Description

Overview

Avante Logixx is a microcap Canadian security (alarms, monitoring, guards) company run by an aligned and entrepreneurial industry veteran. The stock is cheap based on current results (~8.6x TTM EBITDA, ~11.2x TTM EBIT for TTM ending 3/31/21E), but I believe we’re in the early innings of realizing both the benefits of operational improvements put in place in the past few years as well as the growth prospects over the next few. 

Those operational improvements depressed the P&L (see 3rd graphic below) since management took over in early 2018 until 3 quarters ago. Now we have a few quarters of tangible evidence of those improvements and management is ready to tell the story. Expanded presentations/disclosures and an appearance at a microcap conference highlight what management has accomplished, and I think we will see a re-rating as investors catch on. My base case is a 2 year double based on 15x taxed EBIT for the year ending 3/31/23 and I see potential beyond that as CEO Craig Campbell grows the business organically and through acquisition in a fragmented industry.

History

CEO Craig Campbell started a security company called Total Security Management (TSM) in 2000 at age 22, growing to over 3,000 employees before selling it in 2013. Here you can see the topline of that company over Craig’s tenure. 

After selling TSM to Garda in 2013 Craig set up an investment vehicle and in 2017 he happened upon Avante Logixx trading on the TSX. He bought stock in the open market in 2017 and by early ‘18 he was the CEO. He immediately installed some of his own people and made operational changes to the company. 

Beyond his stock holdings, in the fall of 2020 he was awarded 200,000 PSUs that start paying out in ‘23 at VWAPs above $3.39 (vs. $1.50 today). Insiders in total own almost 30% of the stock and board members have minimum ownership requirements. Note also that there is a convertible debenture ($8.2mm, 7%, converts at $1.56, matures late ‘24) owned by Fairfax that would be ~20% of the stock as converted. 

Since Craig took over, he’s rapidly grown the company organically and through acquisition.

But reinvestment and operational changes in the business have obscured profitability, until recently. 

The Business

Avante Logixx has two segments: Logixx Security and Avante Security. 

Avante Security provides alarms, monitoring, rapid response (through their own responders) and other services to ultra high net worth individuals in Ontario. It’s like ADT but with 10x higher prices and 1/10th the attrition. The pitch is that if you have a home that costs $10mm you’re willing to pay a bit more to get better monitoring and a 6 minute response time. In most locations a police force won’t even respond to an alarm unless it’s a confirmed issue, and even then it could take 20-30 minutes.

Clearly the market for this type of service is limited, but Avante is in only 3 of 12 potential Canadian markets and there is still room to grow this business. Growth mostly happens when Avante acquires customers in specific zip codes from a larger monitoring station or from a small company. They’ve found that they can convert 25% or more monitoring customers right away to their “platinum” service, which costs $5-6k a year vs. $50 a month for just monitoring. Platinum really is a white glove service: they will do things like check mail and get packages when you’re on vacation, do drive-bys to make sure nothing is wrong, and so on. Customers clearly value the service given the low attrition levels. 

Logixx Security provides a variety of services including security guards, other protective services (executive protection), electronic security installation and monitoring, and some security hardware. This business isn’t amazing, but it’s grown nicely over time and has successfully taken share. Contracts for guarding and other services are mostly multi-year in length, and the company is pushing to grow into areas around guarding, which was the impetus for the ASAP acquisition.

The guarding industry is very fragmented, with literally thousands of smaller companies and then a few large incumbents like Allied. The playbook here has three parts. The first part is that you can gain share from Allied by offering better quality and service. Management wants to concentrate on winning national accounts from them, because those accounts can drag you into new regions. The second part is buying up smaller regional players. The third part relies on upselling and cross-selling existing customers. 

Management’s idea is that they can increase their margin dollars and reduce customer costs by upselling monitoring and other services to existing guarding customers. As an example, they might pitch a company that they should be able to reduce costs by moving from three guards to two if they layer in continuous electronic surveillance monitored by Logixx. Customers also appreciate having a security provider that can cover both guarding and monitoring. Logixx wins because they lose a 15-20% gross margin guard but gain a 70-80% gross margin monitoring contract. 

We’re early into adding more services onto the core business here, but organic growth has been very strong and the service is clearly resonating with customers. Taking customers from the large incumbents like Allied isn’t difficult if you can offer better quality and service, more touchpoints and reporting/KPIs. I expect strong organic and inorganic growth to continue. 

Valuation (all in CAD)

Capitalization: 21.2mm shares, net debt of $6.6mm excluding a convertible debenture of $8.3mm converting at $1.56. Given current prices, treating this as debt or as-converted gives you roughly the same EV of ~$45mm. 

One way to think about the near term potential of the business is to consider that before Craig made his changes EBITDA was $2.7mm. Acquired EBITDA was $2.6mm pre-synergy. Therefore before organic growth the business was capable of about $5.3mm in EBITDA. This is roughly what I expect FY 2021 (ending 3/31/21) to be. If you assume that the assets we had in FY18 plus the acquired assets haven’t worsened (I don’t think they have), you’re seeing nothing yet from organic revenue growth of $31mm. At FY21 margins this could be another $1.8mm or so of EBITDA (and ~8% margin). At that price the business is more like 7.4x EBIT vs. 10.7x highlighted above. 

The company has a goal of 10% organic revenue growth and 10% EBITDA margins by FY23. 10% organic revenue growth seems achievable given the organic growth we’ve already seen. Management is adamant that direct opex won’t need to grow much in the next few years, and recent history proves that. Therefore I think 10% EBITDA margins should be achievable as well. Most of their deals have been done without intermediaries, and I think there is a reasonable chance they do accretive acquisitions in the next few years. 

You could also look at a multiple of RMR for the Avante business. At 40x you get about $30mm for that biz, leaving $16mm of EV for about $4mm of EBITDA. Precedent transactions like Telus for ADT Canada have been done at 35x - 50x. This is a more pie in the sky way of valuing things, but management is increasingly pointing people to the metrics of this business and valuation could follow. 

My hypothesis is that we see re-rating as the profitability of the current business becomes more obvious. EBITDA turned positive again only recently and we still don’t have 4 quarters of positive EBITDA hitting people’s screens. On top of that I think Craig is incentivized to and capable of growing revenue (organically and inorganically) and margins (mostly through operating leverage) at a decent rate over the next few years. If we grew at 7% CAGR and could hit 9% EBITDA margins, at 15x taxed EBIT we would almost exactly hit Craig’s PSUs. That or a sale of the entire business both seem reasonable to me. 

Catalyst

Increased recognition of a return to profitability after growth investments hit the P&L.