High Arctic Energy Services $HWO.to

This isn’t my first go around with High Arctic. See here.

Background

This idea is quite simple. A number of years ago High Arctic was an early mover in PNG. They built strong industry connections and have benefited from having above average utilization and profitability for a company in their industry. They have used the cash that has been built up to purchase assets in distress. Here is a brief summary of activity since the downturn in 2016

  • In 2016, they purchased assets on the cheap from Tervita for $42.8mil. This is the Concord Well Servicing assets.
  • They also invested in their rental fleet in 2016 to the tune of about $10mil.
  • In 2017,  they entered into an agreement with a major PNG customer for ownership of some rigs in PNG. They will operate the rigs under a 3 year exclusive agreement. This will give them better revenue visibility for 2 of the rigs in PNG.
  • In 2018 they acquired the shares of Power Energy Holdings (Powerstroke assets).
  • Bought Saddle Well Services in August 2018, increasing exposure to southeast Alberta.
  • In April 2019, they announced that they have purchased snubbing assets from Precision Drilling for $8.25mil.

As you can see this is a much larger company than it was a few years ago. Their discipline with the balance sheet has allowed them to purchase assets and grow their customer base in the midst of a downturn. The company has done everything in their control to survive and be a bigger company once activity returns. On the Q1 2019 call, they indicated that activity in Q2 was better than expected.

Chart Dump

Since this post was short, here are some charts.

*net cash doesn’t include the acquisition of the Precision Drilling assets for $8.25mil

Summary

Similar to my other energy ideas. This is really a bet on business activity returning coupled with investor sentiment. There is also a 5.8% dividend yield as well. Current valuation is about 4x EV/EBITDA and I am betting that the EBITDA is temporarily depressed.

 

Thanks,

Dean

Disclosure: the author is long shares of HWO.to at time of writing.

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McCoy Global $MCB.to

Continuing from the post where I said I was sniffing around the energy services names I took a look at McCoy Global. I’m no stranger to McCoy and owned it a few times in the past. The most recent post is from early 2012. I ended up selling in mid 2013 and early 2014.

Background

McCoy is a leader in threaded connections in well casings. They have exposure to onshore and offshore markets. Despite listing in Toronto, they do most of their business internationally.  About 5% of their revenue is derived from the WCSB.

McCoy has worked to remove the high cost manufacturing form their book of business, they outsource as much as possible now. Focusing on supply chain as they have become a global business has been a priority; especially given their size, their geographical exposure and large business customer base.

Current State

Their current backlog was only 9.9mil in Q1 2019, down from 15mil at the end of 2018. 7.2 mil of orders came in April 2019 and this gives confidence that they will survive this lean environment. Their top line has bounced back somewhat after the lows in 2016, but is very far below previous cycle peaks. As you can see McCoy has done what they can to control opex costs.

Valuation

At $0.63 (from a few weeks ago) McCoy has a market cap of just over $17mil and an EV of $12mil. See the valuations below.

Management compensation is reasonable and the board owns 3%. It could be better, but I’ve definitely seen worse in O&G. Several large institutions own significant stakes in McCoy.

McCoy has also continued to invest in R&D and building a suite of products that uses data to ensure the best possible connection and monitoring for the customer. I’m expecting a couple new products by the end of 2019.

Given the ever increasing well complexity (which lend well to McCoy’s products), diverse geographical exposure, off-the-grid size of the business and modest valuation; I feel that McCoy has substantially more upside than downside.

Are you finding any value out there?

 

Thanks,

Dean

Disclosure: the author is long MCB.to at time of writing.

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Buy when there’s blood in the streets? O&G edition

So many investors pride themselves on being a contrarian. I’m not really interested in labels, but I do like to increase my net worth.

Oil and gas has been out of favor for years now. Back in 2015 $WTIC was over $100, it bottomed in early 2016 around $30 and today it sits around $55. There are numerous reasons, many of them I’m not very versed in.

Activity in my backyard here in Alberta has been particularly hit hard. You can see the number of active rigs in Alberta below.

Western Canadian Select has been under pressure with the broader market and the difference between West Texas Intermediate and Western Canadian Select was growing until the mandatory production curtailments. The curtailments are in response to the inability for our oil to reach international markets given pipeline capacity constraints. You can get some more information here on the curtailments.

With so much negativity around oil and gas companies in today’s market I have decided to take another look. I’ve been down this road before.  I’m taking a top down approach, with some specific criteria in mind to lower my risk. I believe that we need at least stability in the oil and gas market in order for these trades to be profitable. We may not need significantly higher oil/gas prices, but I will need sentiment to change. I don’t expect all my picks to be winners, but I do expect this to be a reasonable way to deploy capital and generate above average returns.

As usual, I chose the oil and gas services/support companies. I like the indirect play on oil and gas activity and these small names seem to be delayed in sentiment which allows me to do research and build a position before shares move higher. I’ll do a quick post on each of the companies I have taken a position in. It may take several weeks or months to scale into each position. Stay Tuned.

Let me know if you have any companies you’d like me to take a look at related to O&G.

 

Thanks,

Dean

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Sold Caldwell (tse:cwl, $cwl.to)

I sold my smallish position in Caldwell. The stock has done quite well given the recent volatility in the market. I would like to put the money to work in some names that have been beaten up.

I would like if they did something with the cash on the balance sheet. Maybe they will as soon as I sell my shares. Who knows. If you look at the cash balance relative to the top line, you can see that it hasn’t moved much in 6 or 7 years despite the cash balance rising.

I am critical on management team’s for carrying too much cash on the balance sheet when they have some visibility into the business. When their company or their particular sector is under pressure, I’m less critical of their use of cash.

 

Thanks,

Dean

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Vigil Health Solutions (cve: vgl)

I wrote this post just before the most recent quarter was released. Not much changed from a valuation standpoint than what is written here.

 

I’ve recently taken a position in Vigil Health Solutions. Of course, I didn’t discover this idea on my own, I stole it from others. Quality Small Caps wrote is up here and this company has been profiled on the MicroCapClub (you should join if you haven’t already). The Quality Small Caps write-up is quite detailed, I suggest you read it.

Background

Vigil develops and markets hardware and software solutions that guide care of and monitor residents in senior living communities. They focus on non-invasive monitoring for residents with dementia.

There are obvious demographic tailwinds with this one. The addressable market is growing quite fast and Vigil provides a high value service with a monthly recurring cost.

They are quality focused and not the cheapest product on the market. They differentiate themselves by focusing on integrating the monitoring system (door, phone, etc) with analytics that will trigger alarms to the relevant parties. For example, if a resident leaves his/her room at 2am when he/she normally doesn’t then the staff are notified and can intervene and ensure the resident is returned safely to their room. They also offer cloud based analytics.

Their service scales up from very basic to quite comprehensive, allowing them to compete on most (if not all) projects.

The sales cycle is long and much of the bookings are part of new facility construction which leads to quite lumpy revenue.

Management

There’s limited information on the management team in the filings, so here’s all I’ve been able to dig up:

  • Troy Griffiths – CEO
    • has been CEO since 2005 and with the company since 1998
    • started out as COO of Vigil’s predecessor
    • compensation last year was $128k in salary with $250k in total comp
    • own 820,000 shares or over 3 times his salary
  • Nicola Chalmers – CFO
    • has been with Vigil since 1998 as CFO
    • compensation last year was $82k salary and $120k total comp
    • owns 167,000 shares or roughly her annual salary
  • Steven Smith – VP R&D
    • has been with Vigil since 2006
    • $117k salary and $156k total comp
    • owns 1.1 mil shares or more than 3x his total comp last year

The team seems to be experienced in the business, is incentivized with common share ownership and gets compensated reasonably.

The variable part of their compensation is based on both financial and business performance. This is something you don’t always see in the Canadian microcap space and is really nice to see.

Board

For a company this size Vigil has a small but quite respectable board. Non-executive directors are compensated by mix of fees and options. Total compensation ranges from $25-41k per year.

  • Troy Griffiths – CEO
  • Greg Peet – Chairman
    • was CEO and Chairman of ALI Technologies which was acquired by McKesson Corp in 2002
    • owns 4.9mil shares
    • principal at GrowthPoint Capital
  • Ian Power
    • several senior positions
    • director of Pender Growth Fund
    • owns 15,000 shares
  • Lindsay Ryerson
    • VP and GM of Telematics at Vecima
    • owns 10,000 shares

Financials

See below for a quick look at the income statement. TTM rev at 6.3 mil, Ebit of 0.5 mil and ebitda of 0.5 mil.

The top line and bottom line have been growing. You can see that they have a strong backlog and bookings. Backlog is almost 4 mil.

They also have a large portion of their revenue based on recurring service and maintenance work. This portion should fetch a high multiple.

Valuation

At $0.50, the market cap is around 9.3 mil and the EV is 6.7 mil. See below for relevant valuations.

Not particularly cheap from a profitability standpoint. But I believe that this is a growing business and should see some operating leverage in the future.

Risks

Here are the risks that I can identify.

  • Liquidity for your personal portfolio. I am blessed to have a small amount of money. If you are responsible for a large amount of capital, it may be difficult to build or unwind a position.
  • Product/service risk for Vigil. There is a chance that despite a large and growing market, customers may seek solutions that Vigil does not compete in. Namely, the low priced and more commoditized portion of the market. Of course, Vigil may be able to adapt. Vigil’s average deal size is around $70k and the facility costs are usually over $10 mil. Go/No-Go decisions are not likely based on the Vigil solutions alone and it’s not a large portion of the cost of the facility.
  • Execution (most notably for a microcap). Many microcaps have the executive teams wearing multiple hats. They regularly have to bounce between long term strategic and day-to-day tactical decisions. That leads to increased importance on specific individuals.
  • Price volatility. Given the long sales cycle, dependent on facility completions and modest valuation, one can paint a scenario where the share price of Vigil could take a hit.
  • There may be concern of reimbursement (medicare/medicaid) risk. I don’t believe that this is a significant risk for Vigil. Given that they participate in the facility build out, they are not exposed to the typical reimbursement risk (at least, not to my knowledge).

Other Things of Interest

  • Wayen Enright owns 2.7 mil share or about 16% of the outstanding. I can’t find much about him online.
  • I’ll be attending the AGM next week

Overall, I think Vigil is a decent bet at these prices. They have a secular tailwind, strong and incentivezed management team, a board that compliments the business and a modest valuation.

Feel free to comment.

 

Thanks,

Dean

*disclosure: the author is long Vigil (cve: vgl) at time of writing.

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Maintenance

I went through a phase where I was listening to podcasts none stop. I thought that if 1/day made you smarter, then why not go for 5 or 6/day. Well, I realized that my brain can’t absorb that much new information constantly. It takes time for me to digest information and actually learn something, let alone recall what I learned. So, I don’t listen to that many podcasts. Maybe 3-5 per week unless I’m on a flight or long road trip.

Having said all that, I found a particular podcast from Freakonomics around maintenance to be particularly useful. It resonated with me on so many levels.

So many things in our life require boring, mundane maintenance. Our health (both mental and physical), our relationships, our car, our house, and of course our portfolio. Performing required maintenance isn’t sexy. No one is lining up to hear how I go to the gym several times per week, how I spend hours each week just “checking in” on companies in the portfolio, watching me enter my receipts and bills into a budget sheet or watch me brush my teeth twice a day. That’s ok with me. I’ll just keep doing it quietly in the corner by myself.

Neglecting maintenance rarely has immediate impacts. I could probably perform no trades and not check up on any of my companies and you may not even notice a change in performance after a year. After 3 or 5 years, you can bet that there would be implications. My operational background emphasizes continuous improvement, but what’s forgotten regularly is the maintenance required to battle entropy. Entropy is persistent and the fight against it is never ending.

The human brain doesn’t appreciate executing consistent recurring tasks that don’t have immediate benefits. It’s probably why maintenance is underappreciated and not really discussed.

Anyways, that’s enough of me rambling. Listen to the podcast.

In praise of maintenance

 

Thanks,

Dean

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Caldwell Partners (tse: cwl)

I recently took a small position in Caldwell Partners and I thought I would would do a post on why I bought. Just to be clear, it’s quite a small position relative to my other holdings. As usual, I stole this idea from others (h/t Gerry Wimmer and DeepDiscount).

I view Caldwell as a position that has good risk/reward profile and will make a nice addition to a portfolio that’s primarily driven by faster growing (and more expensive companies).

Background

Caldwell is an executive search firm that specializes in finding the highest levels of management and operations across many geographies and functions. They have been slowly expanding the number of partners over the years.

The numbers

At $1.20 Caldwell has a market cap of 24.5 mil and an enterprise value of 8.1 mil. Yeah lots of cash. It trades at about 6.5x ebit and 2.2 ev/ebit. That’s statistically quite cheap. One would expect a slow growth (or no growth) business for those prices. They also pay a dividend that is yielding 6.7%.

See below for the income statement

There is top line growth with some operational efficiencies being gained.

See below for geographical mix.

Canada has been flat to slightly up while the US has been consistently growing.

See below for some quick analysis by geography. Note the different axis min/max and Europe is starting from a relatively low base.

The last quarter was particularly strong in Europe, we have seen this before.

 

Positive Comments

The news release from the latest quarter had positive comments that indicates that momentum may continue.

“This was an outstanding quarter, bringing the firm to a new high-water mark for revenue,” said John Wallace, chief executive officer. “Our search teams throughout our geographic regions drove strong growth in both search volume and the value of assignments, despite pressure from foreign currency rates. We are especially pleased with the quarterly profit of our UK operations. With the largest level of new bookings and revenue in a single quarter in our history, we are positioned well for the fourth quarter. The significant increase in volume and our sustained focus on strategic additions to our partner team is creating search execution support needs, for which we will continue to hire in the fourth quarter.”
Wallace continued: “There is a lot of positive momentum inside our firm right now – our updated brand has been very well received since its debut, and we are excited about the recent expansion of our Agile Talent offering with the launch of our Value Creation Advisory Solution. We have an exceptional team of talented professionals at every level, all working towards a common goal – to provide value to our clients and shareholders – and it shows.”

Risks

I think the most obvious risk that came to my mind was LinkedIn taking away market share in executive search. Anecdotally, I would have expected this to have been a bigger impact on lower and mid level managers and not senior leaders in important roles. One would think that LinkedIn could actually be leveraged as a tool by Caldwell. I would think that given how important the roles are in the organizations that quality of candidates matter more than anything. I see the Caldwell brand as particularly important.

The other big risk that I can think of is the economy. Less hiring equals less need for Caldwell’s services. One does tend to get nervous after 9 years in a bull market.

These risks are not going away, so you will have to get comfortable with them if you take a position. For me, I will control these risks by limiting exposure to Caldwell.

Management

  • CEO – John Wallace. He jointed in 2008 and has previous experience in another executive search division of Hudson Highland Group. John owns about 20% of the shares.
  • COO & CFO – Chris Beck. Joined in 2013 as CFO. Recently appointed COO as well. Also has experience at Highland Parnters (which is a division of Hudson Highland Group).
  • Total compensation seems a little high, but much of the total compensation is based off performance bonuses.
  • Both of these gentlemen have employment agreements in place.
  • I think a key metric to think about is revenue per partner, which has been trending in the right direction.

Board

  • The board is comprised of 5 members with 4 of them being deemed independent.
  • The Chair of the board is not the CEO of the company.
  • The board is comprised mostly of corporate directors.
  • Many of the board members are also on the board of other public companies.
  • Almost all board meetings had full attendance in 2017.
  • Compensation is a mix of fees and shares. Average 2017 compensation was $40k/director.
  • I did some digging on the board members and there seems to be pretty good mix of strategic, operations and public market presence.

Summing it Up

I think a starter position is warranted. I would be willing to add with continued confidence in operational leverage or other positive news. Caldwell is nice because you get paid to wait.

Disclosure: the author is long Caldwell Partners at time of writing.

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