Beacon Securities maintains $1.05 target price on PHM “Hard” Money Made, “Easier” Gains to Come
Normally one hears of stocks that the “easy” money has been made.
However, we believe with PHM, the opposite is the reality. Over the past
year, investors had to have faith that management could both execute
the acquisition strategy and successfully cross-sell the services.
Furthermore, at the start of its strategy, it did not have the robust balance
sheet it currently enjoys and as such, investors were diluted during FY14 as
the company raised money to execute its strategy. Meanwhile, the
valuation today on an EV/EBITDA is cheaper than it was a year ago. The
stock closed September 30, 2013 at $0.30, implying a 30x LQA (last quarter
annualized) EBITDA multiple and a P/S multiple of 4.5x. Clearly at that
time, the stock was getting a “benefit of the doubt” valuation as pertains
to future execution.
As of today, the stock trades at $0.43, implying a LQA EV/EBITDA multiple
of 6.7x and a P/S multiple of 1.7x. In our view, the stock currently trades at
a value reflective of the current cash flow with no growth. As we have
seen, with a 20%+ organic growth rate and a 50% EBITDA flow through, if
the company makes no more acquisitions, it should be at a run-rate of $43
million in revenue and $12.5 million EBITDA. That would imply a valuation
of 5x EBITDA and 1.4x sales. Given we know it going to make additional
acquisitions with its $25 million in cash (assume $32 million in revenue and
$8 million in EBITDA in all-cash deals), then the company could be at ~$70
million in sales and $21 million of EBITDA a year from now. That would
imply a valuation of 1.1x P/S and 3.9x EBITDA, assuming the share count
increases because of the exercise of the warrants.
As we have detailed, we believe PHM should be getting a greater “benefit
of the doubt” valuation because of its better-than-expected execution as
witnessed by the organic growth and the actual 50% EBITDA flow through
and the fact the market is still VERY conducive to growth – the reason why
investors were willing to assign a higher multiple a year ago.
The risk-return, in our view, remains excellent. We maintain our Buy
recommendation and $1.05 target price.
ciao vito