We’ve now heard two key interviews with Dave Massey: the YouTube Q&A and now the short NYSE interview. I wanted to get down some rough thoughts and predictions for Q4 and for FY 2023. These will obviously be very speculative, but I’ll lay out my best case, worst case, and “moderate” scenarios.
In the NYSE interview recently posted, Dave confirmed that Q4 revenue will be around $25m. This is clearly a large drop off from Q3 which saw $57m in revenue. As has been repeated ad nauseam, this revenue drop seems to be from three key things.
First, lack of funding has held up initial investments needed in working capital to start projects. This can be seen in the “Work in Progress Receivables / Payables” on the balance sheet. They’ve recognized a portion of the revenue and direct expense from these projects as per ASC 606, likely due to initial contracts being signed, but they’re stalled because they need up-front cash to pay for direct costs.
So what we’re likely to see as revenue in Q4 are projects they can push through that don’t need large up-front funding, or projects that were already in the works pre-cash crunch.
Second, the company has been restructuring heavily the last six months. They had to integrate more than ten subsidiaries into a single company vision, which is extremely difficult to say the least. Whenever these things are going on people are getting fired, getting new bosses, new roles, etc. This tends to slow down the sales process and can hinder growth in the short run.
Luckily, this is only a short-term problem. The idea is the cost savings will far outweigh any inefficiencies of the last six months. Unfortunately, we’re going to see that hit in Q4 and Q1 2023.
Lastly, SIRC’s business is cyclical and follows the usual construction season. So Q2 and Q3 should always look like the strongest quarters. So comparing Q3 and Q4 is not necessarily effective.
In terms of hard numbers, I suspect we’ll see an income statement that looks something like this:
- Revenue: 25m
- COGS: 17.5m
- Gross Profit: 6.5m
- SG&A / OPEX: 8m
- Operating Income: -1.5m
- Interest Expense, etc.: 1.5m
- Earnings Before Tax: -3m
Obviously there’s some wiggle room here, but we know fixed OPEX went up in Q4 with the addition of the new management team (which has now resigned). Interest expense likely also went up as we know they were getting poor funding terms on straight debt. We can also assume they are losing gross margin efficiency with decreased revenue, so I have forecast a poor gross profit versus prior quarters.
From a cash flow perspective, we already know it’s going to still be negative. The only bright side there is that much of the temporary new management’s compensation was in stock/options. So while it’s still an expense to the company, it’s noncash which is something, I guess?
All in all, don’t expect a pretty Q4.
FY 2023 Predictions
Since this all quite speculative, I’m going to go down the list of key topics and give a best case and worst case scenario, along with my most likely scenario in my opinion.
Cash Flow Positive
This is the name of the game here, when will this company generate positive cash flow and be able to self-sustain without crippling debt terms and unfortunate equity financing.
Best case here, straight from the head-honcho’s mouth, is by April 2023 we’ll start seeing cash flow positive results now that draw-downs on debt financing have begun. Recall above, you draw down on debt to fund working capital (inventory purchases) which are then sold for a margin, you bill the revenue and collect in X amount of days. And that’s all it takes really for them to become cash flow positive.
Worst case, and let me stress that I don’t think it’s true, the financing doesn’t exist, falls through, or isn’t enough. Basically the company will start a bit of a death spiral as it can’t generate cash on its own and needs outside cash to push along working capital purchases. Either the company has to close up shop (unlikely) or it has to issue equity to raise the cash while the stock price is already quite poor (yuck). Not good all around.
My current prediction is this. Dave is self admittedly overly optimistic on deadlines and I think there’s a legitimate track record for that. But I do think the financing is not only real, but enough for what they need. Therefore, I do expect them to become cash flow positive this year. However, given the tendency for delays at SIRC, I think we’ll see positive cash flow by Q3 or Q4 at the latest. By Q3, I’m also only expecting break-even or small positive cash flow. But that should be enough.
We’ve now received news of a signed LOI for SIRC to acquire AVCO roofing, which is basically a SIRC-esque business but located primarily in Texas (where SIRC wants to expand to). We’ve also heard Dave mention they have a few acquisitions in the pipeline, so this is clearly one of them. He also hinted that he sees the personnel of an acquired company(ies) as the future CEO/C-suite.
It’s pretty clear that the best-case scenario is that they acquire all of these companies with decent financing (likely a mixture of equity and debt) and they are accretive to the bottom line.
Worst case is we get another Pablo Diaz, etc. situation where the acquired companies turn into lawsuits and headache for the company. Another worst case is that the company is too equity heavy on the acquisition terms while the share price is so low and we see extremely dilution while the share price is undervalued.
It’s very early and hard to speculate, but if I had to guess going off of company track record… The acquisitions will likely go through even though I’d prefer the company shored up its own cash flow situation first and stabilized the share price. This could mean simply waiting 2-3 quarters. But I’m not the CEO and he clearly has more information on the impact of these acquisitions. It seems risky, but not without merit.
In terms of financing, I have a pretty strong feeling there will be a heavy equity compensation component to these, especially if they want to do them in the next 3-6 months. This means we likely see some hefty dilution at some (recent) all-time lows in the share price.
That being said, I feel like the company has probably learned its lesson in acquisitions and having a myriad of subsequent lawsuits. At this point, if we see the same thing happen with these new acquisitions as the previous ones, I will probably never trust a SIRC acquisition again. This, I think, is quite unlikely though.
Revenue and Profit
Your guess is probably as good as mine on where we land with revenue. Assuming their financing works out, I think we still see some organic growth from FY 2022 and we’ll still see some book profits. But I’m not expecting thrilling margins like we saw in certain quarters of 2022.
Assuming no acquisitions and effective debt financing, my current prediction is somewhere around 200-225m in net revenue, 15-20m in book net income, and a similar amount of positive cash flow from operations.
I will not even begin to forecast their 2023 financials with acquisitions. One would assume revenue would be higher I suppose! There are just too many unknowns with the target companies. The only one we know of earned 21m in revenue in 2022. But who knows how well that translates into their performance post-SIRC integration. It could be way better or way worse.
Again, if I knew exactly where this would go I wouldn’t be telling all of you! In all seriousness, we all know the best case scenario is “to the moon” and worst case is “par value”.
My personal take, if (a big if) the above margins and cash flow projections hold and dilution isn’t out of control this year, we should see a share price pick-up. My rough forecast:
I despise revenue multipliers, I’m more of an EV / EBIT or EV / EBITDA guy myself. EV / EBITDA is probably better for a company like SIRC without many fixed assets. My back of the napkin multiple for a company that size is a forward EV / EBITDA multiple of 6-7x for now (as they get larger and more consistent those multiple go up). And that only assumes they become cash flow positive.
As to not gum up this article (it really needs its own), let’s say their enterprise value is currently around 80m using Q3’s balance sheet. That would imply an EBITDA between ~11m-~13m. Using my above net income target of 15-20m, let’s say EBITDA is 25-30m for 2023. This would imply the share price should be trading around double where it is now (around a 120% gain from a PPS of 0.033).
This assumes no stellar acquisitions and pretty moderate growth / profitability targets. So needless to say, despite all of the issues around the company, I still think it’s undervalued even using a really rough and conservative calculation. I will refine over time and maybe release a more precise estimate in an article, so this is always subject to change.
Miscellaneous Other Predictions
I’ll rapid fire here:
Buybacks – this is extremely unlikely unless they are swimming in cash by Q4 and Dave wants to clear out the remaining Preferred Shares. It is very counterproductive for them to do this anytime soon given how cash strapped they are.
New Management Team – I am not expecting it this year, even with a key acquisition. I’d expect Dave and co. to see out the year and then maybe for 2024 we get a new leadership announcement.
Arbiter Lawsuit – I highly doubt SIRC ever sees a penny back from the 4.2m they loaned Darin Pastor. They just need to move on.
That’s it for now! There is some hope on the horizon, but the risk profile of the company is as high as its been for the last 12 months. Be careful, understand the risks, and all in all I think there is a play here. I’ll keep checking in on SIRC as more news comes out and/or the 10k is released.
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THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. AS OF THE TIME OF WRITING THIS ARTICLE, I HAVE A LONG POSITION IN SIRC.