Summary
Special mention to credit 'The Market Plunger' blog for this idea, as such i will try not to repeat too much of the same information he mentions. I recommend reading his post to this one as a result.
Capital-light company with 1.7m in cash with no debt. Revenues are anti-fragile in that it's a mission critical company assuming crime rates remain similar for the foreseeabl
Aging management across the entire board is a key personnel risk evidenced by a recent death of one of the directors.
Remaining project terms raises a question market on the predictability of ongoing revenues
Valuation suggests a payback time well past a predictable range, cutting my conviction until this is addressed.
Business Overview
Jemtec's business model is project driven. Since 1987, the Company has provided Canadian federal and provincial government agencies with offender monitoring services and te under project agreements with terms of 1 to 7 years. The management approach of offering different levels of technology allows corrections, courts and police to select from a variety of options ensuring the correct level of offender control at the lowest overall cost.
Offender location detection/verification technologies include: offender reporting via telephone contact, offender reporting kiosks with integrated database, GPS active and passive voice verification, electronic monitoring house arrest systems, remote alcohol in-home monitoring and private monitoring services.
Management
One area of which i found the referenced post did not talk about enough is management, this is where i see quite a material risk for this particular company so I wil below.
Eric Caton, President & CEO of the Company, has served as a Director since February 1991. Jeremy Kendall has served as Chairman of the Company since December 1985. I a to see a long tenure with the company as it gives me reassurance that management is experienced with the company and can make decisions that would be best for it. Ownership of Eric Caton (CEO) represents just over 20% of the company, which i think definitely makes him an owner-operator. Having such interest in the succes company is great for shareholders to see. In saying this, their tenure clearly shows that these directors aren't young, and their would be risk of them actually retiring company or unfortunately passing away, which has actually happened as of the day of writing 89 year old Cyril Ing passed away, a director of the company.
So what needs to be done to mitigate this risk? A succession plan to replace key management personnel in the event of loss. There is very little in the way of details on this
Operations and Financial Position
I Know i mentioned i would try not to overlap with the referenced post however in light of that, i will mention the main takeaways I see for Jemtec.
So straight out of their most recent discussion announcement they state that "Over the past year, most of the Company’s agreements have been renewed and/or extended". So b based, the companies revenue predictability ideally comes with locking in these contracts for an extended period of time. A dynamic that is increasingly important seeing as time management's side. An outline of their mentioned agreements is as follows:
Public Works and Government Services Canada (PWGSC)
On March 5, 2015, Public Works and Government Services Canada (“PWGSC”) confirmed that Jemtec’s solution has been evaluated as the winning proposal to provide Correcti Services of Canada (“CSC”) Electronic Monitoring services throughout Canada effective immediately for its propose Electronic Monitoring Research Pilot. The contract is for an in year period with two additional one-year options selectable by CSC. In March 2019, PWGSC confirmed that it was going to exercise the additional (second) one-year option.
So it's clear to me that the second and final option will expire in March 2020. With no further options available does this mean further negotiations? A risk to be sure.
Nova Scotia Department of Justice
On February 12, 2016, Nova Scotia Department of Justice, Correctional Services (“Correctional Services”) confirmed that Jemtec has been selected to provide offender monitorin The initial contract has a three-year term with an option for two additional two years extensions for a possible seven-year term. In March 2019, NS Correctional Services sent the an extension agreement for signature outlining its plan to exercise its first two-year additional extension.
So this one has 1 more year until expiry of the first option with the option to extend for another 2 years for a maximum of 3 more years revenue until negotiations on a new agreem potentially takes place.
Province of Saskatchewan
In February 2017, the Company extended its agreement with the Province of Saskatchewan for a threeyear term to March 31, 2020 with two optional extensions of up to one yea
This one is up for it's first option in March 2020, with a maximum of 2 more years revenue before negotiations.
Ontario Ministry of the Solicitor General (SOLGEN)
In March 2017, Jemtec signed an agreement with Ontario Ministry of the Solicitor General (“SOLGEN”) to provide electronic monitoring equipment, technology, central monitoring and technical services in support of its electronic Supervision Program. This agreement is for a four-year term with two optional extensions of up to one year each.
This contract still has one more year until the first option is due, with a maximum of 3 more years revenue before negotiations.
Taking into account all four of these contracts, the average guaranteed term remaining (Not including options) is 6 months, with the possible option extension average of 18 mont these into account I would have a fairly confident outcome that this would work over a 2 year time period, however I do not know what will happen after expiry of these contracts. given that they have not signed a new one since 2017, leading me to think that their is an emphasis on their reliance on the above contracts to continue to succeed.
So all of these agreements do not provide a reliable recurring revenue stream for a long time without the potential of falling out or being forced into negotiations to arrange new contract.
Valuation
So keeping this time horizon in mind, does it make sense to buy Jemtec at the current price? Recently they paid out a special dividend to shareholders so that will be accounted for in the valuation. Also i will take a back of the envelope approach given the simplicity of this company.
Market Cap = 4.27M CAD
Cash on Hand = 2.42M (Financials) - 0.68M (Dividend) = $1.72M
Total Liabilities = 0.49M
Enterprise Value = 3.04M
Net Income TTM = 0.412M
EV/NPAT = 7.37x
Jemtec to me while it looks cheap at first glance, the main risk i see here is the predictability of revenue, as such i consider it too uncertain for my portfolio. The valuation implies a payback time of ~ 7-8 years whilst if you factor in growth it may be significantly less.