|Price:||0.57||EPS||0.05 (untaxed)||0.05 (taxed)|
|Shares Out. (in M):||53||P/E||11.4||11.4|
|Market Cap (in $M):||30||P/FCF||11.4||11.4|
|Net Debt (in $M):||-8||EBIT||3||4|
All amounts in Canadian (unless otherwise stated).
Pioneering Technology (PTE.V, $0.57) is cheap based on continued growth. With its “Temperature Limiting Control” technology (covered by 4+ patents), Pioneering Technologies is the clear leader in aftermarket solutions to prevent home cooking fires.
PTE was founded by inventor Dr. Reza Shah in 1998. Dr. Reza Shah (who passed away 5+ years ago) was a fascinating person as he converted from Islam to Mormonism (later becoming a bishop in the Mormon church) and was a scientist/inventor working on military technologies at NASA before founding PTE. It started as a personal project. After a stove fire in his home, at the urging of his wife and after many months of tinkering, Dr. Shah developed a multi-component, novel device which prevents stove fires. Kevin Callahan (now CEO), who has an investment banking background, spent time with Dr. Shah in 2002 and recognized the opportunity. As happens with many new technologies where there is little/no initial market, PTE management spent more than a decade slowly commercializing the technology in a methodical way. PTE finally became consistently profitable in 2015.
Generally, I like to see 20-40% management/insider ownership in my microcap investments. Less than 20% and management may not be incentivized enough to improve the share price. Above 50% and management may be more focused on treating the company as their “piggy bank.” As we like it, PTE management/insiders own around 40% of the shares outstanding.
CLEAR NEED (IN THE U.S.)
In the U.S., the number one cause of household fires is…cooking fires! In fact, cooking is the cause of 48% of all reported U.S. home fires. Each year, there are over 5 million home cooking fires (the vast majority unreported), which cause 172,000 structure fires, 570 deaths and over 5,000 serious injuries. Per the National Fire Protection Assn., these fires represent annually about US$1.1 billion in direct property damage and US$7 billion in indirect costs.
In North America, there are more than 140 million stoves/ranges and more than 140 million microwave ovens. With units generally replaced every 10+ years, there’s an annual replacement market of several million stoves and microwave ovens. That implies a potential annual market of $1+ billion for “temperature limiting control” devices that prevent fires.
With its “Temperature Limiting Control” technology (patented), Pioneering Technology has proprietary cooking fire prevention solutions for both stoves and microwaves. Unlike devices which are reactive (like various fancy smoke detectors), PTE’s devices are truly preventative, limiting the stove/microwave well before a dangerous temperature is reached. For example, SmartBurner toggles off the electricity when the temperature exceeds ~600 degrees F (before the temperature that cooking oils ignite; note that electric coils can reach well over 1,000 degrees F) and then toggles the electricity back on when temperature falls. That means that, in addition to preventing fires, the technology lowers electric bills. The apartment/condo/home owner can also sometimes get insurance discounts, which can result in a payback period of several years.
When stove manufacturers declined to integrate this technology in their stoves (perhaps similar to how auto manufacturers for years rejected the idea of including air bags until they were forced to include them), PTE has had to manufacture its own products (in China) and develop its own distribution channels. Today the company offers four main products:
Safe T Element (professionally installed): the company’s first solution. It must be professionally installed, replacing the electric coils on a house stove. PTE has installed well over 100,000 of these products – without a single cooking fire reported.
SmartBurner (consumer): introduced in 2014, it can be installed by a consumer. In addition to preventing cooking fires, SmartBurner saves energy (due to that cycling of turning the electricity on/off), can save on insurance premiums (of 4-7% for some insurance companies), and has a cast iron plate (which means a larger and more consistent cooking surface than electric coils). SmartBurner costs about US$200 for a set of four burners, and PTE has installed over 50,000 of these products.
Safe T Sensor (consumer): it is installed by the consumer on a microwave. A sensor system just above the microwave’s vent interrupts the unit’s power at the first detection of smoke, preventing microwave fires and nuisance fire alarms. Of course, many of us likely experienced (perhaps more than once) having to evacuate and stand outside a college dormitory due to a drunk/silly classmate burning their popcorn at 2am (which can cost the fire department about $2,000 per visit). Safe T Sensor costs about US$60.
RangeMinder (consumer; introduced 2015): a set of dials that wirelessly sends alerts (including timed alerts). RangeMinder sells for about US$150.
Overall, U.S. is 88% of sales and Canada is 12% (F17 ending September).
Initially, the company had a focus on military bases (both in U.S. and Japan) and university housing (in the U.S.). Now, PTE sells B2B and B2C and both online and through retail partners. The company has 10+ major distributors, including: STAPLES Advantage and HD Supply Facilities Maintenance Canada (spin-off of Home Depot). A EU partner is Innohome.
Large customers include hotel chains and housing authorities. Some housing authorities have had payback in less than one year. For example, Toronto Community Housing (TCH)) had a $250,000 deductible and $574,000 in cooking fire claims (2009). TCH installed 1,600 Safe T Elements at a cost of $300,000 and eliminated much/all of its cooking fire claims. In early 2017, SmartBurne was available for sale through U.S. Communities, a large national government purchasing cooperative.
CATALYST #1: MORE INSURANCE DISCOUNTS
In August 2016, MiddleOak, an insurance carrier that specializes in multi-family insurance for apartments and community associations, gave a 7% discount on premiums for policyholders who installed SmartBurner in their properties. In March 2017, The Ontario's Housing Services Corp. (HSC) gave a 4% discount on premiums for policyholders who installed SmartBurner or Safe T Element in their properties. Discounts on insurance premiums – plus energy savings – can result in payback periods of several years or less for individual policyholders (and even faster payback periods for large building owners).
CATALYST #2: NEW INDUSTRY STANDARD (April 2019)
The company will benefit from continued U.S. government attention and legislation on preventing home cooking fires. In 2017, The Federal Emergency Management Agency (FEMA) started a grant program for large public housing authorities and universities to adopt these solutions. These grant programs are administered by the U.S. Department of Homeland Security (DHS) in cooperation with the U.S. Fire Administration (USFA).
As I’m sure you noticed (ha), in May 2017, the UL858 standard for electric coil stoves was finalized and published. It will become a requirement of sale as of April 2019. All electric coil stoves sold in North America will be REQUIRED to pass an oil ignition test (a test where a stovetop is turned on to “maximum” for 30 minutes with a pan of oil on the element). PTE has stated that “Pioneering’s SmartBurner with its Temperature Limiting Control (TLC) technology is the ONLY [emphasis added] product currently available that meets this new standard for electric coil stoves” (per MD&A on January 17, 2018).
CATALYST #3: GROSS MARGIN IMPROVEMENT
PTE shares have been cut in half from the fall. Since mid-2017, the CEO has signaled F17 sales of $10 million, which the company exceeded. Sales have been strong, so the weakness in PTE shares is likely due to the decline in gross margin from 67% historically (F15, F16) to only 51% in F17. The result was flat EBIT from F16 to F17, despite a 55% increase in sales. It seems that growth investors (and algo/quantitative traders) quickly sold the stock after seeing no y/y EPS growth.
Per the recently-released MD&A, “the decline in gross profit margin was largely due to a combination of nonrecurring expenses (including management bonuses, consulting fees and lease termination fees), preferred pricing to secure the hotel/motel channel sale, unfavourable changes in foreign currency exchange rates, a one-time inventory impairment charge, and growth in lower margin sales at retail.” If you just add up the inventory impairment loss ($78,212) and reclassification of installation and freight out expenses (previously included in warehousing expenses; $294,929), that’s $373,141, or 360 basis point improvement in gross margin. Adding other factors back, a gross margin of 60% is arguably achievable going forward.
Because of potential large one-time orders (like from hotel chains), quarterly sales can be lumpy. Let’s look at financials on an annual basis. PTE has grown sales at an average rate of 52% for the last three years (F14-F17), which is one of the most impressive growth rates for public companies across North America. With continued growth in distribution and the catalysts above (i.e. insurance discounts, new industry standards), I believe sales can grow 30% a year for the next three years. That would imply F20 (Sept.) sales of $22.6 million. With gross margin of 60%, growth in SG&A to $7.1 million from $4.2 million in F17, full taxes (company will likely use up its $5.4 million NOL carry-forward), FDS of 54 million (with some creep but ignoring the 3 million warrants at C$1.80 that expire in March/April 2019), that’s EPS of $0.08. 20x or 15x plus net cash (currently $7.5 million, which could grow to $15+ million), implies a $1.50-1.60 stock, almost a triple from here.
Risks include major regulatory and competitive changes. The patent portfolio appears solid with four major patents, expiring between 2028-2033 (ten to fifteen years from now). Of course, the monster upside scenario (of 10+x; not reviewed here) would be if some major stove manufacturers license the technology and integrate it into their stoves after their designs fail to meet the new industry standard.
Continued growth of 30%
More insurance discounts
New industry standard in April 2019
Gross margin improves to 60%