Titan Logix Corp V.TLA

Q4 2012 and beyond

[snajem]

• Based on Q3's outlook, I am glad to see flat sales QoQ in Q4. On one softer note, US sales growth has halted (again, sequentially), but this is not surprising after all the economic headwinds and recent news of capex cuts in the oil/gas sector. I personally expected total sales Q4 sales of $4.1M -- so actual results surprised me considerably --good.
   
• GMs remain juicy at 50% and above historical trend. Down sequentially (Q3 was 53.4%). Will need to see longer term trajectory before further commenting. From what I hear, TLA is a leader (by far) in their niche. So I can't say I'm worried about comps bitting away GMs --yet.
   
• Q4 Operating expense likely is noisy. We have to back out the FX loss of $162k (ie. FX loss averages $0 over the long-term) to get ~$1,488K. General and Admin expenses were highest on record. The hiring of the sales manager in July 2012 probably had its load of one-time expense. Other than that, historically Q4 is not seaonally higher than other Qs for General and Admin expenses. It will be interesting to see what the run rate is on this item (my guesstimate is $700k). But clearly not $813k. Moreover, increasing General and Admin can be interpreted as a leading indicator --company is increasing headcount = feeling optimistic = preparing for higher volumes, etc.
   
• So if I am to take an educated guess, I would say that normalized EBT for Q4 was closer to $1.1M vs reported $919K. Q3 adjusted EBT (ex-FX gain) was ~$1.5M, Q2 was $1M and Q1 $600K. Let's take out Q1 out of the equation since the impact of USA penetration was not yet fully in effect. So, based on the last three quarters, this company seems to be, on average, generating EBT of $1,200K / quarter. Thats $4,800K a year. Eventually, co. will run out of tax shield ... so assuming a conservative 30% normalized tax rate = normalized net income of ~$3.4M. That's $0.14/share.
   
• Now, I wouldn't go so far as to say the co. deserves a P/E of 10x. After all, this is a microcap, with one singe product and exposed to one industry. Between 5x and 7x seems fair. Middle range, earnings power is worth ~0.85 /share.
   
• I wouldn't say that cash is the only redundant asset on the balance sheet, but to simplify, let's assume it is. Same is sitting at ~$0.20 / share.
   
• Now, granted, I'm being overly conservative... and yet floor valuation is pointing to >$1.00.
   
• Outlook: I went back to previous outlooks.. and I gather that management errs on the side of caution/conservatism. They tend to underpromise/over-deliver. Again, this is good. So when they say that they are cautiously optimistic for FY2013, I would say that it bodes well.
   
• They are putting more emphasis in the outlook on M&A. They will most probably have to contract debt and deploy most/all their cash to buy a serious competitor. The fact that they would consider this, knowing that they are a conservative bunch, sends me a signal that they believe cash flow will be stable going  forward to service the potiential debt. Agreed, this logic may be stretched... but food for thought.
   
• Overall, be patient. Like someone else said in a previous post: sooner or later, someone will discover this company --when that happens, good luck building a serious position when the price momentum is on upside. Just go back to April 2012 and observe the swift move.  I won't speculate on a price target... but at current levels, stock is too cheap to ignore.

Disclaimer: I'm long -obviously