Total Telcom Inc. - 2024 write-up -
From Break-Even to Breakthrough: The Journey Ahead
NAME: TOTAL TELCOM INC.
TICKER: TTZ.V (TSXV)
PRICE: CA$.23 (10/7/24)
SHARES OUTSTANDING: 26.42M
MARKET CAP: CA$6.08
DEBT: NO DEBT - CA$2.75M IN CASH 45% of Market Cap
ENTERPRISE VALUE: CA $3.34M
INSIDE OWNERSHIP: ~30%
1. Company Overview
Total telcom is a Canadian micro cap that’s profitable, with recurring revenues, no debt and half of its market cap in cash, the company is in the field of remote asset management solutions. They specialize in crafting innovative wireless technologies, making it affordable and user-friendly for businesses and consumers to monitor, track, and control their assets remotely.
Their offerings include advanced wireless modems that utilize microcomputers integrated with sensors, GPS engines, WiFi, RFID, and a variety of inputs and outputs. One of their strengths is the user-friendly interface, which requires no special applications or equipment for configuration. Users can easily set up and control these systems through a wireless WiFi connection using any smartphone, tablet, laptop via the Internet.
In addition, Total Telcom's subsidiary, ROM, plays a crucial role as an authorized airtime reseller and hardware developer for satellite, cellular, and wireless IP networks. This integration of technology across various platforms underscores Total Telcom's position as a pivotal player in the communications industry, effectively keeping the world connected through smarter, more efficient methods.
Source: Company’s presentation.
2. Key Thesis Points
So, let me break down my thesis about the company. Basically, in the company’s own words
“The Company has essentially reached the break-even point from its recurring business, and barring any unforeseen circumstances, should continue to see increased profitability from growth in hardware sales as new products are rolled out for full commercialization.”
Here’s what I think makes this company really interesting:
They’ve got solid recurring revenues coming in. Reaching break-even point.
The company is at an inflection point where they're expecting an increase in hardware sales. With the right strategies in place, this could mark a significant turning point for their growth!
They’re debt-free, with around 50% of their market cap sitting in cash, which is pretty sweet.
The company operates in unique niches.
Their stock has hit some 52-week lows, so there might be a good buying opportunity here.
They’re already profitable and not diluting their shares much.
They have high profit margins.
Honestly, I don’t see much downside right now. If they come up with a solid marketing strategy and get back into growth mode, this company could really take off!
And on top of all that, with climate change causing all sorts of environmental issues, there’s a growing demand for advanced water and weather data monitoring solutions.
3. Business Model & Competitive Advantages
The company generates money by recurring revenues, equipment rentals and hardware sales, and they’re now focusing on making most of their sales through third parties and white-label partnerships. This strategy is great because it means they won’t have to spend much on R&D anymore, which could help boost their margins and sales without any extra expense.
Now, the hardware they offer isn’t anything revolutionary, but what really sets them apart is how they integrate with the customer’s existing equipment and meet their specific needs. They see themselves more as a service company than a hardware company.
The company has three main revenue streams:
Hardware: Customers pay anywhere from $300 to a few thousand dollars per unit for the hardware, but this segment has the lowest gross margins.
Communication Services / Recurring Revenues: This is where they really shine! The communication charges range from $20 to $125 per unit each month, and this part has much higher gross margins.
Racing Management: They also offer tracking units for off-road racing events like the Best in Desert Race. Customers rent the equipment for race day, and the rental revenue here has gross margins similar to the communication segment.
Overall, the blended gross margin across all these revenue streams is over 60%, which is pretty solid!
When it comes to competitive advantages, this company excels at being cost-effective. Their solutions enable businesses to eliminate the need for manual, on-site inspections, which significantly reduces travel costs and optimizes resource allocation. By efficiently capturing and compressing data, they empower companies to make better decisions, allowing for early detection of potential issues that can prevent costly breakdowns and minimize asset downtime. With access to accurate and comprehensive asset information, businesses can plan more effectively and allocate resources wisely, leading to optimized operational efficiency and lower overall expenses.
Furthermore, by utilizing small packets of data for satellite communication, the company ensures efficient bandwidth utilization. This not only enhances data reliability by minimizing the impact of errors and interference but also reduces latency, which is vital for time-sensitive applications. Their reliable, rugged, and self-contained data loggers and remote monitoring solutions have earned them a strong industry reputation. Clients choose them because they prioritize customer needs, are known for solving complex problems, and excel in reverse engineering solutions. This trusted reputation makes them a go-to partner for companies looking to enhance operations and drive down costs.
Market Share
The satellite communication market is projected to experience significant growth, increasing from approximately USD $282 million in 2023 to an estimated USD $1.13 billion by 2028. This translates to a remarkable compound annual growth rate (CAGR) of 32.1% during the forecast period.
One of the key factors driving this expansion is that approximately 85% of the planet lacks conventional cellular connectivity. This situation presents a substantial opportunity for satellite communication solutions to address connectivity challenges in underserved regions, meeting the demand for reliable communication services where traditional networks do not reach. Given these dynamics, the market for satellite communications is positioned for substantial growth and innovation in the coming years.
Source: Markets and Markets
5. Growth Drives
The company is strategically focusing on white-label partnerships, which could result in:
A rapid increase in hardware sales
Enhanced recurring revenues
Improved management of profit margins
There is significant opportunity to:
Expand rental services to encompass additional types of competitions
Growing concerns over global warming and environmental challenges may lead to:
Governments implementing stricter regulations
An increased demand for accurate data and information related to:
Forestry management
Water management
Environmental monitoring
This regulatory trend presents an opportunity for the company to position itself as a key provider of essential monitoring solutions in a changing landscape.
New product development, spending less on R&D and more cash into marketing to ramp up sales
6. Management
The management team consists of highly experienced professionals, with around +30% of the company’s shares:
Neil Magrath is the CEO and Director, with over 15 years in material management and engineering. He successfully transformed a private corrosion business from $750K to $10M and contributed to the Alberta Fibre Optic Supernet. He has been a director since 2000 and holds 2.83 million shares.
Scott Allan, the CFO and Director, is a Chartered Professional Accountant who has been on the board since 2004, owning 1,086,100 shares.
Paul Andreola, who joined the board in 2023, brings 25 years of business development expertise and a strong reputation in the micro-cap space, with an excellent track record of identifying promising companies. He currently owns 798,500 shares.
Wayne Jamieson, a Director since 2021, has a background in engineering technology and is actively managing large-scale projects while owning 302,000 shares.
David Hammermeister, a Director since 2011, is a Chartered Professional Accountant who has focused on private enterprises and high-net-worth individuals throughout his career. Holding 2.395 million shares.
In terms of compensation, the reported 2023 salaries and fees are relatively low, with annual salaries at $126,000, management fees of $30,000, and director fees of $10,000. This contrasts with the substantial number of shares many directors own, highlighting a strong alignment with shareholder interests and emphasizing their commitment to driving the company’s success
7. Financial Position
As of March 31, 2024, the company has a solid balance sheet with total assets of $5 million and only $289,000 in liabilities, including $37,000 in lease liabilities. They also have $2.8 million in cash. However, they’ve capitalized $1.37 million in product development costs, and I think that’s worth a second look. While it might make their financials look better now by spreading out those costs, it can also hide the real expenses they’re actually dealing with when it comes to innovation.
Even though the company has said they're planning to put more of their money into marketing, I believe the spending on R&D is something to keep an eye on. Capitalizing these costs can create a bit of a false sense of security; if the products they’re working on don’t pan out, they could be staring at hidden costs down the road. So, while the balance sheet looks good overall with no debt and solid working capital, I still think they need to be careful about how they handle their R&D expenses.
8. Valuation
Assumptions:
The valuation will focus on estimating sales, noting that the company has high gross margins and a potential net income of around 20%.
The key factor is to assess how the company will generate sales, with the expectation that the bottom line will remain consistent with historical performance, and there should not be significant changes in the Cost of Goods Sold (COGS).
The company experiences seasonality, with fewer races occurring during the summer months. Additionally, demand for heater controllers tends to increase in the fall and winter seasons.
The break-even point is estimated to be around $800,000 or approximately $1.5 million in sales.
Hardware sales are expected to have slightly lower profit margins compared to other revenue streams.
The revenue mix may shift in the future, with a potential increase in revenues from communication services, which offer higher margins.
As of FY23, the company has approximately $5 million in non-capital loss carryforwards.
For FY24, I’m assuming almost no growth since results should be coming out this month or next, and we can adjust our estimates accordingly. Overall, I believe we’re looking at a solid company with all the traits I like to see—good management, a solid growth history, no debt, good margins, and profitability, all within a sector that has plenty of room for growth.
While I’m factoring in minimal growth in races right now, I see plenty of opportunities for growth as the economy improves. People are starting to spend more on recreational vehicles, and since the pandemic, there’s been a noticeable increase in outdoor sports participation. I think my assumptions are quite conservative, which is how I prefer to approach things. I’m not taking into account any new developments or other potential opportunities the company may have. Instead, I’m looking at it as a company where it seems tough to lose money given all the positive factors previously mentioned.