SuperCom Path To $250M In Revenues By 2018
Jan. 22, 2014 2:27 PM ET | 1 comment | About: SPCB
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
SuperCom (SPCB) is a relatively unheard-of name. I suggest you read the excellent piece by Lazarus Investment Partners, which had the pleasure of interviewing the company's CEO. SuperCom is an Israeli company that operates in the RFID (radio frequency identification), and the e-ID (electronic ID) markets. Last week, an interview with Arie Trabelsi, the company CEO and major shareholder, caught my eye. Trabelsi has been leading SuperCom since 2010, when Sigma Wave, another company Trabelsi owns, acquired SuperCom's debt for a few million dollars. That debt was eventually converted to shares, and Trabelsi became the majority owner of SuperCom. A number of things got me to thinking that SuperCom might be a true gem. In this article I'll explain why I think you should definitely get to know the SuperCom name. I will also suggest a model that will enable you to follow the company in the coming years and tell if it is on course to achieve $250M in revenues by 2018 as Trabelsi suggests. So, what's the story with SuperCom?
1. An Impressive Turnaround
Usually, when CEOs make rosy declarations in the media, I would like to see their past record. SuperCom was a losing company up until Trabelsi took the company's reins. Initially, the financial situation was harsh.
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Source: SuperCom Investor Presentation
As you can see, it took the new management four quarters to turn the company around and bring it back to profitability. That is while revenues were pretty flat q/q. In my view, this is a sign of impeccable management skills and great execution of the turnaround plan.
(click to enlarge)
In Q2-13 the company reported shareholders equity was $4.8M, and working capital was $3.13M.
2. Trabelsi Has Ambitious Plans
In his interview, Trabelsi said he plans to achieve revenues of $250M by 2018. After the recent acquisition of the e-ID division of On Track Innovation (OTIV), SuperCom put forth a pro-forma estimation of the 2012 results of the combined entity.
(click to enlarge)
As you can see, in 2012 the combined entity had revenues of $26.3M. That means that Trabelsi aims to grow the business by a factor of almost 10 above 2012 levels. He plans to do so by 2018. You don't see a lot of CEOs that go forth and set such ambitious goals. Are Trabelsi's goals sustainable? What's the path to $250M? We'll come back to that shortly.
3. SuperCom Is Still Undervalued
SuperCom's shares traded at $6.81 a share (as of Friday the 17th), and according to a recent press release, for 2013, the first six months' net income was $4.12M. That means that the company is on the path of achieving a net income of ~$8.6M and an EPS of $0.66. That gives the company a P/E of about 10. If Trabelsi's goals are to be materialized, and SuperCom will start enjoying a recurring revenue stream from e-ID contract wins, SuperCom should grow its bottom line in very high double-digit rates. Giving the company a PEG of 1 will require a much higher PE than 10 (in the 30-40 range). Thus, I believe that even after the recent stock price appreciation, the company is still cheap.
4. Balance Sheets Are Clean
As of June 2013, SuperCom had $6.9M in current assets. The company has only a $81K short term bank debt. With a shareholders' equity of $4.8M and a working capital of $3.7M, the company looks like it is financially sound. While the current financial situation might prevent SuperCom from winning certain large contracts, with rapid growth rates expected, this will quickly change.
The Path toward $250M
Dilution
Assuming that SuperCom will make two more acquisitions in the next five years, I got to the following:
In the next five years, SuperCom will acquire two businesses, each with $10M in revenues.
I assume SuperCom will pay $15M-$20M for each business.
Until SuperCom's pockets get deeper, it probably won't have a lot of access to bank debt. In that case, SuperCom will raise the required funds through secondary offerings.
Assuming the first offering will be at $6 a share, and the second one at $8 a share, we are facing an additional dilution of about 5M shares in the worst-case scenario.
Taking into account that 5M dilution, the company will have 18M shares in 2018.
I wanted to add this assumption to the model to get ready for the worst-case scenario, dilution-wise.
The 2014 revenue figure is based on the notion that SuperCom will win three contracts in 2014. In the Lazarus-Trabelsi interview, Trabelsi mentioned that the sizes of contracts vary between $5M and $150M. Assuming $15M per contract, winning three contracts in 2014 should bring SuperCom to a run rate of $70M/year.
Assuming a CAGR of 50% and decelerating growth, the path to $250M in revenues might look like this:
Year 2014 2015 2016 2017 2018
Revenues
$70M $120M $180M $220M $250M
Growth Rate 133% 71.43% 50% 22.22% 13.46%
According to the Trabelsi interview with Lazarus Investment Partners, SuperCom management believes such growth is possible with organic growth alone. I took the conservative side and assumed two more acquisitions. SuperCom inherited a pipeline from OTI of bids in more than 20 countries around the world. Management expects to win a few contracts in 2014. This will be crucial to the company. According to the above model, SuperCom needs to win at least three big contracts a year in the e-ID business. So, this will be a very easy way of following the company's success. Looking into 2014, if SuperCom is to achieve their goals, we need to see a contract win within the April timeframe.
Don't Be Confused by Financial Income
The first six months of the 2013 results are showing $3M in tax benefits in comparison with $1.1M of income before tax. This might confuse investors. While tax benefits are without a doubt an asset, I don't like to base valuation upon big, non-operational items. SuperCom is showing that the combined entity had a net income of $4.6M in 2012, representing 38% of revenues. Just to be on the safe side of things, I'll assume a 30% net income margin, to make sure I'm not including any financial income in my model.
Valuation
When taking all of the above together, and taking a P/E of 15, I came up with:
Year 2014 2015 2016 2017 2018
Net Income $21M $36M $54M $66M $75
Diluted Shares 18M 18M 18M 18M 18M
EPS $1.17 $2 $3 $3.67 $4.17
Share Price $17.5 $30 $45 $55 $62.5
You can't afford to ignore these numbers. This is the potential reward you can get by riding along with Trabelsi and SuperCom. Of course, the reward is only one side of any investment. What's the risk?
The Risk
Let's take the possibly worst-case scenario. That would be that Trabelsi turns out to be a dreamer and nothing of his plans ever gets realized. So, what might SuperCom's shares be worth in that scenario? Let's say that the combined SuperCom & OTI show 0% growth in 2013 and 2014. Revenues are $26M and net income is $8M (ignoring any tax benefits). An amount of $8M in net income equals to $0.62 in EPS (taking 13M shares). Let's say the company stays under the radar and the market gives the company a low P/E of 9.
SPCB PE Ratio (
SPCB PE Ratio (TTM) data by YCharts
Applying those numbers gives us a stock price of $5.58 per share. That's a downside of 18.4% from Friday's closing price of $6.81.
Looking at both scenarios, the reward (2014 share price) is 8.5 times bigger than the risk. Not a risk/reward profile you stumble upon every day.
Conclusion
This could be a very interesting investment for those of you who can handle this level of risk. This will not be a gradual growing of the business, but rather a jumpy ride. I wanted to give you, the investors, both possible sides of this play. It is of the upmost importance to do your due diligence and know what factors affect the business you invest in. I hope that with the actual modeling of Mr. Trabelsi's goals, I have supplied you with a tool that you can refer to when you want to see if the company is on/off track. You know how many/how often contract wins should be reported each year, so you know what to expect from the company. Right now the goals are clear, and Trabelsi has proven he can live up to his goals in his turnaround of the company over the past two years. Will Trabelsi lead SuperCom to join the elite club of 10-baggers? Only the future will tell. You know the risks, and you know the potential reward. Choose and invest wisely.
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