**READ PART 2 HERE
I had a ton of fun writing up an article on forecasting out AITX. So given ALPP is going to have their annual shareholder meeting next week, I figured this was a great opportunity to get something similar out.
Originally, I only wanted to model out FY 2023. However, with ALPP we do not have current financials for Q3 2022, which made this a little tricky. As I was modeling this out, it quickly became two modeling exercises – Q3/Q4 FY 2022 and then FY 2023.
Because of this, the article got way too long. and I’ve decided to release two parts: FY 2022 and then FY 2023 in part 2.
So today we’re going to model out some potential scenarios for the rest of FY 2022 for ALPP. Let’s get to it.
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Introduction / Rules of the Road
The entire purpose of this article is to give you some tools to set your expectations for the rest of FY 2022. We’re only forecasting two quarters, but they are still a big unknown… I don’t have all of the answers here.
Also, because people seem to consistently misunderstand or misquote these forecast articles (actually, the AITX community did a great job with it), let’s go over some ground rules.
- This model and my current assumptions will 100% not be correct. They are a tool for YOU to use and tinker with and decide what YOU think is most likely.
- The current assumptions I’ve provided are supposed to provide a wide range of outcomes, it doesn’t mean they won’t do better or worse. I’ll discuss where those assumptions came from.
- My opinion on where I think they land at the end is just that, an opinion. There’s a rhyme and reason to it, but it’s an opinion at the end of the day.
So let’s all be responsible with this exercise please!
The Model – Base Case
You can find the model HERE as a read only version. You should be able to copy and paste this into your own excel/google sheet and play around with the numbers.
When modeling out ALPP, you need to be VERY cognizant of the fact that they have very distinct business segments. Each of these segments have completely different business profiles, asset intensity, risk, and expected profitability. For example, the sheet metal business is absolutely nothing like drones.
Therefore, even though it’s a pain, we really need to forecast each segment separately and then layer on the corporate piece. Luckily for us, ALPP has very high-quality financial reporting when it comes to their segments (even though they’ve changed a bit). Because of this, it helps me out a ton in putting this together.
The Model -Q3/Q4 Forecast
Using our base financials, we need to make some key assumptions for forecasting the last two quarters.
Assumption 1 – Remove Non-Recurring Items
This is sort of an easy one, but the gain on the sale of the Alt Labs building in the first half of 2022 is not a recurring item. So we can’t assume that the margin bump they got from that will continue in the second half of 2022. So that’s an easy one to remove.
Assumption 2 – Six Month Revenue Growth
This is one of those “your guess is as good as mine” moments. However, we still need some sort of educated guess of range of values or else this whole exercise is pointless. Therefore, here are my two ranges:
LOW – on the low end, I assumed that for any segment we didn’t have any data for (most of them), that revenue was in-line with inflation from the 2nd half of 2022: around 3%. This is still not the most negative extreme, which would assume contraction, but I personally doubt that happened.
HIGH – on the high end, I gave each segment a very robust six-month growth rate of 12%, which is quite strong when annualized and I think everyone would be VERY satisfied with that.
Let me touch on two specifics here… Technologies and Aerospace.
For Technologies, we actually did get PR saying that RCA’s Q3 revenue increased by 28% from Q2. However, remember that Technologies is RCA and Elecjet, which is far less mature than RCA. Because of that, on the low end I gave Technologies a 20% growth rate and on the high end 30%.
For Aerospace, we’re all excited I know about the drone purchases. However, those will not be starting until Q1 2023. So we have to assume Aerospace was still in its infancy revenue-wise in 2H 2022.
Now we have our range of revenues.
Assumption 3 – EBIT Margins
Forecasting revenue is great, but if we can’t determine EBIT margins it doesn’t really tell us much. This is also one where you really need to play around with it to figure out what you think is likely to happen in your range of values.
As an aside – the company has self-admitted that margins have been quite poor due to the macroeconomic environment, which completely makes sense. Inflation completely squeezes a middle-of-the-supply-chain manufacturer like their Manufacturing and Construction segments.
We should see margins get stronger as inflation cooled somewhat in the 2H of 2022, but I’m still not expecting them to reach their full potential in 2022. These issues can take several quarters, or sometimes years, to work their way out in in line with the business cycle.
Furthermore, straight from the horse’s mouth, we’re hearing that certain businesses / segments are seeing margins increase from company PRs. We’ve heard Excel’s margins are increasing as well as MSM.
Given that, here’s what I did:
LOW – I basically assumed margins stayed poor and the loss-making segments like Construction and Manufacturing continued to suck wind. Remember, Manufacturing only earned a profit because of the one-time sale, so I’m using their EBIT margin adjusting that out as my base. This scenario is pretty unlikely given PR’s, but that’s why it’s the bottom of our range.
HIGH – In this scenario, Kent worked his magic and we saw very healthy significant margin increase of 15%. Maybe they were able to pass on increasing costs better, they were more efficient, cut costs, etc. It’s definitely possible, but it’s not exactly guaranteed. PR’s tend to make it sound like it’s the case for some businesses, but not all. Given that this is a “high” scenario, this assumes basically every segment is at some level of profit minus Aerospace.
Two sidebars on this: Defense and Aerospace
Defense – this has been a shining spot in their segment reporting so far. It’s their most profitable segment percentagewise and in absolute value. I personally think this segment is already near its terminal EBIT margin and, while a pickup in margin would be great, I’m mostly just assuming this stays where it is.
Aerospace – see above, based on PRs most of the pickup in this segment will be next year. So we can hang tight waiting for that one!
Assumption 4 – Net Income
Our assumption for net margin is, by design, really more of an assumption of interest expense and any other expenses not included in within EBIT. This is a less value-add of an area to beat to death, so I just assumed that interest expense as a percent of revenue across the segments remained the same.
This technically means interest expense went up (as I had revenue increasing), but it’s a relatively minor factor in the grand scheme of things.
Assumption 5 – Corporate Expense
Corporate expenses are those unallocated to the segments and are mostly the compensation expense to Kent and his management team. There is also some interest and depreciation there as well.
For this analysis, I assumed that those costs remained flat over the quarters. I am not expecting wild deviations in that cost bucket, but there will likely be some fluctuation. However, like interest expense, it’s not worth beating it to death for minimal delta in the model.
If you don’t feel like opening the model, here is how my above assumptions shake out for the two quarters vs. the prior two quarters. Note that for FY 2022 1H, I am adjusting out the gain on the building sale so that you can compare apples to apples. Technically EBIT and Net Income were higher by 5.8m.
Based on these assumptions, even my “High” scenario is still forecasting a book loss, with the low end forecasting a fairly heavy loss, but in line with prior quarters.
Now would be a great time for you to start playing around with your assumptions and create your own range.
But for now…Let’s get into opinion time on where I think this could shake out.
Let me start out by saying that it’s very unlikely 2H of 2022 is any worse than 1H 2022. What few PR’s we’ve gotten have mentioned topline growth and some amount of margin growth. However, these PR’s have been limited to specific segments or businesses. So either they’re hiding some incredible news, or margins and profitability are still in loss territory for most segments.
As a second point, the whole point of ranges is that they are generally the extremes (or somewhere near it). For example, each band may be 20% likely each, so your range of values are something like 60% probable. Of course I’m not saying I have my assumptions that precise, but it gives you something to consider as you tinker with the model.
But my whole point is this – I tend to find that if you have somewhat realistic ranges of values, the median tends to be a reasonable place to think of a landing point.
If we look at the median of my assumptions, it looks like we’re coming in at another six months of losses and MAYBE positive cash flow. So all in all, I’m not expecting a very stellar six months based on this and it might look pretty bad depending on where it shakes out in this range.
I’m personally mentally preparing myself for a decent sized loss. Or put differently, it’s going to take a lot to get them profitable in this short of a time period. So seems quite unlikely we see profitability in my opinion.
Could I be wrong? Sure. Could it be better? Absolutely. But don’t forget it could be worse.
At the end of the day, I’m forecasting an unknown with hundreds of variables. So play around with my assumptions if you think I’m too conservative and see exactly where they could land. That’s the magic of forecasting… anyone can do it and nobody knows for sure what’s going to happen. I have my own opinions, but it could shake out a million ways.
To wrap up with a final key point – while I think 2022 will probably not look great, I think 2023 has some very exciting developments, especially in the Aerospace division which has extreme potential. But that’s for the next article!
Thanks for reading!
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I HAVE A LONG POSITION IN ALPP. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN RESEARCH.