TOTAL TELCOM INC TTZ
January 05, 2017 - 3:54pm EST by
devo791
2017 2018
Price: 0.08 EPS 0 0
Shares Out. (in M): 25 P/E 0 0
Market Cap (in $M): 2 P/FCF 0 0
Net Debt (in $M): -1 EBIT 0 0
TEV ($): 1 TEV/EBIT 0 0

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Description

Total Telcom, operating under the tradenames of ROM Communications and RacingTraX, is a provider of telematics services with a focus on niche markets.  The business has been growing at a 20%+ rate for the past two years, and the strong growth has the potential to accelerate in 2017 as the company rolls out new products and services.  Despite these strong prospects, the shares currently trade for a very low valuation of only around 0.66x revenues and 5.3x current run-rate net income (excluding cash) and thus represent a very attractive investment opportunity.  

The company’s size and liquidity make it more suitable for personal accounts.  Shares trade as TTZ on the TSX Venture Exchange and TTLTF in the US.

 

Overview

As a telematics provider, the company generates revenues by selling an asset tracking solution that consists of monitoring hardware (essentially a GPS unit with a satellite data transmitter) and recurring communications services.  The offering could be used to track a wide variety of high-value industrial assets, but they have historically focused on the niche of fishing vessels.

Two to three years ago, the company was in much different financial shape.  The business was burning over $500k a year and had flat-to-declining revenues.  The large operating losses were partly due to having sub-scale operations and partly due to professional fees incurred as they pursued a breach of contract lawsuit.  They were also investing in the development of new products and services which had yet to bear any fruit.

Starting in Q2 2015, however, the company’s fortunes changed.  They prevailed in their lawsuit that quarter and won a $600k settlement, a meaningful amount given the size of the company and its burn rate.  Then in Q3, their expansion efforts finally started to generate results, and they posted 30% revenue growth -- the first quarter in a long string of high growth quarters.  Given the operating leverage in the business, that was enough to finally get the business to breakeven.  Finally in Q1 2017, with the launch of a new business, RacingTraX, the company added another $100k in quarterly revenues which was enough to push the company solidly into the black -- netting a run-rate of a little under $200k annually.

 

RacingTraX

RacingTrax is a business that I am particularly excited about.  This is a communications and online mapping solution that has been developed specifically for the off-road racing market, and the company just launched it last quarter. They signed an agreement with the Best in the Desert Racing Association that makes them the exclusive provider of satellite tracking services for the BITD racing circuit, which importantly is a mandatory purchase for all participating UTVs (http://www.newswire.ca/news-releases/total-goes-off-road-racing-588536181.html).  In this business RacingTraX is renting the hardware to racers so it is all recurring revenues.

With the first race occurring in Q1, the company generated $100k in revenues.  Since the Best in the Desert is a 4-race circuit, this should be a reasonable approximation for average quarterly revenues.  There is actually some additional near-term growth potential as the company notes in the press release that they will be expanding the number of units in the rental pool from 250 to 400 this calendar year to provide a smaller version of the device for motorcycles and ATVs.  Furthermore, there are other non-BITD off-track races that the company can market the solution to, which might draw a little attention now that they’ve demonstrated the technology in the first BITD race.

 

Growth and 2017 Prospects

As mentioned previously, the company has been growing at a 20%+ clip for two years now.  By quarter it has been:

Q3 2015 30% growth
Q4 2015 29%
Q1 2016 68%
Q2 2016 65%
Q3 2016 13%
Q4 2016 21%
Q1 2017 22%


As you can see there can be a little quarter-to-quarter lumpiness due to the hardware revenues, but the volatility on the bottom line is much less as the margin contribution from hardware is obviously well below that of communication and rental revenues.  Furthermore, with the addition of the RacingTraX business, as of Q1 hardware revenues are now down to less than 20% of revenues, with over 80% coming from the more attractive recurring, high margin communications and rental revenues.

More importantly, management’s commentary in the MD&A suggests that not only do they expect the strong growth to continue, but they believe that it can actually accelerate in 2017:

“The Company is optimistic that its growth in revenue seen over the past two years will continue and increase more rapidly in 2017 as management hopes to capitalize on global opportunities that have been initiated and are currently in the development and testing stages.”

The mention of global opportunities is particularly interesting as right now 98%+ of revenues come from North America.  Management appears to be working on landing some international projects that would be incremental to the existing North American business, but they haven’t yet disclosed the nature of these opportunities.

Time will tell if management’s optimism here is well-founded.  Considering revenue growth in 2016 was 39%, however, if an acceleration did in fact materialize due to some of these “global opportunities”, it implies 40%+ revenue growth -- which is the type of growth that tends to catch the eye of the market and get investors excited (particularly when it’s selling for a 5x P/E).

 

Operating Leverage

In addition to continued revenue growth, the company should also benefit from strong operating leverage which should increase margins.  Over the last few years they’ve demonstrated this as they have doubled revenues from $180k to $360k per quarter with no increase in operating expenses.  

I suspect we’ll start to see the company reinvest some of their incremental revenues back into the business, however, operating margins are still relatively low and have a lot of room to expand if the company can maintain their growth.  Operating margins were 11.9% last quarter, and considering the high contribution margin on communication and rental revenues and the margins that other telematics businesses can achieve, getting to 20% eventually seems well within reach.

 

Valuation

The company has a $2 million market cap and $1 million in cash, with an enterprise value a little under $1 million.  Excluding interest income and foreign exchange gains the company had a net income of $43k in Q1, or a $172k annual run-rate.  As a result, the ex-cash P/E is only 5.3x.  Furthermore, the company has over $7 million in NOLs, so they will not pay any taxes for a very long time.  I believe there is even more upside to these figures from both strong revenue growth in 2017 and further margin expansion, but at a 5x P/E you’re clearly not paying for any of that.

Finally, I would also note that the CFO was making frequent purchases of stock in the open market for several months last year until the end of November.  Insider ownership is also fairly high at 25%.

 

Risks

 

  • RacingTraX is a new business with only one quarter under its belt so it is difficult to forecast.

  • Hardware revenues can be volatile which can create some quarter to quarter lumpiness.

  • Customer concentration -- one customer was 27% of revenues last quarter.  The loss of a major customer would have a significant negative impact on profitability.

  • This is a small company with a small number of employees.   As such, there is a higher degree of operational risk than exists in a larger company.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Expansion of the RacingTraX rental pool in 2017.

  • Successful commercialization of the global opportunities that are currently in development and testing in 2017.

  • Eventual initiation of investor relations activities.  The company has remained under-the-radar thus far due to a lack of investor relations.

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    Description

    Total Telcom, operating under the tradenames of ROM Communications and RacingTraX, is a provider of telematics services with a focus on niche markets.  The business has been growing at a 20%+ rate for the past two years, and the strong growth has the potential to accelerate in 2017 as the company rolls out new products and services.  Despite these strong prospects, the shares currently trade for a very low valuation of only around 0.66x revenues and 5.3x current run-rate net income (excluding cash) and thus represent a very attractive investment opportunity.  

    The company’s size and liquidity make it more suitable for personal accounts.  Shares trade as TTZ on the TSX Venture Exchange and TTLTF in the US.

     

    Overview

    As a telematics provider, the company generates revenues by selling an asset tracking solution that consists of monitoring hardware (essentially a GPS unit with a satellite data transmitter) and recurring communications services.  The offering could be used to track a wide variety of high-value industrial assets, but they have historically focused on the niche of fishing vessels.

    Two to three years ago, the company was in much different financial shape.  The business was burning over $500k a year and had flat-to-declining revenues.  The large operating losses were partly due to having sub-scale operations and partly due to professional fees incurred as they pursued a breach of contract lawsuit.  They were also investing in the development of new products and services which had yet to bear any fruit.

    Starting in Q2 2015, however, the company’s fortunes changed.  They prevailed in their lawsuit that quarter and won a $600k settlement, a meaningful amount given the size of the company and its burn rate.  Then in Q3, their expansion efforts finally started to generate results, and they posted 30% revenue growth -- the first quarter in a long string of high growth quarters.  Given the operating leverage in the business, that was enough to finally get the business to breakeven.  Finally in Q1 2017, with the launch of a new business, RacingTraX, the company added another $100k in quarterly revenues which was enough to push the company solidly into the black -- netting a run-rate of a little under $200k annually.

     

    RacingTraX

    RacingTrax is a business that I am particularly excited about.  This is a communications and online mapping solution that has been developed specifically for the off-road racing market, and the company just launched it last quarter. They signed an agreement with the Best in the Desert Racing Association that makes them the exclusive provider of satellite tracking services for the BITD racing circuit, which importantly is a mandatory purchase for all participating UTVs (http://www.newswire.ca/news-releases/total-goes-off-road-racing-588536181.html).  In this business RacingTraX is renting the hardware to racers so it is all recurring revenues.

    With the first race occurring in Q1, the company generated $100k in revenues.  Since the Best in the Desert is a 4-race circuit, this should be a reasonable approximation for average quarterly revenues.  There is actually some additional near-term growth potential as the company notes in the press release that they will be expanding the number of units in the rental pool from 250 to 400 this calendar year to provide a smaller version of the device for motorcycles and ATVs.  Furthermore, there are other non-BITD off-track races that the company can market the solution to, which might draw a little attention now that they’ve demonstrated the technology in the first BITD race.

     

    Growth and 2017 Prospects

    As mentioned previously, the company has been growing at a 20%+ clip for two years now.  By quarter it has been:

    Q3 2015 30% growth
    Q4 2015 29%
    Q1 2016 68%
    Q2 2016 65%
    Q3 2016 13%
    Q4 2016 21%
    Q1 2017 22%


    As you can see there can be a little quarter-to-quarter lumpiness due to the hardware revenues, but the volatility on the bottom line is much less as the margin contribution from hardware is obviously well below that of communication and rental revenues.  Furthermore, with the addition of the RacingTraX business, as of Q1 hardware revenues are now down to less than 20% of revenues, with over 80% coming from the more attractive recurring, high margin communications and rental revenues.

    More importantly, management’s commentary in the MD&A suggests that not only do they expect the strong growth to continue, but they believe that it can actually accelerate in 2017:

    “The Company is optimistic that its growth in revenue seen over the past two years will continue and increase more rapidly in 2017 as management hopes to capitalize on global opportunities that have been initiated and are currently in the development and testing stages.”

    The mention of global opportunities is particularly interesting as right now 98%+ of revenues come from North America.  Management appears to be working on landing some international projects that would be incremental to the existing North American business, but they haven’t yet disclosed the nature of these opportunities.

    Time will tell if management’s optimism here is well-founded.  Considering revenue growth in 2016 was 39%, however, if an acceleration did in fact materialize due to some of these “global opportunities”, it implies 40%+ revenue growth -- which is the type of growth that tends to catch the eye of the market and get investors excited (particularly when it’s selling for a 5x P/E).

     

    Operating Leverage

    In addition to continued revenue growth, the company should also benefit from strong operating leverage which should increase margins.  Over the last few years they’ve demonstrated this as they have doubled revenues from $180k to $360k per quarter with no increase in operating expenses.  

    I suspect we’ll start to see the company reinvest some of their incremental revenues back into the business, however, operating margins are still relatively low and have a lot of room to expand if the company can maintain their growth.  Operating margins were 11.9% last quarter, and considering the high contribution margin on communication and rental revenues and the margins that other telematics businesses can achieve, getting to 20% eventually seems well within reach.

     

    Valuation

    The company has a $2 million market cap and $1 million in cash, with an enterprise value a little under $1 million.  Excluding interest income and foreign exchange gains the company had a net income of $43k in Q1, or a $172k annual run-rate.  As a result, the ex-cash P/E is only 5.3x.  Furthermore, the company has over $7 million in NOLs, so they will not pay any taxes for a very long time.  I believe there is even more upside to these figures from both strong revenue growth in 2017 and further margin expansion, but at a 5x P/E you’re clearly not paying for any of that.

    Finally, I would also note that the CFO was making frequent purchases of stock in the open market for several months last year until the end of November.  Insider ownership is also fairly high at 25%.

     

    Risks

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

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