Poseidon Concepts Corp. (TSX: PSN)
Solid Beat for Q2/12; Int'l expansion, new products
key developments
Outperform
Above Average Risk
Price: 14.20
Shares O/S (MM): 82.2
Dividend: 1.08
Price Target: 18.00
Implied All-In Return: 34%
Market Cap (MM): 1,167
Yield: 7.6%
Priced as of the close of market August 8, 2012.
Event
Announced Q2/12 results with adjusted EPS of
.41 beating our estimate of
.37 and consensus of
.36.
Highlights and Potential Catalysts:
• Margins holding strong. Despite seasonally weak demand in Canada, gross
margins rose 290 bps QoQ while EBITDA margins held flat at ~84%. This
highlights the benefits of its low cost structure and implies U.S. margins rose
QoQ.
• Guidance maintained. PSN maintained its guidance for $210MM in EBITDA
for 2012 and 500 tanks by the end of Q3/12. It will provide a further update
when Q4/12 capital plans are released later in Q3/12, with capital allocation for
new products the key swing factor to tank fleet growth.
• Successful field trials of new products/services. While details were minimal,
PSN did note it had several successful field trials of multiple new products
during Q2/12. Product line expansion is the key hurdle to maintain growth over
the medium term (2-3 yrs). We expect more details later in Q3/12.
• International expansion begins. PSN signed a two year agreement with an
existing U.S. customer for tanks to be deployed internationally, although the
number of tanks and country was not revealed.
Investment Opinion
We maintain our Outperform rating, driven by PSN's strong yield (7.6%) and
growth profile. While we expect competition to begin to ramp-up in 2H12,
margins, pricing and PSN's first mover advantage continue to generate strong
results and we see ample running room for these trends to continue.
Price target unchanged: Our unchanged 12-month price target of $18 is
calculated by applying a 6.0x EV/EBITDA multiple to our 2013 estimates.
No material changes to our estimates, as we have left our assumption for ~600
bps of margin compression by YE12 intact, despite the strong margin
performance, given our macro outlook for softness in activity levels in 2H12 in
NAm.
Focal Points
? Margins holding strong. Despite seasonally weak demand in Canada, gross margins rose 290 bps QoQ while EBITDA margins
held flat at ~84%. This highlights the benefits of its low cost structure and implies U.S. margins rose QoQ as the U.S. business
matures. We do expect margins to return to Q1/12 levels in Q3/12 as Canada ramps back up again.
? Rentals pricing pressure on steel tanks. Industry feedback suggests rental prices for steel tanks have begun to fall in the WCSB.
We continue to forecast an ~10% fall in pricing for PSN’s tanks by YE12 driven by our macro WCSB assumptions.
? Guidance maintained. PSN maintained its guidance for $210MM in EBITDA for 2012 and 500 tanks by the end of Q3/12. It will
provide a further update when Q4/12 capital plans are released later in Q3, with capital allocation for new products the key swing
factor to tank fleet growth.
? Successful field trials of new products/services. While details were minimal, PSN did note it had several successful field trials of
multiple new products during Q2/12. Product line expansion is the key hurdle to maintain growth over the medium term (2-3 yrs).
We expect more details later in Q3/12.
? International expansion begins. PSN signed a two year agreement with an existing U.S. customer for tanks to be deployed
internationally, the number of tanks was not revealed, nor was the new operating area.
? On a negative note, receivables rose QoQ again. Accounts receivable rose ~$35.6MM QoQ despite revenue essentially flat. PSN
is taking corrective action, including the roll out of a new, real time electronic ticketing system for the field expected for Q4/12 as
well as adding staff in this area. Obviously, given its rapid growth over the past 18 mos., PSN is playing catch-up from an internal
system for receivables and this bears watching over the next few quarters. Importantly, PSN noted that ~47% of its receivables are
with investment grade clients and only ~19% are over 120 days.
? Given ample liquidity, we see PSN’s dividend as sustainable through 2H12 despite the increased draw on cash in 1H12 from rising
receivables. PSN currently has ~$35MM drawn against a line of $100MM.
Valuation
Our 12-month price target is based on an EV/EBITDA multiple of 6.0x our 2013 estimates, approximately in-line with the average of
its Canadian small-cap diversified peer group.
Price Target Impediment
Potential for commodity price declines to reduce NAM drilling activity levels, ability to source skilled labour for organic growth,
ability to continue to grow market share and maintain pricing in the face of new entrants, and changes to government regulations
regarding fracturing operations and fluid handling.
Company Description
Poseidon Concepts is a Calgary based Oilfield Services company whose sole business is the development and leasing of its proprietary
large-capacity tanks for fluid storage in the upstream oil and gas industry. These tanks are currently primarily used by oil and gas
exploration companies to store fracturing-related fluids.
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