PIH.TO - Pacific Insight Electronics

[JayGatsby]

Didn't see a thread on this company. It turned up on a screen I ran this weekend and since then I've established a small position. The company primarily makes LED lighting for automotive purposes. The company was founded in 1989 and grew revenue fairly steadily with some ebbs and flows depending on the automotive cycle. Profit had been pretty modest. In 2016 sales totally exploded, with their core LED lighting sales up 75%. From the annual report:

Pacific Insight manufactures both LED printed circuit board assemblies and fully assembled LED interior lighting systems for OEMs, Tier 1, and Tier 2 lighting suppliers in both the automotive and commercial vehicle markets. The Company’s LED lighting products feature micro-processor and passive designs that are power-smart and customized to each vehicle application. Future prospects are strong in this area.

 

LED Lighting Products and Systems revenues for the year ended June 30, 2016 were $93.2 million, an increase of $39.8 million, or 75%, compared to $53.4 million for the fiscal year ended June 30, 2015. The increase was primarily a result of newly launched interior LED lighting programs, as well as growth in sales of existing products to meet the increase in automotive build rates and vehicle option take rates. For the quarter ended June 30, 2016, revenue from LED Lighting Products and Systems increased 14% from $19.9 million to $22.7 million, primarily as a result of sales from new automotive programs. The Company has also benefited from a strong North American automotive market, and increases in volume and take rates.

 

Very little outside information on the company, but a large chunk of that growth seems to be from Ford:

Indeed, PI now supplies a range of Ford and Lincoln programs, including the Ford Escape, Fusion, Lincoln MKZ, MKX and MKS, Mustang, Edge, and Taurus, along with the newest Lincoln MKC, the 2015 Mustang, the new F150 and the 2015 Ford Edge for the U.S. market and the Ford Galaxy in Europe, as well as the 2016 Lincoln MKX.

https://web.archive.org/web/20161103070946/https://industrytoday.com/article/hit-the-lights/

 

In the annual report at one point they say their top 4 customers are 45% of sales, but in another area they say "the majority of the Company's automotive book of business related to Ford vehicles". They allude at one point that they have some components on the next Tesla, but not sure how much volume that is worth.

 

From a valuation perspective the company has 7.4 million shares (including warrants) at 7.90 CAD/share (C$54M market cap). Total debt of $8.8M and no cash (I assume the revolver just sweeps automatically). EBITDA was $18M, so EV/EBITDA was 3.7x. Capex was $5M and they also capitalized $1.7M of project development costs. All at the British Columbia tax rate of 26%. Net income was $9.8M. Tangible book value per share is $4.9. The company owns their facility in Nelson, British Columbia. 

 

The shares were trading around $3.50 for much of 2015 and exploded to close to $15 in August on their sales growth. Since June the shares have fallen back to $7.9 for reasons I haven't been able to identify... quite the roller coaster. Sales were down sequentially in June but nothing to warrant that big of a decline.  I haven't found any real coverage of the stock, except from a Canadian small cap mutual fund manager (named Bruce Campbell) who mentioned it in a few interviews. There was a VIC writeup on the company back in 2003.

 

Biggest negative I've found is the company sold shares in a private placement 2015 largely to the CEO and Chairman (http://www.pacificinsight.com/wp-content/uploads/2016/02/Sep-23-2015-1443034926631.pdf). Each issued share also included a warrant. It would look to me like they could have financed the transaction with debt or done a rights offering. This was done right before the shares exploded.  They also changed auditors in 2016 to PwC replacing Davidson & Co.

 

Thoughts? Sedar won't let me save the financials in a normal format, but the financials are available at http://www.sedar.com/

 

EDIT: I think this shows some of their products on the Mustang:

[JayGatsby]

Shares down another 15% since I first posted this. Had some hit today at CA$6.80 and down even further. Not sure of the dynamic that has pushed shares down. As they say in poker, if you can't spot the sucker at the table in the first 20 minutes, you're the sucker. Auto has slowed a bit, but not enough to warrant the decline. Trading at 3.25x LTM EBITDA now with growing sales.

[Jackie Moon]

Thanks for writing up your thoughts. I also noticed the company towards the end of last month and had almost the exact same key takeaways from reading through their disclosures.

 

The main reasons I have so far remained on the sidelines are the low number of customers contributing to half of their sales, the lack of a real MOAT apart from existing relationships with their clients and most importantly the cyclical nature of the auto market and the current peak it has reached in the current cycle in terms of turnover and units sold in North America.

 

On the upside I could imagine that as electric vehicle model introductions become more numerous, the manufacturers would kit them out with more internal and exterior lighting vs. traditional models, but I have no evidence that this will be the case.

 

Any thoughts on those risk factors?

[dwy000]

Could this company get clobbered if Trump continues with plans to tear up NAFTA?

[rukawa]

Profit had been pretty modest. In 2016 sales totally exploded, with their core LED lighting sales up 75%.

 

What really bothers me about this stock is that I feel I have almost zero information on how they had such a massive increase in revenues and profits except for the statement that LED lighting sales are up. For such a huge change there isn't much explanation.

 

Thoughts? Sedar won't let me save the financials in a normal format, but the financials are available at http://www.sedar.com/

 

Change the extension to pdf and everything works...not sure why sedar defaults to .go

 

There is also a more recent VIC writeup that made me want to buy the stock right away...until I saw this post which was thankfully more realistic.

 

https://www.valueinvestorsclub.com/idea/PACIFIC_INSIGHT_ELECTRONICS/139343

[JayGatsby]

Sorry, I'd missed the earlier discussion following my original post.

The main reasons I have so far remained on the sidelines are the low number of customers contributing to half of their sales, the lack of a real MOAT apart from existing relationships with their clients and most importantly the cyclical nature of the auto market and the current peak it has reached in the current cycle in terms of turnover and units sold in North America.

 

On the upside I could imagine that as electric vehicle model introductions become more numerous, the manufacturers would kit them out with more internal and exterior lighting vs. traditional models, but I have no evidence that this will be the case.

 

Any thoughts on those risk factors?

One blurb in the recent MD&A was fairly positive: "The Company anticipates that the launch of additional programs in fiscal 2017 will be at a lower rate in comparison to the programs launched in the previous two fiscal years. As a result of recent launch success, the Company currently has booked business in excess of $100 million per annum through each of the next several years. Booked business refers to any program the Company currently sells product into or future business that has been awarded. In addition to this booked business, the Company continues to quote on new program opportunities and add content to existing programs. "

 

I've been looking closer at auto interiors since researching this company, and the new LED accent lighting is definitely a push in interiors for new models. I was in a new Volvo rental recently that had nice ambient light down by the floor and also LED lighting on the door trim floor where it said Volvo. Really gave the interior a nice feel. A new Kia rental had some similar features. This isn't just for electric models, but seems to be increasingly commonplace in all new models. Feels like a feature that will stay, but it will likely become more commoditized.

 

What really bothers me about this stock is that I feel I have almost zero information on how they had such a massive increase in revenues and profits except for the statement that LED lighting sales are up. For such a huge change there isn't much explanation.

That's a fair complaint. It seems to be largely Ford but that info is pieced together from elsewhere and partly conjecture rather than coming from their financials. Would be nice if they did conference calls, although to be fair to them, I haven't tried reaching out with any questions and there isn't any analyst coverage so why have a call to read the press release? There may be competitive reasons they don't want to publicize exactly what they're doing, although hard to say. Definitely a bit of a black box.

 

Last thing to point out is they seem to have increased the number of stock options by nearly 1M shares. For a company with ~7M shares outstanding that's massive dilution. Positive that management wants to load up on options I guess, but still a huge number. This is on top of the dilutive private share sale to insiders the company did a year ago. I need to go through some of their documents in additional detail to confirm the 1M shares are all new, but prior disclosures only referenced a number in the 350k range:

Additionally, at the Meeting, shareholders of the Company approved a new stock option plan (the “2016 Plan”) for the Company, subject to the approval of the Toronto Stock Exchange. 1,300,000 Common Shares are available for issuance pursuant to exercise of stock options under the 2016 Plan, which includes 350,000 Common Shares issuable on exercise of currently outstanding stock option of the Company.

[rukawa]

Big runup on this recently due to acquisition offer.

 

http://www.newswire.ca/news-releases/pacific-insight-reaches-arrangement-agreement-with-methode-electronics-637958863.html

[JayGatsby]

Big runup on this recently due to acquisition offer.

 

http://www.newswire.ca/news-releases/pacific-insight-reaches-arrangement-agreement-with-methode-electronics-637958863.html

I sold a bit over 2/3 of my position on Monday :o

 

I've been having pretty good success (and/or luck) with these high cash flow / enterprise value micro caps. Usually tough to be comfortable with much concentration due to the lack of disclosure / media coverage, as you pointed out, and I usually assume a business of this size doesn't have a huge moat. Transaction costs are high as well. I need to move more to IB, but through Schwab I think transaction costs may be ~4% for this one (1% for each currency change, 1% for each purchase/sell). Fidelity is similar... need to go back and research more what the fees are though IB.

[rukawa]

Big runup on this recently due to acquisition offer.

 

http://www.newswire.ca/news-releases/pacific-insight-reaches-arrangement-agreement-with-methode-electronics-637958863.html

I sold a bit over 2/3 of my position on Monday :o

 

I've been having pretty good success (and/or luck) with these high cash flow / enterprise value micro caps. Usually tough to be comfortable with much concentration due to the lack of disclosure / media coverage, as you pointed out, and I usually assume a business of this size doesn't have a huge moat. Transaction costs are high as well. I need to move more to IB, but through Schwab I think transaction costs may be ~4% for this one (1% for each currency change, 1% for each purchase/sell). Fidelity is similar... need to go back and research more what the fees are though IB.

 

Just checked. Its essentially zero for fx and for PIH its about 0.05% for purchase/sell. So your round trip on IB is 0.1% or basically nothing. With IB you also don't have to change currencies. I am able to fund in CAD and they will automagically create a loan in USD when I buy a US stock which means I am basically currency hedged. Or you can exchange currencies and you pay 0.002% which is basically zero.

 

Where you get fucked is when you do any trade on TSX venture exchange but there is basically no way to avoid high ecn fees no matter which broker you choose. Usually you are paying around 0.5% ecn fees but sometimes they are as high as 1% on TSX Venture exchange. PIH is thankfully not on TSX Venture.

 

My trade was done on Questrade (a Canadian Broker). I paid $5 to buy $3285 of stock or 0.15%. Questrade fucks me on Fx where I would pay 1% like you...however I can keep US cash so generally once I exchange to USD and I don't exchange back to CAD. I am guessing you cannot do this with CAD...so you are forced to do the round trip which is incredibly painful.

 

You should definitely consider IB. Only thing though is that IB has monthly minimum of $10 in commission. Here are the commissions for various currencies that I paid on IB

 

AUD: 3 trades, $10000 CAD value, $30 in commission, 30/10000= 0.3%

HKD: 2 trades, $6400 CAD value, $12.91 commision, 13/6400= 0.2%

JPY: 15 trades, $50000 CAD value, $65.69 commission, 65/50000= 0.1%

SGD: 3 trades, $10000 CAD value, $10 commission, 10/10000 = 0.1%

 

[JayGatsby]

Thanks. That's really helpful. That becomes a massive difference over time.

[rukawa]

Thanks. That's really helpful. That becomes a massive difference over time.

 

Forgot to mention that IB tends to be more expensive with penny stocks since they basically charge on a per share basis. For CAD its a cent a share with a max of 0.5% of value. For US its half a cent a share. In either case if your stock is a penny stock you will probably be paying 0.5% of value. This means if your penny stock is valued at $3000, you pay $15. In addition IB will charge ECN fees if the exchange does and in the case of Canadian exchange they charge like 0.35%. So it gets expensive.

 

In Canada the way we avoid this is by going with the big Canadian banks which charge a flat rate for trades and don't charge you for ECN fees. However the banks will hit you hard when it comes to FX exchange. So I am gravitating to using IB for all international stocks and using a big Canadian bank for Canadian penny stocks.

[JayGatsby]

Thanks. That's really helpful. That becomes a massive difference over time.

 

Forgot to mention that IB tends to be more expensive with penny stocks since they basically charge on a per share basis. For CAD its a cent a share with a max of 0.5% of value. For US its half a cent a share. In either case if your stock is a penny stock you will probably be paying 0.5% of value. This means if your penny stock is valued at $3000, you pay $15. In addition IB will charge ECN fees if the exchange does and in the case of Canadian exchange they charge like 0.35%. So it gets expensive.

 

In Canada the way we avoid this is by going with the big Canadian banks which charge a flat rate for trades and don't charge you for ECN fees. However the banks will hit you hard when it comes to FX exchange. So I am gravitating to using IB for all international stocks and using a big Canadian bank for Canadian penny stocks.

Thanks. I checked with Schwab and I can wire the CAD in my Global Account to IB. Not too much of what I do ends up being penny stocks although I find Australian companies have a higher tendency to have really low share prices. Maybe they aren't big on reverse splits? PRT (free to air broadcasting) and OPG (commercial printing) are ones I currently own. PGR (retail, but also has an interesting licensing/design business) I'm looking to buy some of once I get the funds over to IB. All of those trade for less than ~A$0.50, although PRT has a market cap of ~A$150M. None are amazing businesses, but all seem to trade for good multiples of cash flow (although PRT has moved up recently).