Carmanah Shines Brightly

Saturday, November 1, 2003

Carmanah Technologies Corporation (CMH:TSX-V)

Current Price $1.20

Carmanah Technologies specializes in patented solar-powered LED lighting solutions for the marine, transit, aviation, roadway, railway and industrial worksite markets. The Company has more than 70,000 units installed in 110 countries.

From a recent research report by analyst Sara Elford of Canaccord Capital Corporation.


  • Reported Q3/F03 results in-line with expectations - revenue was up 43% to $2.3 million with breakeven EPS.
  • Acquisition of AVVA Technologies approved by shareholders effective October 1, 2003. No change to our F03 and F04 EPS estimates of $0.00 and $0.06 for now; introducing a F05 estimate of $0.10.
  • Increasing our target price from $1.25 to $1.50 and maintaining our BUY rating.

Strong Q3/F03 results in-line with expectations

Carmanah reported strong Q3/F03 financial results last week that were in-line with our expectations. Revenue increased 43.4% year over year to $2.3 million and net earnings rose 163.1% to $0.1 million. The company reported EPS of $0.00 in both quarters. A few points are worth noting:

The increase in revenue this quarter is a reflection of the early success of Carmanah's solar-powered LED lights in a variety of newer end markets - namely the aviation and transit segments (30% of the quarter's revenue). We expect this diversification strategy to continue to bear fruit in the quarters and years ahead.

Bearing in mind that its products are produced in Canada and priced in US dollars, we were pleased to see Carmanah's 54.1% gross margin, consistent with the year-to-date average.

All other cost items continued to be well contained, and in fact grew at a slower rate than revenue. We expect this trend to continue.

Carmanah had cash and equivalents of $1.4 million at the end of the quarter, working capital of $3.4 million, and negligible long-term debt. At the end of the quarter, Carmanah had a backlog of $1.1 million (recall that the company got a $1.6 million order for 300 bus shelter lighting systems for the city of London, England). That said, this isn't really a backlog-based business at this point. Most of Carmanah's orders are still relatively small and turn over quickly.

AVVA joined the fold effective October 1,2003

Carmanah received shareholder approval to acquire Alberta-based AVVA Technologies for roughly $2.9 million (3.1 million shares at a deemed price of $0.95). AVVA's financial results will be reflected in Carmanah's statements beginning in Q4 (the transaction has an effective date of October 31, 2003). AVVA has 25 employees.

AVVA designs, manufactures, and distributes LED illuminated (edge lit) signs for corporate identity, point of purchase sales, and architectural applications in North America. In 2002, AVVA entered the roadway market with LED-based, edge lit, street signs with some early success. The roadway market is one of Carmanah's targeted end markets.

In the nine months ended June 30, 2003 (September year end), AVVA generated revenue of $2.9 million and EPS of $0.00. We figure AVVA will do somewhere around $3.5 million in revenue for the full year and EPS of $0.00 (this suggests Carmanah paid roughly 0.8 times revenue).

The tentative game plan is to continue to sell AVVP's indoor products under the AVVA name, while all highways products (solar and non-solar versions) will be branded with the Carmanah name and sold by a common sales rep. Already, two new products using a combination of AVVA and Carmanah technologies are scheduled for release in Q4/F03.

Apart from the complimentary technical expertise of the two companies, AVVA also has excess manufacturing capacity in Calgary that will better satisfy the combined company's growth over the next couple of years.

Maintaining BUY rating

Based on Carmanah's financial results for Q3/F03 and the inclusion of AVVA's business effective October 1, 2003, we are increasing our revenue target for F03 from $8.0 million to $9.0 million. That said, we continue to expect Carmanah to deliver F03 EPS of $0.00.

For F04, we are increasing our revenue target from $15.0 million to $18.5 million (to reflect AVVA), but we have elected to leave our EPS estimate unchanged at $0.06 for the time being. For F05, we are introducing a revenue target of $25.0 million and an EPS estimate of $0.10.

We are maintaining our BUY rating and increasing our one-year target price from $1.25 to $1.50. This translates into a PIE multiple of 25 times and 15 times our F04 and F05 EPS estimates, respectively.

As proven by the blackouts in eastern Canada and the US this past summer, costeffective, solar powered, LED products like Carmanah's should be well positioned for continued growth in the years ahead.