Enterprise Group ($E.TO) - Scotland Edition
Q2 2024 (4.5 / 5)
I did not expect to get waken up before 5 am by a screaming monkey while on a golf holiday in Scotland, but I’m staying near the Edinburgh zoo, and here we are. I’m dead serious.
Enterprise group received four and a half stars last quarter, upgraded after several previous four star reviews and was also selected as a top pick of 2024. The stock has more than tripled since I took a position back in May of 2023 and 80% from the top pick selection. Reception to the financials released last week could be described as lukewarm at best so let’s take a peek.
Balance Sheet:
Once again a stellar current ratio of 4.2 that consists of $10.4M in cash, $5.4M in receivables and $2.2M in other short term assets against short term liabilities of just $4.3M. 97% of their A/R is current. Enterprise has $17.7M of long term debt and a $3.6M mortgage.
Cash Flow:
The company was able to produce $10.6M in operational cash flow through six months, up $2.1M or 25% better than they achieved at the mid way point of 2023. They produce enough OCF to be able to service the entirety of their debt within one year. They raised $7M back in March of this year (a bit of a surprise at the time) which partially paid for the $9.7M in asset purchases they have made YTD. Overall they have improved their cash position by 3.8M from the beginning of the year.
Share Capital:
59.2M shares outstanding, 19% dilution from the start of the year from the previously mentioned PP and 1.3M options and warrants exercised
5.7M options outstanding, all ITM
3.8M warrants and broker warrants, all ITM
40% insider ownership, nothing worth mentioning from an insider transaction perspective
The company has not utilized its NCIB to buy back any shares and that expires at the end of this month
Income Statement:
$7.7M of revenue achieved in Q2, up 41% from last year and through six months, $20M against $15.5M, up 30%. Gross margin was absolutely off the charts at 43% compared to 30.8% which results in a 98% improvement in gross profit dollars on 41% more business. Outstanding. YTD margins now sit 700 bps above last year at 51%.
Cash burning expenses remain extremely well controlled with G&A at use 8.6% of revenue and YTD have actually spend less on 25% more business. Financing expense on their debt is the killer here at $700k per quarter which takes their net income to $76k against a $525k loss last year, but YTD still sit at an extremely strong $4.06M, 79% more profitable than they were a year ago.
Overall:
An excellent quarter in what is typically their softest of the year, but the company has been able to mitigate this with other rental income which also appears to be driving greater margins.
Their overall debt isn’t an issue given the level of operational cash flow the business generates but I am surprised the company isn’t able to get an interest rate better than 10.5%. Currently that results in about $700k worth of costs per quarter and the cost of their debt is actually higher than their General and Administrative expenses. They recently added another year to the term of their $30M facility and since they removed prepayment penalties last year it will be interesting to see if they decide to attack that debt or renew their NCIB at the end of the month to better utilize their strong balance sheet position. The only other minor concern I see in these financials is that 48% of their YTD business is from their top two customers, up from 28% a year ago, and ideally you’d like to see a little more diversity within their customer base.
Even with an 80% increase in share price YTD, there still appears to be some value here. Enterprise Group has $38M in TTM revenue while producing over 25% net income with escalating margins and they maintain to run the business extremely lean. This all comes at single digit P/E and an EV/EBITDA ratio of under 6.
Not sure if this individual quarter is a 4.5 star but the YTD numbers are, so will maintain that rating achieved last quarter.
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Disclaimer:
My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings and I do so without compensation. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.