Description

Investment Thesis:

• I believe that Namsys is undervalued because the market has not been appreciating the true earnings power in the reported financials. From Q3-2019 through Q4-2020, the company had the cost of its special long-term bonus plan being expensed through the income statement, optically depressing earnings. 

• Micro-cap stocks often don’t react to news until it shows up in the reported filings. By canceling the plan in the most recently reported quarter, 2021 and especially 2022 will be a much cleaner year in the reported financials. 

• I believe organic growth will continue, as the company’s software (recurring revenue) is being offered through Brinks, as more companies outsource their cash management. Yes, cash is in a long-term secular decline, but this is a tiny company relative to a large market of customers who could use their services, so it doesn’t take much to grow when 2020 revenue was ~$4.7M. 

• Today I value the company with a stock price of $1.03 per share, at 8.4x 2022E EBIT-Capex. My 2022 price target is $1.47 (~42% upside), assuming a conservative 12.5x 2022E EBIT-Capex of approx. $3M, with 28M shares outstanding and $3.5M of net cash on the balance sheet (debt free); giving it no credit for cash generation over the next two years. 

• Typical microcap dynamics make insights such as these hard for the market to discover; hence why I love these tiny companies for my PA, despite the low liquidity. The business trades on TSX Venture exchange and of course has no analyst coverage.  

Business Background:

• To keep this brief - I suggest reading the write-up from last August by “andrew152”. The author does a good job explaining the company’s cash management software. I’m more bullish than the author and my differentiated view comes from this recent change in the accounting of the employee bonus plan, which I personally feel is the most underrated aspect of the thesis which I have not seen discussed and I’m sure the market is missing this. 

Explanation of the long-term bonus plan:

• I’m going to reproduce the company’s explanation below so you don’t have to hunt for it. Basically, Namyss wanted to align incentives with its employees, and since they do not give stock options and such, they made a pledge to give 15% of company’s value to “employees and officers” in the event of sale. 

• No change of control imminent, so the company decided to terminate the plan and settle-up early (by end of 2020) by paying out the value to employees now. 

• I understand the viewpoint that all of this was too much value to give away to employees, in particular the COO. For context, Namsys doesn’t award stock options so this was the first (and only) dilutive event for the company. Anyways - I don’t think that debate is relevant anymore; now that’s been paid out it is in the past and no longer a major question mark hanging over valuation.

Explanation from the Company: Reproduced here 

“The Long Term Bonus Plan for Employees (the “Bonus Plan”) established June 29, 2015 and amended July 2, 2019, was put in place to ensure that the key personnel in the development and maintenance of the Company’s “SaaS” offerings were rewarded for their diligence and knowledge. The trigger for payment under the Bonus Plan was a change of control of the Company or December 31, 2021, whichever occurred first.

The Bonus Plan, however, did not anticipate that under IFRS Accounting Rules, the ultimate cost of the Bonus Plan would be amortized as Employment expense over the period July 2019 to December 31, 2021, adjusted quarterly for changes in the value of the Bonus Plan based on the average stock market price of the Company’s shares during that period.

The senior management and the Board of Directors, excluding Mr. Jason Siemens, who is a beneficiary of the Bonus Plan and is therefore conflicted, determined it is in the best interest of the Company to terminate and pay out the Bonus Plan. Therefore, on October 30th, 2020 the Board of Directors, with the concurrence of the Bonus Plan Employees have terminated the Bonus Plan.”

Full Description of Material Change 

“Changes made to the Bonus Plan in the past few years resulted in the need for the Company to amortize the take-out amount through the end of fiscal 2021. This amortization has the effect of skewing the quarterly results by increasing the employment costs, particularly with the price of the Company’s shares in the market increasing. Accordingly, Management and the Board of Directors of Namsys took steps to terminate the Bonus Plan on October 30th, 2020.

The Bonus Plan was originally designed to pay out fifteen percent (15%) of the value of the Company if it was sold or amalgamated or if there was a change of control. In 2019 an amendment to the Bonus Plan set a termination date of the Plan at December 31, 2021. If a payout event had not happened before that date, the Bonus Plan was to be paid out on December 31, 2021. To eliminate the need to continually amortize the Bonus Plan payment, the Board of Directors (without the vote of Jason Siemens who is a beneficiary of the Bonus Plan), and with the concurrence of the Bonus Plan participants, formally terminated the Bonus Plan.

The payout agreed to on termination with the written concurrence of the Bonus Plan recipients was three-quarters cash and one quarter shares of Namsys priced at the 20-trade day weighed average of the stock price prior to October 30th (0.85/share). The cash amount has now been paid net of employment tax on the total value of the payout. The Namsys common share part of the payment has not yet been completed and the method of doing so has not been determined.

However, if the Company decides to do so by issuing shares from the treasury, the matter will be put to shareholders for approval at our Annual Meeting planned for April, 2021.”

Impact on Financials

Since my differentiated pitch leans heavily on making accounting adjustments not reflected in the current financials - below I’ve reproduced the trailing earnings for the last 2 years. 

You’ll notice that I showed the earnings down to EBIT as presented in the company filings, and below that with the non-cash bonus plan expense added back. They were running this expense through the cost of sales line (depressing gross margins) and through selling and G&A lines (further depressing operating income). 

Estimate for 2022 earnings potential and margin expansion

• The way I get to my earnings estimate of $3M in EBITDA-Capex in 2022 is as follows:

• FY2020 revenue was $4.7M, or +15% during a pandemic year. 2021 will be better as some business was delayed, so I’m assuming +17.5% growth this year, and then we return to a conservative pandemic level growth of +15% in 2022 to get you to $6.4M in revenue. 

• Gross margins are to be watched, so I have them going from 69% in 2019 to 67% in 2022, so some margin compression - will monitor. 

• Given the high-fixed cost, asset light nature of the business, I give them a little EBIT margin expansion, so 48% EBIT margins (vs. 47% in 2020 adjusted), gets you to a little over $3M in 2023. 

• Capex is almost nothing, only $10K last year, so that gets you almost $3M in EBITDA-less capex. 

Catalyst

• Upcoming annual meeting on April 29th, 2021; I expect a business update 

• New financials going forward without the long-term bonus expense should show above-average earnings growth for the next few quarters