Euro Pacific begins coverage of STT Here is the first page of a 24 page report, contact Euro Pacific or STT investor relations for more
Amr Ezzat | 514.905.7944 | amr.ezzat@europac.ca Page 1 of 24
8 December 2015
STT-TSXV: $0.25
www.epccm.ca
STT Enviro Corp. Quality at Deep Discount – Initiating Coverage with a Speculative Buy Rating and $0.40 Target Price
We are initiating coverage on STT Enviro Corp. (“STT” or “the Company”) with a Speculative Buy rating and 12-month target price of $0.40, equating to a 60.0% return from current levels.
As we expand in our report, STT exposes investors to a solid and growing business at what we believe to be very compelling valuation levels. With the Company currently trading at what we consider deep value levels (2.1x EV/2016E EBITDA), we see this as an opportunity to consolidate a position in a quality operation. Despite the mining and oil & gas downcycle, we see organic top line growth of 11% per annum over the next three years, driving EBITDA growth of 28% per annum during the same time period. An upswing in the mining and oil & gas sectors could see STT materially outperform our forecasts. While we recognize the risks of customer concentration and industry cyclicality, we believe the Company presents attractive risk-reward characteristics at current levels (please refer to our “Risks” section for further discussion). We are namely comforted by STT’s net cash balance of $0.14/shr, providing limited downside from current levels relative to our targeted return.
We summarize our investment thesis below:
Growing and profitable operation with a call option on a commodity price uptick: STT is an engineering and design company focused on supplying customers with (i) environmental systems to neutralize pollutants (namely acid water) in the mining and oil & gas industries, and (ii) bolted storage tanks and transload facilities. The Company’s products are primarily used by mining, oil & gas, power, construction, and municipal clients.
The Company is on track to grow its top line by 53% in 2015 despite the commodity downcycle, reflecting strong product momentum and market share gains. While there are short-term headwinds ahead (we are forecasting a slowdown to a modest 10% sales growth in 2016), we remain positive on the Company’s medium- and long-term prospects. Our revenue forecast calls for a 11% top line CAGR from 2015 to 2018, excluding any potential acquisitions. An uptick in commodity prices could see STT materially outperform our forecasts.
Margin expansion drives strong EBITDA/EPS growth: STT moved from a high cost operator (partly because of its high debt load and unfocused business model) to a lean and profitable operator focused on project execution. Since 2010, cash operating costs as a percentage of sales have decreased from 35% to 17% in 2015. We have cash operating costs as a percentage of sales decreasing further during our forecast period driving EBITDA margin expansion. Our forecast calls for EBITDA margins to expand from 6.1% in 2015E to 9.1% in 2018E, driving EBITDA/FD EPS CAGR of 28%/36%.
Strong free cash flow generation provides for a solid balance sheet and ample room to acquire: STT is debt free, having concluded an aggressive debt repayment plan in Q215, which saw its long-term debt position decline from $2.8M in 2014 to virtually nil today. Strong FCF generation drove the cash balance to $6.5M in Q315. Our forecast calls for the cash balance to continue to grow from $0.14/shr in Q315 to $0.30/shr in 2018, equating to 56%/120% of cash in Q315/2018 versus the Company’s current market capitalization.
Special Situations
Speculative Buy Rating
$0.40 Target Price
Projected Total Return: 60.0%
Valuation: DCF (15.0% discount; 2.7x exit multiple)
Market DataMarket Capitalization12.1Net Debt-6.5Cash & Equivalents6.5Debt0.0Enterprise Value5.6Basic Shares O/S47.2Fully Diluted Shares O/S48.4Avg. Daily Volume (M)0.2052 Week Range$0.15 - $0.38Financial MetricsFYE - Dec 312014A2015E2016E2017ERevenue (M)22.3534.1137.4442.79Growth-21%53%10%14%EBITDA (M)2.102.072.743.57Growth-20%-2%32%30%Margin9.4%6.1%7.3%8.3%EPS (FD)0.030.020.040.05Growth-12%-28%56%32%Valuation DataFYE - Dec 312014A2015E2016E2017EEV/Sales0.3x0.2x0.2x0.1xEV/EBITDA2.7x2.7x2.1x1.6xP/E7.3x10.2x6.5x4.9xCompany DescriptionSTTEnviroCorp.suppliescosteffective,incremental,environmentalimprovementstotraditionalindustrialproducts.TheCompany’stwooperatinggroups,STTEnviroCorpSystems&SolutionsandSTTEnviroCorpTanks&Industrial,worktoreducetheircustomers’environmental footprint, cost efficiently. STT Enviro Corp Systems&Solutionsengineersandsupplieschemicalmakedownsystemstoneutralizepollutants(usuallyacidwater)createdintheoreoroilrecoveryprocess;andaftermarketservicesincludingoptimizationofchemicaluseforourcustomerstolowercostsandreducetheircarbonfootprint.STTEnviroCorpTanks&Industrialengineersandsuppliesboltedtankswithasmallerenvironmentalfootprintforbothdryandliquidstorageapplications.STTEnviroCorp.wasfoundedin1970 and is headquartered in Milton, Canada.0.001.002.003.004.005.00$0.00$0.10$0.20$0.30$0.40VolumePrice
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STT-TSXV | 8 December 2015
We expect STT to use some of its balance sheet strength to acquire and grow its revenue base. While we expect the Company to deploy cash into acquisitions, we do not model any contribution from M&A in our forecasts. Instead, we build out three illustrative acquisition scenarios to gauge the potential EPS accretion/dilution of potential acquisitions (P. 14). We see potential FD EPS accretion of up to 30% above and beyond our forecasts contingent on acquisition size, deal structure, and multiple paid.
Revenue diversification to provide business model sustainability: The Company recently introduced transload facilities for frac sand, cement and fly ash as part of its product offering. The major competitive advantage here is that the bolted silos can be deconstructed when they are no longer needed. With strong demand for cement transload facilities in the power and construction industries, we see the new products as an integral part of STT’s diversification strategy. We point out that these are higher dollar value projects and thus expect the lion’s share of future growth to come from the new product offerings.
Capable management team and board of directors with a strong track record of execution: Since taking the helm of the Company in early 2011, the management team and board of directors were able to turn around an unprofitable and highly levered operation to a consistent and well capitalized performer, growing revenues at 22% CAGR since 2010 and taking STT to profitability. Insiders own ~24% of total shares outstanding.
Attractive fundamentals not reflected in current valuation levels: The Company currently trades at what we consider very attractive valuation levels relative to its fundamentals. The Company’s stock price is currently reflecting a 2.1x 2016E EBITDA multiple and a 6.5x 2016E diluted EPS multiple. We derive our $0.40 target price using a discounted cash flow analysis with a 15.0% discount rate and a 2.7x exit EBITDA multiple. Our DCF valuation equates to a 5.1x 2016E EBITDA multiple and a 10.9x 2016E earnings multiple. A 1.0% change in our discount rate increases/decreases our target price by +/- $0.01 and a 0.5x change in our exit multiple increases/decreases our target price by +/- $0.03.
Exhibit 1 – Discounted Cash Flow Analysis and Sensitivity Analysis
Source: Euro Pacific Canada
Valuation ParametersTrading Multiples @ Share PriceValuation Date06-Dec-16EV / EBITDAP / EExit Multiple2.7xDec 2015E2.7x10.2xDiscount15.0%Dec 2016E2.1x6.5xDec 2017E1.6x4.9xDCF SummaryImplied Multiples @ DCF ValuePresent Value of Free Cash Flows$6,329,391EV / EBITDAP / EPresent Value of Terminal Value7,619,906 Dec 2015E6.7x17.1xEnterprise Value13,949,297 Dec 2016E5.1x10.9xNet Cash6,458,489 Dec 2017E3.9x8.3xEquity Value20,407,786 Per Share$0.42Total Return Potential68.00%DCF Valuation Sensitivity Upside From Current LevelsExit Multiple vs. WACCExit Multiple vs. WACC$0.421.7x2.2x2.7x3.2x3.7x1.7x2.2x2.7x3.2x3.7x12.0%0.370.410.440.470.5012.0%48.0%64.0%76.0%88.0%100.0%13.0%0.370.400.430.460.4913.0%48.0%60.0%72.0%84.0%96.0%14.0%0.360.390.420.450.4814.0%44.0%56.0%68.0%80.0%92.0%15.0%0.360.390.420.450.4815.0%44.0%56.0%68.0%80.0%92.0%16.0%0.350.380.410.440.4716.0%40.0%52.0%64.0%76.0%88.0%17.0%0.350.380.400.430.4617.0%40.0%52.0%60.0%72.0%84.0%18.0%0.340.370.400.430.4518.0%36.0%48.0%60.0%72.0%80.0%
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STT-TSXV | 8 December 2015
STT Enviro Corp. (STT-T, $0.25) - Data SheetSPEC BUY | PT: $0.40Company DescriptionConsensus3 Mths AgoCurrentReturnRating:nananaTarget:nananaMedian:nananaHigh:nananaLow:nananaConsensus DistributionSector Outperform/BuynanaSector Perform/HoldnanaSector Underperform/Sellnana# EstimatesnanaHistorical ValuationLTM EV/EBITDALTM EV/SalesKey Financial MetricsFinancial Summary2014AQ115AQ215AQ315AQ415E2015E2016E2017EKey StatisticsValueRevenue22.38.711.27.96.334.137.442.852-Week High$0.3850%Growth y/y(21.4%)74.1%124.1%33.5%(1.9%)52.6%9.8%14.3%52-Week Low$0.15(40%)Cons.NANANANANANANANAAvg Vol (3-Mo)138kCons. 3 Mts. AgoNANANANANANANANAShares Outstanding (FD)48Gross Profit6.92.12.61.51.57.78.09.1Market Cap$12.10Margin30.8%23.7%23.2%19.6%24.4%22.7%21.4%21.3%Net Debt (Net Cash)-$6.46Cons.NANANANANANANANAEnterprise Value$5.64Cons. 3 Mts. AgoNANANANANANANANADiv Yield0.0%EBITDA2.10.61.00.20.32.12.73.6FYEDec 31Margin9.4%7.3%8.8%2.4%4.1%6.1%7.3%8.3%Employees~90Cons.NANANANANANANANACons. 3 Mts. AgoNANANANANANANANADiluted EPS0.030.010.010.000.000.020.040.05Top OwnershipM SharesΔ 6 Mnths% HeldGrowth y/y-11.5%-46.1%122.0%-76.5%-59.0%-27.7%56.0%31.9%Sadler, Stephen4.750.009.8%Cons.NANANANANANANANAKompass Kapital Manageme 4.354.359.0%Cons. 3 Mts. AgoNANANANANANANANAGenovese, Bobby3.353.356.9%BG Capital Group, Ltd., Inves 3.35(5.05)6.9%BreakdownQ115AQ215AQ315AQ415E2015E2016E2017EBringeland, Hal Fraser 2.530.005.2%Systems & Solutions Sales3.85.83.73.116.415.016.5Timelo Investment Managem 0.930.211.9%Tanks & Industrial Sales5.05.34.23.217.722.526.3Wilby, John H.0.810.111.7%Total Sales8.711.27.96.334.137.442.8Useppa Holdings0.740.201.5%Systems & Solutions GM1.21.91.51.05.65.15.7GM %30.9%31.8%40.8%33.0%33.9%34.0%34.5%Tanks & Industrial GM0.90.70.00.52.22.93.4GM %18.2%13.7%0.7%16.0%12.3%13.0%13.0%ReturnEV / SalesEV / EBITDAP / EEBITDARev. GrowthDividendLTM1 Week1 Month3 MonthYTD1 YearLTMNTMLTMNTMLTMNTMMargin2016EYieldROECanadian E&C PlayersSNC-Lavalin Group Inc.(5.1%)(2.7%)5.1%(9.2%)(3.0%)0.5x0.6x11.2x6.9x4.2x14.6x4.7%14.3%2.4%51.4%WSP Global Inc.(1.2%)(4.9%)5.7%27.7%27.2%0.9x1.0x13.2x9.9x23.5x17.5x6.8%87.9%3.3%8.2%Badger Daylighting Ltd.(6.7%)17.4%15.9%(13.2%)(22.4%)2.3x2.4x8.3x8.6x25.0x28.0x28.3%-2.7%1.5%15.5%Aecon Group Inc.(4.0%)(11.3%)10.1%27.2%26.3%0.4x0.4x7.5x7.2x16.4x15.3x4.6%7.9%2.9%7.5%Bird Construction Inc.(1.5%)7.2%15.8%17.6%20.9%0.3x0.3x6.3x6.8x27.0x15.5x5.1%4.8%5.3%13.3%NAPEC Inc.(2.7%)5.9%(4.0%)(20.9%)(18.2%)0.4x0.3x7.5x3.9x58.7x5.5x5.1%10.3%-1.0%Median(3.4%)1.6%7.9%4.2%8.9%0.5x0.5x7.9x7.0x24.2x15.4x5.1%9.1%2.7%10.7%Canadian Machinery PlayersATS Automation Tooling Systems In(4.0%)(1.8%)(6.7%)(20.6%)(18.8%)1.3x1.3x11.2x9.6x25.8x15.7x11.9%11.9%-7.7%Exco Technologies Limited6.6%10.3%9.1%33.2%34.9%1.3x1.2x8.6x7.2x16.8x12.7x15.5%9.5%1.5%18.2%Ag Growth International Inc.(1.6%)(6.4%)(24.5%)(49.3%)(47.9%)1.7x1.4x16.2x8.7xNM12.4x10.8%10.5%8.3%(9.6%)Ovivo Inc.7.4%64.3%26.0%(19.2%)4.4%0.3x0.3x7.8x6.5xNM12.9x3.9%0.1%-(17.5%)H2O Innovation Inc.-(9.1%)(17.8%)(17.8%)(30.2%)0.6x0.5x11.7x6.6xNM16.3x4.9%12.0%-0.2%Median-(1.8%)(6.7%)(19.2%)(18.8%)1.3x1.2x11.2x7.2x21.3x12.9x10.8%10.5%-0.2%STT Enviro Corp.6.4%(7.4%)(12.3%)38.9%25.0%0.2x0.2x2.7x2.1x10.2x6.5x5.0%9.8%-34.6%Source: Euro Pacific Canada, Company Reports and Filings, Capital IQSTT Enviro Corp. supplies cost effective, incremental, environmental improvements to traditional industrial products. The Company’s two operating groups, STT Enviro Corp Systems & Solutions and STT Enviro Corp Tanks & Industrial, work to reduce their customers’ environmental footprint, cost efficiently. STT Enviro Corp Systems & Solutions engineers and supplies chemical make down systems to neutralize pollutants (usually acid water) created in the ore or oil recovery process; and aftermarket services including optimization of chemical use for our customers to lower costs and reduce their carbon footprint. STT Enviro Corp Tanks & Industrial engineers and supplies bolted tanks with a smaller environmental footprint. STT was founded in 1970 and is headquartered in Milton, Canada.$0.00$0.05$0.10$0.15$0.20$0.25$0.30$0.35$0.40Dec-12Apr-13Aug-13Dec-13Apr-14Aug-14Dec-14Apr-15Aug-15Stock Price ($)Last Sale Price50-Day MA200-Day MA0.0x2.0x4.0x6.0x8.0x10.0x12.0xDec-12Feb-13Apr-13Jun-13Aug-13Oct-13Dec-13Feb-14Apr-14Jun-14Aug-14Oct-14Dec-14Feb-15Apr-15Jun-15Aug-15Oct-150.0x0.5x1.0x1.5x2.0x2.5xDec-12Feb-13Apr-13Jun-13Aug-13Oct-13Dec-13Feb-14Apr-14Jun-14Aug-14Oct-14Dec-14Feb-15Apr-15Jun-15Aug-15Oct-15
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STT-TSXV | 8 December 2015
Table of Contents
Review of Recent Results and Q415/2016 Preview ............................................................................................................ 5
Company History, Turnaround, and Business Model ......................................................................................................... 6
History and Turnaround ..................................................................................................................................................... 6
Business Model and Products ............................................................................................................................................ 7
Competitive Landscape .................................................................................................................................................... 10
Analysis of Historical Results ........................................................................................................................................... 10
Financial Forecasts .......................................................................................................................................................... 12
Illustrative Accretion/Dilution Analysis ........................................................................................................................... 14
Valuation: DCF Analysis & Historical Trading Multiple ..................................................................................................... 15
Risks ............................................................................................................................................................................... 16
Financial Statements ....................................................................................................................................................... 17
Income Statement ........................................................................................................................................................... 17
Balance Sheet ................................................................................................................................................................... 18
Cash Flow Statement ....................................................................................................................................................... 19
Appendix I – STT Products ............................................................................................................................................... 20
Appendix II – Lime Slaker Technical Drawing ................................................................................................................... 21
Appendix III – Management Team Bios ........................................................................................................................... 22
Appendix IV – Board of Directors Bios ............................................................................................................................. 23
Euro Pacific Canada Inc. Research Disclosures ................................................................................................................. 24
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STT-TSXV | 8 December 2015
Review of Recent Results and Q415/2016 Preview
On the backdrop of solid Q115 and Q215 results, STT’s Q315 results were highlighted by continued exceptional top line growth and solid FCF generation. Soft margins tempered the otherwise strong results.
Product momentum continues to drive strong top line growth, positioning the Company for a record 2015: STT delivered sales of $7.9M in Q315, up 33.5% y/y. Sales for the first nine months of 2015 are up 74.6% y/y.
We note the Company’s closing backlog as at September 30, 2015, of $22.0M versus last year’s $31.3M (-29.5% y/y) and last quarter’s $25.1M (-12.2% sequentially). The lower backlog is nothing to fret about, in our view. We expect the backlog to be lumpy q/q going forward as STT starts to bid on larger projects. Just like last quarter, management confirmed in the MD&A that the Company’s “sales funnel remains full” and that it continues to “track towards a record year in terms of revenues”.
Cost overruns hamper GM and EBITDA margins; management commentary suggests a rebound going forward: STT’s gross margin for the quarter came in at 19.6% versus last year’s 28.9% and last quarter’s 23.2%, driving EBITDA margin to a meagre 3.0% ($0.24M) versus last year’s 10.0% and last quarter’s 10.4%. The Company noted that cost overruns on a large project in the Tanks & Industrial division impacted margins. The Company has since taken steps to strengthen its project control process, implying a rebound in margins from current levels.
Exceptional FCF generation provides balance sheet strength: The Company finished the quarter with a cash balance of $6.5M ($0.14/shr in cash versus the current share price of $0.24) driven by exceptional FCF generation of $2.8M ($0.06/shr). We note that net changes in non-cash working capital balances positively contributed $2.5M to operating cash flows during the quarter.
STT concluded an aggressive debt repayment plan last quarter, which has seen its long-term debt position decline from $2.8M in 2014 to virtually nil in Q215. The Company currently has a $48K vehicle loan outstanding, bearing 0.99% interest.
Balance sheet dry powder provides opportunities to acquire: Management has previously expressed its intention to supplement the Company’s organic growth with complementary acquisitions. STT is targeting the US market noting that Canada can be tackled organically. Management emphasized its focus on discipline when evaluating potential targets.
Q415/2016 preview: Our forecasts call for Q415 Sales/EBITDA of $6.3M/$0.3M. Our top line estimate reflects flat growth from $6.4M last year. Our EBITDA estimate equates to a 4.1% margin, compared to 2.4% last quarter and 9.3% last year. We anticipate that EBITDA will be impacted by a lower gross margin one-time costs related to the departure of the Tanks & Industrial group head.
Our Q415 estimates imply that STT will achieve an impressive 53% y/y growth for the full year. We estimate that the Company will close out the year with $2.1M in EBITDA, implying a 6.1% EBITDA margin, down from 9.4% last year. We expect margins to start recovering as early as Q116, and call for full year 2016 EBITDA margin of 7.3% on $37.4M of sales, implying 32.5% EBITDA growth. We expect sales growth to be driven by strong performance in the Tanks and Industrial segment.
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STT-TSXV | 8 December 2015
Company History, Turnaround, and Business Model
History and Turnaround
STT is an engineering and design company focused on supplying customers with (i) environmental systems to neutralize pollutants (namely acid water) in the mining and oil & gas industries, and (ii) bolted storage tanks and transload facilities. The Company’s products are primarily used by mining, oil & gas, power, construction, and municipal clients. We provide a more comprehensive discussion of the Company’s products in the next section (“Business Model and Products”) and in Appendix I.
Exhibit 2 – STT Frac Sand System (Left) and Lime Slaker System (Right)
Source: STT, Metso
The Company traces its routes to 1970, going public in 2000 with a focus on the design and installation of pneumatic conveying systems. Control of STT changed in late 2006 when OCMES Acquisition Corp. acquired 51% of the Company. A new strategy was developed after this acquisition to grow the business aggressively through acquisitions within the industrial and distribution sectors.
Between March 2007 and April 2008, the Company went on an acquisition spree under the direction of its new controlling shareholder acquiring 7 companies in the space of 13 months. The economic downturn in 2008 in conjunction with a highly levered capital structure forced STT to divest five of its recently acquired businesses at steep losses and revisit its business model altogether.
With the Company unsuccessful at bringing debt levels down and turning the business around, the CEO & Chairman stepped down and current CEO David Deacon joined the board, becoming CEO in early 2011. The board went through further changes shortly thereafter and is now completely rejuvenated from the 2007-2009 era. The new management team and board’s main focus was now on organic growth and debt reduction in order to decrease the Company’s exposure to economic cycles (sales were down 58% in 2010).
Between March and May 2011, STT underwent a financial restructuring, which provided the Company with fresh financing through the issue of approximately $2.5M of convertible debentures maturing in April 2014 and a significant reduction in its debt load through the conversion of approximately $4M of term debt and accounts payable to common shares. STT concluded its aggressive debt repayment plan last quarter, which has seen its long-term debt position decline from $2.8M in 2014 to virtually nil in Q215.
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Business Model and Products
Overview
The Company’s two operating groups, Systems & Solutions and Tanks & Industrial, work to cost efficiently reduce their customers’ environmental footprint. The Company has a growing list of customers, with well over 1,200 installations of its products worldwide. The business strategy going forward is to expand organically and through acquisitions.
On the organic front, the Company is focused on bidding on higher dollar value projects ($3-15M range) and growing its high margin after sale parts and services business.
On the acquisition front, we believe the Company’s scope of potential acquisitions extends from technology-focused to client-focused acquisitions. From our discussions with management, we do not believe that STT would jeopardize its balance sheet strength. While we expect the Company to deploy cash into acquisitions, we do not model any contribution from M&A in our forecasts.
Exhibit 3 – Sales by Division (2010-2015E)
Source: STT, Euro Pacific Canada
Systems & Solutions – 48% of YTD 2015 Sales
Snapshot: Systems & Solutions focuses on engineering, supply and optimization of chemical (mainly lime) storage and preparation solutions used in water remediation and emission control systems to reduce or eliminate pollutants.
The Company acts as a subcontractor to E&C firms to supply them with an integrated solution as part of a given project. STT’s solution includes the design and engineering, sourcing of equipment, installation/commissioning, and lifecycle support and maintenance. While a portion of business comes from referrals and repeat customers, we estimate that a large portion of sales are generated through RFPs.
The end customers of E&C firms include oil & gas, mining, food, steel, and chemical companies in the Americas. Revenues are driven by increasing regulation relating to the use of water and its cleanup as well as tighter regulations concerning air emissions.
Products: For water and wastewater treatment as well as air emissions cleanup, the Company designs, assembles, delivers and optimizes dry bulk material storage and handling systems for the chemicals used to clean or neutralize pollutants — from the unloading systems, storage silos, through to the handling, make-down and transfer systems, including integrated instrumentation and controls. The Company has an exclusive co-operation agreement with Metso (HLSE:MEO1V, NR), a leading supplier of equipment to the
$- $5,000,000 $10,000,000 $15,000,000 $20,000,000 $25,000,000 $30,000,000 $35,000,000 $40,000,00012 monthsDec-31-201012 monthsDec-31-201112 monthsDec-31-201212 monthsDec-31-201312 monthsDec-31-201412 monthsDec-31-2015Systems & SolutionsTanks & Industrial
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STT-TSXV | 8 December 2015
mining industry, for the integration of Metso’s VERTIMILL® lime slaker into large lime slaking systems in North, Central, and South America. The Company also provides clients with its proprietary ZMI PORTEC Slaker technology (acquired in 2008). A technical drawing of a slaker is provided in Appendix II. STT currently has over 1,200 installed systems to which it provides life-cycle support services. The Company also has an extensive inventory of parts and retrofits available to improve the efficiency of existing systems.
Growth opportunities: Short-term growth might be challenged in 2016 due to soft commodity prices. That being said, a tighter regulatory environment requiring companies to remediate water used as part of operations provides tailwinds for continued demand for STT’s products. We see the Company putting more emphasis on retrofits in the challenging environment and growing its after sale market altogether (currently $5-6M in revenues/year).
Exhibit 4 – Lime Slaking System with Chemical Storage Tanks
Source: STT
Tanks & Industrial – 52% of YTD 2015 Sales
Snapshot: Tanks & Industrial engineers and constructs custom bolted storage tanks, silos and transload systems with a smaller environmental footprint and often at a discount to other options.
The Company provides engineering support, drawings, capacity charts, specifications, life-cycle analysis, and construction services for liquid storage projects and transload systems. The Company has an exclusive partnership with CST Storage and CST Covers, the world’s largest bolted storage solution provider. The agreement covers western Canada (MB, SK, AB, BC, NT, YK). STT is not a mere distributor, but also provides value-added custom engineering to the products to help fit clients’ needs and provides the associated construction services.
Value proposition: Bolted steel tanks act as a cost effective and less invasive alternative to field-welded and field-coated steel tanks. The tanks are prepared, manufactured and coated in the factory, which eliminates paint usage and excessive waste in the field. Installing a bolted tank requires a mere five to six onsite construction personnel. Construction can be performed year round, and takes on average six months from order time to commissioning. Costs are typically 25-30% cheaper than field-welded tanks. The unique jacking installation system also eliminates the need for heavy equipment onsite. The ability to install these tanks in a tight space means fewer trees need to be cut down, and less environmental footprint. In addition, during the reclamation process of an industrial site, bolted tanks can be torn down and recycled at minimal cost compared to a field-welded tank. Clients include Cenovus (TSX:CVE, NR),
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STT-TSXV | 8 December 2015
Suncor (TSX:SU, NR), Devon (NYSE:DVN, NR), District of West Kelowna, Vancouver University Research Centre, and Canada Malting.
Products: Products include a wide range of turnkey solutions for the design, engineering, and installation of bolted storage solutions for bulk material storage and handling. Glass-fused-to-steel bolted tanks have been around for over 60 years. CST Storage first discovered the method of controlling corrosion by fusing glass to steel in the 1930s. The technology was initially used in the brewing and hot water heater industries. While other uses for glass-fused-to-steel were explored, the first glass-fused-to-steel tank went into service in 1949. Glass-fused-to-steel is the premium technology in the tank market. The factory-applied silica glass coating on tanks forms a hard, inert barrier for both the interior and exterior tank surfaces to guard against weather and corrosion. Glass-fused-to-steel is impermeable to liquids and vapors, controls undercutting caused by corrosion, and offers excellent impact and abrasion resistance; it never needs to be painted. Epoxy coated tanks are used for a wide range of applications including waste water, oil & gas, potable water, fire protection, power generation and industrial liquids. The tanks are suited for up to 93 degrees Celsius with capacity of up to 6M US gallons. Epoxy typically lasts 25+ years while glass-fused tanks last over 40 years. In addition to the tanks, STT provides clients with custom accessories to fit their needs (baffles, ladders, mixers, nozzles, railings, immersion heaters, etc.) and with various floor foundations and roof options.
New products and diversification initiatives: The Company recently introduced transload facilities for frac sand, cement and fly ash as part of its product offering. The major competitive advantage here is that the bolted silos can be deconstructed (as opposed to cement for example) when they are no longer needed. With strong demand for cement transload facilities in the power and construction industries, we see the new products as an integral part of STT’s diversification strategy. We point out that these are higher dollar value projects and thus expect the lion’s share of future growth to come from the new product offerings.
STT provides clients with a full system, including the custom bolted silos, a fill and transfer system (pressure and vacuum conveying equipment, fill station controls, truck, railcar and vacuum unload, railcar to truck transfer systems, mechanical conveying), fill and transfer station controls, and withdrawal systems (bin activators, aeration rings, air slides, impactors, reclaimers).
Growth opportunities: We see the biggest short- and medium-term growth opportunities in tank farms for refineries/upgraders and transload systems for cement. Namely, the Company is currently working on a large tank farm project, and with increased infrastructure spending by the newly elected Liberal government, we see opportunities in transload cement systems (for both power and construction projects). An oil & gas recovery can provide strong growth opportunities in the division.
Exhibit 5 – STT Frac Transload Silos in Fort Nelson, BC
Source: STT
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STT-TSXV | 8 December 2015
Competitive Landscape
The competitive landscape varies depending on the geography and size of the project being bid on (with more competition for smaller projects). Most of the Company’s competitors are privately held businesses focused on specific geographies. In the tanks division, competitors include Titan Environmental Containment, Tarsco, American Structures, Superior Tank, and Western Tank & Lining. The Company’s competitive position in Western Canada is protected by its exclusive agreement with CST, the largest manufacturer of bolted tanks. In addition, the value-added engineering work the Company performs on its tanks also helps to fend off smaller/less engineering inclined competitors. In the systems division, competitors include Merrick Industries, Westpro, Sodimate, and Chemco. The Company’s competitive position is protected by its exclusive agreement with Metso (signed in December 2014) to integrate the VERTIMILL® lime slaker into complete lime slaking systems. The agreement is for a three-year period and is automatically renewed for successive periods of one year thereafter. Being chosen by a large player like Metso validates STT’s engineering expertise and reliability in the field.
In light of the current difficult operating environment, we expect STT to be aggressive with its bid pricing.
Analysis of Historical Results
The Company has done a good job of turning around the business since the new management team and board of directors took over in early 2011.
On the gross margin side, STT managed to steer costs in the right direction taking gross margins from 19.2% (prior to the new CEO taking the helm of the Company) to 30.8% in 2014. In 2015, gross margins have come under pressure due to competitive bid pricing and more recently in Q315, cost overruns in the tanks division. The results remain nonetheless impressive considering the current environment.
Exhibit 6 – Sales & Gross Margins (2009-2015E)
Source: STT, Euro Pacific Canada
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STT-TSXV | 8 December 2015
The turnaround and strong operating execution is evidenced in the chart below, where STT moved from a low/negative operating income operation, to a solid operator delivering consistent results. The aforementioned gross margin pressures impacted operating income in 2015.
Exhibit 7 – Operating Income as % of Sales (2009-2015E)
Source: STT, Euro Pacific Canada
In tandem with its improved margins and return to profitability, STT built a solid balance sheet. Between March and May 2011, STT underwent a financial restructuring which provided the Company with fresh financing through the issue of approximately $2.5M of convertible debentures maturing in April 2014 and a significant reduction in its debt load through the conversion of approximately $4M of term debt and accounts payable to common shares. STT concluded its aggressive debt repayment plan last quarter, which has seen its long-term debt position decline from $2.8M in 2014 to virtually nil in Q215.
As at September 30, 2015, STT had $6.5M in cash, up from $2.3M at the beginning of the year. Cash balance at quarter end equated to $0.14/shr versus the current stock price of $0.24/shr (58% of market capitalization).
Exhibit 8 – Net Debt Position (2009-Q315)
Source: STT, Euro Pacific Canada (8,000,000.0) (6,000,000.0) (4,000,000.0) (2,000,000.0) - 2,000,000.0 4,000,000.0 6,000,000.0 8,000,000.012 monthsDec-31-200912 monthsDec-31-201012 monthsDec-31-201112 monthsDec-31-201212 monthsDec-31-201312 monthsDec-31-20143 monthsMar-31-20153 monthsJun-30-20153 monthsSep-30-2015
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STT-TSXV | 8 December 2015
Financial Forecasts
Revenues: As at September 30, 2015, STT’s sales order backlog stood at $22.0M versus last year’s $31.3M (-29.5% y/y) and last quarter’s $25.1M (-12.2% sequentially). The lower backlog is nothing to fret about, in our view. We expect the backlog to be lumpy q/q going forward as STT starts to bid on larger projects. The Company is now bidding on multiple projects in the range of $3-15M. Management confirmed in the MD&A that the Company’s “sales funnel remains full” and that it continues to “track towards a record year in terms of revenues”. The sequential drop in backlog is the normal course of business in this cyclical/lumpy industry.
We forecast our sales per division taking into account (i) the pace of backlog bookings, and (ii) our expectations of new order realizations. We namely see the Tanks division’s sales growth outpacing that of the Systems’ division. We are calling for 2016/2017/2018 sales of $37.4M/$42.8M/$47.1M, equating to 9.8%/14.3%/10.0% y/y growth. While we expect the Company to deploy cash into acquisitions, we do not model any contribution from M&A in our forecasts.
Gross Margin: On the gross margin side, we derive our forecasts by projecting gross margin performance for both segments. With the Company aggressively growing its lower margin Tanks & Industrial division, we expect consolidated gross margins to compress from 22.7% in 2015E to 21.5% in 2018E.
Exhibit 9 – Sales and Gross Margin Forecast Summary (2015E-2018E)
Source: Euro Pacific Canada
For the Fiscal Period Ending12 monthsDec-31-201512 monthsDec-31-201612 monthsDec-31-201712 monthsDec-31-2018RevenuesSystems & Solutions16,423,923 14,989,040 16,487,944 18,136,739 Tanks & Industrial17,688,880 22,455,000 26,300,000 28,930,000 Total34,112,803 37,444,040 42,787,944 47,066,739 Y/Y GrowthSystems & Solutions33.0%-8.7%10.0%10.0%Tanks & Industrial76.9%26.9%17.1%10.0%Total52.6%9.8%14.3%10.0%Revenue SplitSystems & Solutions48.1%40.0%38.5%38.5%Tanks & Industrial51.9%60.0%61.5%61.5%Total100.0%100.0%100.0%100.0%GM $Systems & Solutions5,565,078 5,096,274 5,688,341 6,347,859 Tanks & Industrial2,179,802 2,919,150 3,419,000 3,760,900 Total7,744,880 8,015,424 9,107,341 10,108,759 GM %Systems & Solutions33.9%34.0%34.5%35.0%Tanks & Industrial12.3%13.0%13.0%13.0%Total22.7%21.4%21.3%21.5%
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STT-TSXV | 8 December 2015
Operating Cash Costs: STT moved from a high cost operator (partly because of its high debt load and unfocused business model) to a lean and profitable operator focused on project execution. Since 2010, cash costs have decreased from 35% to 23% in 2014. In 2016/2017/2018, we have cash operating costs as a percentage of sales decreasing to 15%/13%/13%.
Exhibit 10 – Cash Operating Costs as % of Sales (2009-2018E)
Source: STT, Euro Pacific Canada
Free cash flow generation will continue to build out a cash balance for the Company in our forecast period. The cash balance grows from $0.14/shr in Q315 to $0.30/shr in 2018 versus the current share price of $0.24, equating to 58%/125% of cash in Q315/2018 versus the Company’s current market capitalization.
Exhibit 11 – Net Debt (2009-2018E)
Source: STT, Euro Pacific Canada (20,000,000.0) (15,000,000.0) (10,000,000.0) (5,000,000.0) - 5,000,000.0 10,000,000.012 monthsDec-31-200912 monthsDec-31-201012 monthsDec-31-201112 monthsDec-31-201212 monthsDec-31-201312 monthsDec-31-201412 monthsDec-31-201512 monthsDec-31-201612 monthsDec-31-201712 monthsDec-31-2018
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STT-TSXV | 8 December 2015
Illustrative Accretion/Dilution Analysis
In Exhibit 12, we present three acquisition scenarios based on TargetCo revenues of $5M, $15M, and $25M. For our base case, we assume the target company has 8% EBITDA margins (pre-synergies), purchase price of 6.5x EBITDA, and net debt capacity of STT of 1.5x Pro Forma EBITDA (the balance financed by equity). We note that all three scenarios are accretive, excluding one-time costs associated with the acquisitions. If we include one-time costs into the equation, only the first two scenarios are accretive. The third is dilutive given the more expensive equity financing needed to complete the acquisition. We sensitize all three scenarios in Exhibit 13, varying EBITDA margin, target multiple paid, and the pro forma capital structure. We note all scenarios have the potential to be accretive owing to the solid balance sheet STT has built up and cheap debt financing.
Exhibit 12 – Illustrative Accretion/Dilution Analysis
Source: Euro Pacific Canada
Exhibit 13 – Accretion/Dilution Analysis Sensitivity
Source: Euro Pacific Canada
Scenario 1:Scenario 2:Scenario 3:(in $000s unless otherwise specified)$5M Revenues$15M Revenues$25M RevenuesTargetCo Revenues5,000 15,000 25,000 TargetCo EBITDA (assumes margin of 8%)400 1,200 2,000 Acquisition size (assumes 6.5x purchase price)2,600 7,800 13,000 STT 2016E EBITDA2,740 2,740 2,740 Debt capacity @ 1.5x net leverage to Pro Forma EBITDA4,484 5,234 5,849 Plus: current net cash available for acquisitions(6,023) (6,023) (6,023) Net Debt capacity for acquisitions10,508 11,258 11,873 Equity Required0 0 1,127 PF Net Debt(3,423) 1,777 5,849 PF Net Debt / PF EBITDA(1.15x) 0.5x 1.5x PF Interest CoverageNA32.7x 11.1x F2016E EPS - excluding acquisitions0.038 0.038 0.038 Pro forma F2016 EPS - including one time costs(1)(2)0.039 0.040 0.038 PF 2016 Accretion (Dilution) - including one time costs1.8%5.3%-2.0%Pro forma F2016 EPS - ex-one time costs(2)(3)0.041 0.047 0.049 PF 2016 Accretion (Dilution) - ex-one time costs(3)7.8%23.5%28.8%(1) Assumes equity issuance costs, integration and other costs all expensed in year 1 (F2016)(2) Assumes equity raised at $.23, a 8% discount to current share price(3) Excludes equity issuance costs and integration/other one time expensesF2016 EPS Accretion (Dilution) @ $5M Target Co. Sales ScenarioPre-synergies EBITDA margin:Total Debt capacity (net leverage to EBITDA)1.8%6.0%7.0%8.0%9.0%10.0%1.8%0.5x1.0x1.5x2.0x2.5x4.5x0.8%2.2%3.7%5.2%6.7%4.5x3.7%3.7%3.7%3.7%3.7%6.5x-0.7%0.5%1.8%3.0%4.2%6.5x1.8%1.8%1.8%1.8%1.8%8.5x-2.1%-1.2%-0.2%0.8%1.8%8.5x-0.2%-0.2%-0.2%-0.2%-0.2%10.5x-3.6%-2.8%-2.1%-1.4%-0.6%10.5x-2.1%-2.1%-2.1%-2.1%-2.1%F2016 EPS Accretion (Dilution) @ $15M Target Co. Sales ScenarioPre-synergies EBITDA margin:Total Debt capacity (net leverage to EBITDA)5.3%6.0%7.0%8.0%9.0%10.0%5.3%0.5x1.0x1.5x2.0x2.5x4.5x2.3%6.7%11.1%15.6%20.0%4.5x11.1%11.1%11.1%11.1%11.1%6.5x-2.1%1.6%5.3%9.0%12.7%6.5x5.0%5.3%5.3%5.3%5.3%8.5x-6.4%-3.5%-0.5%2.5%-5.6%8.5x-20.6%-7.3%-0.5%-0.5%-0.5%10.5x-10.8%-8.5%-18.7%-26.7%-33.1%10.5x-38.3%-30.1%-18.7%-6.3%-6.3%F2016 EPS Accretion (Dilution) @ $25M Target Co. Sales ScenarioPre-synergies EBITDA margin:Total Debt capacity (net leverage to EBITDA)-2.0%6.0%7.0%8.0%9.0%10.0%-2.0%0.5x1.0x1.5x2.0x2.5x4.5x3.8%11.2%18.6%25.9%33.3%4.5x7.8%18.6%18.6%18.6%18.6%6.5x-3.4%2.7%-2.0%-8.1%-13.0%6.5x-28.6%-17.7%-2.0%8.9%8.9%8.5x-23.7%-31.4%-37.3%-42.0%-45.8%8.5x-50.2%-44.7%-37.3%-27.1%-11.8%10.5x-46.6%-52.9%-57.6%-61.4%-64.4%10.5x-64.5%-61.5%-57.6%-52.7%-45.9%EBITDA multiple paid:EBITDA multiple paid:EBITDA multiple paid:Scenario 1Scenario 2Scenario 3EBITDA multiple paid:EBITDA multiple paid:EBITDA multiple paid:
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Valuation: DCF Analysis & Historical Trading Multiple
We derive our $0.40 target price using a discounted cash flow analysis with a 15.0% discount rate and 2.7x exit multiple:
A 1.0% change in our discount rate increases/decreases our target price by +/- $0.01; and
A 0.5x change in our exit multiple increases/decreases our target price by +/- $0.03.
Our DCF valuation to 5.1x/3.9x 2016E/2017E EBITDA multiple and 10.9x/8.3x 2016E/2017E earnings multiple versus current trading multiples of 2.1x/1.6x 2016E/2017E EBITDA and 6.5x/4.9x 2016E/2017E earnings multiple.
Exhibit 14 – Discounted Cash Flow Analysis and Sensitivity Analysis
Source: Euro Pacific Canada
Exhibit 15 – Historical EV/LTM EBITDA
Source: Euro Pacific Canada, CapitalIQ
Valuation ParametersTrading Multiples @ Share PriceValuation Date06-Dec-16EV / EBITDAP / EExit Multiple2.7xDec 2015E2.7x10.2xDiscount15.0%Dec 2016E2.1x6.5xDec 2017E1.6x4.9xDCF SummaryImplied Multiples @ DCF ValuePresent Value of Free Cash Flows$6,329,391EV / EBITDAP / EPresent Value of Terminal Value7,619,906 Dec 2015E6.7x17.1xEnterprise Value13,949,297 Dec 2016E5.1x10.9xNet Cash6,458,489 Dec 2017E3.9x8.3xEquity Value20,407,786 Per Share$0.42Total Return Potential68.00%DCF Valuation Sensitivity Upside From Current LevelsExit Multiple vs. WACCExit Multiple vs. WACC$0.421.7x2.2x2.7x3.2x3.7x1.7x2.2x2.7x3.2x3.7x12.0%0.370.410.440.470.5012.0%48.0%64.0%76.0%88.0%100.0%13.0%0.370.400.430.460.4913.0%48.0%60.0%72.0%84.0%96.0%14.0%0.360.390.420.450.4814.0%44.0%56.0%68.0%80.0%92.0%15.0%0.360.390.420.450.4815.0%44.0%56.0%68.0%80.0%92.0%16.0%0.350.380.410.440.4716.0%40.0%52.0%64.0%76.0%88.0%17.0%0.350.380.400.430.4617.0%40.0%52.0%60.0%72.0%84.0%18.0%0.340.370.400.430.4518.0%36.0%48.0%60.0%72.0%80.0%0.0x1.0x2.0x3.0x4.0x5.0x6.0x7.0x8.0x9.0x10.0x19-Dec-1219-Feb-1319-Apr-1319-Jun-1319-Aug-1319-Oct-1319-Dec-1319-Feb-1419-Apr-1419-Jun-1419-Aug-1419-Oct-1419-Dec-1419-Feb-1519-Apr-1519-Jun-1519-Aug-1519-Oct-15
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Risks
Cyclical industry with little visibility creates for lumpy financials: As experienced in 2008 and 2009, economic downturns can have a negative impact on the Company’s business since customers may reduce capital expenditure programs or may experience difficulty in paying for services performed. Demand for products and services are subject to significant fluctuations due to a variety of factors beyond the Company’s control, including economic conditions. During economic downturns, the ability of both private and government entities to make expenditures may decline significantly, which could have a material adverse effect on the Company’s revenue and profitability. The Company cannot be certain that economic or political conditions will generally be favourable or that there will not be significant fluctuations that adversely affect the economy as a whole or the key markets that the Company targets. The Company’s results of operations can be affected significantly by fluctuations in mineral and oil prices since capital investments by customers may be deferred if underlying commodity prices are weak. We note that revenues were down 58% in 2010.
Customer concentration: At September 30, 2015, the Company had accounts receivable from one customer representing 27% of its total accounts receivable (December 31, 2014 – one customer representing 64%). During the nine months ended September 30, 2015, the Company earned revenues of $15,183,032 from two customers (2014 – $1,907,712 from one customer) representing 55% of YTD revenues.
Foreign exchange fluctuations can hinder the Company’s profitability: The Company sells and purchases goods and services in both Canadian and US dollars. Since the Company reports its results in Canadian dollars, it is exposed to changes in the value of the US dollar relative to that of the Canadian dollar. The Company occasionally uses forward contracts to manage its exposure to changes in exchange rates related to transactions denominated in US dollars.
Acquisition risk: We believe the Company’s scope of potential acquisitions extends from technology focused to client focused acquisitions with the goal to grow its revenue base. From our discussions with management, we do not believe that STT would jeopardize its balance sheet strength.
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Financial Statements
Income Statement
Source: Euro Pacific Canada
For the Fiscal Period Ending12 monthsDec-31-201012 monthsDec-31-201112 monthsDec-31-201212 monthsDec-31-201312 monthsDec-31-201412 monthsDec-31-201512 monthsDec-31-201612 monthsDec-31-201712 monthsDec-31-2018Revenues 13,160,100 26,457,860 29,188,243 28,421,577 22,348,399 34,112,803 37,444,040 42,787,944 47,066,739 Growth-58.0%101.0%10.3%-2.6%-21.4%52.6%9.8%14.3%10.0% Cost of Goods Sold (10,635,587) (20,510,711) (22,037,155) (20,926,627) (15,464,104) (26,367,923) (29,428,617) (33,680,604) (36,957,980) Gross Profit 2,524,513 5,947,149 7,151,088 7,494,950 6,884,295 7,744,880 8,015,424 9,107,341 10,108,759 Margin19.2%22.5%24.5%26.4%30.8%22.7%21.4%21.3%21.5% Selling, General and Administrative (4,037,532) (3,831,327) (4,822,868) (4,951,219) (4,917,870) (5,861,995) (5,275,796) (5,539,585) (5,816,565) Operating Income (1,513,019) 2,115,822 2,328,220 2,543,731 1,966,425 1,882,885 2,739,628 3,567,756 4,292,194 Margin-11.5%8.0%8.0%8.9%8.8%5.5%7.3%8.3%9.1% Currency Translation Gain(Loss) (13,144) (23,709) 35,537 70,772 132,982 184,823 0 0 0 Interest Expense (593,318) (626,135) (662,772) (429,191) (324,729) (114,517) 0 0 0 Accretion Expense 0 (53,663) (131,474) (187,525) (97,550) (46,797) 0 0 0 Gain/loss on Sale of Capital Assets 0 0 (353) 2,831 513 2,325 0 0 0 Amortization of Property and Equipment (188,471) (116,706) (119,716) (156,389) (202,603) (236,282) (262,108) (299,516) (329,467) Gain on Settlement of Debt 0 0 0 0 0 33,911 0 0 0 Write-off Investment in Pipe Asset 0 0 0 0 0 (75,524) 0 0 0 Financing Expense Stock Based (21,159) (126,444) (138,579) 0 0 0 0 0 0 Amortization of Intangible Assets (639,696) 0 0 0 0 0 0 0 0 Impairment of Goodwill, intangible Assets (7,506,935) 0 0 0 0 0 0 0 0 Other (448,356) 2,523,592 0 0 52,143 0 0 0 0 Earnings before Taxes (10,924,098) 3,692,757 1,310,863 1,844,229 1,527,181 1,630,824 2,477,520 3,268,240 3,962,727 Margin-83.0%14.0%4.5%6.5%6.8%4.8%6.6%7.6%8.4%Taxes and Other Expenses Provision for Income Tax 2,199,150 (316,170) (358,015) (822,587) (344,515) (489,548) (619,380) (817,060) (990,682) Earnings of Discontinued Operations 3,895,534 0 0 0 0 0 0 0 0 Net Income (Loss) (4,829,414) 3,376,587 952,848 1,021,642 1,182,666 1,141,276 1,858,140 2,451,180 2,972,045 Margin-36.7%12.8%3.3%3.6%5.3%3.3%5.0%5.7%6.3% S/O (basic) 15,548,934 23,548,703 26,528,944 26,528,944 33,737,082 45,066,339 47,156,448 47,156,448 47,156,448 S/O (diluted) 15,548,934 23,548,703 26,529,251 26,528,944 34,716,274 46,367,842 48,380,123 48,380,123 48,380,123 EPS (basic) (0.31) 0.14 0.04 0.04 0.04 0.03 0.04 0.05 0.06 EPS (diluted) (0.31) 0.14 0.04 0.04 0.03 0.02 0.04 0.05 0.06
Amr Ezzat | 514.905.7944 | amr.ezzat@europac.ca
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STT-TSXV | 8 December 2015
Balance Sheet
Source: Euro Pacific Canada
For the Fiscal Period EndingDec-31-2010Dec-31-2011Dec-31-2012Dec-31-2013Dec-31-2014Dec-31-2015Dec-31-2016Dec-31-2017Dec-31-2018Current Assets Cash and Cash Equivalents 572,475.0 2,062,437.0 2,103,433.0 4,375,057.0 2,281,991.0 5,908,019.3 8,229,764.5 11,021,299.7 14,366,739.3 Short-term Investments 0 0 397,737.0 0 0 0 0 0 0 Accounts Receivables 3,066,851.0 2,359,749.0 4,815,699.0 5,326,273.0 5,816,154.0 3,780,000.0 6,187,500.0 6,806,250.0 7,486,875.0 Deferred Contract Costs and Unbilled Revenue 966,744.0 3,919,987.0 1,990,920.0 870,103.0 1,569,523.0 1,334,200.0 2,258,550.0 2,477,763.8 2,718,234.8 Income Tax Recoverable 29,677.0 0 0 0 38,546.0 0 0 0 0 Notes Receivable 0 0 0 0 0 0 0 0 0 Inventory 418,484.0 435,163.0 470,403.0 242,381.0 295,018.0 285,900.0 483,975.0 530,949.4 582,478.9 Forward Contracts 0 0 0 0 52,143.0 29,500.0 29,500.0 29,500.0 29,500.0 Prepaid Expenses and Other Assets 99,284.0 235,302.0 289,473.0 206,196.0 359,656.0 190,600.0 322,650.0 353,966.3 388,319.3 Restricted Cash & Equivalents 0 0 0 53,576.0 1,300,000.0 0 0 0 0 Current Assets of Discontinued Operations 0 0 0 0 0 0 0 0 0 Total Current Assets 5,153,515.0 9,012,638.0 10,067,665.0 11,073,586.0 11,713,031.0 11,528,219.3 17,511,939.5 21,219,729.0 25,572,147.2 Non Current Assets Property and Equipment 344,762.0 373,899.0 371,433.0 857,012.0 802,396.0 994,995.0 994,995.0 994,995.0 994,995.0 Term Deposits 0 0 52,999.0 0 0 0 0 0 0 Goodwill and Intangible Assets 0 0 0 0 0 0 0 0 0 Long-lived Assets of Discontinued Operations 0 0 0 0 0 0 0 0 0 Total Assets 5,498,277.0 9,386,537.0 10,492,097.0 11,930,598.0 12,515,427.0 12,523,214.3 18,506,934.5 22,214,724.0 26,567,142.2 Current Liabilities Accounts Payable and Accrued Liabilities 4,049,451.0 4,874,665.0 4,296,214.0 4,283,235.0 3,992,523.0 3,812,000.0 6,453,000.0 7,079,325.0 7,766,385.0 Bank Indebtedness 798,923.0 101,673.0 0 0 0 0 0 0 0 Current Portion of Long-term Debt 0 0 0 0 0 0 0 0 0 Current Portion of Notes Payable 5,975,464.0 924,984.0 264,984.0 2,329,724.0 1,206,526.0 0 0 0 0 Income Taxes Payable 0 17,647.0 17,201.0 1,018,686.0 0 126,000.0 206,250.0 226,875.0 249,562.5 Deferred Revenue 2,651,418.0 2,078,068.0 1,729,755.0 2,433,704.0 2,897,021.0 1,764,000.0 2,887,500.0 3,176,250.0 3,493,875.0 Future Income Taxes 0 0 0 0 Current Liabilities of Discontinued Operations 0 0 0 0 0 0 0 0 0 Total Current Liabilities 13,475,256.0 7,997,037.0 6,308,154.0 10,065,349.0 8,096,070.0 5,702,000.0 9,546,750.0 10,482,450.0 11,509,822.5 Non Current Liabilities Notes Payable 26,980.0 3,887,518.0 5,154,611.0 1,859,554.0 1,554,412.0 0 0 0 0 Deferred Income Taxes 218,775.0 512,210.0 845,250.0 647,748.0 742,876.0 745,902.0 745,902.0 745,902.0 745,902.0 Leasehold Inducement 0 0 0 0 142,100.0 117,024.0 117,024.0 117,024.0 117,024.0 Total Shareholders Equity (8,222,734.0) (3,010,228.0) (1,815,918.0) (642,053.0) 1,979,969.0 5,958,288.3 8,097,258.5 10,869,348.0 14,194,393.7 Total Liabilities & Shareholders Equity 5,498,277.0 9,386,537.0 10,492,097.0 11,930,598.0 12,515,427.0 12,523,214.3 18,506,934.5 22,214,724.0 26,567,142.2
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STT-TSXV | 8 December 2015
Cash Flow Statement
Source: Euro Pacific Canada
For the Fiscal Period Ending12 monthsDec-31-201012 monthsDec-31-201112 monthsDec-31-201212 monthsDec-31-201312 monthsDec-31-201412 monthsDec-31-201512 monthsDec-31-201612 monthsDec-31-201712 monthsDec-31-2018Operating Activities Net Income (8,724,948.0) 3,376,587.0 952,848.0 1,021,642.0 1,182,666.0 1,141,276.3 1,858,139.9 2,451,179.9 2,972,045.2 Amortization of Property, Plant, and Equipment 188,471.0 116,706.0 119,716.0 156,389.0 202,603.0 236,282.0 262,108.3 299,515.6 329,467.2 Amortization of Intangible Assets 639,696.0 0 0 0 0 0 0 0 0 Gain/loss on Disposal of Assets 0 0 353.0 (2,831.0) (513.0) (2,325.0) 0 0 0 Impairment of Goodwill and Intangible Assets 7,506,935.0 0 0 0 0 0 0 0 0 Deferred Income Taxes (2,062,164.0) 293,435.0 333,040.0 (197,502.0) 95,128.0 3,026.0 0 0 0 Discontinued Operations (32,237.0) 0 0 0 0 0 0 0 0 Stock Compensation Expense 21,159.0 189,037.0 268,226.0 71,441.0 86,735.0 395,053.0 280,830.3 320,909.6 353,000.5 Accrued Interest 0 0 0 33,192.0 0 0 0 0 0 Unrealized Gain on Financial Instruments 0 0 0 0 (52,143.0) 0 0 0 0 Accretion Expense 0 53,663.0 131,474.0 187,525.0 97,550.0 46,797.0 0 0 0 Cash Interest Paid 384,776.0 517,970.0 499,531.0 396,000.0 324,729.0 108,832.0 0 0 0 Net Gain on Settlement of Term Debt 0 (2,512,192.0) 0 0 0 0 0 0 0 Expiry of Forward Contracts 0 0 0 0 0 22,643.0 0 0 0 Special Recovery - Gain on Settlement of Debt 0 0 0 0 0 (33,911.0) 0 0 0 Net Change in Working Capital Balances 1,886,473.0 (1,448,534.0) (1,570,266.0) 2,613,997.0 (2,137,925.0) 1,275,577.0 182,775.0 19,445.6 20,394.0 Cash Flow from Operating Activities (191,839.0) 586,672.0 734,922.0 4,279,853.0 (201,170.0) 3,193,250.3 2,583,853.5 3,091,050.8 3,674,906.9 Investing Activities Purchase of Capital Assets (4,410.0) (146,711.0) (126,105.0) (644,637.0) (151,475.0) (431,258.0) (262,108.3) (299,515.6) (329,467.2) Proceeds of Disposition of Property and Equipment 0 1,616.0 8,500.0 5,500.0 4,000.0 4,700.0 0 0 0 Proceeds of Disposition (purchase) of Investment 0 0 (397,737.0) 0 0 0 0 0 0 Receipt of Proceeds from Loan Receivable 51,199.0 0 0 0 0 0 0 0 0 Proceeds from Disposal of Short-term Investments 0 0 (52,999.0) 397,160.0 (1,246,424.0) 1,300,000.0 0 0 0 Cash Flow from Investing Activities 46,789.0 (145,095.0) (568,341.0) (241,977.0) (1,393,899.0) 873,442.0 (262,108.3) (299,515.6) (329,467.2) Financing Activities Discontinued Operations 0 0 0 0 0 0 0 0 0 Principal Payments on Long-term Debt (1,876.0) (1,050,736.0) (1,139,274.0) (2,246,337.0) (1,361,275.0) (2,773,822.0) 0 0 0 Proceeds from Long-terms Borrowings 0 3,285,798.0 1,614,893.0 876,085.0 813,374.0 0 0 0 0 Repayment of Bank Operating Loan 0 (697,250.0) (101,673.0) 0 0 0 0 0 0 Borrowings from (repayment Of) Bank Operating Loan 798,923.0 0 0 0 0 0 0 0 0 Proceeds from Issuance of Common Shares 0 0 0 0 374,633.0 2,531,706.0 0 0 0 Cash Interest Paid (384,776.0) (517,970.0) (499,531.0) (396,000.0) (324,729.0) (108,832.0) 0 0 0 Transaction Cost Related to Issue of Shares 0 0 0 0 0 (89,716.0) 0 0 0 Cash Flow from Financing Activities 412,271.0 1,019,842.0 (125,585.0) (1,766,252.0) (497,997.0) (440,664.0) 0 0 0 Changes in Cash Due to Changes in FX 12,223.0 28,543.0 0 0 0 0 0 0 0 Cash Flow Net Changes in Cash 279,444.0 1,489,962.0 40,996.0 2,271,624.0 (2,093,066.0) 3,626,028.3 2,321,745.3 2,791,535.2 3,345,439.7 Cash Beginning 293,031.0 572,475.0 2,062,437.0 2,103,433.0 4,375,057.0 2,281,991.0 5,908,019.3 8,229,764.5 11,021,299.7 Cash End 572,475.0 2,062,437.0 2,103,433.0 4,375,057.0 2,281,991.0 5,908,019.3 8,229,764.5 11,021,299.7 14,366,739.3
Amr Ezzat | 514.905.7944 | amr.ezzat@europac.ca
Amr Ezzat | 514.905.7944 | amr.ezzat@europac.ca
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STT-TSXV | 8 December 2015
Appendix I – STT Products
Source: STT
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STT-TSXV | 8 December 2015
Appendix II – Lime Slaker Technical Drawing
Source: STT
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STT-TSXV | 8 December 2015
Appendix III – Management Team Bios
Mr. David Deacon, CEO & Director
Mr. Deacon became President and Chief Executive Officer of STT Enviro Corp. on March 15, 2011. He has broad experience in entrepreneurial management, marketing, sales and finance. From 2007 to February 2011, he was founder, Chairman and Chief Executive Officer of Group DKG Corp., a private company involved in the production of industrial fibreglass for application in the corrosion sector. From 2001 to 2006, Mr. Deacon was President and Chief Operating Officer of Azure Dynamics, an early-stage hybrid electric vehicle company. Prior to that, Mr. Deacon had a career which included running Porsche Canada, and taking the Canadian market from the thirteenth largest in the world to sixth largest and along the way creating the Rothmans Porsche racing series. His first nine years in business were spent in the brokerage industry: four as an institutional analyst and five as vice president of retail sales. He is a Canadian car racing champion and raced at the 24 Hours of Le Mans for the BMW team as well as with Jacques Villenueve in a Canadian Tire sponsored team.
Mr. John Wilby, CA, Chief Financial Officer
Mr. Wilby joined the Company in July 2007. He has over 25 years’ of senior financial experience, including 10 years as CFO of Soroc Technology Inc. and 5 years with Moneysworth & Best Shoe Repair Inc. in financial and operational roles. He obtained his designation as a Chartered Accountant in 1988 and holds a Bachelor of Commerce degree from Queen’s University.
Mr. Ali Abbas, M.Eng, P.Eng, Group Executive Vice President, STT Systems & Solutions
Mr. Abbas joined the Company in November 2008 as a Project Engineer, and led the enhancement of the Company’s then-recently acquired line of ZMI Portec lime slaking products. A seasoned water/wastewater engineer, Mr. Abbas is now the Group Executive Vice President of STT Systems & Solutions, which provides aftermarket support, optimization, engineering and design of reagent preparation systems to industrial customers across North America. Prior to joining the Company, Mr. Abbas spent 13 years working in technical and sales roles with leading suppliers of water treatment technology in Canada and the US.
Mr. H. Fraser Bringeland, Vice President, Business Development & Director, System Sales
Mr. Bringeland joined the Company in July 2007 as Sales Representative. Mr. Bringeland has over 25 years’ experience in sales and marketing roles, including 11 years spent with Metso Minerals, a large mining industry supplier. He left Metso in 2007 to join STT and led its efforts in selling complex systems to mining industry customers. Mr. Bringeland holds a Bachelor of Commerce degree from the University of British Columbia.
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STT-TSXV | 8 December 2015
Appendix IV – Board of Directors Bios
Mr. Robert J. Tweedy, Chairman
Mr. Tweedy is Chairman of STT Enviro Corp. and a Director of Aurcana Corporation. Mr. Tweedy is also an advisor to MaRS, an organization which supports the creation and growth of Canadian companies with innovative technology. Mr. Tweedy started his career as a consultant with McKinsey & Co. Inc. in Toronto, Cleveland and Paris, France and, while in Europe, he worked as an Executive of Holderbank Financier Ltd., Zurich, Switzerland. He returned to Canada to become President of Dufferin Concrete Products Group, Toronto. From 1977 to 1980, he was President and Regional Coordinator, Bata Shoe Company Inc. (USA and Caribbean). From 1980 to 1989, he was President and CEO of PCL Industries Ltd., Toronto and then, from 1990 to 2006, he was Chairman and CEO of Sklar Peppler Furniture Corporation. His affiliations include membership in the World Presidents’ Organization and Past Chairman of the Young Presidents’ Organization, Ontario chapter.
Mr. Bradley Berger, Director
Mr. Berger is the President of Kompass Kapital Management, LLC and serves as the Chair of its Investment Committee. Mr. Berger and his team manage a diverse portfolio of marketable securities and private equity investments, with total assets under management in excess of $100M. Mr. Berger has diverse experience in board and advisory capacities, including corporate governance, risk management, operations, corporate strategy and executive leadership. Mr. Berger holds a Master of Business Administration degree from Pepperdine University and has also served as an Adjunct Professor in the MBA program at Baker University teaching corporate strategy and executive leadership.
Mr. Peter F. Clark, Director
Mr. Clark joined the Company’s board of directors on August 15, 2012. He was President and CEO of Clark Shoes from 1969 to 1988 and President and CEO of CPI Plastics Group from 1989 to 2009. Mr. Clark has served on numerous public and private boards, including Just Energy, and also served for 15 years as Chairman of the Metropolitan Toronto Licensing Commission.
Ms. Alina Osorio, Director
Ms. Osorio is a seasoned investment professional in the utility and infrastructure investment and financing sector. Ms. Osorio currently serves as CEO of Aquila Infrastructure Management Inc. Ms. Osorio has worked as an Equity Research Analyst, an Investment Banking professional in the Infrastructure and Utilities sector, and as principal investor in various roles. Ms. Osorio was the CEO of the Macquarie Essential Assets Partnership (“MEAP”), one of the pioneer infrastructure investment funds in North America. In addition, Ms. Osorio led the infrastructure program at OPTrust with a capital allocation of $2.5B to the asset class. Ms. Osorio holds a Bachelor in Engineering degree from McGill University, a Master of Business Administration degree from the Schulich School of Business at York University, the Chartered Financial Analyst (CFA) designation, and is a Professional Engineer in the Province of Ontario.
Mr. David W. Snowden, Director
Mr. Snowden joined the Company’s board of directors on January 15, 2010. He is a Chartered Accountant and has managed his own practice since 1978, providing financial and tax planning services to individuals and corporations. Mr. Snowden holds a Bachelor of Commerce degree from the University of Toronto.
Mr. David Deacon, CEO & Director
Please see Appendix III.
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STT-TSXV | 8 December 2015
Euro Pacific Canada Inc. Research Disclosures
Analyst Certification
Company: STT Enviro Corp. Ticker: STT-TSXV
I, Amr Ezzat, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
https://europac.ca/research/disclosures.php
COMPANY SPECIFIC DISCLOSURES
Is this an issuer related or industry related publication?
Issuer
Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?
If Yes: 1) Is it a long or short position? NA; and, 2) What type of security is it? NA
No
Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?
No
Does Euro Pacific Canada Inc. or the Analyst have any actual material conflicts of interest with the issuer?
No
Does Euro Pacific Canada Inc. and/or one or more entities affiliated with Euro Pacific Canada Inc. beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?
No
During the last 12 months, has Euro Pacific Canada Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering, or private placement of securities of this issuer?
Yes
During the last 12 months, has Euro Pacific Canada Inc. received compensation for having provided investment banking or related services to this Issuer?
Yes
Has the Analyst had an onsite visit with the Issuer within the last 12 months?
Yes
Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?
No
Has the Analyst received any compensation from the subject company in the past 12 months?
No
Is Euro Pacific Canada Inc. a market maker in the issuer’s securities at the date of this report?
No
U.K. DISCLOSURES This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.
EURO PACIFIC CANADA INC. IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS.
The contents hereof are intended solely for the use of, and may only be issued or passed onto persons described in part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.
U.S. DISCLOSURES This research report was prepared by Euro Pacific Canada Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Euro Pacific Canada Inc. is not registered as a broker-dealer in the United States. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts.
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