Junior Sector Investors Turn to De-Risked Cash-Flowing Stories

Etienne Moshevich |

Dear Readers,

Investors in the junior sector are most likely willing to take risks. Most of the investments on the TSX Venture exchange are in small, micro-cap mining companies or small oil companies hoping to drill a “gusher” which could take their stock from $0.10 to $10.  The micro-cap “one drill wonder” stories aren’t gaining much traction in the market these days. Most are having a tough time financing their projects and seem to be above the risk tolerance of most investors.

With the downturn in the junior market since late 2011, even companies with significant assets to back up their valuations are trading at heavy discounts. This is where the opportunity lies. New opportunities have come up offering investors the chance to get into companies that have been significantly de-risked, are generating substantial amount of cash, are constantly growing and still have massive upside potential. These are the sorts of investments we need to filter our money into. If you have an appetite for risk, here are a few stories you need to keep on your radar screen:

Parkit Enterprise (TSXV:PKT)

Parkit Enterprise (PKT.V) acquires income producing commercial real estate in the parking sector.  The company’s core asset is the Canopy Airport Parking facility servicing the Denver International Airport. Canopy will generate the company USD $1.3 million this coming year and is expected to continue increasing. According to their news release dated April 7, 2014, Parkit is now working on closing its second cash flowing parking facility for $18.5 million, and an additional five others identified for its first close portfolio. This will generate Parkit shareholders additional cash flow this year, with a plan to add additional assets and earn up to $50M in equity over the next five years.Parkit established a strategic alliance with Propark America, a leading private US owner/operator of over 425 parking facilities. Its access to deal flow gives Parkit its edge.

Not only that, but they already have a number of investment groups that are willing to finance the company’s acquisitionsFor example, for this next $18.5 million acquisition, a leading US institution will be underwriting 70% of it through debt while Parkit looks to raise the additional 30% through a separate L.P. fund which they have just established. This is only the second facility Parkit looks to close on out of a total of seven that they have already lined up as targets. Industrial Alliance Securities, one of the largest institutions in the country, continues to assist in raising the necessary capital. The company looks to build a portfolio of over $500 million in assets over the next three to four years similar to how Mainstreet Equity (TSX:MEQ) built its business. This is a proven model that has been successfully executed time and time again, and most importantly, it has been extremely lucrative to shareholders. Take a look at MEQ’s 10 year stock chart below:



TSX: MEQ began their business by acquiring revenue generating apartment buildings. Parkit is doing the same with parking lots. The most important thing here to note is the fact that Parkit is going after INCOME PRODUCING assets utilizing non-recourse financing. Unlike many junior companies on the exchange these days, Parkit is paying for real assets that produce cash flow. This isn’t a stock that will hit a positive drill hole and have the potential to pop 5-10X in a day, but I do foresee this stock having the potential to be growing steadily with an ultimate exit strategy that could be very lucrative to current shareholders.

Less Mess Storage (TSXV:LMS)

Less Mess Storage (TSXV:LMS) is in the business of operating and managing profitable self storage depots in Central Europe. To date, the company owns and operates four self-storage depots: two in Warsaw, Poland and two in Prague, Czech Republic, and operates another leasehold operation in Prague. Less Mess just went public under the symbol LMS.V and raised a total of $7 million in equity and $14 million in debt to acquire these assets.

Now that the acquisition is finally complete, the company will generate over 4 million in revenue and is expected to generate over 2 million in EBITDA this year, while currently sitting at below a $9 million market cap. The reason for the big disconnect is the market simply doesn’t know about it. The company just went public last week and hasn’t had a chance to brand their new identity yet and start beating the drums to the market. This is your opportunity to take a look at it first before anyone.

Less Mess purchased the five self-storage depot operation for $21 while Colliers International valued the business in 2010 at $40 million (that valuation was further updated by a local Vancouver group at over $50 million).  I believe the company looks to be very undervalued at these levels. LMS bought their assets at 11X 2013 pro forma EBITDA while similar companies in the space trade at 20X or higher. Since Collier’s initial valuation, revenues and profit margins have increased substantially and yet the business is being valued at less than a $9 million valuation in the market right now.... that's where the opportunity lies for investors. 

The potential on this play is massive. For example: the population of Toronto and Warsaw are approximately the same. Toronto has over 100 self-storage depots while Warsaw has two...and Less Mess bought both of them!  Think of it this way: everyone knows the self-storage business is a money making machine in North America but the fad is only getting started in Central/Eastern Europe as the economy is just starting to prosper.  The average home in Warsaw is 620 square feet and houses more than three people. As people are earning more money they are needing more room; and there is only one place people will look to store it. 

 If you believe in the future growth of both Poland and The Czech Republic, then here is your opportunity to get a piece of the action. Poland and Czech Republic's economy has been growing steadily over the last few years. Poland's GDP and retail sales growth has been the best performing in the EU and the number of self-storage depots has been growing at a tremendous rate over the last three years.

Not only is the company profitable and producing real cash flow, but Less Mess owns the land the storage depots sit on which de-risks the play and adds additional value to the proposition. This is a profitable, high margin and predictable business with plenty of upside potential. It's a venture listed deal where investors can put a real value on the assets to decide if the company is worth the investment. In this case I believe it is.

Make sure you keep an eye on both Parkit Enterprise (TSXV:PKT) and Less Mess Storage (TSXV:LMS) and stay tuned for further updates. These are the sorts of companies investors need to follow if they're looking for more of a risk on approach to balance their portfolio. These companies have real cash flow to back up their valuations but offer plenty of upside at the same time. Investors don't need to rely on a single drill hole to make substantial profits; they just need to seek the right opportunities the market seems to have overlooked.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AJINY Ajinomoto Co. Inc. ADR 19.36 0.00 0.00 129

Comments

Emerging Growth

PixarBio Corp

PixarBio Corp is a specialty pharmaceutical/biotechnology company focused on pre-clinical and commercial development of novel neurological drug delivery systems for post-operative pain.

Private Markets

Spotify

Spotify is a online music service offering providing digital content from a range of record labels and artists. Users can browse through the interface by artist, album, genre, playlist, record…

Cloudera

Cloudera offers enterprises a new data platform built on the Apache Hadoop open-source software package. Hadoop is a data-management platform that can consolidate data in a single repository for comprehensive…