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Edward Vranic, CFA
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Edward Vranic, CFA is a private investor based out of Toronto, Canada. He has 10 years of investment experience and 7 years of Corporate Finance experience for a major Canadian Wireless Communications company. His investment area of expertise includes small cap technology and mining TSX-listed... More
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  • Partner Jet's Outstanding Earnings Growth Points To 1000% Gain Potential

    Partner Jet (PJT.V) released financial results on July 24 for Q2 ended May 31. I have written about Partner Jet before, and these results further my long-term bullishness on the company. Keep in mind when reading these results that upon market close on July 24th the stock price was 11.5 cents and the market cap was just over $1M. Here's a chart from the company's MD&A that shows the last 8 quarters of performance:

    (click to enlarge)

    Needless to say, these were excellent results. The 2 cent EPS for Q2 2014 represents a 196% increase to net income compared to Q1 2014 and a continuation of the trend of outstanding revenue and earnings growth for the past three quarters. Revenues for Q2 2014 of $3.7M more than doubled when compared to the Q2 2013 result of $1.7M and were more than 50% higher than Q1 2014's result of $2.4M which at that time was a record for the company.

    For the last three quarters the growth in the company has been phenomenal. The key questions going forward is how did the company grow so much all of a sudden in the first place and if the company can maintain this aggressive growth rate?

    We can begin to answer those questions by looking at what has changed for the company over the last little while. What stands out is the acquisition of an aircraft called the Citation X in April 2013. This aircraft claims the title of being the fastest business jet around. Clues from the MD&A seem to point to that conclusion as well as the explanation of "... more aircraft activities due to the increase in number of corporate aircraft managed" appears to be a prevailing theme.

    Note that with the increased revenue comes better gross margin with not only the aircraft management sector of the company's business, but with all three sectors. A clue that suggests Q2's revenues are sustainable and are not just a fluke can be seen in the company's charter activities.

    Regarding the sustainability of these revenues, I point to the first paragraph stating that the "charter rates remain unchanged...fixed by the long-term contracts with the aircraft owners". This suggests that Partner Jet has a set of long-term contracts that will ensure a solid base of revenue going forward. These customers must be very happy with PJT's services as evidenced by the increased flight volumes. It looks like PJT has found a niche to service clients effectively, because business travel as an industry has not been on a growth path given cuts to corporate spending and increase in teleconferencing. My guess would be due to the new aircraft, PJT is able to offer some of the fastest and cheapest travel services around. Since the company is so small, it isn't making a big dent into the services of larger commercial carriers and other chartered flights services so it may be able to grow like this for quite a while before competitors react.

    The final division is aircraft maintenance. As seen by the numbers below, it is the youngest and fastest growing division and the only one with negative gross margin. That margin appears to be quickly heading towards positive territory for future quarters.

    While the revenue growth has been extremely impressive, the company's ability to control costs during this growth period is truly unique. Even with record setting revenue growth, general operating costs were flat for the quarter when compared to Q2 2013. As the company has grown, it hasn't lost focus on efficiency gains from cost control measures.

    Reading through the MD&A, Partner Jet takes advantage of the relationship its CEO has with ownership of other companies at a centralized location. Refer to this note:

    "Partner Jet Corp. and its subsidiaries are located at one centralized location at 2450 Derry Road East, Hangar #9, Mississauga, Ontario. These recently renovated facilities house sales, dispatch, maintenance, administration and accounting, all under one roof allowing synergies for the Company to move forward. The hangar is large enough for the continued expansion of the Company's management and maintenance operations. The hangar also has 24 hour surveillance and is completely controlled by the Company."

    As well as the related party transactions:

    What does this mean for PJT going forward? Reviewing once again the last four quarters of financial performance, the following numbers can be gathered.

    The important thing to gather from this growth rate is that revenues are very likely to be growing each month. Meaning that while revenues for each of the last three months average out to $1.2M, the exit month of May probably had a much higher figure, as illustrated by my estimate below.

    (click to enlarge)

    If the company achieved $1.5M in revenue for May, that means the June starting point would also be $1.5M and likely to grow from there. With this growth trajectory, revenues should be $4.5M or greater for Q3 ended August. Based on the increase in net margin and controlled operating costs, a margin percentage of 6.5% seems achievable. On $4.5M in revenue that would lead to net income of $292,500, an EPS of 3.2 cents.

    Assuming no growth or margin improvement thereafter (a very conservative assumption), the 3.2 cent quarterly EPS would translate to a 13 cent annual EPS. A conservative 10 P/E ratio leads to a stock price of $1.30, or more than 1000% above the 11.5 cent close.

    One could argue that PJT.V is deserving of a much higher P/E ratio than 10 given the growth rate and that the 13 cent EPS target is too conservative. I can easily see this stock trading between $2 and $5 at this time next year if the market finally recognizes and rewards the company for such great financial performance.

    The issue with PJT.V is that it is an extremely thinly traded stock. I have been much of the purchase volume over the past several months and there are times when no shares are up for sale at any price. Because of this, I plan to offer up a few of my shares at $1 and above. Not because I feel that's a good price to sell (I did the last time, but that was before Q2 was released), but because I want to ensure a market for these shares so that people don't get discouraged and ignore PJT's great growth because they can't buy into it. So for full disclosure, if you plan to purchase at $1 and above, there's a chance you could be buying a bit of my shares. But I assure you it's not because I want to sell out of my position. Sacrificing 10% or so of my holding in order for PJT to be valued at a more reasonable price is worth it to me.

    Based on these financials, a stock price of well over $1 for PJT seems very reasonable to me and upon investors doing their own research, I'm confident many others will feel the same.

    Jul 25 9:31 AM | Link | Comment!
  • Partner Jet Is A Great Investment For Longer-Term Investors

    Partner Jet is an aircraft services and management company listed on the TSX Venture under the symbol PJT. I have written once before about PJT after the company released outstanding financial results for Q1, and wanted to reiterate my position as Q2 results should be released within the next month.

    The chart below outlines the financial performance of the last eight quarters, from the Q1 MD&A listed on SEDAR.

    (click to enlarge)

    The positive trend on revenue and EPS is apparent over the past two quarters with a 0.7 EPS for Q1 2014 and 0.3 cent EPS for Q4 2013. You can refer to my previous post on PJT to dive into the details of its 87% growth in revenue for Q1. It is reasonable to expect further positive quarters going forward, as highlighted in this note:

    With a relatively small working capital of under $400K, PJT expects to be able to fund all further capital needs out of operations. That means the company anticipates continued profitability and will not need to dilute its very small float of 9 million shares.

    One might wonder how an aircraft services company of such small size has managed to become profitable? Usually this industry calls for substantial capital and operating costs which means economies of scale are paramount. I direct you to this note regarding related parties in the MD&A:

    The CEO of PJT also owns several other companies that when combined allows him to streamline work processes for them and Partner Jet and obtain more favorable market prices for items like fuel. Staff from those other companies are sometimes brought over to PJT during heavier periods of work to ensure that PJT can be run as efficiently and low-staffed as possible during down times. Note also that PJT has greatly increased its reliance on these related parties for inputs to the business:

    (click to enlarge)

    There are two ways to look at this. On the critical end, one could say that PJT needs these relationships to maintain its superior financial performance and if these relationships are ended the company does not thrive as its costs go up. PJT was a money-losing entity until just recently, and that coincides with the increase in related party purchases.

    On the positive side you can say that the CEO of all of these companies is very likely to maintain these relationships. The note about having sufficient working capital to maintain operations implies the management team is willing and able to keep these relationships going and PJT will continue to churn out ever-improving EPS figures. While PJT is profitable we don't know if the companies are underselling to make the public company look as good as possible, or if they are selling at good prices for them so the CEO collects an income on his private entities. My assumption is that he is running those other businesses at a profit and that the relationships are beneficial to all parties involved. Another good sign is that revenues from the related parties are negligible and shrunk from Q1 2013, so PJT's revenue growth from external customers is real. Perhaps the growth in EPS can be attributed mostly to the nearly doubling in revenue as opposed to the favorable cost of sales.

    I own 66,000 shares of PJT and have purchased them as low as 7 cents and as high as 35 cents. I would like to obtain a larger position in the stock but it is hard to accumulate a lot of shares quickly as it is quite illiquid. With only 9 million shares outstanding, I already own 0.7% of the company even with my relatively small investment.

    PJT is clearly not a stock for day traders. For those who are interested in accumulating shares of this high growth, low float and recently profitable company for a long-term position I would suggest putting in a bid at 20 cents and seeing if it gets filled. At the time of this writing, there are only 7,000 shares up for sale at any price. So it is a stock for those who are patient enough to wait for someone to fill their order. But illiquidity in a growing profitable company has its upside once you get filled. Because such few shares are available, you can name your price to sell upon increased demand. If the company earns 5 cents per share this year, that would lead to a 20 P/E at $1. With its current growth trajectory I believe 5 cents EPS is possible and $1 would be my lowest selling point.

    If PJT maintains its illiquid status on the exchange, it will be difficult for investors, including the CEO and insiders, to extract value from the company through stock sales. That means there are two courses of action that the company will eventually have to take. The first would be to eventually start paying a dividend. If the stock has a 5 cent EPS, a 1 cent dividend is possible and a rarity on a penny stock. If the stock price was to remain at 20 cents that would be a dividend rate of 5%. However, I believe the eventual course of action will be to sell the company. There may be some issues with that thanks to the reliance on the related parties. The CEO may choose to sell PJT in conjunction with his other companies as one entity to an interested buyer.

    Jun 26 11:25 AM | Link | Comment!
  • Keek: Heavy Buying From Pinetree Capital

    In my previous blog post which briefly mentioned Keek (OTCQX:KEEKF), I was promised a message board of serious investors. Instead I saw a couple of upset day traders accusing me and Danny Deadlock of a pump and dump and that KEEKF's volume has dried up. Keek trades much more actively on the TSX Venture Exchange under the symbol KEK. What those investors wondering if Keek is a pump and dump are probably unaware of is the volume wasn't driven by myself or Danny Deadlock, but it was driven by heavy investment from a fund manager in Canada who already held significant interest in Keek's old incarnation of Primary Petroleum. The insider buys can be seen here:

    (click to enlarge)

    Pinetree Capital is a well-known fund in Canada led by Sheldon Inwentash which focuses on early-stage investment opportunities. Its portfolio has suffered in recent years thanks to the significant pullback of resource stocks on the TSX Venture but the company has made a bit of a comeback through POET Technologies Inc. (OTCQX:POETF) (PTK on the TSXV) and appears to be doing the same with Keek as it looks to get into technology plays.

    Referencing the table above, Mr. Inwentash and Pinetree have combined to buy more than 4.4 million shares just in the time period from June 12 to June 19 with the biggest purchase made at 16.6 cents. The only dump that took place was from a relative of the former CEO for 100K shares. The buying represents nearly a third of all volume that occurred on KEK for that week. Looking at the buying history on PTK:

    Suggests that once Pinetree determines a business is of interest to them, the fund is relentless with its buying as represented by the numerous green marks pointed out on PTK's chart over several months. Pinetree's recent buying spree on KEK was a little over $600K in cash. If the buying on PTK is any indication, KEK could be seeing a lot more investment from this fund with added buying pressure potentially causing the stock's price to spike. Since Pinetree started buying PTK in the $1 range, its stock price rose above $2.50 before pulling back to $1.50-$2.00 range where more buying throughout May took place.

    Disclosure: The author is long KEEKF.

    Tags: KEEKF, POETF
    Jun 24 1:00 PM | Link | 14 Comments
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