RE:RE:RE:Tough business. Currently overpriced. Mgmt in doghouse.Reposting this previously analysis that was proven correct - along with the following new points:
- the reaction to the recent insider buying is likely a "head fake". all insider buying in the recent history of this company has been proven a wrong indicator.
- insiders like Briscoe and the Zucker trust are likely just buying shares to support their existing holdings and to show strength, which will likely prove short lived.
- the recent CFO departure should raise caution. Also, the new interim CFO appointment, who is from Garda World (a rather poor history of acquisitoins and accounting), should also cause some red flags.
- the company has a cultural history of self-serving, non-transparency, typical of some Quebec companies.
- despite the recent buying, the new CEO owns a highly immaterial amount of stock. (~700k of stock purchased for ~$350k). This compares to an annual salary (if comparable to the previous CEO) of $500k. So to say that the new CEO is taking risk with his share purchases is a real stretch.
- remember the bonds are trading terribly and should tell people the equity may be worthless.
- the company may have to complete another highly dilutive debt reorg.
- even though the new CEO has an interesting background, a quote comes to mind about restructuring: "when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." - Warren Buffett
- bottom line, the company has a history of squandering your money.
smallcap87 wrote: Reposting this again. Could not have been more right. Have to imagine the company starts tripping convenants soon. Forget about any meaningful cash generation (roughly half of operating cash flow last year went to interest costs alone). There will either have to be some sort of equity raise or debt restructuring (once again), which means the equity probably goes way lower. And after restructuring, you still have a bad business to deal with. Perhaps the operations get broken up or sold. Either way, wouldn't be owning this.
smallcap87 wrote: Reposting again my post from this past March. All of the below still holds true, and in fact the picture has gotten worse as the company has shown an inability to grow and be competitive. I invite Fabrice to counter my arguments below. His appearance on BNN yesterday was very weak.
smallcap87 wrote: Tough to be long GCL:
- highly competitive business; management showing it cannot compete effectively.
- where it wins or keeps business it has to take lower margin; not competitive advantage
- contracts lost due to 'undercut' by competition; one must question why GCL can't match (underinvested in technology?)
- business has little visibility or is poorly managed; Q4 was supposed to show good yoy improvement from lapping of contract renewals and full effect of cost cuts (instead we got a decline)
- management in the penalty box and can't be trusted yet; reading the last 8 quarters of conference calls tells you they are in a difficult business and overpromising and underdelivering as the quarters roll on
- management just issued themselves 3.1m additional stock options in December without a separate press release (buried in the annual filings); shareholders arbitrarily diluted by 3% without notification or justification
- "costs not related to current operations" of $4-5m annually are starting to look like recurring costs (becuase they happen every year); can make a rational argument to deduct these from EBITDA
- recent recap puts company on more solid footing, but does not correct what could be systemic issues in this company. Investments by Mr. Briscoe may seem material, but are likely immaterial to his own personal net worth, and he keeps an option to recover his investment by selling it to GCL. Additionally, although CDPQ and Zucker invested materially in the recap, they likely felt compelled to do so in order to save their existing investments (but likely weren't compelled otherwise).
- Q1 likely to be quite messy; poor revenue comps due to contract losses / closures in 2H2016, investments in sales infrastructure without benefit, and seasonally weak quarter will pronounce the magnitude of the swing.
- valuation math in a best case scenario is difficult to see huge upside:
cash generation for next three years
$30m EBITDA
- $2m capex
- $5-7m of interest
- ~$4m of taxes
= average annual cash flow of ~$18m x 3 years is ~$60m (rounding)
(I am assuming no profit growth (this has been the track record) but I am also assuming no one-time restructuing costs or investments to grow the business).
Using the above, estimate the EV and stock price in three years:
7x $30m EBITDA = $210m EV - $110m debt + $60m 3yr cash flow = $160m equity value / 105m diluted shares = $1.52/sh.
Even if you assume an 8x EBITDA multiple, which is very rich for a business that hasn't shown profitability growth and operates in a competitive industry, your upside goes to about $1.80/sh (3 years from now)
Risks to current share price:
For a business in a highly competitive industry, showing inability to grow profit, with a high (although more managemeable) debt load, the EBITDA multiple shold be closer to 6.
6 x $30m = $180m EV - $110m debt = $70m equity value / 105m shares = $0.67 per share. Even if you take the multiple up to 8x, that results in a $1.20/sh price, and $0.95/sh at 7x. (you are seeing the volatile effect of leverage on share price)
Seems best to stay on the sidelines until improvement is shown, and a lower price can be had. A compelling case could be made to go long at the recap price, provided the business shows some stability over the coming quarters.