The sun has set (for the moment) on how growth stocks used to be valued e.g. price-to-sales, revenue CAGR. If these were still in play the SP would be multiples of what it is now. These days cash is king. Thought I would pull together a list of the drivers of profitability for this company for those interested.
1.) Continued expansion maximising economies of scale. ECS is already operating cash flow positive, further increases in revenue should grow margins.
2.) Maximising usage. Security fencing was only recently completed around the two outdoor fields on the west side (California looovvvveee) which represent a combined growing area of ~45,000 square meters which doubles their outdoor growing space. These fields have yet to be used. They also haven't utilised the full production capacity of the PCEs for a full year due to delays in the construction of the 6 new PCEs.
3.) Production trial. This also plays into point 2 above, but deserves to be called out separately. If their current trial of growing during winter goes well then the company will be able to do three harvests per year from the PCEs (currently 2). Each PCE generates $700k p.a. based on two harvests, if all 17 can do a third harvest that roughly equates to an additional $350k p.a. per PCE of which there are 17 so an additional 17 x $350k = $5.95m p.a.
To determine what's coming from where, I've used some simple mathematics below:
- Revenue for FY23 = $15.63m
- Revenue per PCE at full capacity = $700k
- 11 PCEs at full capacity: 11 x $700k = $7.7m
- 6 PCEs at half capacity: 6 x $350k = $2.1m
- Outdoor value (non-PCE): $15.63m - $7.7m - $2.1m = $5.83m
Based on the above, we still have another $2.1m that can be made from the PCEs that only operated at half capacity in FY23 plus an additional $5.83m that can be generated from the new fields. This means revenue potential from what they have today is $15.63m + $2.1m + $5.83m = $23.56m.
If the production trial goes well and they get another round out of each of the 17 PCEs then revenue potential is $23.56m + $5.95m = $29.51m.
All of the above is not taking into account the fact that management for ECS does not sit still. They are licensed to build another 9 PCEs at a cost of $200k per PCE = $1.8m. If they build these and do the current 2 harvest per year it will contribute $6.3m. If they are able to do 3 it will contribute $9.45m.
It's not hard to work out how this company can get to $40m in revenue per year. If they keep margins where they are (or grow them as Nan is focused on) then that's $6m - $8m in profit per year. At today's share price that puts this company on a P/E of 3 - 4 (market average = 15) which is why this company represents such great value at these prices.
*hops down
(20min delay)
