What are enterprise valuations?

What are enterprise valuations?

 

I recently read a book called 'How to Pick Quality Shares' by Phil Oakley. It was an excellent read. Below is an article he wrote about enterprise values. I got it from this UK site where he discusses much more about researching stocks.

 

 https://www.sharescope.co.uk/philoakley.jsp

 

 

An enterprise value tell you how much a buyer would have to pay to buy a company as a whole, not just the equity part of it. To calculate a company's EV you need the following bits of financial information about a company:

• Its market capitalisation (the market value of its equity) - this is simply the current number of shares in issue multiplied by the current share price.
• Total borrowings - this can be found on a company's balance sheet.
• The total value of cash and cash equivalents. Again this can be found on the balance sheet.
• The value of any preferred equity shares (preference shares). This can be a balance sheet value or a market value of the preference shares traded on a stock exchange.
• The value of any pension fund deficit. These are real, debt-like liabilities that any buyer would have to take on or pay off. Again, this number can be found on a balance sheet.
• Minority interests - the amount of equity that does not belong to the company's shareholders. Minority interests occur when a company owns more than 50% but less than 100% of a business.

EVs can be seen as a total market valuation of a company's assets.

Calculating Booker Group's EV (£m)

 

Here's how Booker Group's EV is calculated.

Mkt Capitalisation (1782.5m x 200p)	£3,565m
Add: Total Borrowings	£0m
Take away: Cash & cash equivalents	-£161m
Add: Preferred Equity	£0m
Add: Pension fund deficit	£47m
Add: Minority interests	£0m
Total Enterprise Value (EV)	£3,451m

Anything added to a company's market capitalisation in the calculation of EV is effectively something that else that has to be bought or a liability that has to be taken on. The cash balance is deducted as it is assumed that the company can use this to pay some of its liabilities. This then lowers the purchase price or EV for a buyer.

How to use EVs

 

The important thing to remember when you are using multiples to look at the value of companies is that the numerators and denominators of them must match up.
So price multiples which concern the equity of a company must be matched with corresponding returns:

PE	Price	EPS (post-tax profit per share)
P/FCF	Price	Free cash flow (for equity)
P/NAV	Price	Book value of equity (net asset value)

The same applies for EV multiples. Because EVs are all about the market values of equity and debt they must also be matched with the corresponding returns: the sales, pre-interest profits and free cash flows that accrue to both lenders and shareholders.
If you don't match up the right numbers then you are effectively comparing apples with oranges. For example price/EBITDA per share or EV/net profit.
Taking this on board, it is possible to calculate the following EV multiples:

• EV/EBITDA
• EV/EBIT
• EV/FCFf
• EV/NOPAT (Debt-adjusted PE)
• EV/Sales
• EV/Capital Employed
• Earnings power value (EPV)/EV
•  

Just as with price multiples, the lower the number, the cheaper the valuation of a business and the cheaper its shares are deemed to be.

As with price multiples, they can be calculated on a trailing/historic basis using reported numbers or on a forecast basis (where forecast values are available). This article uses reported numbers.
Always remember that low valuations can often be a sign of a poor quality business and do not make very good long-term investments. Conversely, higher valuations associated with high quality businesses which have good growth prospects can be very good investments.
Let's take a look at these EV multiples in turn by using them to analyse the value of the UK food retailing sector.

If you are a less-experienced investor, don't worry if you get a bit bogged down. Pick one or two of these ratios and try using them alongside the usual price multiples. It's all about gradually expanding your knowledge and analytical toolkit.

EV/EBITDA

This is by far the most popular and widely used EV multiple.
EBITDA (earnings before interest, tax, depreciation and amortisation) is seen as a proxy for a company's pre-interest, pre-tax gross operating cash flow. It is favoured by some analysts and investors over measures such as the PE ratio because:

• EVs are better than PEs for comparing companies with different amounts of debt and cash. (This argument applies for all EV multiples). EBITDA is a pre-interest figure - unlike EPS - so looks at a number that can be claimed in part by a company's lenders and shareholders.
• Different companies have different depreciation, amortisation and tax - all of which distort EPS numbers. EBITDA gets rid of these distortions.
• Because of the deductions, EPS will be a negative number more often than EBITDA. EV/EBITDA therefore gives some way of valuing a loss-making company and comparing it with others.

Detractors of EV/EBITDA (including me) would make the following points:

• EBITDA is not a reliable measure of a company's operating cash flow. This is especially true for a fast-growing company which requires lots of working capital cash outflows. EBITDA will also not take into account companies making large top up pension deficit payments.
• EBITDA does not take into account the amount of money needed to replace a company's assets. This is especially true for capital intensive sectors such as food retail, pubs, manufacturing and mining where assets need to be replaced (replacement capital expenditure or capex) in order to maintain sales and profits.
• EBITDA also ignores differences in accounting policies such as revenue recognition and the the capitalisation of costs. For example, software companies can choose either to fully expense or to capitalise and amortise development costs. A company capitalising and amortising development costs would have a higher EBITDA than one which fully expensed them against revenues even if they had spent the same amount of cash.

So unless a company has no replacement capex, no tax bill, no pension deficit or no working capital requirements. EBITDA is not a good proxy for cash flow that can be paid to investors which makes EV/EBITDA a poor valuation method in my view.
But this is how it might be interpreted for the UK food retailing sector:
Sainsbury's would be seen as the cheapest company on this measure trading on just 6.2 times its last annual EBITDA with Ocado the most expensive on 25.3 times.
6.2 times is a very low multiple and may be seen as a sign of a very cheap business or one that is facing a number of challenges. 25.3 is expensive and requires many years of strong profits growth to justify it.

EV/EBIT

EBIT (earnings before interest and tax), also known as operating/trading profit, is probably the best measure of profits for a company as a whole. It is subject to many of the same criticisms as EBITDA above but at least a deduction for the replacement of fixed assets in the form of depreciation has been made.

A thorough analyst or investor will spend some time looking at the quality of a company's accounting on issues such as working capital, depreciation, pension funds and revenue and cost recognition. This requires quite advanced financial analysis but if the analyst is satisfied that there is nothing dodgy going on then EV/EBIT can be a reasonable basis for valuing a company in steady state (ignoring the costs of growing the business)

Again low EV/EBIT numbers can be seen as a sign of cheapness and vice versa. EV/EBIT can also be turned upside down (EBIT/EV) to get something known as an EBIT yield. Expressed as a percentage, the higher the EBIT yield, the better value the share.
As with EV/EBITDA, Sainsbury's looks cheap on this measure but McColl's looks slightly cheaper. Ocado has a very high valuation of 86.5 times or a very low EBIT yield of just 1.1%. Again, this is telling us that very high rates of profit growth are needed to justify its current EV.

Generally speaking, if you can pick up a decent quality business with an EV/EBIT multiple of less than 10 and where there is the prospect of growth you stand a reasonable chance of making money. 

I have bought businesses with EV/EBIT multiples as high as 20 providing the quality of the company is very high and it has a good chance of growing strongly for many years to come. Of course, I'd rather pay a lot less.

EV/FCFf

Free cash flow for the firm (FCFf) measures the amount of surplus cash flow left over to pay lenders and shareholders after assets have been replaced, new assets have been invested to grow the business (capex) and tax has been paid.

Providing capex levels are not too low (considerably less than replacement needs or depreciation) and the tax expense is not too high or low then FCFf is a good number to value companies. Professional investors will often adjust the capex number for maintenance or "stay in business" capex to get a better feel for underlying free cash flow generation. SharePad deducts all capex when calculating FCFf.

EV/FCFf or 10 or less can be a sign of very cheap share. Morrisons looks interesting from this point of view. McColl's which looked relatively cheap to its peers on EV/EBIT looks less attractive on this measure.

Closer inspection of McColl's reveals that this is due to working capital cash outflows. An investor would need to reassure themselves that these outflows were temporary. The same approach applies to companies whose FCFf has been boosted by temporary inflows of working capital.

EV/NOPAT (Debt-adjusted PE)

NOPAT stands for Net operating profit after tax (or taxed operating profits). We call this Debt-adjusted PE in SharePad. It is very similar to EV/FCFf but with a couple of differences.

• NOPAT only includes a deduction for depreciation (replacement capex) whereas FCFf deducts all capex. Where capex is considerably more than depreciation, a company will have a lower debt-adjusted PE than EV/FCFf multiple.
• NOPAT makes no adjustments for working capital inflows or outflows whereas FCFf does. In some ways this is sensible if you want to look at the value of a business in steady state before growth is taken into account. EV/FCFf can be lower than debt-adjusted PE if there is a substantial working capital inflow (due to reducing stock or paying bills later).

In my view, companies should not be penalised heavily for working capital outflows used to fund future growth. If there are consistently high outflows - faster than the growth in sales - then this may be a sign of profit manipulation. Also, working capital inflows such as those from squeezing suppliers for longer payment terms are rarely a permanent source of value which can be mistakenly ignored if using FCFF.

I like debt-adjusted PE or EV/NOPAT as a way of weighing up a company's value. If I can reassure myself that the company's accounting is sound and profits are capable of growing then it is something I tend to use a lot in my own investing toolkit.
Ideally I look to see if I can buy high quality, growing companies for less than 20 times debt adjusted PE. That's not very easy in current stock markets.

The food retail sector is not looking very attractive on this measure with the possible exceptions of McColl's. That said, food retail is fiercely competitive with low profit margins and poor growth prospects. McColl's may not be a cheap share for this reason.

EV/Sales

Price to sales is commonly used to weigh up the value of loss-making companies or those with cyclically-depressed profits in a recession. It was a measure that was used extensively by technology analysts during the dot-com boom of the late 1990s.

As with all price-based multiples, a price to sales multiple ignores companies which are financed by significant amounts of debt. Some of the sales will be needed to pay interest on debts. EV/Sales gets round this problem.

When I worked in the City I occasionally used to come across analyst reports comparing the EV/Sales ratio with a company's profit margins. Broadly speaking, the argument was that there was a correlation between the two numbers - higher margins justified higher EV/Sales multiples and vice versa.

For example, an ex-colleague of mine used to argue that a company with a 10% EBIT margin should trade on a EV/Sales multiple of 1.0. The rough and ready rule was that you divided the EBIT margin by 10 to get the implied EV/Sales multiple. So if a company had an EBIT margin of 5% it should trade on an EV/Sales multiple of 0.5 times. If it was less than that the shares might be undervalued.

On that basis, supermarket shares are no bargains. Perhaps, Sainsbury's with an EV/Sales of 0.3 and a profit margin of 2.6% is worth considering.
I'm not a fan of sales-based valuations. Profits and cash flows are what matters when the valuation of a company is concerned. 

As for the EV/Sales versus profit margin argument. I can see where it is coming from, but would say that profit margins are not the sole determinant of company valuation. Crucially, they ignore the amount of money that has been spent to produce the margins.

EV/Capital Employed

This is the debt-adjusted version of P/NAV (aka price to book value). Here the company's EV is compared with all the money invested (capital employed) in the business.
You can adjust these ratios to take into account of off-balance sheet leases in SharePad if you want to. I have not in this example just to keep things simple.

This ratio is strongly linked to a company's sustainable return on capital employed or ROCE. Good companies with high ROCE will usually see their market valuations - their EVs - trade at a substantial premium to their capital employed.

This is because high returns on capital add value to that capital. Low returns destroy value.
As a rough rule of thumb, a company will need a sustainable ROCE of around 10% to justify the value of its capital employed. As you can see, Sainsbury's trades at a big discount to the value of its capital employed due to its poor ROCE.

So if a company has sustainable ROCE of 20% then a multiple of 2.0 (20% divided by 10%) might be reasonable for the underlying business. You could then adjust this multiple higher if decent levels of growth at a high ROCE were expected to continue.
You could argue that Tesco's and Morrisons' EV/Capital Employed ratios are factoring a big improvement in sustainable ROCE from current levels. If this does not happen, then there is a case for arguing that their shares are overvalued on this measure.

Earnings power value (EPV)/EV

EPV (Earnings Power Value) gives you an estimated value of a business - an EV - based on its current operating profits (EBIT) after tax continuing forever. By comparing this value with the current EV you can have a feel for how much a company's current valuation is explained by its current profits and how much is based on future growth in profits. This ratio is one of my favourite ways of using EVs - I've called it EPV yield in the table below.
For example, McColl's has an EPV yield of 95.8% which suggests that almost all of its current EPV is explained by its current trading profits. Sainsbury is similar. Your job as an investor is to try and work out whether that is reasonable. Ask yourself:

• Can these businesses growth their profits from their existing business?
• Can they invest in new assets at reasonable ROCE (more than 10%)?

If the answer is yes, then perhaps the shares are undervalued.
Tesco and Ocado are the outliers here. More than 80% of their current EPV is explained by future profit growth. Again, ask yourself whether that is a reasonable expectation.

Stock Idea…Guyana Goldfields Inc

Stock Idea…Guyana Goldfields Inc

Symbol : GUY

Exchange: TSX

Market Cap : 811.5 Million

Revenue : 187 Million
Three Year Revenue Growth :
Investment Type : Small Cap Value/Growth

Price/Earnings : 34.2

Forward P/E : 11.0

Price/Book : 1.8

Price/Sales : 3.5

Price/Cash Flow : 11.6

Price : 4.69
Investment Stem :

Guyana Goldfields Inc. (Guyana Goldfields) is a Canada-based mineral development and exploration company primarily focused on the acquisition, exploration and development of gold deposits in Guyana,

Guyana Goldfields Inc. (Guyana Goldfields) is a Canada-based mineral development and exploration company primarily focused on the acquisition, exploration and development of gold deposits in Guyana, South America. The Company's Aurora Gold Mine is an operating gold mine project, which is located in Guyana. The Company owns approximately 100% interest in the Aurora Project, which has total proven and probable reserves of approximately 3.04 million ounces of gold. The Company also holds an interest in a land package located in the Aranka district of Guyana approximately 30 kilometers northeast of the Aurora Gold Mine, known as the Aranka Properties, which consist of a number of separate properties, including Sulphur Rose. Within an area located northeast from the Aurora Gold Mine, the Company also holds an interest in certain additional properties known as the Other Properties. The Company's subsidiaries include Aranka Gold Inc. and AGM Inc.

The dreaded metrics from Morningstar…

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=GUY&region=CAN&culture=en-CA&ops=clear

The company’s website…

https://www.guygold.com/Home/default.aspx

An article from seeking alpha (just for a little perspective)

https://seekingalpha.com/article/4043945-guyana-goldfields-slated-50-percent-production-growth-2018

Another junior gold producer (I’m growing quite fond of this sector). The Baupost Group (yes that’s the house where Seth Klarmin lives) is a beneficial owner. The company itself owns lots of their own stock, strong Balance sheet with $65.4 million (US) cash versus debt of $68.8 million (US) as June 30^th 2017.

The company is a high grade gold producer with 15 plus years reserve with good cash flow generation and no by-products (100% gold exposure). Operating numbers over the last couple of years have shown dramatic improvement...While the market is going gaga over the US big cap tech stocks I'm finding value in the junior gold mining sector in Canada. As always this is just an investment idea, remember to do your own due diligence before putting your money at risk in the market. Investing in the stock of listed companies can be fun but it can hurt too.

An Interview with David Barr of PenderFund Capital Management

An Interview with David Barr of PenderFund Capital Management

Seeking Alpha recently conducted an interview with David Barr of PenderFund Capital Management, an investment institution I have followed for a few years now. I thought I would pass along this interview as it sheds light into his investing approach to the stock market...

David Barr, CFA, is the President and CEO of PenderFund Capital Management. He is also the Portfolio Manager of several of Pender’s funds. David began investing in 2000, initially working in private equity, which gives him a unique background to investing capital in public markets. He is an advocate of value investing and believes that investing in a company well below intrinsic value decreases the risk and sets it up for generating long-term performance.

He looks for value in unpopular places with a view to finding “quality at a discount.” David has been interviewed for his opinions on small cap, the technology sector and value investing by Bloomberg, Financial Post, The Globe & Mail, BNN and other media. We emailed with David Barr about major catalysts for a thesis, how to determine the private market value of a company and how he takes a private equity style approach to public markets.

Seeking Alpha: For two years in a row, your fund (Pender Small Cap Opportunities Fund) won a Lipper Fund Award for Best Canadian Small/Mid Cap Equity Fund – what are the key drivers for this performance? How does this apply on a go-forward basis?

David Barr: The fund’s performance since inception has been driven by two factors. First, our investment process and secondly, the sector of the market we invest in.

Our investment process is a private equity style approach to public markets. We like to dig deep on the companies we invest in and the industries they operate in. This gives us an in-depth knowledge of various aspects of the company which helps us to evaluate the opportunity.

We look at competitive advantage, what does the company do to differentiate itself and how sustainable is it? What is the operating landscape and what are the associated dynamics?

How big is the market being addressed, and how fast is it growing? What stage is the company at?

We assess the management team, asking ourselves how competent are they, can they execute on an operational and strategic level? What is their ability to allocate capital? We also like to assess the incentive system for management and the cultural integrity of the firm.

And of course, we look at fundamentals; what are the underlying economics of the business? What is the true, long-term earnings power of the business in terms of free cash flow?

Once we understand the business, we can make a better estimate of what we believe the intrinsic value of the company is and answer the question “what would an independent third party come and buy this whole company for?”

The second factor is the part of the market we operate in. Many traditional Canadian investors have a significant portion of their portfolios allocated to resource-based stocks. We have always gravitated towards non-resource stocks and more into technology, and technology has outperformed resources over the past five years.

On a go-forward basis, we don’t know which part of the market is going to perform well, particularly in the short term. What we do know is that we will continue to execute the same disciplined process that has underpinned our performance record to date.

SA: As a follow up, can you explain the reasoning behind the decision to cap the fund and the benefits of this? How much capacity is available in the Canadian micro/small cap space? How does this compare to the U.S. markets?

DB: We capped the small cap fund a couple of years ago to allow the fund to maintain the same investment strategy it had employed since inception. As funds grow, they become restricted from investing in small and microcap companies and we believe this part of the market contains some of the most compelling investment opportunities. Our view on capacity is that you can continue to operate effectively at $200 Million, but it becomes more challenging when you get to $500 Million.

We are spending a lot of time looking for US-listed opportunities now. The reality is that US markets have more companies to invest in, and in particular, non-resource ideas. Our view on capacity is the same for the US as for Canada. As long as you are running a fairly concentrated portfolio, the limiting factor is the size of positions in microcap opportunities.

SA: What are some of the most out of favor industries or stocks right now? How do you make the key determination between a security that is out of favor for a good reason compared to one that is merely oversold or misunderstood by the market?

DB: To determine the merits of a security that is out of favour for good reason, compared to just being oversold, you need to distinguish between secular and cyclical forces. Wynn Resorts’ (NASDAQ:WYNN) problems a few years ago seemed cyclical. Sears Holdings’ (NASDAQ:SHLD) on the other hand are secular.

As for what’s out of favour? We ask ourselves what’s currently most popular and invert. The case right now is that ETFs and passive investing are in vogue, therefore we look for non-index names that appear either attractively valued or cheap. And small cap companies seem to be more chronically undervalued because they don't get an automatic bid from the inflows of index investors. Eventually, math matters. In the meantime, it's a great time to pick up undervalued securities in these ignored areas.

SA: What catalysts do you look for in value investments? How often are the projected catalysts realized? How do you determine when to sell if a catalyst is realized (or not)?

DB: As is our answer to so many questions, it depends. Let’s define a catalyst as an event that makes the share price go up. The most logical event is the sale of a company. For our part, we try to determine private market value or the price another company will pay. This process also helps us to assess the likelihood that company will be acquired and to do this you need to understand the shareholder base and management incentives.

Having a large assertive shareholder will increase the probability of acquisition, as will having a management team that is incented to create an exit for shareholders. These include companies that are increasing their market share and addressing new and large markets, or companies that have a wonderful product that fits into the product roadmap of a competitor. Not only do we think these types of companies are worthwhile to own over the long term, other companies tend to share our view.

The other major catalyst we see is when uncertainty becomes certainty. For example, when a company hits a significant inflection point such as going cash flow positive. In this situation, the uncertainty as a going concern is removed. Another example is an established company with a declining legacy business that develops a next generation product, and growth in sales of the new product eclipse those of the legacy product, making the business attractive again.

SA: How do you determine the private market value of a company, especially from an M&A standpoint? What metrics do you use to arrive at this value?

DB: Having been involved in the sales process of several companies, it gives you a lot of insight into what buyers are looking for when they buy a company. In determining private market value and the metrics used, again, it depends. So many variables come into play that every situation is unique. The bottom line is that you need to determine what the earnings power of the acquired entity will be within the acquiring entity. To assess this, you need to understand what drives the gross margin.

You need to understand the degree of general and administrative expenses that can be eliminated, similarly with sales and marketing overlap or R&D overlap. That drives the base earnings power and value. You can then layer in some additional assumptions, like whether the larger company will get an immediate revenue bump through increased distribution, or sometimes companies only want to buy from a larger, very well capitalized company so this will drive an increase in sales. When calculating our margin of safety, we use the base case, but we are always looking for additional optionality.

SA: Can you walk us through your thesis on GreenSpace Brands?

DB: GreenSpace Brands (TSXV: "JTR") is a Canadian organic food, consumer product company. Their brand development is done in-house or through acquisition, and their current brands include: Love Child, Rolling Meadows, Central Roast and Kiju amongst others. The company has recently traded with a market cap of around $85 Million.

We believe GreenSpace Brands has the potential to grow significantly as they consolidate the highly fragmented natural and near-organic food market in Canada. Smaller mom and pop brands naturally hit a growth plateau as it is very challenging to secure large distribution arrangements.

Large retailers dominate the Canadian grocery market and these companies prefer to deal with suppliers that have several brands. GreenSpace Brands has developed strong relationships with these national retailers and can introduce acquired brands quickly into their distribution channel. M&A can be accretive as a result of increased revenue growth and cost savings from M&A, G&A and manufacturing.

Two recent transactions, Love Child and Central Roast are shining examples of possible M&A accretion. GreenSpace Brands was able to double Love Child revenues in five months and turn $600K losses into profitability. And with Central Roast, the company was able to close two distribution deals (Costco and Loblaws) within six months of acquisition for a nearly 50% lift in revenue.

Management has a proven ability to execute. The CEO has an extensive background in natural foods, having founded and operated multiple brands of his own. There is also significant experience at the managerial level in retail product placement and marketing at the national level. On the M&A side, the team has already completed several successful acquisitions, proving their discipline on buying brands at the right price and their ability to integrate them into their existing business.

As previous shareholders of Whole Foods Market, we have spent a lot of time looking into the organic and natural foods market. In Canada it is a $10 Billion market and growing in the low-double digits. We see a great runway ahead as Canada ranks in the middle of the pack in organic food sales per person. In addition, lots of big players are scrambling to compete and the traditional CPG companies have been highly active on the M&A front, something we look for when trying to identify potential catalysts.

The current run rate for the business is around $40 Million of revenue and $1 Million in EBITDA. We are comfortable with some analyst estimates of $55-60 Million in revenue, $2-3 Million in EBITDA (year end March 2018) before any further acquisitions, and ~$65-75 Million in revenue, $3-4 Million in EBITDA (year end March 2019).

The stock is currently trading ~1.4X 2017 revenue, a slight discount to larger food manufacturing brands, which trade around 1.5X revenue and organic/natural brands, which trade around 2X revenue. We believe the discount is unwarranted due to the significant growth runway ahead of company, the lack of competition in its niche and an accretive M&A roadmap.

We see several potential catalysts for increased financial performance of the company. Operational improvement through continued integration efforts and a new warehouse facility coming online (1-2bps improvement to EBITDA); internal development efforts, especially New Love Child products, are gaining momentum and should drive company SSSG; and lower margin products, such as dairy, are naturally becoming a smaller portion of overall revenue. In addition the company has around $5 Million of dry powder for future M&A.

SA: Can you walk us through your thesis on BSM Wireless?

DB: BSM (TSXV: "GPS") is a hardware and software provider for commercial fleet tracking and asset management focusing on key verticals including rail, construction, government and service (utility, security, trucking).

The company is an industry leader with an attractive valuation and the upside of potentially being acquired. It’s a global leader in its key verticals such as the rail industry and has all seven of the Class 1 railways as customers. Its merger with Webtech in late 2015 is a game changer. The merger expanded BSM’s vertical and geographic footprints and catapulted the company into the top 20 commercial fleet telematics providers globally. Post-merger, BSM effectively doubled revenue to $60 Million, reduced costs by $4-$5 Million through cost synergies and moved its EBITDA margin up to around 15% from the low single digits.

BSM has continued to strengthen its core business by consolidating into one software platform and one hardware platform. It is also working on becoming more software focused and hardware agnostic. The company acquired Mobi in October 2016, adding higher margin recurring revenue on analytics to its subscription revenue. At the end of Q3 (June 30, 2017), BSM had 161,000 subscribers and approximately 70% of its revenue was recurring.

As BSM consolidates, organic growth has been slower. However, the company is starting to gain traction in converting its sales pipeline into revenue, especially in the rail and government sectors. Notable recent successes include a government agency signing monthly subscriptions for a potential fleet size of 6,000 vehicles, a Tier 1 rail customer adding 1,500 subscribers, and ongoing orders from the Company’s largest construction customers.

While the sales pipeline is growing, the churn rate is stabilizing. BSM’s churn rate was abnormally high in Q2 due to the 2G/CDMA shutdown of AT&T (NYSE:T) in the US, but it returned to 9% in Q3, a more normal annualized rate. Another 8,000 subscribers are potentially at risk as a result of the 2G/CDMA turndown in Canada: roughly 4,000 will drop off in 2018 and the remaining 4,000 subscribers will go by 2020.

BSM is in the early stages of working through these subscribers and it is likely that some of them will return. In the US, around 1,000 customers returned out of the 10,000 estimated subscriber losses. Gross subscription “adds” from increasing new business will also offset some of these subscriber losses.

The stock is trading at 1.6X revenue and 12X 2018e EBITDA at consensus estimates, a discount to its peers. Recent telematics transactions point to higher valuation multiples - Verizon (NYSE:VZ) acquired Fleetmatics at 6X revenue and 18X EBITDA forward multiples. Given the involvement of activist investor Crescendo (with over 10% ownership) and BSM’s increased scale, it is more likely to become an acquisition target itself for financial and strategic buyers.

Stock Idea…Caledonia Mining Corp PLC

Stock Idea…Caledonia Mining Corp PLC

Symbol : CAL

Exchange: TSX

Market Cap : 77.0 Million

Revenue : 65 Million
Three Year Revenue Growth : -0.7 %
Investment Type : Micro Cap Value/Growth

Price/Earnings : 8.4

Forward P/E : 182.5

Price/Book : 1.1

Price/Sales : 1.0

Price/Cash Flow : 3.0

Price : 7.30
Investment Stem : Cheap Small Cap Screen

Caledonia Mining Corp PLC and its subsidiaries are engaged in the operation of a gold mine and the exploration and development of mineral properties for precious metals. Its segments include Corporate, Zimbabwe, South Africa and Zambia.

Caledonia Mining Corporation Plc is primarily involved in the operation of a gold mine, and the exploration and development of mineral properties for precious metals. The Company's activities are focused on the Blanket Mine in Zimbabwe. Its segments include Corporate, Zimbabwe, South Africa and Zambia. The Corporate segment includes the Company and Greenstone Management Services Limited (UK) responsible for administrative functions. The Zimbabwe segments include Caledonia Holdings Zimbabwe Limited and subsidiaries. The Zambia segments consist of Nama copper project and cobalt project. The South Africa segment comprises a gold mine, as well as sales made by Caledonia Mining South Africa Proprietary Limited to the Blanket Mine. The Blanket Mine is located approximately 560 kilometers south of Harare and over 150 kilometers south of Bulawayo. It has exploration title holdings in the Gwanda Greenstone Belt totaling approximately 80 claims, covering a total area of over 2,500 hectares.

The dreaded metrics from Morningstar…

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=CAL&region=CAN&culture=en-CA&ops=clear

The company’s website…

http://www.caledoniamining.com/

An article from seeking alpha from 2016...

https://seekingalpha.com/article/3969581-small-stock-big-dividend-caledonia-mining-corp

Another company which came up in my cheap small caps scan of the Canadian market. Very cheap with surprisingly good operational metrics. Has a dividend yield of 4.80 percent which is very rare for a micro cap gold miner. Capex is expected to drop dramatically starting next year. Allan Gray (South Africa Institution) owns 19.8 percent of the company. There are risks of course but as far as I can see they have already been discounted into the company’s stock price. Not trading too far above its tangible book value. A very interesting investment idea especially for the longer term. Is listed on the NYSE as CMCL

Stock Idea…Ten Peaks Coffee Co Inc

Stock Idea…Ten Peaks Coffee Co Inc

Symbol : TPK

Exchange: TSX

Market Cap : 55.9 Million

Revenue : 84 Million
Three Year Revenue Growth : 15.0 %
Investment Type : Micro Cap Value/Growth

Price/Earnings : 12.6

Forward P/E : 12.9

Price/Book : 1.2

Price/Sales : 0.7

Price/Cash Flow : 8.0

Price : 6.18
Investment Stem : Cheap Small Cap Screen

Ten Peaks Coffee Co Inc is a specialty coffee company owning interest of Swiss Water Decaffeinated Coffee Co. Inc., a green coffee decaffeinator and Seaforth Supply Chain Solutions Inc providing green coffee handling & storage services.

Ten Peaks Coffee Company Inc is a Canada-based specialty coffee company. It operates through two subsidiaries, Swiss Water Decaffeinated Coffee Company Inc (SWDCC) and Seaforth Supply Chain Solutions Inc (Seaforth). SWDCC is a green coffee decaffeinator located in Burnaby, British Columbia. SWDCC employs the SWISS WATER Process to decaffeinate green coffee, which are sold to specialty roaster retailers, specialty coffee importers and commercial coffee roasters. SWDCC also sells coffees internationally through regional distributors. SWDCC's target market is the specialty coffee segment. Seaforth provides a range of green coffee logistics services, including devanning coffee received from origin; inspecting, weighing and sampling coffees, and storing, handling and preparing green coffee for outbound shipments. Seaforth provides all of SWDCC's local green coffee handling and storage services. In addition, Seaforth handles and stores coffees for various other coffee importers and brokers.

The dreaded metrics from Morningstar…

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=TPK&region=CAN&culture=en-CA&ops=clear

The company’s website…

http://www.tenpeakscoffee.ca/

An article from seeking alpha from 2015 (just for a little perspective)

https://seekingalpha.com/article/3275465-ten-peaks-coffee-wait-for-a-pullback

This company came up in my cheap small caps scan of the Canadian market a couple of months ago. It is presently trading at not much above its tangible book value so you are getting the operational side of the business for peanuts. The company is currently taking their free cash flow and investing it in a new plant to grow its business in the future. Stephen Takacsy has talked about this company on Marketcall (a phone in investment show on BNN), he has a large holding in the company. I expect much better operational results in the next year or so. Right now it is suffering from low expectations which is a good thing and very commonplace in the underfollowed Canadian small cap market.

Update on Ten Peaks Coffee Inc...as of June 18 2018

Based in Burnaby, B.C., the company is the world’s only third-party producer of decaffeinated coffee using a 100-per-cent chemical-free Swiss Water process. Also provides coffee storage and handling/logistics services. Customers are large chains like Tim Horton and McDonald’s, specialty roasters/coffee chains and global importers. Decaf is growing faster than coffee, and methyl chloride used to decaffeinate most coffee is being increasingly shunned worldwide. Competition is shrinking as two older chemical-free CO2 plants have recently closed in the U.S. and Europe. TPK is forecasting double-digit volume growth in 2018, and is opening a European office to meet additional demand there. It is currently building a new plant to increase capacity by 50 per cent, which will be ready in 2019. Stock is very cheap at 14x trailing P/E and 0.6x sales for a consumer-product company with high barriers to entry, strong free cash flow generation and global growth potential. Also pays a 4.1-per-cent dividend. We recently added to our position in the low $6s, and now own eight per cent of the company.

Interesting Comments from Leon Tuey

Interesting Comments from Leon Tuey 


Not too many people have heard of Leon Tuey, but he is a Canadian technical analyst, now in his eighties who has a good long term track record and is usually worth listening too.

"Short-term, the major market indices and their internal measures are overbought.  Moreover, short-term sentiment backdrop has deteriorated.  Hence, a pause would not be surprising.  After a minor pause, however, the rally will continue as the intermediate gauges are far from overbought.  Moreover, momentum is re-accelerating.  Long term, the primary trend remains powerfully bullish and the end is nowhere near in sight as the six major factors (monetary, economic, valuation, sentiment, supply/demand, and internal/momentum/technical) continue to give bullish readings.  One of the most amazing aspects of this great bull market is sentiment.  Although the bull market is in its ninth year and most stocks are up several hundred to several thousand percent, investors remain skeptical and pessimistic.  Note that many hedge fund managers are bearish.  Seth Klarman’s Blaupost holds 42% of its assets in cash.  In terms of asset allocation, funds are sitting on a mountain of cash and very low in equities.  In fact, funds are the most underweight in U.S. equities in ten years.  Also worth noting is the shrinkage in the supply of stocks.  In 1996, over 8000 stocks traded in the U.S.  Today, that number has been halved.  This supply/demand imbalance creates an explosive situation for the market.  When the prevailing bearish sentiment recedes, that huge hoard of cash will find its way back to the equity market.  I can hardly wait!

In conclusion, evidence continues to suggest that investors are witnessing the biggest bull market on record.  The first leg of this great bull market commenced on October 10, 2008 and ended in May 2015.  As always, it was driven by an easy/accommodative monetary policy.  The second leg commenced in February 2016, which was driven by improving economic conditions caused by the monetary easing of the last 8.5 years.  Hence, earnings momentum accelerates.  Accordingly, it is always the longest and strongest [segment of a secular bull market].  Investors should emphasize industrials, technology, healthcare, and resource issues and other economy-sensitive areas.

One of the biggest mistakes investors make in a bull market is selling too soon.  Accumulate favored areas when they are oversold and hold for the long-term.  The time to liquidate is when the Fed starts to tighten meaningfully, i.e., when the Fed drains liquidity from the system; raises the discount rate many times in succession; and inverts the Classic Yield Curve (13-week T-bill Yield vs. the 20-year T-Bond Yield).  Do not be distracted by the “noise” and the black headlines."

Stock Idea…Metanor Resources Inc

Stock Idea…Metanor Resources Inc

Symbol : MTO

Exchange: TSXV

Market Cap : 48.4 Million

Revenue : 60 Million
Three Year Revenue Growth :
Investment Type : Micro Cap Deep Value

Price/Earnings : 5.1

Forward P/E :

Price/Book : 0.7

Price/Sales : 0.6

Price/Cash Flow : 3.2

Price : 0.77
Investment Stem : Cheap Small Caps Screen

Metanor Resources Inc is engaged in acquisition, exploration and development of mining properties. The Company operates a gold mine in Quebec and exploration & evaluation properties in the area.

Metanor Resources Inc. is engaged in the acquisition, exploration and development of mining properties, as well as the commercial production of the ore reserves of its Bachelor Lake and Hewfran properties. The Company operates through three segments: the mining site (Bachelor mine), exploration and corporate. The Bachelor Mine is located approximately 90 kilometers northeast of the city of Lebel-sur-Quevillon, Quebec, Canada. The Bachelor property consists of approximately 240 claims and over two mining concessions covering an area of approximately 7,566.73 hectares. The Company is conducting surface drilling program on its Moroy Property. The Company's properties also include Barry project, Wahnapitei Property, Dubuisson Property, Hewfran-2 Property, MJL-Hansen Property, Barry United Property, Barry Extension Property, MJL-2 Property, Nelligan Property, Barry-Souart Property, Geonova Property and Coniagas Property.

The dreaded metrics from Morningstar…

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=MTO&region=CAN&culture=en-CA&ops=clear

The company’s website…

http://www.metanor.ca/en/

An article from seeking alpha from 2015 for added information.

https://seekingalpha.com/article/2793385-metanor-resources-a-high-grade-gold-producer

Sometimes an investing thesis can be quite simple. This company is a small gold producer in Canada that trades at below tangible book value. The much larger Kirkland lake Gold Ltd. (KL on the TSX) took an initial position last April and is now a beneficial owner of this company. When larger companies become beneficial owners (owns more than 10 per cent of tradable stock) of smaller companies, it usually means they are interested in buying it outright sometime in the future. The management team at Kirkland Lake Gold obviously think that the stock of MTO is trading at a discount to its net asset value. Free cash flow can be very volatile with junior resource companies but MTO currently has a cash return of 8.3 percent.