Kelso Technologies Inc. (NYSE: KIQ) Kelso is an engineering product development company that specializes in the development, production, and distribution of proprietary service equipment used in transportation applications.
On May 9th, the company released interim financial statements and Management Discussion and Analysis for the three months ended March 31, 2018.
Key Recent Highlights:
- In addition to its rail tank car business, Kelso continues to diversify its longer-term strategic direction.
- The Company continues to make key investments in new products with the understanding that profits, assuming that they develop as planned, can provide reliable future financial growth from multiple transportation markets.
- The key focus of product development strategy is that the company develops new products that do not require lengthy regulatory approval processes, hence the elapsed time from the design-production process to sales and distribution activity is expected to be shortened significantly.
- As per management, these strategic plans have successfully delivered an array of new products for new target markets that include specialized truck tanker equipment, rail wheel cleaning systems, fuel loading systems, military applications, first responder emergency response kits and ASCS suspension systems for motor vehicles being used in rugged outback terrain applications. Most new products not requiring AAR approvals are completed or nearing completion.
On the flip side, the company continues to face challenges on the liquidity front, due to diminished cash flows from subdued sales in the past. Also, previous product development initiatives have been complex, expensive and company faced time overruns. It said, from a forward-looking perspective, the company’ business profile is expected to benefit from its focuses on products which have the minimum gestational period. Moreover, the reduction in operational and human resource expenses and the recent improvement in sales performance has allowed the Company to continue operations without access to additional external capital at this time. Furthermore, the Company still remains free of long-term debt.
Outlook over the near to medium term: After a prolonged recession in the rail tank industry Kelso is beginning to see an upswing in business activity in 2018. The Company’ main goal is to generate revenues from new marketplaces while continuing to improve sales performance from its proven rail tank car equipment. The primary focus is to reduce the risk of exposure to future economic downturns in rail tank car markets and to decrease the total dependence on revenues from specialized rail tank car equipment. Management believes that through its diversified strategic program the Company can put itself in a much better position to succeed financially in the future.
Sales Strategy for 2018:
While past recent results show some pressures on the markets in which it operates, Management remains confident that they are taking the right steps to position KIQ for long-term growth. Moreover, taking a forward-looking perspective, the company is expected to achieve further improvement in reducing expenses, further diversifying its business/market and repositioning KIQ for future success, with an eye towards driving shareholder returns over the long term. The company is expected to generate a healthy return on invested capital, has no debt and is servicing a huge market opportunity expected over the medium term.
Analysts tracking the stock see promise in the company and believe it will provide a robust fundamental appeal to the investors as well as momentum players trading the stock.
About the company: Kelso is an engineering product development company that specializes in the development, production and distribution of proprietary service equipment used in transportation applications. Their reputation has been earned as a developer and reliable supplier of unique high- performance rail tank car equipment for the handling and containment of hazardous and non-hazardous commodities during transport. All Kelso products are developed with emphasis on economic and operational advantages to customers while mitigating the impact of human error and environmental release. The Company offers specialized truck tanker equipment, rail wheel cleaning systems, fuel loading systems, military applications, first responder emergency response kits and suspension systems for motor vehicles being used in rugged outback terrains.
Product Profile at a Glance:
Improving Industry sentiments: The management highlighted that Canadian crude by rail exports are likely to grow from 2017 levels of 150,000 barrels per day to an implied 250,000 barrels per day in 2018 and rising to approximately 590,000 barrels per day in 2019. There is a lot of scheduled production capability growing in Alberta and limited ways to transport it as pipelines are at full capacity. Political battles over new pipeline construction continues in Canada, and new pipeline transmission capability may be a long way from utilization. This situation is expected to drive healthier rail tank car market opportunities for Kelso over the next several years.
Synergies that KIQ is expecting from improving industry sentiments: This stimulus in crude oil has rail tank car analysts expecting average production rates to settle between 12,000 and 20,000 new rail tank cars annually for the next three years. Based on these predictions Kelso expects to participate on approximately 5,000 to 7,000 rail tank cars annually. A key business dynamic is getting more pieces of Kelso’s tank car equipment adopted by the hazmat shippers. Once this adoption trend can be established and customers begin to specify its PRV with the One-Bolt Manway, VRV or BOV, sales can range from approximately $1,400 to in excess of $10,000 per tank car.
Liquidity and Capital resources: At March 31, 2018, the Company had cash on deposit in the amount of $503,710, accounts receivable of $873,227, prepaid expenses of $95,366 and inventory of $3,463,877 compared to cash on deposit in the amount of $411,223, accounts receivable of $653,445, prepaid expenses of $183,966 and inventory of $3,980,243 at December 31, 2017.
The working capital position of the Company, at March 31, 2018, was $3,406,617 compared to $3,628,911 at December 31, 2017. On March 31, 2018, the Company had no long-term interest-bearing liabilities or debt.
Key risk factors and potential stock drivers:
- Although Kelso has been able to quantify and demonstrate the effectiveness and economic rewards of its products, there is still a regulatory challenge to having customers specify multiple products on each rail tank car. AAR approvals continue to be a barrier for customer confidence and adoption.
- Capital management has been challenging due to diminished cash flows from poor sales over the past three years. Therefore, the company’ ability to manage its liquidity/financial flexibility, while improving its operating performance would continue to remain a key stock sensitivity factor.
- The meaningful outcome and impact of diversification and cost reduction strategies on company’ business and finance would be one of the most significant catalysts for the Company over the near to medium term.
- The company business risk profile is exposed to the economic scenario. Therefore, its ability to reduce the risk of exposure to future economic downturns in rail tank car markets and to decrease the total dependence on revenues from specialized rail tank car equipment would also be a critical driver.
- The company’s operational and market risk profile is exposed to risk related to competitive forces., and KIQ competes with numerous other players. Some of these companies have substantially greater operational and financial resources than KIQ.
- On Friday, July 13th, 2018, KIQ closed at $0.60, on volume of 614K shares exchanging hands. Market capitalization is $28.1 million. The current RSI is at 71.32
- In the past 52 weeks, shares of KIQ have traded as low as $0.32 and as high as $1.25
- At $0.60, shares of KIQ are trading above its 50-day moving average (MA) at $0.50 and above its 200-day moving average (MA) at $0.51
- The present support and resistance levels for the stock are at $0.49 & $1.48 respectively.
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