Description

Titan Logix is the market leading provider of fluid measurement technologies for over-the-road crude oil tankers in North America.  I believe that the business is currently at a major inflection point, with an imminent cyclical rebound and operational improvements poised to drive strong revenue growth and profitability.  

The company trades at cash (and investments) value and has fairly negligible cash burn even at highly depressed revenue levels.  As such, I expect future revenue growth and profitability to drive a revaluation in the stock price when the market eventually places a value on the underlying business again.

I believe that the company is worth at least $0.75 per share, which implies a value of only ~$8mm for the core business.  This works out to roughly 1x revenues and 8x EBITA that I believe the business will generate in a more normalized environment.  With the stock trading at cash/investment value, minimal cash burn, and significant upside from a cyclical rebound and operational improvements, I believe that the risk / reward is highly skewed and provides investors with a very attractive opportunity.

The company’s size and liquidity make it more suitable for personal accounts.  Shares trade as TLA on the TSX Venture in Canada.

Overview

Titan’s core product line is the TD Series of tank level monitors using Guided Wave Radar (GWR) technology, which represents around 96% of revenues.  These sensor and monitoring products are used by over-the-road (mobile) crude oil tankers to prevent overfills. This is a small niche market, but it’s historically been a highly attractive one with 20%+ operating margins as Titan has a fairly dominant market position.

The company’s revenues are roughly 1/3rd from mobile tank OEMs with the remaining 2/3rd sold through a dealer channel.  The dealer network is nicely diversified without any major concentration in it, with roughly 30-40 dealers providing 80% of the revenues.  The largest customer overall is ~13% of revenues.  Finally, 70% of revenues come from the US with the remaining 30% from Canada.

Growth Catalyst #1: Impending Cyclical Rebound

The first major growth catalyst is that I believe the industry is on the verge of a meaningful cyclical rebound.  First, let me provide a bit of history to put this into context.

Sales of tank level monitoring technology are directly driven by new crude oil tanker production.  Not surprisingly, new crude oil tanker production in turn is highly correlated to commodity prices.  If you look at Titan’s history, revenues have been quite cyclical and have roughly tracked the WTI crude oil futures price.

The last time that WTI crude oil was over $80 was a roughly four year period from the fall of 2010 to the fall of 2014.  The average price over this period was roughly $95.  In a strong market environment like this, Titan generated considerable profits: $16-18mm in revenues per year in fiscal years 2012/2013/2014 with ~$4mm in EBITA per year.  Not surprisingly, shares traded markedly higher in those years, up to around $1.50 per share in early 2014.

As often happens in cycles like this, the high crude oil prices drove an oversupply of tanker trucks during the boom which has taken time to be absorbed by the market.  Furthermore, WTI crude prices have largely fluctuated around $50, levels well below the peak and too low to stimulate much incremental demand for tanker trucks.  As a result, starting in FY2016, Titan’s annual revenues crashed to the $3-6mm per year range, which is where they have been maintained for the last six years.

The tide finally started to turn in 2021.  WTI crude oil pricing improved throughout 2021, finally getting back over $65 by the summer, and over $80 a few months ago.  As in many other industries, however, supply chain challenges have caused new tanker builds to lag this recent rebound in tanker demand, so the improving market has not yet manifested in Titan’s financial results.  Management described this in a recent press release as follows (emphasis mine):

“The intel we are getting back from our tanker OEMs (original equipment manufacturer) and dealers is that there are shortages of material, parts and other supply chain issues, resulting in a slowdown of tanker builds. Most operators are currently recommissioning sidelined equipment.  This has led to a drop in sales. We don't expect this situation to continue much longer as demand for oil movement is strong. It is a matter of clearing the glut of used tankers and a return to normal for material supply chains.”

With the recent WTI crude oil futures now approaching the commodity price levels that drove $16mm+ in revenues with $4mm in EBITA, I expect that revenues and EBITA will increase sharply over the next few years.  As I said in the introduction, I believe that the business can generate $7-8mm in revenues and $1mm in EBITA in a more normalized environment.  If the tanker market were to enter a boom period again, certainly there is the potential for much higher revenues and profitability levels, which I believe the market would capitalize at a value much higher than the $8mm that I have modeled.  

Growth Catalyst #2: Management/Strategy Change

The 2nd growth catalyst in the business is expected operational improvements from a recent change in management and strategy.  To be clear, I have significantly higher conviction that a near-term cyclical rebound will drive revenues and profitability higher than any other potential growth drivers.  That said, I do think that the company is likely to realize operational improvements independent of this, which I wanted to highlight.

In February 2018, the company named Alvin Pyke as CEO.  Over the last four years, however, I believe that he was unfortunately a fairly ineffective leader of the company.  In his LinkedIn profile he describes his employment just prior to Titan as “Founder and Visionary”; I half-seriously suggest this says more about why he was ultimately ineffective at driving growth than anything I could possibly write.  

Without going into too much detail, he pushed the company to develop a number of new hardware and software products, and wanted to expand into a wide variety of new markets that he felt were ancillary: wastewater, hydrovac services, fuel supply chain, aggregates, forestry, etc.  Based on early results, I don’t think any of the new products have received meaningful traction, although it’s certainly possible that it’s too early to judge.  The bottom line is that this is a $3-4mm revenue company.  All of this product expansion and diversification sounds really nice in theory, and I’m sure that many of these projects were great ideas given sufficient resources and attention, but a $3-4mm revenue company can’t boil the ocean.

The problem is that by having such an ambitious and wide-ranging product development plan for the company, the lack of focus not only dooms the individual new projects – but more importantly, it takes resources and attention away from the core business that is 95%+ of revenues and currently paying the bills.  Perhaps not surprisingly, he was finally fired last month and replaced with Nick Forbes.

The core lifeblood of the business is really the dealer network for the TD Series product line.  The former CEO neglected those dealers, allowing competitors to gain market share and causing revenues to stagnate.  Titan has historically had a very, very dominant position in their niche – I believe market share has been as high as ~80% at the peak.  Over the last five years, however, some competitors have made inroads; that said, Titan is still quite dominant and I would be surprised if their market share was lower than 50%.  Garnet Instruments, for example, uses float technology that is less accurate, but they’ve been able to gain some market share by being very attentive to dealers.

The good news is that they have a great product with unparalleled accuracy.  The new CEO sees that they need to get back to basics; they need to be a little less distracted by new products and markets, and a little more focused on supporting and developing their channel.  Management just changed over so it will certainly take some time to fully assess the state of the business, plot the company on a new course, and to generate tangible results from those actions.  That said, I’m optimistic because I think there’s a lot of low hanging fruit here.  There are opportunities for partnerships, integrations, fleet deals, etc.  The new CEO also feels there are things they can be doing on the OEM side to win more business too.

Growth Catalyst #3: New Products

The final growth catalyst is success with new products.  The company has developed and launched a number of new products over the last few years and has some additional product additions and improvements planned for the current fiscal year.  While none of this recent product development appears to have generated material revenues thus far, I do think that it’s possible they could have a winner or two in their portfolio with a little bit of focus and perhaps with the benefit of a reinvigorated channel.

In the short-term they will be launching the T-LITE wireless transmitter for commercial sales in Q2, which includes the TDS Light AWS application and the T-PULSE smart device app (for connection to the wireless T-LITE digital level gauge) as an integrated system.  They will also be releasing an update to the SensorLink configuration software that should make the T-LITE system more scalable.

With the recent change in management, the existing product portfolio and roadmap will no doubt be re-evaluated.  I think that once that process is complete investors will be able to have a better idea about the potential from recent/new product development, but in the meanwhile I have not factored any benefit from it into my valuation.

Valuation

The company has $9.8mm in cash and cash equivalents, or $0.34 per share.

The company has a $3.5mm loan to Bri-Chem, that was made via a participation agreement with Greypoint Capital.  This loan has been providing them with ~$500k in interest income per year, plus there are $400k in principal repayments per year.  I have no present concerns regarding the repayment of this loan, particularly in the current commodity price environment.

This loan has a value of $0.12 per share.

Titan’s cash and investments therefore total $0.46 per share.  With $600-700k in interest income each year, the company has essentially been cash flow break even despite running modest operating losses due to cyclically depressed revenue levels.  For reference, in August 2017 the company had $13.5mm in cash.  Even after modest operating losses for 4 consecutive years they still have $13.3mm in cash and investments today, which has thus remained relatively unchanged.

With shares trading for the value of the company’s cash and investments, and considering the cash flow breakeven nature of the company even at trough levels of business activity, I believe that there is very strong downside support around current prices.

As for the upside, as mentioned in the introduction, I believe that the operating business is worth at least ~$8mm, which works out to ~$0.29 per share – bringing the combined value of the company to $0.75 per share.  $8mm works out to roughly 1x the $7-8mm in revenues and 8x the $1mm in EBITA that I believe the business can generate in a more normalized environment.  The business has currently been running around $3-5mm per year in revenues but at the peak of course they were generating around $16mm in revenues with $4mm in EBITA.

Ownership

Titan Logix has one major shareholder in the Zucker family trust, which owns ~10.5mm shares, or 37% of the company.  This is the trust of the late billionaire industrialist Jerry Zucker, who is more well-known in Canada for his 2006 acquisition of the Hudson’s Bay Company.  Over the last 15-20 years his family trust has been reasonably active investing in micro/small-cap Canadian industrial businesses.

The Zucker trust bought ~4mm shares at ~$1.00 per share in 2015, another ~3mm shares at ~$0.65 per share in 2016, and another ~3mm shares at $0.55 in 2019.  Suffice to say the trust is considerably underwater on their investment in Titan, although they appear to remain committed to the company.

This ownership stake is very notable as a large percentage of the overall value of the company is currently in the form of cash and a loan – roughly 60% based on my sum-of-the-parts valuation.  With the Zucker trust having such a large position here, and with their history of being fairly active and involved holders, I am very comfortable that the company’s cash resources will be invested prudently.

Risks

Crude oil prices decline and new tanker build activity declines accordingly.

The company invests their cash holdings poorly.

The company fails to adequately support their dealer network and loses market share.

All of their new product developments fail to generate traction in the market.

Competitors develop superior products that cause Titan to lose market share.

The loan to Bri-Chem is not repaid to Titan.

Catalyst

Higher crude oil prices spur increased tanker builds, which in turn drives strong revenue growth for Titan over the next few years.

Revenue levels increase high enough to return the company to consistent profitability, which in causes the market to start placing a value on the operating business.

The company makes an attractive investment with its cash resources.

The company pays a large one-time dividend.  I am not expecting this, but I also think it's a lot more possible than a lot of investors realize.  Circa Enterprises, which the Zucker Trust owns 43% of, has paid a number of special dividends in recent years.

Titan Logix is acquired.  Companies with dominant market positions in small niche markets make particularly attractive targets.