Description

All amounts in Canadian (unless otherwise stated).

Total Telcom (TTZ.V) was introduced on VIC on 1/5/17 at $0.08. Sorry to re-introduce a nanocap idea, but at least three reasons make it worthwhile IMHO: 1) the stock is investable for personal accounts and small funds (about 4 million shares have traded this year); 2) there’s now enough information available to get conviction about the company’s earnings and see a stock price of $1.00 in three years’ time, +300% (which is rare, especially in today’s environment); and, 3) after ten years of the smartphone era (Apple introduced the iPhone in 2007, successfully kicking off the last “wave of computing”), we are arguably now entering the next “wave of computing”: Internet of Things (IoT). After looking at a bunch of private and public companies in the IoT space (I include AMZN, TSLA, PI, etc.), I find this (little) idea to be my “top pick” in IoT.

Total Telcom, based in Kelonwa, British Columbia, through its subsidiary Rom Communications, for more than a decade, offers custom satellite tracking hardware and software for niche commercial uses. Since 2007, the company has been a value-added reseller for the Iridium satellite network. Manufacturing is outsourced to a contract manufacturer in Vancouver that assembles the hardware components. Distribution is largely outsourced as distributors are assigned for certain products in certain markets. Finance is even effectively “outsourced” as the CFO is part-time. Importantly, with the current staff of around ten, the CEO mostly just needs to hire customer service support as the company’s client list grows. Total OPEX is running at $800k a year, with the company already break-even just on its communications revenue. That means that any growth in communications revenue (minus ~40% cost) and/or any gross margin on hardware sales and/or any rental sales almost entirely contributes to the bottom line. We have seen this effect in the last three quarters (along with the corresponding rise in the share price).

The company’s “secret sauce” appears to be the back-end programming platform, which has been refined over ten years and is adopted for each customer application. Per the customer’s specific application, the data is defined so that it can be best compressed, encrypted and processed most cost effectively with the minimal satellite data transmission costs. There are also trade secrets and special know-how in the software that make the platform extremely reliable and almost-real-time compared to other systems.

Importantly, management has a long-track record (about 20 years in this business), has 25% ownership (28% with options) and take low salaries. With their stock positions valued at 5-10x their annual pay, management is highly incentivized to profitably grow the company and increase the share price. I like management’s alignment with minority shareholders.

TRADITIONAL BUSINESS LINES

Only about 30% (guestimate) of Earth’s land surface has cellular service. That means there are many potential industrial and commercial applications that could use satellite, such as ocean vessels (especially fishing vessels, where tracking is often mandated), industrial equipment monitoring (especially oil & gas, water systems), and forestry/environment. The company’s traditional, decade-long business is building custom applications for companies/municipalities in these areas. Hardware ranges from $300-1000. The monthly fee (communications charges) starts at $20. Starting in 2013, the company launched “TextAnywhere” for consumers, a $300 hardware module (much like a portable WiFi), that synchs with your smartphone and allows (only) two-way satellite texting for $0.25 a text. It can be used for remote travelers (e.g. hikers) and, on a cost per text, it can compete favorably with satellite GPS trackers like Garmin’s inReach (Iridium) and SPOT (Globalstar).

Outlook:

For the last few years, the company has enjoyed organic, lumpy growth of about 20% in these traditional areas. Importantly, this organic growth is expected to continue for at least the next several years, per management. Growth is coming across “all” of the company’s client areas, including oil & gas, remote worker safety, forestry, etc. Clients typically start with a pilot with 1-2 devices, then ramp to 20+, then to 100+, etc. The only (small) product transition coming up is AlarmPoint, a 2G cellular monitoring system for businesses that will be phased out and converted to 4G. As mentioned, the company’s inflection point of becoming profitable occurred about a year ago, in mid-2016.

NEW PRODUCT LINE #1: RACE TRACKING

In 2015, a few U.S. race teams at a SCORE race series in Baja Mexico brought Rom devices to track their desert race cars. After this initial test was deemed a success, the company decided in mid-2016 to launch RacingTraX, a race tracking system for the U.S. race series “Best in the Desert” (BITD). BITD uses RacingTraX exclusively, and RacingTraX is mandatory for the event’s long-distance races for safety reasons. The immediate alerts can both reduce accidents and most expeditiously notify emergency support after an accident. In January 2017, the company launched MotoTraX, the same race tracking system but for motorcycle races. RacingTraX plugs into the car’s power-supply, while MotoTraX has an internal battery and attaches to the motorcycle. About $100k was spent on 400 units over the last few quarters. The company receives US$250 per racer per race (yeah, the company recoups the cost of the device in one rental!), which is recorded as “rental revenue” (there are no communications charges). Since starting this new product line in mid-2016, quarterly revenue has already grown to $99,589 in 1QF17, $139,058 in 2QF17 and $245,448 in 3QF17. It’s pretty easy to track revenue as the races and number of racers are listed on the “Best in the Desert” website (see chart below, which I pieced together). It should be noted that 4QF17 rental revenue should be around zero due to two smaller races that were not long distance (no mandatory tracking needed).

“Best in the Desert” races

Source: Author’s estimates based on race sign-ups (numbers don’t tie exactly due to add-ons)

Outlook:

The founder of BITD, Casey Folks, passed away recently. Due to losing Casey, BITD has no immediate plans to grow the race season. BITD is an organization and still appears to be doing well based on sign-ups. BITD is reportedly “very happy” with the RacingTraX system, so the company should remain the exclusive vendor for the immediate term.

There are at least two other companies that are heavily involved in remote race tracking via satellite. Snube Sport offers “Stella III” (Iridium) devices for the four SCORE races in Baja Mexico (e.g. Baja 1000). YB Tracking (in the U.K.) offers Iridium-based devices for 200+ yachting races a year. While these two competitors’ devices appear much fancier than RacingTraX, it seems that there are issues with their reliability and their lack of near-real-time race results. Thus far, RacingTraX has apparently had flawless reliability in competitions and seems to be the “only” company with a successful track record in near-real-time race monitoring for remote vehicle races. In its first year in F17 (June), RacingTraX – with just one race circuit – has generated about $500k in rental revenue (with 70+% contribution margin). I’m conservatively modeling flat rental revenue in future years, but there is clearly an opportunity to bring a few more race circuits on board.

NEW PRODUCT LINE #2: HEATER CONTROLLERS

A perhaps even bigger opportunity is the launch in late 2016 of heater controllers for industrial heaters, starting with the Eberspächer line. More than 100,000 German-made heaters are sold into North America each year, with an installed base of several million heaters. These heater controllers can be remotely controlled and are WiFi or satellite-based. Despite missing the selling season, the company sold 600 devices for $72k in late 2016. The company has a goal of 50% gross margin (though gross margin was below the target for the initial sales). The company has a single distributor in Canada, which has an exclusive agreement to sell in North America. Sales are typically made in spring and summer, ahead of the winter season. 

Outlook:

After I pushed him, the CFO admitted that, with strong distribution, sales for the WiFi heater controllers could reach $1 million in 2-3 years. At a 50% gross margin, that implies $500k operating profit contribution.

Furthermore, yesterday, the company announced a new line of WiFi heater controllers for cabins of semi-trucks, starting with Webasto fluid heaters. The company already has a 1,000 unit order (likely implying ~$200k in sales). This WiFi heater controller segment is also significant, with over 80,000 semi-trucks fitted with a heater each year in North America.

VALUATION: PUTTING IT TOGETHER

Today, here is a company with $1.4 million in net cash and NOLs of about $7 million. Putting the three parts (above) together, we have a company today with sales of $1.9 million and EPS (untaxed) of $0.02 in F17 (June). In three years in F20 (June) – with 20% organic growth in the traditional business, flattish rental revenue and $1 million in new WiFi heater controller sales - we could have a company with sales of $3.6 million and EPS (untaxed) of $0.05. A 15x multiple plus net cash at June 2020 (three years from now) implies a ~$1.00 stock, up +300% from here.

It’s pretty amazing to me that, after ten+ years doing custom work for clients and struggling, the company found two highly profitable niche products. Each of the new products has an annual sales potential of $20+ million, with very high margins. With 40+% operating margins, the operating profit potential of each new product is potentially larger than the company’s current market cap.

RISKS:

Execution risk: CEO currently runs the company with a small team of 10 people. Manufacturing is outsourced. Distribution of new products is outsourced. Even the CFO (part-time) is effectively outsourced. Management’s track record (about 20 years) and ownership (28% with options) arguably reduces executive risk. Also, with high ownership, management is closely aligned with minority shareholders.

Competitive risk: moat TBD. 

Catalyst

Continued organic, profitable growth

Continued profitable growth in the two new product lines

New product lines (TBD)

Continued accumulation of cash and potential share repurchases/ return of capital