Friday, August 3, 2012

Poseidon Concepts


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:

  1. 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)
  2. 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.
  3. 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:
  1. 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).
  2. G&A spend has been growing fast.  It will be interesting to see if this plateaus over the next 2 quarters.
  3. 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.