October 13, 2021

Today, we are recommending a South African company that trades in the U.S. It looks highly compelling:

• High insider ownership (insiders own ~45% of shares outstanding)
• Strong momentum (stock is near 52 week high)
• 100%+ revenue growth
• Reasonable valuation: P/E ratio of 13x
• Low share count (only 5.4MM shares outstanding)
• No debt

All the details are inside this month’s Issue. Enjoy!

New Recommendation

Time for a Rocket
This week, I was tempted to recommend another cyclical energy name as I tend to believe we are in the early innings of an energy crisis.

Soaring commodity prices and low equity valuations should result in some explosive returns. But we already have decent exposure to this possibly from Dorchester Minerals (DMLP) and Epsilon Energy (EPSN).

This month, I want to recommend a “Rocket”. If you’ve read my Cabot Micro-Cap Insider Guide (you can download it in the members area) you know that I have “3 buckets” of investments: 1) Rockets, 2) Quick Trades, and 3) Slow and Steady.

My favorite type of recommendation are Rockets.

These companies have the following characteristics: 1) Cheap valuation, 2) Strong earnings growth prospects, 3) No or manageable debt.

The idea behind “Rockets” is that, if things go well, investors can benefit from strong earnings growth as well as valuation expansion. This can result in 100% to 1,000% upside.

My recommendation this week is a Rocket.

My initial price target implies ~50% upside, but if this company continues to execute, there could be significantly more upside over the next couple of years.

Without further ado, let’s discuss this month’s idea: Leatt Corporation (LEAT).

New Recommendation

Leatt Corporation: Rapid Grower Trading at a P/E of 13
Company: Leatt Corporation
Ticker: LEAT
Price: 23.95
Market Cap: $128 million
Enterprise Value: $128 million
Price Target: 36
Upside: 50%
Recommendation: Buy Under 27.00
Recommendation Type: Rocket

Executive Summary
Leatt (LEAT) Corporation is a South African company that designs and manufactures protective equipment for motor bike riders. Despite a revenue compound annual growth rate (CAGR) of 24% from 2017 to 2020, and an EPS CAGR of 165%, the stock trades at a forward P/E multiple of just 13.2x. Insiders own 45% of shares outstanding, and I expect strong growth ahead. My price target of 36 implies significant upside ahead.

Company Overview
Background
The Leatt Corporation is a South African-based designer and developer of innovative gear for sports.

The company was founded by Chris Leatt, a doctor and surgeon.

In 2001, he witnessed the death of a fellow motorcycle rider the weekend after his son began riding.

Inspired by a desire to prevent his son and other riders, he began researching and developing a neck brace that could prevent these catastrophic injuries.

He filed his first patent in 2003 in Cape Town, South Africa, and sold his first product in 2006.

The company was initially entirely dependent on the success of the neck brace.

The neck brace became the most popular in the market, but growth eventually stalled out.

In 2010, Chris Leatt hired Sean MacDonald as CEO to lead the company in a new direction.

The new plan was to leverage its brand and existing distribution channels by creating and selling other protective products.

Today, Leatt sells a wide variety of products, as shown below.

Over time, Leatt’s revenue has become more diversified, as shown below (source: Finding Moats).

Current Business
Currently, most of Leatt’s revenue comes from chest protectors (23% of sales), knee protectors (22%), and neck protectors (21%). See the full breakdown below.

In 2020, Covid benefitted this business tremendously as it benefitted all other outdoor sports.

For the year, revenue grew 36% while net income grew by 222%.

What is more impressive to me is that the business was growing so strongly prior to Covid.

Strong growth has continued in 2021.

In Q2 2021, revenue increased 106% to $14.3MM while EPS increased 238% to $0.44.

Business Outlook
As mentioned above, incredibly growth has continued into 2021. Year to date, revenue has increased 88% while net income has increased 331%.

Management hasn’t provided guidance for the second half of the year, but I’m assuming growth slows due to 1) the company lapping some difficult comparisons and 2) well-documented, worldwide supply-chain delays/challenges.

As such, I expect revenue to grow 46% for the full-year 2021, EBITDA to grow 90% and net income to grow 88%.

In 2022, I expect growth to normalize a bit with revenue growth of 12% and EPS of $1.78.

I want to note that my projections are likely conservative.

Consider the $0.44 of EPS the company reported in its latest quarter. If we just annualize this number, we get $1.76. As such, our 2022 estimate is probably low. However, I would prefer to be conservative and to raise my estimates over time.

Insider Ownership
As Cabot Micro-Cap Insiders know, insider alignment is high on my check list.

Founder Chris Leatt owns 2,178,514 shares, or 40% of shares outstanding.

CEO Sean Macdonald owns 271,501 shares of 5% of shares outstanding.

This alignment ensures that both will do everything in their power to continue to grow the company and create shareholder value.

Valuation and Price Target
From 2017 to 2020, revenue has grown at a 24% compound annual growth rate (CAGR) while EBITDA has increased at a 108% CAGR, and EPS has increased at a 165% CAGR.

The stock is currently valued at 15.4x 2021 EPS and 13.2x 2022 EPS. This seems way too low.

What’s the right multiple?

It’s tough to say, but 20x doesn’t seem unreasonable. Again – revenue has grown at a 24% CAGR.

Assuming a P/E ratio of 20x for 2022 earnings implies a fair value of 36.

My official rating is Buy under 27.00.

As always is the case with micro caps, use limits as volume is quite low.

Risks

• Revenue growth could slow.
  
  • Mitigant: Revenue growth is clearly going to slow from the current 100% y/y rate. However, I’m comforted that revenue was growing at 19% CAGR from 2017 to 2019 (pre-Covid).

• Logistical Challenges.
  
  • Mitigant: You have probably heard that supply chains are extremely backed up and that shipments are delayed (I ordered a couch two months ago and am still waiting for it to arrive). This will no doubt impact Leatt’s business, but it doesn’t appear to be too big of an issue for the company (based on its last conference call).

Updates, Watch List and Ratings

Recommendation Updates
Changes This Week
No changes.

Updates
Aptevo (APVO) continues to perform poorly. The investment case remains the same. The market is currently valuing the stock as if its pipeline is worth negative value (currently negative-$30MM). This doesn’t make sense as Aptevo’s main drug, APVO436, has shown promising data and the company has a pipeline of other assets. This is a high-risk/reward trade because the upside could be substantial, but downside could also be substantial if it continues to burn cash with little to show for it. We will see preliminary phase II data later this year which could be a nice catalyst. Original Write-up. Buy under 40.00

Atento S.A. (ATTO) has gotten a recent boost because of this write-up. It’s nice to see that more investors are finding Atento because it continues to look incredibly cheap. Atento reported earnings in August. In the quarter, revenue increased 22% to $382MM, beating consensus by 4%. EBITDA increased 123% y/y to $50.7MM. EBITDA margin increased to 13.3%, up from 7.1% a year ago. Despite the strong performance, ATTO is still only trading at 3.9x my estimate for 2022 EBITDA. Peers such as Concentrix (CNXC) trade at 10x or higher. Original Write-up. Buy under 30.00

BBX Capital (BBXIA) recently disclosed in an 8-K that it is increasing its share buyback authorization from $10MM to $20MM. The first $10MM authorization was used to buy back $8.3MM worth of shares, the additional $10MM authorization will enable them to continue these buybacks. Further, the company announced that it recognized a $7.7MM cash distribution from a property that they had held at a $2.1MM valuation. This is good news and implies that book value per share ($17.53) may be understated. I recently moved up my price target to 12. Here’s how I’m thinking about my new valuation: The company has $7.44 per share of net cash/notes receivable on its balance sheet and I’m giving it 100% credit for that (given recent shareholder-friendly actions). I’m assuming the remaining business is worth 5x this year’s free cash flow. Note: A 12 price target is still at a significant discount to book value per share ($17.53). Original Write-up. Buy under 9.00

Cipher Pharma (CPHRF) had no news. The company is a cheap, Canadian specialty pharma company that has a promising pipeline. Despite strong potential, the stock trades at a draconian valuation. Insider ownership is high, and insiders have been buying the stock in the open market. Further, the company is buying back its own shares in the open market. Downside protection is high given net cash on its balance sheet and strong free cash flow generation. My price target of 2.50 implies good upside over the next 12 months. Original Write-up. Buy under 2.00

Dorchester Minerals LP (DMLP) has moved sharply higher over the past couple of weeks, and I wouldn’t be surprised if the stock took a little bit of a breather. Within a week or so, the company should report its Q3 distribution. I expect it to be at least $0.50. The company recently reported Q2 2021 earnings of $0.46, or $1.84 on an annualized basis. As such, the stock is trading at 11.1x annualized earnings, too cheap a multiple for such a high-quality, high-margin, and no-debt business. At its current quarterly dividend, the stock is trading at a dividend yield of 9.4%. I continue to like this low-risk stock which will continue to benefit from higher oil prices. Original Write-up. Buy under 17.50

Drive Shack (DS) reported preliminary Q3 revenue of $75MM, in line with consensus. We will get a sense of the full results later in the month. The investment case is on track for Drive Shack. At its current valuation, Drive Shack’s share price gives minimal value to the strong upside potential from new Puttery venues. Finally, alignment is high as management and directors own 16.3% of shares outstanding and have recently bought in the open market. My price target is 6.00. Original Write-up. Buy under 4.00

Epsilon Energy (EPSN) has performed well as natural gas prices have rallied. I recently spoke to the CEO of the company and learned more about Epsilon’s natural gas hedges. The company has two-thirds of its product hedged in the $3/Mcf range, but the other third has exposure to the spot market. From November 2021 to March 2022, 30% of production is hedged at ~$3.34/Mcf, but 70% of production is exposed to the soaring spot market. I see significant upside over the next 12 months as the company benefits from high natural gas prices. Original Write-up. Buy under 5.50

FlexShopper (FPAY) saw strong insider buying in August in the $2.50 to $2.90 range following a strong earnings release. In the quarter, revenue grew 25% y/y to $30.7MM. Looking out to the rest of the year, strong growth should continue as the company is expanding its pilot program with an undisclosed national retailer and has added a second national retailer to its pilot program. My 12-month price target for FlexShopper is 4.70. Original Write-up. Buy under 2.50

IDT Corporation (IDT) reported a great quarter with strong growth across the board. Mobile Top-up revenue increased 41% y/y, the sixth consecutive quarter of 20%+ revenue growth. National Retail Solutions (NRS) revenue increased 76% y/y, with performance being driven by an increase in average revenue per user (ARPU) and terminal growth. Management expects continued upside in ARPU, driven by merchant services, advertising, and data. Net2phone subscription revenue increased 46% y/y, with 80%+ gross margin. Lastly, Traditional communications reported its third consecutive quarter of revenue growth and generated $29mm of EBITDA. Original Write-up. Buy under 45.00

Liberated Syndication (LSYN) recently announced that it hired a new full-time CFO. This is a positive as the company had been operating without a CFO or CEO. However, I do have strong confidence in President Laurie Sims, who has been leading the business. The stock has been languishing of late, and I recently wrote an article that addresses why that might be the case. In short, it has become very difficult to buy companies that are not current on their financials or don’t report their financials to the SEC or OTCmarkets.com due to an SEC rule change (15c2-11). I believe this is pressuring Libsyn’s stock lower. But I also believe it represents an opportunity as when the company reports its restated financials it will show a company growing revenue at ~17%. At its current valuation of 2.5x 2021 revenue, it looks very attractive. Original Write-up. Buy under 5.00

Medexus Pharma (MEDXF) had no news on the week. I think the risk/reward looks attractive at the current valuation. Nonetheless, I’m not going to be buying more stock until I start to see some good news/good execution from the management team. Sales should stay roughly flat sequentially over the next couple of quarters, but are likely to perk up in the fourth quarter and into 2022. I believe IXINITY has strong potential longer-term, and the company has several interesting pipeline opportunities which should drive growth into 2022. Assuming execution improves, there is a lot of upside. I still believe this could be a mid-teens stock within a couple of years. But I’m personally going to be waiting for improved results before adding to my position. If I must pay a slightly higher price, so be it. It will be a small price to pay to gain increased conviction. Original Write-up. Hold

Performant Financial (PFMT) had no news on the week. Following a strong quarter, the company raised $40MM of equity in August. While I’m disappointed in the dilution, it will improve the company’s balance sheet substantially and allow it to accelerate growth. All in all, the investment case is still on track. My price target decreases a little bit in the medium term to 6.60 (due to the dilution) but, longer term, I think this stock could trade over 10. Original Write-up. Buy under 5.00

P10 Holdings (PIOE) recently announced it will price its (previously telegraphed) IPO in the range of $14 to $16, but there will be a 0.7-to-1 reverse split. PIOE opened at $11.24 yesterday (Tuesday), equivalent to a $16 post-IPO price. Essentially, P10 is uplisting from the OTC market to the NYSE. As part of the IPO (which really should be viewed as a secondary offering instead of as a true IPO), the company is raising ~$172MM to de-lever and strengthen its balance sheet for additional acquisition opportunities. In addition, certain shareholders are selling ~3MM shares. Despite the stock’s recent move up, its long-term prospects still look attractive as it’s currently trading at 13x free cash flow and 15.5x EBITDA. Very reasonable considering its closest (albeit larger) peer is Hamilton Lane (HLNE) which trades at 28.2x EBITDA and 21.5x free cash flow. Original Write-up. Buy under 10.00

Stabilis Solutions (SLNG) reported record earnings in August with revenue of $16.1MM, up 221% y/y. It was 45% above Q2 2019 revenue (pre-pandemic) of $11.0MM. The investment case remains on track, and I had an encouraging conversation with the CFO of the company recently. The high price of natural gas will not impact Stabilis’ business either way as it does not take commodity risk. As a reminder, Stabilis Solutions specializes in delivering liquid natural gas (LNG) and hydrogen to its customers who are away from pipelines and off the energy grid. Customers use Stabilis Solutions as it provides them with cheap, reliable energy that is cleaner than other fossil fuels. The company has grown revenue at a 27% CAGR and has a bright outlook. Insiders own more than 50% of the company but have been relentlessly buying more stock in the open market. The stock has performed well since the pandemic but looks like a double over the next 12 months. Original Write-up. Buy under 9.00

Watch List
American Outdoor Brands (AOUT) is a recent spin-off that sells outdoor apparel and hunting paraphernalia. The stock looks cheap, trading at 11.2x forward earnings yet growing revenue 20% in the previous quarter. The low valuation is due to investor concern that the company benefitted from pandemic tailwinds which mute this year’s growth outlook. Nonetheless, I think the stock look interesting and there has been recent insider buying.

Nanophase Technologies (NANX) is a fast-growing (~50%) skin care company that is trading at a reasonable valuation (22x 2022 EPS).

Amerigo Resources (ARREF) is a Canadian copper company that earns most of its money from Chile. There are significant political risks that the new government (elections upcoming) will be socialist and raise taxes sharply on the copper industry. Nonetheless, the stock is extremely cheap at 2x EV/EBITDA. It is attempting to buy back a significant portion of its stock in a tender offer. Further, the company will initiate a dividend in the fourth quarter.

Recommendation RATINGS

* Return calculation includes dividends

Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Rich Howe owns shares in BBXIA, HPTO, PIOE, MEDXF, LSYN, IDT, FPAY, DMLP, PFMT, DS, and SLNG. Rich will only buy shares after he has shared his recommendation with Cabot Micro-Cap Insider members and will follow his rating guidelines.

The next Cabot Micro-Cap Insider issue will be published on November 10, 2021.