Monday, 24 April 2017

My Preliminary Thoughts on PKK's Latest Pivot

Peak Positioning Technologies (PKK.C) (PKKFF) released an updated investor presentation and news release this morning following its attendance at the GCFF conference in Vancouver. I don't have enough information to release a full blown article but I thought I would share some quick thoughts. I plan to update it once the company has released Q4 and provided official guidance.

Peak has pivoted once again into more lucrative businesses with the introduction of Asia Synergy Data Solutions (ASDS) and a proposed financial institution Asia Synergy Financial Capital (ASFC). ASDS teaming up with Cubeler sounds a lot like what LongKey would have been, except with the backing of ZHWY Enterprises. ASFC is the method for Peak to try to increase its margins as it looks to bring the lending component of the Gold River platform in-house.

With these pivots which will obviously be very good for the long-term, it sounds like there will be some short term "pain" in that Q4 revenue probably won't come in as expected. I'm not too disturbed by this. We know from a prior news release that PKK will be recording at least $50 million in revenue for 2016. Going from $0 to $50 million in revenue in a year is still a monumental accomplishment, even if it's a little less of an accomplishment than going from $0 to $100 million a year.

On page 23 of the presentation, there are two numbers referenced for AST in 2017. $503 million in revenue and a $10.8 million number which isn't clear if that's gross margin or EBITDA or something else. Assuming that is the case, this would be below previous guidance of a 3-5% EBITDA margin on $550 million in revenue stated in the Q3 news release. Offsetting that is the $1.4 million in projected revenue for ASDS in 2017 and the unknown benefit of ASFC assuming it goes live as planned some time in 2017.

Based on this, it looks like PKK will take a little longer to get to my $0.50 target as first planned, at least justifiable from financial ratios. There always remains the possibility that speculative investors will like this new business and bid up the stock to very high valuations in the near term. But by 2019 revenue for AST and ASDS is expected to be a combined $887 million. It's difficult to project such a fast growing business two years out, but if these numbers do in fact come true with $50M in EBITDA or greater, a $0.50 stock price should be more than justified.

Assuming the $10.8 million number is EBITDA for 2017, this still justifies my first target of $0.20:

$10.8M x 15 EV/EBITDA multiple = $162M EV
$162M EV + $10M in cash from exercise of warrants and options = $172M market cap
$172M / 678M fully diluted shares = $0.25 per share

There was a small sell-off this morning to 14 cents after the warning about the negative impact on the near-term numbers and some of the ambiguity around these projections. Buying has picked back up and the stock is trading at 15 cents, down a penny. I think it is reasonable to assume that Q4 will be disappointing relative to previous guidance (but still great compared to where the company was in 2015). However, 2017 guidance could go in either direction depending on how quickly PKK can get ASFC up and running. For now, I think we should assume revenue just slightly over $500M and margin/EBITDA slightly over $10M, but even that should support the stock price where it is now.

With this pivot there is no guarantee of success for ASFC or even that it will get off that ground. But that's why PKK is trading at a fully diluted market cap of $100M and not much higher. I remain confident of my heavy investment in PKK, other investors can figure out for themselves if they share that same level of confidence.

EDIT: This is what PKK's CEO Johnson Joseph had to say shortly after I released this piece:

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