|Shares Out. (in M):||0||P/E|
|Market Cap (in M):||55||P/FCF|
|Net Debt (in M):||0||EBIT||0||0|
Despite rapid growth, incredible returns on capital and an industry leading position, Aeroquest trades for about three times what I figure it will earn next year. After that, the company should continue to grow at around fifty percent annually for a number of years into the future. This is possibly the cheapest growth company I have ever seen. More importantly, it has a very wide technological moat.
It has now been a year since I first wrote this up. Please see the prior write-up for info on the business. In the past year, the shares essentially doubled before giving back those gains and are now back to where they were last year. Meanwhile, the business has greatly increased in size and profitability. More importantly, there is much better forward visibility now than there was when I first wrote it up. The backlog remains steady at three to four months and if the company were willing to book further into the future, the backlog would be even stronger—giving great visibility into 2009 earnings. More importantly, at this point last year, the company was primarily servicing the junior mining world. Hence they were dependent on these speculative companies continuing to receive funding. In the past year, an increasingly large portion of the business has shifted to servicing the majors, which should be repeat business with no funding risk. If the juniors can begin to raise capital again, that should only make the market for geophysical services tighter.
At this time last year, the company was working on the acquisition of UTS, a provider of fixed wing geophysics services. The company changed its fiscal year end, and then had a two month stub period and a few integration expenses which have confused everyone in the analyst community—including myself. Going forwards, the numbers will be much cleaner, which should help in evaluating the business.
Estimates and Valuation
The business is somewhat seasonal, with the summer months (Q3 and Q4) having the best revenues and hence much higher margins. I will base the following numbers off the just released guidance. I think they are being conservative, so figure 33m in revenue in 2H instead of the 30.5m-32.5m they guide to. Then 55% growth in 2009. I base this revenue growth off them increasing the number of systems from 27 currently to around 45 by year end 2009, or 4 a quarter going forward. I also assume that margins increase a little and that they get some economies of scale as they grow the business.
FY 2008 (e) FY 2009 (e)
Revs 57,491 89,111
Margin 25,830 42,773
Gross % 45% 48%
R&D 410 614
G&A 8,666 11,584
G&A % 15% 13.5%
Amort 2,640 3,960
Total Expense 11,716 16,159
EBT 14,115 27,215
Tax 4,283 9,525
Net Income 9,832 17,689
Shares Out 33,700 32,500
Per Share 0.292 0.544
The company should do around 29c this year and 54c a share next year. At a 20 multiple (conservative for a company with pre-tax returns on capital of around 50% and growing at least 50% a year) it should trade for a bit more than six times today’s quote. This doesn’t give the company any credit for accretive acquisitions or massively better margins if the capital markets open up again for junior mining companies. Looking out another year, FY 2010, starting October 2009, could have earnings of 85c/shr. At a bit better than a 20 forward multiple, you have a 10-fold move within two years or so.
Why Aeroquest Is So Cheap
Like all small-cap equities, the shares have been pummeled by both a lack of interest and liquidity. This was further influenced by the company’s lack of guidance or interest in shareholder relations. Finally, this was all accentuated by a 6,666,667 share bought deal done with
The shares are cheap, but so are many small cap companies. What will change this?
The company has thus far repurchased 795,900 shares or roughly 2% of the total shares outstanding for 2.18. This is also about 12% of the total shares in the bought deal. The company just increased the size of the buyback by another 300,000 shares. Give them credit, even after investment banking fees, they’re great day-traders. They wanted to do a Dutch tender for a much more sizable buyback, but the expenses involved in buying back 3,000,000 shares ($6,000,000) may have been around $1,000,000 and negated the whole advantage of a buyback.
On Thursday, the shares were listed on the TSX main board. Previously, they were listed on the Venture exchange. This should give much better visibility, and also credibility—the venture is well known for housing companies of dubious quality. For this reason, many institutional accounts in
Better Shareholder Communications
For the first time ever, last week the company pre-released revenues and put out forward revenue guidance for the next quarter. The company also gave better color on the number of systems going forwards and future business plans.
The company intends to be more active in their interface with the street. For instance, they intend to finally put something besides press releases into their website section called ‘investor relations.’ The company even intends to hire an in house person who will strictly field investor questions.
Margin of Safety
Benjamin Graham would love this one. In very rough numbers, at the end of Q3, the company will have a $55 million market cap and $20 million in cash for a $35 million enterprise value. There is no debt and another $10 million in receivables. Going forward, the company should earn just under $5 million after-tax for the next few quarters and after that, the cash flow should really accelerate. At this rate, within six quarters, the whole market cap should be cash—even with the company reinvesting in the business to grow at better than 50% a year.
What Can Go Wrong
I’m baffled at this one. As long as gold stays over $500/oz, silver over $8/oz, copper over $1.50/lb and people want to wear diamonds or drink water, there will always be a demand for these geophysical services using an aerial platform because it is significantly cheaper than other methods of detecting resources that were used in the past. The company has recently diversified into the oil and gas space. While this is a small part of the business, once they are credited with being responsible for a major discovery, this business should pick up significantly which will add to diversification. Aeroquest has now been cited in being responsible for 41 major discoveries in the mining industry. The company is also looking to get into mine field detection and unexploded ordinance. While I doubt these will be significant contributors going forwards, it will help to add some diversity to the revenue streams, especially in the winter months when the core business is weaker.
|Entry||07/27/2008 08:44 PM|
What gives you confidence that pricing, margins and returns on capital can perform as you expect, and that recent results are not inflated as a result of a temporary supply/demand imbalance in this space?
Thanks in advance for your thoughts.
|Entry||07/28/2008 03:31 PM|
|Hkup - Thanks for the idea/update. A few questions: 1. it looks like there have been some disappointments in the past six months in the equipment ramp-up, the capacity utilization, and perhaps other areas. Could you summarize the key issues over that period, and give you thoughts or comments on them? 2. Other than Geotech, are there any other competitors, or are there other technologies or methodologies they are competing against? 3. does the cost of helicopter or airplane charter flow through their p&l, or are they just renting out their systems? If the former, are they being impacted at all by higher fuel costs? 4. it looks like their international business might be inherently less profitable because they end up getting lower utilization rates. Is that the case? If so, does their international expansion suggest that the Canadian market is mature? 5. It is your sense that their systems are an integral part of on-going mining development, or that they are primarily used in the earliest stages of exploration? Understanding that might help better understand the cyclicality. Thanks in advance for your answers.|
|Entry||09/26/2008 05:52 PM|
|This is just beyond silly cheap at this point. The lawsuit from Geotech appears to have hit the shares most recently, but the company maintains (and if you read the complaint and response their position seems valid) that it is pure BS. Moreover, the shares haven't moved at all on the announced Anglo LOI which baffles me, as it clearly legitimizes these guys in a big way. I have a quick question for you. Do you know how customers are billed for the aircraft services (i.e. usage of the actual airplane or helicopter)? I don't believe that the company actually owns aircraft; are independent contractors used who then bill clients independently, or does the charge run through the company's P&L?|
|Subject||RE: RE: hkup|
|Entry||09/29/2008 07:20 PM|
|Hkup, Thanks, that's helpful. Feel free to throw out some of your other favorite names @ 1-2x EBIT if you care to. zzz|