With this blog’s most recent idea, BQE Water, reporting FY23 results after the close yesterday, I figured I’d use this opportunity to provide an update on each of the currently open ideas.
BQE Water
Let’s start with BQE. FY23 results were impressive and largely in-line with what I expected. Proportional Revenue came in just shy of $23m and GAAP revenue (i.e. excl. the implied JV revenues) reached $18m. EBITDA was $4.6m, while net income increased 128% on the year to $2.6m. The company also increased its cash balance by 27% up to $7.9m. At today’s opening price of $58, the enterprise value is ~$65m, putting the stock ~14x TTM EBITDA, which is just ridiculous given how quickly the company is growing (we are closer to a mere mid-single digit multiple on NTM’s numbers).
What’s far more important is some of the insight we can glean about the future. A few things stood out to me. First, on the pipeline of operations contracts expected to come online in the next 12-18 months: the company noted it anticipates contracts (plural) for new plants being built in 2024 will begin the transition to the operations phase in H2 24 or early 25. Moreover, a third SART plant in China is set to come online in early 25. That’s at least 3 new operations projects in the next 18 months: and remember, the average revenue per project is ~$1.6m per year; so assuming these are average projects, that’s an incremental $4.8m of recurring revenue to add to what was a mere $8.3 of total recurring revenue in 2023. And that’s before accounting for a full-year of operations from the large Selen-IX plant that came online in the back half of 2023, which contributed $2.2m of revenue alone in only ~4 months!
That is more than half of what I projected this project would contribute in all of 2024. Let’s conservatively say the plant contributes twice as much as it did in its first four months over the course of the full year ($4.4m); then adding that to 2023 recurring revenue (excluding its 2.2m contribution) gets us to ~$10.4m of recurring revenue — add the +3 new projects noted above and we are quickly looking at ~$15m of recurring revenue in the next 12-18 months, or ~100% growth in this segment. At 50% margins, we are therefore perhaps looking at +$6m of EBITDA before accounting for contribution from Technical Services and the China JVs (which will both be material contributors).
And what’s more — that is also before considering any “major projects because the timing of these projects is not sufficiently certain to include at this time”. That sounds like a pretty clear signal that there are some “company maker” projects on the way soon, which as I have said, should contribute multiples of the average project.
It appears, based on this, that I’ve likely underestimated the growth we are going to get over the next 12-18 months.
All said, BQE is currently my favorite idea by a significant margin and I picked up a few more shares this morning.
Finally, I was on the Value Hive podcast discussing the company yesterday. We recorded before earnings came out, but nothing I said really needs revision based on the report beyond what I just detailed above. Here’s a link for anyone interested.
CRONOS GROUP
Nothing to report here on the operations, but there have been some developments on the regulatory front. Firstly, in what is terrible news for the Canadian cannabis industry broadly, but what I firmly believe is great news for the longer-term thesis here, the Canadian government has (unsurprisingly) declined to include reform on the excise tax on cannabis producers in this year’s Federal Budget. Why is this good news for Cronos? Because it is going to mark the demise of many of the increasingly few competitors left in the space. Here is what the Tilray CEO had to say:
As I noted in the original write-up, some 40% of licensed production capacity has come offline since mid-2020. That trend is clearly set to continue, if not accelerate, given the continuation of the excise tax, which has been the leading factor in producers exiting the space. I believe that Cronos, with its cost advantages and fortress balance sheet, is built to withstand this hit to its margins and is poised to emerge a superior business as the industry continues to consolidate. In short, this definitely mutes the short-term upside by taking a big catalyst off the table, but it strengthens my conviction on the long-term thesis.
On the US theatre, the Democrats are becoming increasingly desperate to have cannabis rescheduled in advance of the election, with 21 Dems penning a letter to the DEA and Attorney General Garland, urging that a decision be made promptly. The matter remains in the jurisdiction of the DEA, but a decision to reschedule will clearly galvanize the entire industry.
Cronos will be reporting Q1 on May 9.
Cipher Pharmaceuticals
The only piece to note here is that Moberg Pharma issued a press release noting “strong interest from pharmacists, physicians and end customers in the launch of MOB-015 under the brand Terclara[®] in Sweden.” This is obviously promising and some early evidence that Cipher’s projections regarding the MOB-015 opportunity in Canada are not fanciful. In my view, the market is not remotely pricing in the upside this opportunity offers and I continue to see this as a very attractive asymmetric bet despite the move.
Sportsmans’ Warehouse
Finally, I am realizing I never provided a proper update on Sportmans’ Q4/FY23 results (I did provide some commentary in the chat feed, though I suspect many of you don’t see those messages). In brief, I thought the numbers and color from management were encouraging and I think the thesis is definitely tracking in the right direction. That said, this will continue to be a show-me story until its clear that margins can revert to pre-COVID norms. Here are my key takeaways:
First, and most importantly, management did what they said they were going to with respect to the debt and inventory levels. In fact, they overdelivered: 1) the revolver balance fell from $185m to $126m and 2) inventory levels fell by about 1/4 from $445m to $355m. These were the two items I flagged as most important for turning this story around, and they definitely delivered here.
Second, on margins: SG&A as a % of sales is also trending in the right direction, though it remains elevated. Gross margins were absolutely hammered, but that was expected as they worked through the distressed inventory.
Third, I really, really like this management team. I knew that Paul Stone and his team would be an improvement given his prior experience; notwithstanding, I may have underestimated them. I am really impressed by the work they've done here and have a lot of confidence they will be able to right this ship.
Fourth, the not so good news is that sales came in at the low range of guidance and management stressed continued weakness in demand. That said, I think the stock is way too cheap even on the current depressed sales run-rate and depressed (but improving) margins.
Indeed, despite the continued weakness in the consumer, management is guiding to FY24 EBITDA of $55m. At the present ~$3.20/share, the market cap is $120m. Add the ~$123m of net debt, and that puts the enterprise value at ~$240m, meaning the stock presently trades for less 4.5x ntm EBITDA (and again, that is a depressed number). Moreover, that is before accounting for further debt repayment, which should be material moving forward as management guided to FCF positive on the year and stated that debt paydown would be the priority for that cash. Assuming a further $30m of debt paydown and more appropriate 6x EBITDA multiple, then shares should be worth ~$6.20/share.
Significantly, management noted that some of the cost measures they have implemented will not fully work their way through the PnL until Q3; further, they noted that gross margins should trend towards the historical norm of ~32% provided the consumer recovers.
Altogether, if we look out a couple years, there’s a path for the company to generate closer to $100m of EBITDA, provided they execute -- if so, we could have a multi-bagger on our hands.
SPWH seems to be tracking well. Like you said, biggest concern is sales and they have made it very clear that their main demographic (low-middle income men) aren't in a strong financial position right now. Im hoping the effect of brought forward demand from covid has worn off, and election tensions may offset the weak consumer. The company will also start comping well compared to last year. In the earnings calls they stated they missed Spring in a massive way last year, which isn't the case this time.
I think being FCF positive this year should at least re-rate it closer to book value, there shouldn't be a big risk of bankruptcy. $6 seems like a decent price target, with the intent to upgrade that if geopolitical tensions rise, or the consumer has an influx of gov cash (not likely until at least next year).
Thanks Jake