Robert Tattersall, CFA, is co-founder of the Saxon family of mutual funds and the retired chief investment officer of Mackenzie Investments.
The failure to build pipelines out of Alberta has certainly beaten up the oil service sector of my portfolio, so I was pleasantly surprised to read that one of my microcap holdings may in fact be a beneficiary of this political impasse.
Titan Logix Corp. manufactures and sells tank gauges for mobile fluid measurement in a wide range of tanker trucks. These trucks carry crude oil, refined fuel, used oil, aircraft fuel, chemicals and the process water associated with oil well activity. Each of these tankers requires a level-management and overfill-prevention system as input to an inventory system and to ensure against overfills. Titan’s Guided Wave Radar (GWR) gauges are part of an Internet of Things (IoT) network that permits management to remotely measure and monitor the performance of their tanker fleet.
Revenue growth over the past few years has been modest as a result of an inventory overhang of tanker trucks, but the company continues to invest heavily in product upgrades. Expenditures on product development were in excess of 17 per cent of sales in fiscal 2018 and fell to 11 per cent in 2019 as field tests and consulting fees diminished following commercialization of new products.
All of this was interesting, but not value-enhancing for an Edmonton-based oil-service company, until I reached the Business Outlook section of the annual report (year ended Aug. 31), where I read: “In Canada, the inability of government and industry to get pipelines built could potentially lead to an increase in oil movement by mobile tankers. We believe that this will drive new tanker builds leading to new [gauge system] sales.”
This alone is not sufficient to justify a rerating of Titan Logix stock, but the company does have other positive attributes: New markets are opening up in which accurate measurement and monitoring of fluid transportation is facing scrutiny from environmental activists and the general public. The company’s evolution from being a hardware producer to an IoT service provider should open up opportunities in these areas outside of the oil patch. In fact, 67 per cent of revenues in the year ended Aug. 31 were generated in the United States, so the company is already well-diversified geographically, although still very dependent on the energy sector.
The TSX Venture exchange has no shortage of stocks with great ambition and a valuation that fully recognizes this potential. Titan Logix does not fall into this category. At a recent price of 46 cents, the stock trades at a discount to the book value of 57 cents a share. In spite of the expenditure on new product development, there are few intangibles, so tangible book value is 53 cents. The balance sheet is pristine, with no debt and cash and short term investments per share of 32 cents. There is an additional 13 cents a share of a loan receivable from another unspecified oil patch company that may prove to be problematic, but not fatal.
Needless to say, there are flies in this ointment: With only 28.5 million shares outstanding, the market capitalization is only $13-million, so no institutional interest is likely and trading shares will be a slow process. Compounding this illiquidity is the fact that 35 per cent of the shares are held by one entity, the Jerry Zucker Trust, which was a buyer as recently as April this year at 55 cents a share.
I have no insight into the motivation of the Jerry Zucker Trust, which is why I advocate a widely diversified portfolio and patience in executing any small-cap value strategy. As investors in Hudson’s Bay Co. have discovered, investing in a company with a dominant shareholder does not mean that they have your best interests at heart. In this case, the value of the float not held by the trust is only $8.5-million, which is less than the cash and short-term investments of $9.2-million on the balance sheet as of year end. A tempting incentive to go private with the company’s own cash!
But, with an intrinsic value well above the current stock price, I am willing to make a small wager that Titan Logix will achieve significant upside either as a standalone entity or as takeout candidate at a higher price.