Donville Kent Asset ManagementThis is from their November issue (published on 3 Dec).
Here's the link to the entire article. GLTA
https://seekingalpha.com/article/4741735-donville-kent-asset-management-november-2024-commentary
| Revenue $9.2M +42% |
| Adj. EBITDA $3.4M +49% |
| EBITDA Margin 36% |
| Cash Margin 14% 8 |
| Total fleet utilization of close to 100% in the quarter |
| Deployed 148 towers in the quarter |
| Total fleet 1,151 towers (expect +3,000 in a year) |
| Hired 2 enterprise-level sales teams |
| Now expanding into Colorado, Arizona, & Midwest |
| The US now represents 10-20% of total business |
| Weekly tower production continues to improve |
| 25 per week by end of year (at 11.4/week now) |
| Just expanded their facility which increases capacity to 30-50 towers/week |
| Nov 12 th = 1,296 fleet |
| 50 Z Box units (new product line) |
| Sales team in the US now 12 people (was 2 people in June) |
| Expect to launch 2 new locations in Canada in 2025 |
| "In first inning in Canada and just getting out of the dugout in US" |
Zedcor reported a great Q3. We've described this investment in detail in recent commentaries and newsletters, so we'll focus on the recent progress. They are on track to be producing 25 towers per week by the end of the year with the goal to be able to produce +50 towers/week next year, which is ~2,600/year. Profit margins were impressive in the quarter and management noted that as they scale, they will bring costs of manufacturing down further plus inherent efficiencies as new locations mature. On the call they noted that locations like Toronto are much higher margin than the rest of the business due to scale.
Of note are their two recent hires who will focus on winning enterprise clients. They hired the Senior VP of Security at Walmart/Home Depot plus they hired the former Chief of Security at Trans Mountain Pipeline & Assistant Commissioner of the Royal Canadian Mounted Police. These new hires and ongoing discussions with the likes of Amazon, Walmart, BestBuy, and some of the largest home builders, we expect announcements around chunky orders in the 300-500 tower range that can get them closer to 10,000 towers over the next ~3-4 years which is roughly 10x the size they are now.
This leads to the popular comment when a stock like this has performed so well."It's expensive." In order to respond, we'll go through a helpful exercise which we do for all our investments.
Zedcor is very much a price times quantity business. Fairly easy to model if you're on top of the demand and supply dynamics. We respect and agree with Cormark's projected outlook of getting to +7,000 towers by 2028 without factoring in large enterprise client wins. Our own work suggests they will blow through their 2025projections and utilization rates will remain between 90-100%. As described, if they match their new manufacturing capacity with growing salesforce, then getting to 7,000 towers by the end of 2027 should be the low-end projection and doesn't factor in enterprise wins. Under this scenario, one can apply a utilization rate and profit margin to come to projected earnings. Next apply an earnings multiple, and you've now calculated your future investment return under that scenario.
Conservatively, using 7,000 towers, an 85% utilization rate, lower profit margins than anticipated and 10x multiple equals an annualized return on the stock of 24%. Not bad and definitely not expensive.
Trying to be more accurate, if overall profit margins continue to improve toward their established location margins, they have success with enterprise and get to 10,000 towers, plus trade on the industry multiple (15x), the annualized return on the stock would be 53% (+450% aggregate).
A way to double check this math is to compare future returns with per tower IRR, which right now we believe is +40% and should improve with scale. Putting multiple aside, future growth and stock returns should mirror the company's ability to deploy capital, so a +40% IRR leading to a +40% annualized return in the stock over time is not incomprehensible.
A 53% annualized return does not agree with the statement that the stock is expensive. A lot of people strictly look at earnings multiples. A multiple in isolation isn't useful. Similar to plainly saying a house that cost $400k is cheap and one that is $1m is expensive. In reality,
a stock trading on 10x earnings can be expensive and a stock trading on 20x earnings can be cheap. One needs to factor in growth (compound growth), margins, ROE etc., to see if the multiple they are paying today is worth owning the company or not.
This is an extremely useful exercise. Think where the company should be in 3-4 years. What type of profits will they generate in that scenario? Apply a fair but conservative earnings multiple and see if the annualized return is worth your investment. There are a lot of stocks out there right now, mostly large caps, where the future returns aren't that appealing using this exercise.