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Research: Innovative Solutions and Support

Notes from their Q2 Release and Call:

Q220 results

• backlog was up to $6.5mm
• started seeing production deliveries from newest customer – Textron
• they had just announced that they had been awarded supplemental type certification (STC) with thrustsense autothrottle of the Beechcraft King Air 300 on Aug 4^th
• thrustsense provides VMCA and engine protection – proportionally reduces engine power to maintain directional control
• offers protection against catastrophic upsets with the loss of an engine if pilot fails to maintain adequate airspeed
• installing the autothrottle is risk mitigation
• is the first and only certified autothrottle for King Air 200 and 300 aircraft
• there are over 5,000 King Airs out there
• annual production rates of King Air is higher than Pilatus
• is being actively marketed at service centers and at Textron shops
• will be standard equipment on all new King Air 360 turboprops
• also will be added to new 200s and C9s
• – their operating expenses were not up at all even though revenue was up 30%
• so now they have OEM production contracts for 3 aircraft: Boeing KC-46A, Pilatus PC-24 and the King Air
• are beginning to market the autothrottle to Textron and other OEMs for twin jets – so so beyond twin turboprop aircraft
• from QA: also do single engine airplanes, finding that military and air transports
• said in Q&A they are in advanced discussions with other OEMs and military
• Pilatus program remains on-track to deliver 50 aircraft this year – that woud be about $2.75mm for the Pilatus
• they are already on 100 Pilatus manufactures
• seeing steady demand for flat panel displays from air cargo companies buying 757 and 767 and converting them
• KC-46 program, which is also a production contract, continues to make contribution
• the one questioner seems to suggest that new production from the King Air isn’t very much – says King Air has been around for 30 years, doesn’t know how many new King Airs will be produced
• large market for King Air is not ongoing production, it is the 5,000 units out there – and points out these are valuable aircraft, not “single engine piper cubs” – the piper cub is a small 1-2 seater, vs a King Air is this:
• new King Air 360 is a fast airplane – and older airplanes are getting upgraded with new engines
• FAA said they lose 100 lives a year and that the safety feature on the autothrottle will save those
• they shipped 13 units for King Air in the quarter
• the company is built on retrofit, in the past did: $150 million on the KC-135 program. RVSM for over 60% of the world market
• according to one questioner – they are doing “pretty aggressive hiring”
• Textron retrofit business could be more than the OEM business – sounds like it should be – the 5,000 aircraft out there are all operating, they are significant investments, retrofit cost is small compared to the expensiveness of the airplane
• have not sold one retrofit yet and market opportunity is $250mm to $300mm – this is King Air only, we are not talking the existing Pilatus retrofit opp
• should know in 1-2 quarters how they are penetrating retrofit market

While I imagine the stock still doesn’t screen that well because they haven’t hit any inflection, this is aerospace so there would be a perception that this will get hit by commercial air travel recession (it will not) and it remains a small company ($120mm market cap).  But the business is as well placed as it could be.  Unless they are lying about the opportunity I don’t see what derails this.

Research: Big 5 Sporting Goods

I have been surprised that Big 5 has not performed better.  One reasonable bear case I can think of is that this year will be a flash in the pan.  I looked back at the historical results to see how Big 5 has performed over the last 10 years.

Highlights from Q2:

Q220 result highlights:

• SSS increased 31.9% in July
• at end of July had no debt and $38mm cash position
• in Q220 they had SSS decrease 4.2% yoy
• in second half of Q2 SSS increased 15.5%
• they had much higher GMs, up to 31.7% from 30.3% yoy – due to product mix favoring high margin categories, less promotional activity
• also they have reduced costs, and reduced warehousing
• SG&A was lower because of “lower employee labor expense reflecting reduced store operating hours and lower advertising expense during the period”
• they are guiding for 5% to 15% SSS increase through the rest of Q320 – would mean 14% to 20% SSS for Q3 as a whole
• EPS for the quarter would be $1-$1.30 per share
• still have 431 stores in operation
• they had opened all closed stores by May

HIBB Comp:

Research: YRC Worldwide

• this is from a Stifel note
• they started YRCW at hold, $5 target

we don’t expect much focus on a company employing union workers in an election year that is going to be usingthe money to buy equipment from U.S. manufacturers.

• YRC has oldest fleet in the industry
• new trucks will save $20k per year in opex
• if they spent $400mm on new tractors, run rate EBITDA would improve $60mm by YE 2021
• even a 5-year old truck would be newer than their fleet right now
• when you add the $700mm from the gov’t onto existing debt total debt is $1.57b by YE 2021
• the EBITDA increase from the new equipment isn’t likely to be beyond $60mm IMO – in the YRC Q2 call they said:

our maintenance expense for a 1-year unit is somewhere in the $1,000 to $2,000 range. Obviously, a full powertrain warranty. And you might ask why $1,000 to $2,000, well you’ve got few — I mean, you’ve got brakes, you’ve got antifreeze, you’ve got oil. You got everything that goes with the daily maintenance of that unit. And then you go out to 5, 6, 7, 8, 9, 10 years, you get in into a number that is probably closer to $11,000, $12,000. So we can easily clip a 10,000, maybe a little bit more coupon per tractor on maintenance expense alone and does nothing to take into consideration what we can get on miles per gallon and fuel efficiency.

• so really, you’ve got a market cap of $170mm and a 2021 EV of $1.74b – even at $300mm EBITDA you are at almost 6x EV/EBITDA
• when I look at an ArcBest they are cheaper than that (~4x EV/EBITDA) and a better company.  The idea that YRC should trade at any premium to the average trucking name is kinda crazy
• its been a nice run but really this was just about getting a ramp from the short interest and the government bailout.  It is probably time to get out

Research: Artemis Gold

Artemis Gold

• at $4.65 has a $569mm market cap – 122.5mm shares
• cash balance of $58mm as of Aug 24/20
• these guys were spun out of Atlantic Gold
• they just bought the Blackwater project from NewGold – closed today
• payment is:
  •  $140mm
  • 7.407mm shares at $2.70
  • cash payment of $50mm after one year
  • secured gold streaming participation for New Gold – 8% of production at 35% of the gold price until 279,908 ounces, then reduces to 4% – so that’s like after 3.5Moz produced
• they completed an offering of 64.8mm shares at $2.70
• they announced the PP back in June, also announced Blackwater acquisition in June
• this was the result of the 2014 feasibility study on Blackwater:

at US $1,300 per ounce gold, US $22 per ounce silver and a 0.95 US$/C$ foreign exchange rate, or CAD$1,368/oz equivalent (compared to current consensus of over CAD $1,900/oz. equivalent and current spot of approximately CAD $2,300/oz. equivalent), Blackwater had a pre-tax 5% NPV of $1,044 million, an IRR of 11.3% and a payback period of 6.2 years

• IRR of 11.3% isn’t much to write home about at $1,300 gold
• 8.2 Moz reserves, so-so grade of 0.95g/t
• there is another royalty to First Nations, not sure how much
• expected to have 17y mine life
• construction of 2 years – cost of $129mm
• located 160km SW of Prince George
• I haven’t read all the background but it doesn’t look like this project was smooth sailing the last few years, probably b/c of economics
• New Gold recorded a $218mm impairment in 2019
• in the New Gold 2020 guidance they were hardly spending anything on exploration at Blackwater – $2mm of exploration
• before buying Blackwater they had some copper-porphyry project and a 39% interest in a company called Velocity Minerals
• this doesn’t seem that cheap to me – $569mm market cap is $70/oz which is fine I guess, but NG only had an EV of ~$1.5b for everything at the time they sold it, and New Gold sold it for $190mm but this stock is nearly triple that