash flow, and earnings are all the highest they have ever been for a Q1. While this doesn’t necessarily predict the future, it sure doesn’t hurt.

Additionally, overall results for Total last year were muted by the fact that they actually lost some customers in the Environmental services sector (in the US). In addition to this, the heater controller segment was impacted by a shortage of vehicle heaters, which dampened their overall sales in this segment. Despite this, Total exited the year with net income of $476K, or EPS of $0.019.

So, while Q1 numbers weren’t blockbuster, they certainly didn’t make us run for the hills either. Based on what we can see today, barring a major catastrophe, it would seem reasonable that Total can at least repeat last years results. If they do manage to do that, then the current price of $0.18 suggests that an investor might see a flat share price or decline to around $0.14. To be fair, Total has traded as low as $0.12 in the last 52 weeks, but it only traded at that level for less than a month. For the vast majority of its “cellar dwelling”, it has tended to trade around $0.14. So, one could see a worst case loss of 33%, or a more likely loss of 22%.

On the other hand, if Total sees expansion in any one of it’s revenue streams, a lot of that incremental revenue flows straight to the bottom line. In my prior post I highlighted how the company now covers all of its costs from its recurring revenue stream, which means that any increases in existing revenue streams (or any new revenue) is “gravy”. To put this in perspective, for the year ended June 2014, Total booked revenues of $765K, whereas for the year ended June 2018 they booked revenues of $1.78 MM – a CAGR of 23%, all while maintaining gross margins of 50% or more. While last years revenue growth was an anemic 2%, Total previously had revenue growth of 6%, 38%, and 54% for the years 2015, 2016, and 2017. The gist of the argument is that it they have managed very significant growth, and I can’t imagine they recently have thrown up their arms and said “that’s good enough”. With management owning almost 30% of the shares, I’m guessing they have a strong interest in growing the company some more.

With this in mind, we continue to hold our position in Total, given that our cost basis is somewhat lower than the current price, and the fact that liquidity is sometimes limited. Assuming that Total does manage to garner more incremental revenues, we believe this could provide upside of 50% or more.

As always, these are only my thoughts & opinions. If you have questions or comments, I can be reached at greyswan2@gmail.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 greyswan2@gmail.com.