We are pleased to introduce Lumenpulse Inc. (“Lumenpulse”, “LMP” or “the Company”) as one of Echelon Wealth Partners’ top picks for 2017. The Company’s recent blockbuster FQ217 quarter is the beginning of what we foresee to be a stellar year of execution. With recent acquisitions digested and one-time costs tapering off, management is focused on capitalizing on cross-selling opportunities and cost synergies. Namely, management’s commentary during the FQ217 conference call suggests a clear line of sight to achieving the Company’s ambitious F2017 guidance. We present below our investment thesis, catalysts, and valuation.
Investment Thesis: Incorporated in 2006, Lumenpulse is a pure-play specification-grade lighting solutions company, providing clients with innovative technologies and strong industrial designs. The Company’s product portfolio includes over 400 products and with five acquisitions now completed, LMP has positioned itself as an enviable player within the industry (Exhibits 1 and 2). Lumenpulse exposes investors to exceptional secular growth trends. We believe the current valuation does not properly reflect the Company’s best-in- class earnings growth profile. Admittedly, in F2015 and F2016 management was focused on bolstering its product offering by executing and digesting acquisitions. F2017 is pegged as a year of execution where we foresee the Company focusing its efforts on integration, transitioning LMP into a double-digit EBITDA margin operator. While we recognize some of the lumpiness in quarterly performance and acquisition related one-timers, we expect these to taper off as early as the current fiscal year, significantly improving sales visibility and earnings quality. Namely, we expect the top line to grow 30.6% from F2016 to F2020. We forecast Adj. EBITDA margins to reach 20.8% by F2020, up from 7.6% in F2016, driving a 67.7% Adj. EBITDA CAGR over the same period (Exhibit 3). ROIC moves from negative territory to 7% during the current fiscal year. Longer term, at higher utilization levels, we anticipate LMP to be a high-20% ROIC operator.
Catalysts and Drivers: Our top line forecast implies a 55.0% growth rate for F2017. Our forecasts are driven by the Company’s latest and upcoming business initiatives, namely: (1) doubling Fluxwerx’s product offering with the launch of three families of products last March, setting the firm on track to achieve the high end of its sales earnout target by fiscal year end (~$55M in top line); (2) Lumenalpha 2.0, a series of 30+ new products, was globally launched in FQ217. Marketed heavily by sales agents and VARs, we anticipate a step-up in sales to occur in FQ317 and FQ417; (3) The UK salesforce has been realigned and strengthened, and is now double in size, the sales efforts of which are expected to act as a substantial driver for organic revenue growth in F2018; and (4) Lastly, 17 new products are scheduled to be launched prior to the end of F2017, illustrative of the Company’s focus, momentum, and innovation.
Beyond F2017, we believe LMP will continue to bulk its network of relationships with design specifiers, and as such fortify its reputation as a best-in-class, “go-to” lighting operator. We anticipate that the Company will enhance its product offering through the application of cross- product designs and technologies (Lumentalk, Lumendrive, Anidolic Optics, etc.), providing design specifiers with a more comprehensive range of product configurations and solutions. The Company’s announced growth initiatives to date include: A North American launch for Exenia (FQ118); a European launch for Fluxwerx products (FQ218); and the launch of a new family of architectural lighting products (FQ318)
Valuation: We derive our $22.00/shr target price using a DCF analysis with a 13.0% discount rate and a 3.5% perpetual growth rate (implied terminal exit EBITDA multiple of 6.5x; a discount to current NTM EBITDA multiple of 12.0x). Our $22.00 target price implies a 13.2x F2018 EBITDA multiple. Our valuation is further corroborated by comparable multiples and historical multiple analyses. LMP trades at an ~18% premium to peers on an NTM EBITDA basis. We believe the current premium to peers is extremely narrow given LMP’s best-in-class growth profile. Namely, the Street expects LMP to grow Sales/EPS at 41.4%/86.0% over the next two years versus the comps median of 4.5%/11.0%. A much wider premium to peers is warranted in our opinion. Looking further out, Lumenpulse currently trades at a significant discount to peers on a C2018 EBITDA basis (7.8x vs. 9.0x). On a historical basis, LMP currently trades close to an all-time low EV/NTM EBITDA multiple.