Tuesday, 1 May 2007

Brainhunter - The $500 Million Company!

Click on the slide below to enlarge
A representative of The Howard Group recently came off the road with CEO John McKimm after two days of meeting with members of the Montreal and Ottawa investment communities.

The trip was part of the plan to ramp up the public profile of the company in context of Management's belief that Brainhunter is now into an extended period of positive growth and that BH is severely undervalued when measured against its peers.

When referring to the EBITDA/Revenue Momentum charts, it's clear that BH is on the right track and is now driving organic growth on the heels of 15 acquisitions over the last 6 years. F06 (Sept. 30) sales of $166 million showed an organic growth rate of 26% over F05. Of note, Brainhunter is currently on an annualized organic growth rate of 67% in F07. It was stated that Management is in agreement with a Catalyst report that calls for revenues in excess of $220 million in F07 and EBITDA of $8.25 million ($0.17/share -basic).

Brainhunter at $0.75 is only trading at slightly more than 4 times projected EBITDA/share, which is less than half of its peer group in the professional contract staffing area.

What was stressed was the belief that Brainhunter could get to $500 million in sales within 2 years through a combination of organic growth and a couple of key acquisitions. The question became, "what would that do to EBITDA on the premise organic growth continues on the current path?" The answer isn't simple and straight forward as one has to estimate how much business will come from staffing versus the technology side that BH is now pushing. However, using even a rate of 7% for EBITDA, a $35 million pops up, with each 1% margin jump adding a further $5 million.

A 7% EBITDA margin is about double what is projected for F07 but it's also the first year that the company has solely focused on organic growth rather than acquisitions. As such, it has built a lot of strength and moved up the status ladder with its larger clients in government, banking and a myriad of other large corporations.

Another point that was stressed is that BH is sitting on $288 million in backlog (signed contracts running to term over the next 18 months) and $300 million in expected renewals.

Back on the point about acquisitions, Mr. McKimm was to the point that he doesn't want to raise capital at the current stock price and would be much more comfortable going to the market in the $1.75 range.

The next leg of the public campaign will see Mr. McKimm in Boston and New York in the latter part of May.