You’ll recall we interviewed Horst Hueniken a few months ago.
One of the top ideas of the President, CIO & Portfolio Manager of Hueniken Asset Management, was Legend Power Systems (TSXV:LPS).
It’s a name I was familiar with having interviewed the CEO a few years ago.
The stock is up more than 90 per cent since we talked to Hueniken.
He provides an update on the Legend Power Systems story and explains why the shares could more than double from here.
by Horst Hueniken, President, CIO & Portfolio Manager, Hueniken Asset Managment
Having remained patient with Legend Power has had its reward. But wait. I see more gains ahead.
The company released its financial results for its fiscal 2020 year in late January. The same day, Chief Executive Officer, Randy Buchamer, hosted a conference call.
I hi-light the most salient disclosures and trends:
✦ Let’s start with the bad news: For its fiscal fourth quarter 2020 (Q4), the company reported $347,000 of sales revenue, a 29% drop compared to its year-ago quarter.
A decrease in revenue is not what one wants to see from a growth company. It reflects two influences: a long sales cycle and the pandemic. But don’t let this backward-looking statistic mislead you.
Over the past four months, the company’s clients have begun to re-engage.
✦ From pushing to getting pulled: Before the company launched its analytics tool, SmartGATE Insights, in November 2019, the sales and marketing team competed against other energy-saving devices available on the market.
Building owners typically set an annual budget for energy-saving devices, and the salesperson’s job was to get a portion allocated to the prior-generation device sold by Legend Power.
From a sales perspective, the customer had to be”pushed” to close a sale. Today, the process is different.
Aided by the SmartGATE Insights tool, the sales and engineering teams now collaborate to show a building owner how she can correct power quality issues such as voltage sags and swells, transients, interruptions, phase imbalances, as well as frequency variations, all in addition to lowering her building’s electricity bill.
Using her own building’s data, she can now see how to avoid the premature failure of heating pumps, cooling fans, other rotating equipment, escalators, and elevators.
And, by extension, how the tenant’s experience improves. She can also see how the SmartGate Platform lowers her building’s carbon footprint.
Importantly, Legend Power is now experiencing demand “pull” from the same and new clients.
✦ Pipeline of opportunities: In its latest disclosure, the company noted that its pipeline of sales opportunities – both with prospects and existing clients – continued to grow through its Q4 quarter and beyond.
This resurgence in activity has been broad-based and included engagements in the multi-family, school, commercial office, and Energy Service Company (ESCO) verticals.
In response, management recently set itself the goal of deploying a minimum of 90 SmartGATE Insights units each quarter, beginning in January 2021.
By my math, this objective foreshadows Legend Power generating a revenue stream totalling $19.8 million, spread out over 24 months.
This figure builds in SmartGATE Platform sales, installation charges, and recurring fees from maintenance contracts.
✦ Reduction in the company’s risk profile: The risk that Legend Power will be forced to issue more common shares from its treasury to fund its operations has abated.
Together with the prospect of accelerating volumes of SmartGATE purchase orders, the latest balance sheet figures have convinced me that we no longer need to worry about a dilutive issuance of common equity.
As of September 30, 2020, cash stood at $2.29 million, working capital at $3.76 million, and debt at nil.
✦ Long-term market growth: In a February 2021 white paper titled “Active Power Management at the Grid Edge,” published by energy consultants Jared Rodriguez and Mark Kleinginna, it is explained that the installation of power management systems – such as the technology offered by Legend Power – will become as commonplace as utility power meters inside large buildings in North America.
While this radical notion may take decades to unfold fully, it nonetheless reinforces my long-held assessment that the addressable market that Legend Power serves is large.
Legend Power stock is at ~$0.67.
The stock market has begun to revalue the company upward, reflecting the de-risking of the balance sheet and early signs that its patented technology is gaining meaningful traction in the marketplace.
If sales volumes continue to build, Legend Power’s quoted market value is bound to trend higher.
My projections and valuation work continue to point to an upside share price within the $1.40 to $3.00 range by 2023.
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