It’s almost that time again.
Yep, you got it. Poseidon (PSN on TSX) will be releasing Q2 results on August 8. PSN has been a very interesting stock to
track, primarily because of the explosive growth they have recorded so far during
their short history. The explosive
growth and short history are also what make it hard to put a value on PSN. Here’s an interesting blog providing some
good background and analysis on PSN written in the early days (it was written 2
quarters ago). With all the new information
that is now available, I thought I’d take a stab at forecasting PSN’s results
ahead of their release date.
Key historical information
|
Q1
2012
|
Q4
2011
|
%
Change
|
Average tanks
Revenue
Qtly revenue
Qtly revenue per tank
Annualized revenue per tank
Operating Costs
Qtly operating costs
Qtly operating costs per tank
Annualized operating costs per tank
General and Admin
|
290
52,129
180
719
4,709
16
65
3,717
|
205
33,824
165
660
3,277
16
64
2,128
|
+41%
+54%
+9%
+9%
44%
2%
2%
75%
|
EBITDA
|
43,703
|
28,419
|
54%
|
- Using historical quarterly information, we can derive
revenue per tank and operating costs per tank.
- Revenue per tank has increased substantially in Q1
2012. In their Q1 2011 release,
management mentioned improved tank utilization.
- General and admin expenses have increased substantially (up
75%). Based on the Q1 release, it sounds like they have been on a
hiring binge, to meet growing business demand. Hopefully this is good news, and hopefully management will stick to their guns when claiming to be a “rental business with
relatively low fixed costs” with a “longer-term goal to be a dividend growth
company”.
- G&A will be a tough variable to pin down, especially if
Q1 is not fully reflecting all of the anticipated ramp up in costs. To be conservative, I will us $20M for the
year ($5M per quarter).
Cost of a tank
- One of the big questions is how much it costs to build a
tank. It looks like this is in the $150k
to $200k range. If this is true, given that quarterly revenue per tank is $180, PSN breaks
even on each tank after one quarter!
- Three
ways to verify the $150k-$200k estimate:
- PSN added $13,361 to PPE during Q1 2012. They built 100 tanks during this period,
which implies a cost of $134k (most of the PPE balance is represented by tanks)
- The total gross balance of PPE at the end of Q1 2012 is
$49,118. At period end, total tanks were
340, implying a cost of $144k.
- Depreciation in Q1 2012 was $1.1M. With 290 average tanks in the quarter, the
implied cost using PSN’s 10 year amortization policy results in a $150k cost
per tank. A similar calculation for Q4
2011 results in $180k cost per tank.
Debt
- The only debt remaining on the books is a $10M note payable
to the parent company (due on November 1, 2012), with interest of prime +
1%. I will assume 4.5% interest.
- Each quarter since spinning off, the company has slowly
shifted its capital weighting from debt to share capital.
Average Tanks
- PSN produces 7 tanks per week. Assuming 50 work weeks, this will add 350
tanks by the end of 2012, or 175 on average for the year
(350/2).
- Add this amount to the number of tanks PSN had at the beginning of the year (240) gives us 415 average earning tanks over the course of the year.
Forecast Scenarios
- With such big margins, it’s difficult to say if management
can maintain them, especially if there are new entrants competing in this space. I’ve added 4 potential scenarios. For simplicity, these variables have been
applied throughout the entire 2012 year even though we have 1 quarter of actual
results.
S1: Assumes revenue
per tank and operating cost per tank is consistent with Q1 results
S2: Assumes a 10%
increase in operating costs per tank
S3: Assumes a 10%
decrease in revenue per tank
S4: Assumes both S2
and S3 occur
- Going forward into 2013, as competition grows, tank utilization (ie. the proportion of tanks that are rented out) will play a bigger role in forecasting PSN. However, for the foreseeable
future, I think it’s safe to assume that
tank utilization will be similar or better than previous quarters.
|
S1
|
S2
|
S3
|
S4
|
Average tanks
Revenue per tank
Total revenue
Operating cost per tank
Total operating cost
General and admin
EBITDA
Interest @ 4.5%
Depreciation
Stock Comp
Tax @ 26%
Net income after tax
Dividends ($1.08 x 28M)
Retained Earnings
Payout ratio
Earnings/share (81M shares)
Price/Earnings ($14 price)
|
415
719
298,394
65
26,955
20,000
251,439
375
6,225
7,200
61,786
175,853
87,480
88,373
50%
2.17
6.45
|
415
719
298,394
71
29,650
20,000
248,743
375
6,225
7,200
61,085
173,858
87,480
86,378
50%
2.14
6.53
|
415
647
268,554
65
26,955
20,000
221,599
375
6,225
7,200
54,028
153,771
87,480
66,291
57%
1.90
7.38
|
415
647
268,554
71
29,650
20,000
218,904
375
6,225
7,200
53,327
151,777
87,480
64,297
58%
1.87
7.48
|
Profitability does seem a bit too good to be true, even though conservative assumptions were used. The last PSN EBITDA forecast for 2012 was $210M, which was revised
upwards from $170M from previous guidance (also up from the $130M original
guidance). The above numbers are higher
than PSN’s latest forecast, however PSN has developed a track record of providing conservative estimates.
This forecast may help rationalize the high dividend (currently ~8%). In Q1 2012, after paying dividends, the company retained only $8.9M to reinvest in operations.
Based on the above, by the end of the year, the company will have
retained $65M+ in the company. This may also help rationalize a growing dividend in coming years.
The P/E above using current market price (~$14) could
be considered high, depending on when you believe revenues/utilization will start to be impacted by competition. Mitigating this is
the high dividend yield and the prospect of accelerated NIAT growth in coming
years.
In addition to the risks identified in Potato's blog, I’ll add
a few more:
- Collections – PSN has been slow in collecting from its
customers, and this has gotten worse in Q1 2012 compared to Q4 2011. Whats the hold up?! It's not clear why it takes 2 quarters for PSN
to collect from customers (could be the way they are recognizing revenue, or
maybe this is how the business works).
- G&A spend has been growing fast. It will be interesting to see if this
plateaus over the next 2 quarters.
- As competition grows, revenue per tank will be under
pressure. However, at this point, it
seems like there is still room in the market for PSN and any new
potential entrants.
Based on Scenario 1 assumptions, here’s my Q2 forecast
estimate:
Revenue
Operating Costs
|
61,680
6,490
|
General and Admin
|
5,000
|
EBITDA
|
50,190
|
Interest Expense
|
113
|
Depreciation
|
1,446
|
Stock Based Comp
|
1,800
|
Tax
|
12,176
|
NIAT
|
34,656
|
Disclosure: I am not an investment advisor. I am long PSN (with a very minor investment). I am more interested in seeing how the company will perform, given the volatility in the stock price and uncertainty in the company's results.
