Finding Value at 1.5x EBITDA in a Tough Space…Its been a tough two years for this story but I really think the story turned in February with the announced guidance for 2018. I was closer to 18-20M in EBITDA but then they go put out a guide 23.5M EBITDA at the midpoint.
Granted these secularly challenged businesses are tough to find any organic growth but these businesses are cash cows and capital allocation becomes so important and let the story as a stock work when you are acquiring businesses at ridiculously cheap multiples.
Now that the story has based and they got their operational footprint optimized this is when we are going to start seeing the operational leverage of the portfolio of businesses. Look no further then the SXP.TO model. Stock went from 1.00/share to 6.00/share in 3 years selling envelopes. Thinks about that…
With insiders and vendors already owning more than 40% of the stock and buying another 150,000 of stock this Spring, clearly the business is turning and it was time for me to load up as well. Here’s How I see it.
Fundamentally
Generating 6.1M in operating cash flow in Q1 this business is not going anywhere. Just looking at the client list across the board in the Canadian market place they have one of the deepest and broadest client books out there. Its no secret, its all about growing the higher margin marketing side of the business. All about cross selling and up selling.
Personally, I think they could be sand bagging with the low end of the EBITDA guide a touch especially after their latest acquisition in May.
Technically
I like it right here, has came back right to previous breakout point and has bounced off 100DMA the last 2 days. Looking at OBV is still sitting at YTD highs so all the selling from the 1.80-2.00/share level has just bee and liquidity pocket.
I cant help but look back to the fall of 2016 and that massive gap down in the chart from 4.20/share down to 2.70/share. Going into that Q3 Earnings print they had generated 7.9M in EBITDA in 1H of 2016 vs 2018 1H they are going to generate 11M+. This equates to 40% EBITDA growth yet stock price is down 60%. Even with the equity issue the stock price is depressed. GAPS GET FILLED….
On Valuation
Using that 25M in EBITDA figure on a EV/EBITDA basis looks cheap to me at 4x EV/EBITDA right here. But with the debt level around 2.5x Net Debt/EBITDA the balance sheet is not even that stretched.
On a Cashflow basis the name looks even cheap with only 2.5M in CapEx needs for 2018.
The leverage to the upside comes from the cash generation of the business and as the debt gets paid down and they continue to consolidate businesses more of the value will continue to shift to the equity holders and you have room for a multi bagger even without any significant organic growth.
The Core Business has turned now time for sentiment to follow.
LONG DCM.TO