Pacific Safety Products Inc. (TSX: V.PSP, Stock Forum) caught my attention when CEO Terry Vaudry appeared on BNN last week (watch interview HERE).
The company provides protective products, such as bulletproof vests and body armour for law enforcement and military agencies nationwide. With roughly 70% of the market share, PSP is Canada’s largest maker of body armour. The company is also exposed to the US market through their subsidiary, GH Armor.
History of Underperformance
Looking through the company’s filings, it’s not hard to find out why PSP trades at $0.13 and sports a market cap of $8.5M. The previous management team allocated significant amounts to developing redundant products and running an inefficient organization. This resulted into a near decade of unprofitability (see below).
New Management Righting the Ship
A new management team, led by Terry Vaudry, arrived in October 2012 looking to right the missteps of the previous team. In less than 3 years, PSP cleaned up their balance sheet by cutting the debt balance in half while also refreshing product lines. Currently, the company has roughly $830,000 in debt, of which $580,000 is a revolving credit.
More importantly, PSP has transition to much leaner operations through means of cost cutting. The chart above indicates this change. Back in 2006-2009, due to major contracts from Canada’s Department of National Defence, PSP reported revenues in the range of $35M-$40M. However, the company only had about $1M in adjusted EBITDA at this time. Even though FY 2014 revenues, at $14M, were less than half of the 2007 figure, the company reported a positive adjusted EBITDA of $439K.
PSP projects to remain profitable at a revenue run rate of $15M-$16M. For comparison sake, revenues in the first 9 months of fiscal 2015 have been $12.3M. Full year fiscal 2015 revenues, ending June 30th 2015, are expected to come in at ~$16M-$18M. Given the new, leaner company structure, such top line figures could lead to a potential adjusted EBITDA figure of $2M.
Profitability and positive cash flows seem to be steady trends now that PSP has normalized results after completing the majority of the operational shift. For investors, this means that the company will be self sustaining, thus no dilution.
Value Play With Near Monopoly Status
Like mentioned above, PSP holds about 70% of the Canadian body armour market. Key customers include the RCMP, OPP and Canada’s Boarder Security. These large agencies have developed a loyal clientele for the company, which should result in future recurring revenue. However, due to the government’s slow nature, contract extensions are regularly delayed and take longer than expected to materialize.
As a result, PSP faces long sales cycles, which are further magnified by the lengthy time to develop highly regulated products like body armour. This has its pros and cons as the company is protected from competition that must overcome high barriers to entry, but also results in lumpy sales figures.
In the last fiscal year, Pacific Safety Products has announced contract wins with large Canadian federal agencies and the US Navy. The company expects a busy upcoming 2015 summer as they partake in large tenders, further driving potential top line growth.
PSP’s legacy issues seem to be in the rear view mirror as the company has revived their growth trajectory. None of this progress however has been reflected in the share price as the company trades at a forward EV/EBITDA of less than 5X and forward P/S ratio of 0.5X. Investors are presented with a good buying opportunity that should return handsomely as the company continues executing on their expansion plans.