This business falls into my favourite type of business in the market. These niche tech hardware offerings with sticky client bases with a predictable high margin recurring revenue stream. Where the scale is small enough you keep the big multibillion dollar businesses out of your hair but are able to generate a nice little return for shareholders and roll up the space.
 
 Whether you look at a AirIQ (IQ.V), Plurilock Security (PLUR.V), BeWhere Holdings (BEW.V) or more on the software only side of a Prodigy Ventures Inc. (PGV.V) or Nubeva Technologies (NBVA.V) I still come back to Route 1 as the best option.
 
Once again, here is another one that has been absolutely smoked by tax loss selling off something like 75% from a 52 Week high all the while they will generate EBITDA in FY21 that will be greater than in FY20 & FY19.
 
This is a perfect example of how retail can win in microcap where the financiers got absolutely smoked on a name playing the 0.80/share PP.  I love these set-ups. They raised capital at 0.80/share into which turned out to be weak hands. As soon as it became free trading they dumped that capital so quickly to fund the next deal. They don’t make their money from buying stock they make it from cycling the capital from company to company.
 
Yet the company still has the capital….
 
You can see it in the chart on the April 30, 2021 when the stock went from 0.80/share down to 0.50/share before it even settled out. Then tax loss selling get a hold of it and before you know it we are in the 0.20s.  These are the set-up retail has to take advantage of.
 
Makes the opportunity is more attractive. Hence it makes the list.
 
Lets Jump In;
 


ROI – Route 1 Inc.
 
 

What to Expect in 2022
 

There was a lot of things that happened in FY21 that went against the company outside of their control that should reverse in FY22. All that said they will still put-up record EBITDA in FY21 and should grow into FY22. As someone who is more quantitatively driven, I love management’s focus on Gross Profit dollar generation and efficiency relative to fixed costs. I find many of these small cap names lack the urgency to adjust the cost lever and this team is excellent at that and defending profitability of the business. So, lets look at things that went against them and how I believe it will normalize into FY22.
 
Supply Chain – Of all the names I like this one got hit hard by supply chain in FY21 whether it be on lead times for the rugged device sales or more importantly on the OEM car manufacturer side for their roll out of the License Plate Reading (LPR) tech product which I am so BULLISH on. These are not lost sales they are just deferred. They should start to hit the income statement early in FY22 which will reverse some of this revenue shortfall in FY21 2H.  
 
This is where being a profitable business gives them flexibility, they have been able to acquire a couple of hardware companies and client lists in strategic geographic/product areas for little cash up front with back end earnouts and pay for these deals within cashflow. This is where having the recurring nature of revenue helps blunt this impact in revenue and helps them keep moving forward.
 
Department of Navy Growth – There was projections for double digit revenue growth in the core high value MobiKey division tied to United States government contract that got pushed out in FY21 into FY22 that was driven by factors outside of the company’s control. The Navy was in the process of switching to IT suppliers and moving to a MSFT365 cloud native product and as a result the MobiKey product has to get reintegrated into the new suppliers’ catalogue.
 
Once again this should be transitory in nature that should resolve into FY22, in the meantime they have a high recurring revenue product that is generating $5M+ in high margin recurring revenue. There also is an opportunity here as we now see work from home is not going away. All those companies that deferred investment, they will have to adjust to the new normal which should help Route 1.
 
Currency Headwinds – With the majority of their business tied to the United States and quoted in USD the large move in CAD/USD pair has blunted growth badly into FY21. For example, the CAD/USD pair went from as low as 0.70 in FY20 and peaked in Q2 FY21 at 0.83. That is almost a 19% drag on FX translation from high to low. Given Route 1 reports in CAD that wipes out a lot growth.
 
But what was a headwind in FY21 turns into a tailwind in FY22 as you start comping over those high CAD Quarters. For example, the USD/CAD is already back down to 0.78 which now you are going to have to have translation tailwinds over the course of the entire year.

You turn those three major headwinds into tailwinds in FY22 and I think its primed to have a big year into FY22.  That is all before you really get a the LPR rollout which I was and still am so BULLISH on. You combine that with the couple of tuck in deals they did this year and the client list it provides them to cross sell their broader offering into you got a set-up here from a really depressed valuation to bounce real hard into FY22.

It’s time for management to step up and buy shares in the open market. They have an NCIB to buy shares in the open market up to 0.75/share. So, management thinks the stock is stupid cheap up 168% up to that 0.75/share. I agree with them, but its time they agree with themselves and put their money where their mouth is. We are starting to see it with 97,000 shares purchased by insiders in the month of December alone. That number has to be higher.
 
One last point, there was interesting commentary on the last call regarding if the stock stays in this 0.40-.50/share lvl there is no point being public. Ie. TAKEOUT. With so much capital sloshing around and rates so cheap I think they would be stealing it if they took it private at that price.   
 
 

On the Numbers
 
$32M Revenue Estimate – I believe there is a lot of deferred purchase here to come through in FY22 and you can see it just looking back at the prior 2 years hardware numbers before the supply chain problems really hit. From 2H FY19 through FY20 hardware sales averaged $5.4M/Quarter or $21.6M annualized. You combine the two hardware tuck in acquisitions, light hardware numbers throughout FY21 and the launch of the LPR product line not hard to get to a $22-25M hardware sales figure for FY22. As the currency rate stabilizes and the LPR product hits the market and hopefully some progress on MobiKey the Recurring side of the business should stabilized and start to grow again into the back half of FY22.  
 
$2.8M EBITDA Estimate – This is why I am so BULLISH on this company; they have a lot of upside optionality from multiple product lines from MobiKey, LPR or engineering services at the same time are very cost discipline. The recurring revenue side of the business drives so much value on a gross profit dollar business it allows them to use the hardware side to drive recurring revenue in the future. They are in the process of building out their engineering and services that are not directly correlated to hardware purchases, if they can get this business line firing into FY22 there is a lot of upside to the EBITDA target for FY22.  
 
 
On Valuation
 
So looking to FY22 Route 1 Inc. is trading 1x ARR, 1x Gross Profit or 4x EBITDA in one of the hottest end markets in cyber/network security.

Route 1 has something that many of the other high fliers in the space don’t have –PROFITABILTY. I know it’s been a LONG since we cared about that but that is what gives you the downside protection and allows you to really load up at these price levels.  
 
Especially when you look other names in the space even down market cap. Take for example PluriLock another one of these hardware/software models selling into the US government cyber environment. PluriLock trades at 5x ARR and 10x Gross profit burning more cash every single Q than the ARR they are generating. If you put that kind of multiple on Route 1 and it would be so much higher. Don’t even get my started about how overvalued Nubeva is…

If I put a 4x ARR figure on the business I get to a valuation target of 1.00/share or 257% upside. All the while it remains profitable.
 
Doesn’t seem so crazy when you take this back to that Feb 16, 2021 six plus months ago when it hit a high of 1.14/share. Take advantage of the tax loss selling….
 

1) Zoomd Technologies Inc. ( Zoomd Technologies Ltd | V.ZOMD Stock Message Board & Forum | Stockhouse )
 
2) Premier Health of America Inc. ( Premier Health Of America Inc. | V.PHA Stock Message Board & Forum | Stockhouse )
 
3) Route 1 Inc.
 
4) Tomorrow…. We will have to wait and see!



 
To be continued… 4/5 coming tomorrow
 
 

VERY LONG