Description

Armada Data operates two distinct high margin and capital light automotive data businesses, Armada Insurance Services and CarCostCanada.  After a failed acquisition in 2011 significantly distracted management and led to revenue declines and operating losses, particularly during the FY 2013 to 2015 period, management subsequently exited the failed business and refocused the company on its core operations, leading to both a return to revenue growth and profitability.  The market, however, has seemingly not yet appreciated the dramatic turnaround that has taken place.  Shares currently trade with a TTM P/E of only 4.6x (net of a modest cash balance and tax receivable) and thus represent a very attractive investment opportunity.

The company’s size and liquidity make it more suitable for personal accounts.  Shares trades as ARD on the TSX Venture Exchange.

Business Overview

Armada Data is a $2.4 million revenue business that did around $460k in EBITDA in the TTM, with healthy margins in excess of 21%.  Around 55% of revenues come from Armada Insurance Services, 35% from CarCostCanada, and the remaining 10% comes from various advertising and IT services.

I will explain the two major businesses later in the report in more detail, but before getting to that it’s important to first understand a bit of the company’s history.

History and Mister Beer

Armada Data was started by Jim Matthews and Paul Timoteo around 1997.  The pair had previously built another successful automotive services business called Lease Busters, which still exists and remains private today.  They decided to spin out Armada Data as an independent public company in 1999 to take advantage of the growing interest in internet businesses, which is how the company came to be public.  Although Jim Matthews retained the title of CEO and Paul Timoteo CFO, Jim essentially ran the day-to-day operations of Lease Busters with Paul running the operations of Armada Data.

For many years Armada Data was a huge outlier on the TSX Venture Exchange: the business was growing, profitable, cash-rich, and it paid a regular healthy dividend.   Then in 2011, Paul decided to use Armada’s cash to buy a startup microbrewery-in-a-bottle business called Mister Beer and everything changed.  While the product was somewhat clever, the acquisition was unfortunately a terrible business idea for a large number of reasons (it was a completely unrelated business with no synergies, the product was too novel thus requiring substantial consumer education, and it required capital in excess of what the core business could fund on its own).  Quickly consuming all of the company’s time and money, revenue growth turned negative, profits turned to losses, the cash evaporated and insiders even had to loan the company money to stay afloat, and the dividend was extinguished.  

Then in late 2012, Paul Timoteo very suddenly and tragically passed away from a stroke.  Jim assumed day-to-day management of the business, made one last attempt to make Mister Beer a success, and then started to turn around the company.  The share price which had previously been around $0.17 at the time of the Mister Beer acquisition fell as low as ~$0.025.  Mister Beer’s operations were shut down and the lease on the production facility was subleased.  The company moved into cheaper office space and costs were cut wherever possible.  Most importantly, the company refocused its attention on its two core businesses which both suffered with the significant distraction caused by Mister Beer.

With the turnaround plan bearing fruit, the company finally returned to revenue growth and profitability in FY2016 with 15% growth for the year and $334k in EBITDA.  These figures have continued to improve into FY2017 with TTM revenue growth of 19% and ~$460k in EBITDA.

Armada Insurance Services

Armada Insurance Services is the crown jewel of the company, responsible for ~55% of revenues and I believe an even greater mix of profits.  The company sells total loss vehicle replacement reports to auto insurance companies to help them save money on their claims costs.  I believe that around 70% of this business comes from new car replacement reports (“43r”) and 30% from used car replacement reports (“ACV”).

43r

The insurance services business started selling “43r reports” to car insurance companies around 2003, a market which Armada essentially created.  Management has described it as being a $6 million market (around 30,000 claims a year).

Around 90% of cars sold in Ontario and Alberta have a waiver of depreciation for total loss claims within the first 2-3 years, so that the insured’s settlement amount won't get hit by the depreciation.  The insurance carrier has the option of paying the lowest of 1) original sale price, 2) MSRP at the time of purchase, and 3) today’s replacement cost of a new vehicle.  Insurance companies used to always just elect the first option and give people whatever they paid for their car.  Armada discovered, however, that because of dealer incentives and things of that nature, 80% of the time the 3rd option was actually cheaper and that on average they could save insurance companies more than $1000 per claim.  They sell these reports to insurance companies for $200 and thus generate at least $800 in net savings for the insurance carrier.

Armada created this 43r report market and came to dominate it.  In the past they’ve said that 8 of the 10 largest insurance carriers were customers.  My understanding is that there are essentially no competitors in this market.  If an insurer doesn’t use Armada they either do it themselves or don’t even bother.

ACV

Although smaller in revenues today, ACV has the potential to be a significant growth driver for the Insurance Services division.  Management has described it as being a $20 million market (around 270,000 claims a year), much larger than the 43r market.  Based on the current size of Insurance Services I believe that Armada still has less than 2% share of this market.

The product is similar in nature to the 43r reports except that it gives the insurance carrier the used car cost to replace a given vehicle.  They essentially sell the carrier a report for around $75 that details the current market value of three comparable used cars.  Solera is the main competitor that has traditionally serviced this market.  Armada management has said in the past that their product has the advantage of using real-time data whereas Solera has used historical data.

CarCostCanada

CarCostCanada is a consumer service where in-market car buyers can purchase a dealer invoice report for a car that they are looking to purchase.  The report details the dealer’s wholesale cost of the vehicle plus any manufacturer or dealer incentives that exist for the vehicle.  By having all of this information consumers are able to obtain significant savings on their car purchase (the average customer pays only a 3% markup, which can obviously equate to thousands of dollars in savings) as well as a shorter and easier negotiating experience.

As part of the offering the company will also sell a customer lead to a local car dealership for around $25.  Over time the business model has shifted away from consumer fees charged for reports to advertising leads sold to dealers.  Over 75% of CCC revenues now come from dealer leads and I expect that this mix will continue to increase.

CarCostCanada was once a business with strong growth (around 2010) and had revenues peak around $1.7 million.  New competitors, however, entered the market with a business model focused on dealer leads over consumer fees, which pressured revenues and forced the company to accelerate the transition to a similar model.  Today CarCostCanada is down to only around $800k in revenues and has been declining at a low double digit rate for over five years.

Despite its struggles, management remains focused on stabilizing CarCostCanada and potentially returning it to growth.  One of their biggest initiatives in this regard has been to expand operations into Quebec, where almost 25% of the population of Canada resides.  In a rare press release for the company in June (https://www.fscwire.com/newsrelease/armada-data-partnering-leasebusters-qu107bec-manage-expand-carcostcanada-la-belle) they announced that they were partnering with LeaseBusters Quebec to drive traffic to CCC, and specifically cited “a four-fold increase in Québec-based traffic” and “a welcome boost to CarCostCanada’s time-tested B2B dealer lead generation program in the province, with member referrals to participating new car dealerships expected to vastly increase.”

Valuation

At $0.105 the company has a $1.9 million market cap and around $300k in cash and a tax receivable, giving the company an enterprise value of around $1.6 million.  TTM net income is ~$412k.  Q4 had $66k in revenues from Mister Beer associated with the wind down / disposition of assets, so to be conservative I have assumed there was zero cost against this revenue and subtracted another $66k in net income, thus yielding TTM net income ex-Mister Beer of $346k (I have similarly subtracted Mister Beer revenue/profits from all of the figures provided in the report earlier as well).  As a result, the ex-cash P/E is only around 4.6x.

Q4 was a strong quarter for the company last year as the Insurance Services business benefited from higher revenues due to the Fort McMurray wildfires.  I estimate that the company probably had an incremental $80k in revenues in the quarter.  As a result Q4 is likely to be a down quarter IMO, but between continued organic growth in the Insurance Services business (has been growing around 15%) and improved penetration into Quebec for CCC I think that TTM net income should be a reasonable proxy for FY2018 net income (the current fiscal year that just began in June).

It’s also important to note that the CEO owns 20% of the company and insiders as a whole own over 50% so management is very incented to grow the business.

Risks

• Decline in CarCostCanada revenues accelerate due to competitive pressures.

• Company loses a major insurance carrier customer.

• Any changes to the insurance market in Ontario or Alberta that resulted in fewer policies sold with the 43r waiver of depreciation.

Catalyst

• Increased revenues from CCC in Quebec hitting the income statement.

• Continued growth in Insurance Services should demonstrate to investors that now that they are focused on it this is an attractive growth business with significant operating leverage and profit potential.

• Eventual initiation of investor relations activities.  The company has remained under-the-radar thus far due to a lack of investor relations.