MIND Technology: outlook still uncertain despite improved order levels
MIND technology (NASDAQ: SPIRIT, NASDAQ:MINDP) or “MIND”, formerly known as Mitcham Industries, is a provider of micro-capsule technologies and solutions for exploration, prospecting and defense applications in the oceanographic, hydrography, defence, seismic and security.
Strategic transformation and ambitious growth targets
The company recently exited its seismic land rental business following the strategic decision to focus on the marine industry with its subsidiary Seamap providing the lion’s share of segment revenue.
Last year, MIND Technology embarked on an ambitious growth plan with revenues expected to grow sevenfold over the next five years to $140 million with an EBITDA margin above 20%:
Unfortunately, the company hasn’t made much progress in fiscal 2022, with sales only increasing 9% to $23.1 million, while backlog is down 8%. to reach $13.1 million. Additionally, cash used in operating activities nearly tripled to a colossal $17.1 million.
The cash outflows were partially offset by proceeds of $6.2 million from equipment rentals and sales of business units.
Additionally, the company raised $14.7 million through the sale of additional 9.0% preferred stock.
The fourth quarter was particularly weak as the company experienced additional supply chain bottlenecks and delivery delays.
On the other hand, management pointed to strong business activity and recent increases in backlog levels:
Inquiries and tenders remain robust. As we announced last week, we have recently received significant new orders and have other pending orders that we are very confident of receiving. Combined with our backlog of approximately $13.1 million as of January 31, we estimate that our current business volume exceeds $23 million. This is significantly higher than what we have seen historically and of course does not include many other prospects that we are actively pursuing. Based on these factors, we expect revenue from continuing operations in fiscal 2023 to exceed fiscal 2022 and believe the improvement will be felt from the first quarter.
At this point, there appears to be only one analyst estimate for fiscal 2023, with sales expected to nearly double year-over-year to $45 million, which at least at in my opinion, seems unrealistic given the ongoing supply chain and logistical challenges.
During the conference call, management nevertheless provided a rather optimistic outlook for this financial year:
While it is evident that supply chain challenges and inflationary pressures remain a factor, we are encouraged by what we are seeing in terms of orders across our business. There will always be some level of microeconomic uncertainty, we believe that with the continued interest, customer optimism and quote requests we have received to date, we are well positioned to significantly increase our revenues in fiscal year 2023.
Given the possibility of supply chain disruptions, the timing of orders may be pushed back. But it is important to note that these commands do not disappear. We have a strong backlog and we are seeing an increase in customer engagement. After taking all of this into consideration, we are confident that fiscal year 2023 will be much better than fiscal year 2022.
We will always remain vigilant in our cost management and we will best overcome supply chain and logistics challenges should they arise. We are optimistic about the opportunities ahead for MIND throughout the year and look forward to achieving our long-term goals and generating significant shareholder value.
Additionally, management remained optimistic that projected growth would be self-financing, but with only $5.1 million in cash at the end of January and no additional sales proceeds from old rental equipment, I m ‘d expect MIND to require up to $10 million in additional capital this year.
Although the company has market offering programs in place for its common and preferred shares, selling more shares will not be an easy task, with preferred shares currently yielding 13.5% and common shares changing hands around $1.25 with medium trading. volume of only 136,000 shares.
After a disappointing 2022 financial year, management expects “significant“growth and”Much improvedresults this year.
Despite the positive outlook, I’m hesitant to keep my “to buynote on the shares given management’s less than stellar execution record, exorbitant analyst expectations and the likely need to raise additional capital this year.
With stocks down more than 50% since I started hedging 14 months ago, it’s time to apologize for a bad call.