REDCLOUDPAINT - In the interest of objectivity, and reflecting the MOST RECENT FACTS available, could the following article be updated and reposted with the new numbers reflecting the financial statements for the quarter ended March 31, 2006 released by the Company? Current HISC information:
Primary Shares Outstanding = 1.171 billion
Fully Diluted Shares = 2.780 billion*
* Includes dilution of Convertible Preferred Stock
1) Proj 2006 EPS :
Primary - $0.0117/shr x 30 P/E = $0.30 price/shr
Fully Diluted - $0.0049/shr x 30 P/E = $0.15 price/shr
Thanks.
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Contibuted by StrongLong:
The new company will have an OS of 47.22 million. 17.22 million shares will be created for issuance to HISC shareholders (861 million divided by 50), while I believe that Actsoft will have 30 million shares (I'm assuming that Tom Mitchell still values his company at $15 million, so he gets 30 million shares of the new company since opening price at BB is 50 cents per share). I'm not sure whether any more parties (owner of BB company?) will be getting shares. If so, then OS might rise higher, but if it is just a shell without any revenue, I cannot see a significant addition to the OS.
More importantly, see what the new merged company will be getting in return. They will be getting all the software side of the HISC/Actsoft partnership, namely the $25 million in revenue that Actsoft is projecting to do this year + all the monthly software revenue that will come from the CTs etc. So we are getting a company with projected revenues of at least $25+++ million (and I think Actsoft can meet the $25 million quite easily)....with an opening market cap of only $23.6 million. If I take Actsoft profit margins of 36-41% (ok, once again, conservative me will use 30%)...that translates into 2006 profits of $7.5 million. 2006 EPS is then projected to be 15.9 cents per share! A P/E of 30 gives me a price of $4.77 (0.159 x 30) while a conservative discounted cash flow model (5% annual growth and 8% long bond rate) gives me a price of $5.30 ($0.159/[0.08-0.05] = $5.30)
REVENUES/PROFITS/MARGINS
First, the expected profit margins:
- The last full year figures we have had so far is 2004, so I'm just going to use the margins from that year as a rough guide. That year, sales was $2 million with net profit of $550,000. That is around 27.5% net margin. So I'm going to use 25% profit margin as a guide.
- I believe the 25% profit margin as a guide is reasonable given that some of our revenues for 2006 will come from ActSoft. ActSoft itself had an even higher profit margin - From the 18 Oct 05 HISC PR, ActSoft sales was $6 million in 2005, with net profit of $2.2 million, while sales was projected by ActSoft to be $12 million, with net profit of $5 million. That is a profit margin ranging from 36% to 41%.
Secondly, the expected revenues:
- We have heard Frank project that HISC is expected to earn more than $125 million over the next 3 years (2006, 2007, 2008). The company has also stated that their target revenue goal for 2006 is $55 million.
- So what do we have so far?
(1) The Pro Sec deals (5000 Cyber Trackers worth $2.5 million + Cyber Noze Explosive Detection Equipment worth $5.5 million) worth a total of $8 million.
(2) The XPress deal announced today (1000 CTs worth about $500,000).
(3) ActSoft revenues of $25 million (I believe that their projection for 2006 has gone up to $25 million, from the original $12 million projected earlier)
(3) The confirmed orders already from Coxsackie Transport, Garda World, the Royal Canadian Mounted Police, the Knox County Tennessee School System, and the Chili House Restaurant chain in Amman, Jordan - no actual sales numbers yet from these orders, but they look finalised to me (CTs have already been delivered to the Amman restaurant chain).
So these are the actual sales numbers confirmed on our books so far - $33.5 million + the numbers from (3) yet to be released. Actually quite good, considering that we still have another 9 more months to go for 2006.
So, if Frank delivers, as I expect him to, with sales numbers to come in the coming weeks (esp after the merger/move to BB), there is a good possibility that we are on track to meet the US55 million revenue target for this year.
Thirdly, the expected profits:
From the use of 25% profit margin as a guide and assuming the $55 million revenue is met, then we have expected profits of $13.75 million for 2006.
VALUATION
This is tricky, but I'm going to use 2 models here. An assumption is that OS remains at 770 million but this can always be tweaked up and down in our calculations when the company reveals the latest OS figures or when it mergers etc
(1) The first is the standard P/E ratio of 30-40 applied to fast growing small/micro cap companies in the US (which HISC belongs to). To be conservative, I will use 30.
So with expected profits of $13.75 million in 2006, that translates into EPS of 1.79 cents. Multiply that by a P/E of 30, and we get an expected share price of $0.53, or 53 cents.
(2) The second is the very conservative discounted cash flow model - and to be even more conservative, I am going to assume NO earnings growth after 2006 (i.e. 2007, 2008 to infinity), to take the extreme end. This essentially is the model that Buffet uses in analysing the value of a company over the long run. And since I expect HISC products to be in the marketplace and to be in great demand for some time (because of the wide variety of uses that the CT can be used for), I think this is a fair extremely conservative model to use.
Essentially, the maths would be:
EPS of 1.79 cents for 2006
Discounted rate of 8% (I will be conservative - the historical average 30-year long bond rate over the last 50 years or so has always been around 6-8%, unlike the 5.8% now)
So, 1.79/0.08 = $0.223 or 22.3 cents
So on both models with conservative assumptions, I personally do find HISC to be relatively undervalued at 4 cents (you might of course disagree with me...) now given that the sales (and purchase of ActSoft) already concluded and the expected sales numbers coming in over the next few weeks/months.
I do understand the following concerns:
(1) HISC is currently a pinksheet company
(2) MMs control the price of stocks in pink land
(3) Investors in pink land do not trade on valuation, profit margins etc. They trade on MOMO and MMs release of prices.
However, I am treating HISC as a company on its way up to BB and then subsequently to NASDAQ small cap or main board over the next 2-3 years (assuming the sales target of $125 million is met - something I believe can be done) - my hope is that when we move to higher boards, investors can start to see us in terms of valuation/profits rather than the way they treat typical pinksheet companies! But to do that, we would need Frank to deliver and grow this company; the sales contracts/numbers that he signs/announces in the next few weeks/months will let us know whether he is on track.
AI
