Friday 19 April 2019

PKK Released Q4 Results. Financial Performance is Headed in the Right Direction


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PKK released its Q4 results, building on the improved results we saw in Q3. The company didn't provide an EBITDA chart like it did in its Q3 press release, but I have done my own calculations:

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Revenue increased from $710,000 to $742,000 which was in line with my forecast seen in a post last November and below under the "Q4 estimate" section. I expected just a slight lift in revenue from the marginally increased loan capacity of ASFC as cash flows from lending activities from the previous period are reinvested and a tiny bit of revenue from third party lenders on the Cubeler platform who were in a trial period using it.

I was far more impressed by the EBITDA results. An $89,000 EBITDA loss versus my expectation of a $300,000 loss. Based on that kind of trajectory, I'm optimistic that we could see positive EBITDA numbers as soon as Q1 which will be released within six weeks.

Why did I think EBITDA loss was going to go in the wrong direction compared to Q3? PKK is a growth company that has done and will need to continue to do hiring. Some R&D investments were made as part of the Cubeler trial period for the third party lenders and revenue growth wasn't going to be that much for Q4. So I thought expenses would have increased greater than revenue for Q4. Expenses did increase but mainly in the form of usual year-end type of cleanup that auditors require like the impairment of the intangible asset of $471,000. But those types of expenses are excluded from the EBITDA calculation. Ideally that is the end of these types of write-offs as PKK anticipates relaunching Gold River under the AST subsidiary and therefore will be a revenue-generating entity again and its remaining book value won't be subject to hastened write-offs.

Something else to point out is the decrease in the non-controlling interest profit (the 49% of ASFC's profit that goes to its minority stakeholders) from $144,000 in Q3 to $25,000 in Q4. Based on ASFC's stable operations and margins, I am surprised to see such a variance. I would have expected around $150,000 in net profit going to the minority interest in Q4. One theory I have is that the minority interest took acceptance of costs in excess of $100,000 away from PKK, accounting for the difference in the minority interest profit negative variance and EBITDA positive variance. This is all just my guesswork though. But it doesn't really matter that much. Q4 was meant to be a transitional quarter for most investors. It is Q1 and especially Q2 in 2019 that I am particularly looking forward to seeing.

Based on these results and the Wenyi acquisition in January, I am expecting revenue to be in excess of $1 million in Q1 with  EBITDA being in the range of -$50,000 to +$50,000. If PKK can show a quarter being essentially EBITDA breakeven (with the expectation of overall net loss after interest and deprecation), this will be a very positive news story leading into Q2 where things should really get interesting. The good news is after we were waiting for five months between Q3 and the annual report, we are in the golden period where this report, Q1 and Q2 will come in the same amount of time.