E Pacific Safety Products’ Unknown Turnaround Offers Huge Upside

For a biased but nevertheless good overview of their products and market opportunities go check out their investor presentation by clicking here.

Valuation going forward

Revenue for the calendar year of 2015 should come out at $20 to $25 million roughly, and EBITDA of about $2 to $3 million. For 2016, I conservatively expect revenue to grow about 20% to 30% to around $30 - $35 million. EBITDA should top $4 million.

The company's current valuation is a tiny $10 million. This is in relative terms equivalent to an EV/Ebitda ratio of 5 and a price/sales ratio of 0.5. These are deeply discounted multiples.

What's fair? A company proving to be able to consistently grow its revenue and profits, I think a price/sales multiple of 1 or EV/Ebitda of 10 is fair at minimum during the first innings of this turn-around. Keep in mind that well-known competitors like Taser (TASR) and Digital Alley (DGLY) are valued at much, much higher multiples. Eventually, investor awareness and strong execution should lead to higher multiple valuations. In terms of share price, this means it should double quickly, and could double again somewhere next year.

In sum, based on the deep discount to fair valuation, ample business improvements and upbeat guidance, I think Pacific Safety Products' stock price offers 100% ~ 250% upside within 12 months from current low levels, while the downside risk is limited.

Risks

  • The debentures and/or option holders deciding to convert. If they do, the stock price will be temporarily be capped at a certain level.
  • A new capital raise. Management has stressed not to dilute shareholders, but if big orders are coming in (which would be highly welcomed of course), they might need extra cash to able to manufacture and deliver the goods. They have a positive working capital, but not a lot of pure cash available at hand.
  • Losing market share to competition. In Canada the company has a near-monopoly status, but in the US there a lot of competitors, and Pacific Safety Products is the new kid on the block. Getting the US Navy on board was a great start, but the competition isn't exactly sitting still either.

But overall, I hardly see any downside risk based on the deep undervaluation, streak of contract wins and financials moving in the right direction.

Conclusion

By my analysis, Pacific Safety Products' successful turnaround is overlooked by all, presenting investors a case of limited downside risk vs. multi-bagger upside potential. Its new management team is doing a great job transforming this company into a steady growing and cash-generating enterprise. You probably never heard of this company, but it's these undervalued and undiscovered micro-caps that can significantly boost your portfolio's return. I added Pacific Safety Products to mine, and I expect to benefit handsomely.

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Disclosure: The author is long PSP.V.

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