Yet another niche OFS micro-pitch
A microcap emerges from legal mayhem
First of all, I’m happy to follow up on PFIE 0.00%↑ announcing its acquisition by CECO 0.00%↑ . I was happy to take a quick gain here.
Moving on to another OFS name: NCSM 0.00%↑. As one of my top analysts has been on the case for years, I was able to make some nimble trades and have a cost basis of $16.57. I believe the share price is likely to increase substantially as the company moves past a prior legal dispute and executes on improved operations. Be careful executing any orders on this stock, as it has a wide spread.
What happened?
There were two lawsuits. Insurance ended up covering the larger lawsuit, while they were able to make product modifications to address the smaller lawsuit. This unwound a massive legal reserve on the company’s balance sheet.
Meanwhile, as a Canadian-focused operator, it’s been a tough environment, leading to guidance cuts from management. But recently that changed.
After unlocking the cash from the legal reserve, management has preserved over $6mm of net cash and a net accounts receivable of over $25mm. After increasing 2024 guidance this quarter, management is now guiding to $18.0mm-$20.5mm adj EBITDA. Looking at their adjustments, I think we need to add back about $5mm in stock-based comp as a recurring expense. At $46mm market cap — ~$60mm EV with minority interest — we’re trading at 4-5x EV/2024 EBITDA.
Though it sucks to write off $5mm a year in SBC and puts us in a “reasonably valued” territory for an OFS microcap, the bright side is that any upside to EBITDA is going to have a lot of leverage to our bottom line. Suppose we hit a target of $20mm real EBITDA (lol) in the short term — 3x EBITDA starts to get pretty compelling. And it’s not like it would be crazy if we can go higher than that.
Timing / Sentiment
It seems to me like we’ve hit a slough of impatient sellers after our initial breakout on the legal settlement news, without getting any credit for the improved guidance yet. Well, hardly any. The news is out, but basically no volume has traded. Sometimes in a stock with wide spreads you end up with a bit of a standoff for a while until someone gets comfortable lifting the Ask.
Risks:
Poor acquisitions / dilution / incentives: I think the biggest risk here is that management chases after bad acquisitions. Of course, their existing stock-based comp is in itself concerning as well.
Deferred maintenance: How is it that they are depreciating several million dollars a year while recording hardly any capex? There could be a risk of major deferred maintenance here.