Post PP Analysis? 2.55x EBITDA w 10 - 20% Organic growth… I have never been more frustrated yet so LONG a stock in my entire life. The total disconnect from fundamentals has created one of the best buying opportunities I see in the market right here.
There are way too many over-priced stocks out there, then I look at AEP which is growing organically 10 – 20% on top of an acquisition program with EBITDA margins now running >15% and expanding all for 2.55x EBITDA. This name has been blown to the point where I just keep adding to my position.
First of all. Let’s talk about the severely suboptimal capital market decision that was made in December.
Private Placement for 10.625M shares @ 0.40/share
It wasn’t the fact they raised capital that frustrated me, it was the fact they raised it all through equity at that size and price with a full warrant. The stock has a 52-week high greater than the exercise strike price… all the while the business has on a fundamental basis continues to strengthen – they shoved it down the throats of investors and it ended in a hot mess.
There should have been more of an emphasis on preservation of the share count especially given the fundamental strength of the business and current valuation.
Granted there is probably more going on behind the scenes but I look at a similar situation with a business that was in a good place fundamentally with an acquisitive history in NLH which did an excellent job raising non-dilutive capital to improve its working capital position through a convertible debenture.
This would have been a perfect solution for AEP as the problem was their working capital ratio and a 2 – 5 year convertible would of brought their liabilities down the balance sheet.
Yes, they were in breach of debt covenants, but the bank was waiving it quarter after quarter and there was no implication given by management that there was a covenant crunch going to be laid down by their bank creditor.
Q4 is going to be so strong, I don’t understand why they didn’t wait a couple months then go back to the market if they still wanted to raise especially as markets continue to melt higher.
They screwed over existing shareholders bad. Real bad.
Where are we now?
With that out of the way, and in the past, we have to look at the investment opportunity it created as the raise was sniffed out bringing the stock down from the low 0.50s down to 0.375/share today or close to a 30% discount.
As a result, I think its has created the best investment opportunities in the first month of the year, as you now have gotten everybody who wanted out of the way and the big money is locked up for 4 months that has participated in the PP.
You now have a window here where they can put up a strong Q4 and Q1 and maybe even put some of that capital raised to work to tuck in another acquisition or two and get this stock ripping.
Would love to see an analyst pick up coverage on the name especially given how cheap it is and the amount of stock that got allocated and the investment banking fees that are being collecting.
Where is the Business Today?
This is why I am so bullish on the name. Fundamentals. You have a broader industry struggling with finding skilled trades labour and the incremental spend from contractors on AEP products continues to grow. As a result, the value proposition that AEP offerings increase, and you already starting to see it in the margin profile of the business. Throw on top of that, the product offering expansion AEP is adding to its suite just increases the potential spend/job size and addressable market.
And its starting to show up in the numbers. They are putting up double digit organic growth and have tripled EBITDA margins in 3Qs and now running EPS positive.
Projecting Out
Without a single further acquisition in FY20 I think they could do $51M in Revenue & $8.8M EBITDA or 17.25% margin.
This would result in YoY Revenue growth of 37% & EBITDA growth of 56% - significant operating leverage!!!
So you have a business now with an updated share count after PP of 60M trading at 2.55x EBITDA. Are you kidding me…
You throw a 6 – 8x EBITDA multiple on that 8.8M FY20 EBITDA number and you get to a share price target of 0.88 – 1.17 share or 1.03/share at the midpoint or 175% upside if they just execute on the underlying business without even having to pursue an acquisition program.
Seasonally Adjusted Annual Housing Starts
Just want to hit on why this trade at such a depressed multiple and why I think it’s not warranted. If you look at SAAR rates in Canada even in the depths of the financial crisis SAAR was still running at 65% of peak 2007 level highs and yet we still haven’t even gotten back to the same SAAR rate since 2007 stubbornly around the 200 – 220K SAAR rate.
If you think the solution to the lack of housing price affordability is to build less not more you are crazy. Simple supply and demand. We need regulatory push to increase Supply and SAAR rates higher around these major metropolitan areas where housing is so unaffordable has to increase. With it be single family housing or multi-family. AEP has exposure to both it doesn’t matter.
This broader Macro is a tailwind for AEP not a headwind. The valuation multiple should be much much higher.
I love a little chaos and a little short-term stock price pain, where opportunity is forged to rise a day to come. Largest position.
LONG