Post by
tamaracktop on May 21, 2022 10:45am
I dig deep
My case arguing that Xebec's multiples should increase markedly is very strong.
The discount to book value and the depressed EV/Sales multiple are warped by a misguided market.
Let's compare the highlights of Xebec's press release announcing Q1 with Greenlane's release, warts and all....
Xebec: Revenues of $41.2 million compared to $20.6 million
Greenlane: Revenue of $16.3 million, a 33% increase over the $12.2 million reported in the first quarter of 2021.
Xebec: Gross margin of $4.6 million (11%) compared to $4.2 million (20%)
Greenlane: Gross profit of $3.6 million, gross margin (gross profit excluding amortization) of $4.0 million (25% of revenue).
Xebec: Adjusted EBITDA of ($9.0) million compared to ($4.9) million
Greenlane: Adjusted EBITDA of $0.03 million1.
(Please note that here Greenlane makes some adjustments in arriving at their ebitda as detailed in the appendages to financial statements. Xebec doesn't)
Xebec: Backlog of $260.5 million on May 11, 2022 compared to $88.5 million on May 12, 2021
Greenlane: Sales order backlog2 of $35.7 million as at March 31, 2022.
Xebec: No mention of " Sales pipeline"
Greenlane: Sales pipeline3 valued at over $900 million as at March 31, 2022.
( look at note 3 attached to Greenlane's financials. )
Xebec: As at March 31, 2022 the company had $34.7 million of cash and restricted cash
Greenlane: Cash and cash equivalents of $23.1 million and no debt, other than payables and bonding resulting from normal course operations, as at March 31, 2022.
Xebec: Working capital of $66.6 million on March 31, 2022 for a current ratio of 1.83:1, compared to working capital of $82.1 million and a current ratio of 1.96:1 on December 31, 2021
Greenlane: Greenlane doesn't highlight or mention their working capital in their press release.
Let me be clear that my intention here isn't to diminish Greenlane at all, rather it's to make it painfully and undeniably clear that there is an inexplicable disconnect in Xebec's valuation.
I found the omission of any mention of Greenlane's working capital odd, so I took a closer look at their financials than I had previously.
Greenlane shows current assets before deferred taxes, property and equipment, intangibles, and goodwill of $55,193,000
The same exclusions make Xebec's equivalent number $147,242,000
The thing I find odd about Greenlane's current assets is the inclusion of $16,852,000 in "contract assets"
These "contract assets" are explained in the following note #5 attached to Greenlane's financials...
"The Company receives payments from customers based on the stage of completion of a contract. Contract assets relate to the Company’s conditional right to consideration for the completed performance under the contract. Accounts receivable are recognized when the right to consideration becomes unconditional. Contract liabilities relate to stage payments that are received in advance of performance under the contract."
Please correct me if I'm wrong, but this seems somewhat unusual to me.
Xebec shows no such entry under "current assets".
If it did, would it not include at least some as-yet incompleted work for the Chevron/Brightmark and Summit contracts?.. and what would Xebec's working capital be then?
Conversely, If we back out this entry in Greenlane's books, we arrive at a current asset figure of $38,341,000 for Greenlane, rather than the $55,193,000 shown.
This would put Greenlane's working capital at $12,325,000.
I'm not an accountant, and there's always a chance I'm mistaken, but I doubt it.
I would suggest Greenlane is in far more need of financing than is Xebec.
As well, Greenlane doesn't have the powerful financial partners that Xebec does in the way of the Fonds and the CDPQ.
And yet this hasn't stopped the Eight Capital analyst from establishing a $1.85 target for Greenlane assuming an EV/sales multiple of 3 based on 2023 sales estimates.
Nor has it dissuaded many other analysts from being far more bullish on Greenlane than Xebec.
Forget about 2023, let's put a 3 multiple on Xebec's current fiscal year revenues.
We'd arrive at a target somewhere between $3.80 and $4.00.
There's also a solid case that Xebec is in a much better position to improve margins than Greenlane is.
Xebec has far more fat to trim.
Far more redundancies have resulted from far more acquisitions.
It astounds me that Xebec trades at .481 times book value while Greenlane trades at 1.895 times book.
Xebec is sadly lacking in market respect vs Greenlane by almost any metric to an extent that isn't warranted by even the absolute worst-case scenario.
The Scotia analyst argues that Xebec should actually trade at a premium multiple to its peers as the company transitions to higher-margin business.
I absolutely agree with that.
The analysts with $2.00 targets are probably at $2.00 only because that's as high as their firms will allow them to go.
Xebec is trading in a distorted market.
I expect it will take a major adjustment to bring it back in line with the valuations currently being accorded its peers.
I expect this adjustment will happen regardless of what the market does.
Comment by
tamaracktop on May 21, 2022 2:33pm
Quarterly results are unaudited.