Boomerang Tracking Inc

Company Valuation Report

Valuation Assignment – Boomerang Tracking Inc.

Prepared For:

Prof. Philippe Gregoire

Corporate Finance

BUS 3019

Prepared By:

Andrew Bishop, # 0121212

Mike Gale, # ??????

Tanner Henderson, # ??????

Nick McCart, # ??????

Matt Lannon, # 0136375

Gabe Nardone, # 0098625

Boomerang Tracking Inc. 10

Company Valuation Report

Table of Contents

Company Description 1

Business of the Company 1

Company Strategy 2

Management Assessment 2

Assumptions 3

Income Statement 3

Table 1- Determination of Market Share 3

Table 2 – Subscriber Projections 3

Projected Income Statement (10 Years) 5

Balance Sheet 6

Projected Balance Sheet (10 Years) 7

WACC Assumptions 8

CAPM: 8

Table 3 – CAPM – Cost of Equity 8

Table 4 – Free Cash Flow Calculations 8

Share Price Calculations 9

Summary 9

Company Description

Boomerang Tracking is a Montreal based corporation that markets and distributes Boomerang tracking devices, which are proprietary products using technology patented by the company. The device is professionally installed by a bonded technician in one of over 100 locations on an automobile. If the vehicle is stolen the device is activated. With the use of cellular technology the company is able to triangulate the vehicles position and notify the authorities. The company has enjoyed profitable growth over the past five years with revenues growing an impressive 2900%. The company was founded in December 1995 by the two inventors of the boomerang, Andre Boulay and Paul-Andre Savoie. They partnered with Peter Lashchuk, then the president of Cellular One – a privately held chain of cellular retail stores, and Robert Nelson, the president of Automobility Distribution Inc. – a distributor of car alarms and car starters across North America, to produce and distribute the Boomerang Product. The company went public and listed on the Alberta Stock Exchange in 1998 and now is listed on the TSX under ticker symbol BMG.

Business of the Company

The device is superior to any other in the asset tracking device on the market in that it is hidden in the vehicle and its presence is virtually undetectable by thieves. Competing tracking systems that use satellite technology require what is called “line of sight” from the sky and cannot receive the signal from the antenna if the asset is underground or when in a shipping container. A thief can render the antenna itself useless simply by detaching it from the asset. The Boomerang device is hidden in the vehicle and is virtually impossible to locate by thieves and it can track assets even if they are underground, in a shipping container or in a cellular dead zone. The boomerang device is capable of sending a signal from these, what were normally, inaccessible locations; allowing the company to track these assets more effectively due to its proprietary technology. It is these efficiencies that have allowed the company to boast a 95% recovery rate.

The company’s business model is simple. It generates revenues from these areas; product sales, monitoring revenues and tracking revenues. The product sales consist of the boomerang device itself, which sells for a couple hundred dollars depending on the model. The tracking revenues are what the company charges when the vehicle is stolen to actually track the vehicle, usually around $250-500 and the insurance company covers this. The reason the company charges this amount is because it actually sends a company vehicle to follow the stolen vehicle until police arrive. The final and most lucrative of all the revenue streams are the reoccurring monthly monitoring fees. The company enjoys a subscriber rate of over 150,000 users and that number grows by about 10,000 users quarterly. When the company signs up a new customer it receives payment for the device and the full year or multi year contract up front.

Over the last two years the company has been implementing advanced systems throughout their organization utilizing the JD Edwards platform to support the extensive supplier network and to help manage their customer’s increasingly sophisticated demands and requirements. This system will allow the company to grow its subscriber base exponentially without significant reinvestment.

The company currently operates in Quebec, Ontario and British Columbia. It has recently received Federal Communications Commission approval in the United States and has opened the head office of its wholly owned American subsidiary in Orange County, California. It is currently in the process of finalizing distribution agreements for the huge opportunity that is the US market.

Through it’s investment over the years in research and development, information and relationship building with insurance companies, Boomerang Tracking has positioned itself to grow significantly over the intermediate term.

The company has located over $159 million in assets to date; yet the company is valued at only approximately $49 million. One might think that a company that can save insurance companies $159 million in expenses and can be bought for $48 million may represent an arbitrage opportunity, at least to the insurance companies.

The stolen vehicle market in Canada is approximately $1 Billion and continually growing, and recently jumped to $8 billion in the United States. This company has all but developed a solution for auto theft, or 95% of it. Once it can create some leverage for itself with the insurance companies, its valuation will have to approach the amount of the expended by them to reimburse clients for vehicles that are stolen.

Company Strategy

The company’s strategy is to provide a cost effective and reliable solution for auto theft, which it can market and sell to insurance companies who will in turn pass on savings to consumers who use the device in their vehicles. While some insurance companies will mandate the device be put in higher end vehicles, it is hard to develop a relationship with them; so the company also employs end user promotion and awareness. Through concentrating its efforts on development of new products and markets, the company is looking to maintain its leadership position in the stolen asset tracking industry as well as maintain the competitive advantage with respect to its leading edge products it enjoys as a result of those efforts.

In the end, the company’s business model is a profitable one in that when it increases its subscriber base each year the lucrative monitoring revenues are not offset by many variable expenses; which help to bolster the bottom line and the company’s growing cash portion.

Management Assessment

In light of the steps that management has taken towards growing this company organically and managing its cash effectively through investment in research and development and a technological platform that will allow the company to cater to a significantly larger pool of customers, it is clear that management’s interests are aligned with the shareholders. As revenues have grown exponentially over the last few years, management has sacrificed some of that growth with respect to short-term profits in order to perfect its product, attract the right talent and create the infrastructure that would ensure long-term growth and profitability.

Assumptions

Income Statement

Revenues - based on number of subscribers. Multiplied the number of subscribers by the cost of the service per year of $129.00.

Number of subscribers – based on our target market share being attained over a ten year period. We projected a market share in 2014 of 30% in Canada, and 10% in the United States (in the Luxury Car market). The growth rate of new vehicles per year of 3.81% was projected as being constant throughout the next ten years. Luxury cars represent 8.9% of the total number of cars in the Canadian market, and 17.4% of total cars in the US market.

Table 1- Determination of Market Share

Table 2 – Subscriber Projections

*Increases in the subscriber base follow a logarithmic pattern, similar to the product life cycle. In ten years it is projected that the growth in new subscribers will begin to fade.

Expenses – are a constant percentage of sales.

Amortization – is 27% of fixed assets.

Research & Development – moves from 4% to 6% of sales over the 10 year period.

Net Interest Income – 2.3% of short term investments or the risk free rate.

Income tax Expense – 37% of EBT has been their historical tax rate.

Dividends – dividend payout ratio is 20% and the dividend grows at 10% each year. The company will begin paying dividends in 2004. Until this point in time they had opted to not distribute dividends.

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Company Valuation Report

Projected Income Statement (10 Years)

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Company Valuation Report

Balance Sheet

Cash – is 12.56% of sales and was also used as the plug variable.

Short-Term Investments – 37% of revenues and net assets were funded through this account as well dividends were paid from this account.

Accounts Receivable – begins at 9% of revenues and falls to 6% because of good cash management.

Income tax Recoverable – 3% of sales.

Inventory – begins at 6.5% of sales and falls to 5.5%.

Prepaid Expenses – 1% of sales.

Future Income Taxes – will be consumed within the next two years.

Fixed Assets – remains a constant 20% of sales.

Patents and Trademarks – assumed a constant $200,000 to maintain these.

Accounts Payable and Accruals – constant 15% of sales.

Deferred Revenue – begins at 38% of sales based on the current level and rises to 40%.

Capital Stock – remains at $770,000, we assume that they will not have to issue equity in the future.

Retained Earnings – Is the sum of current RE plus yearly earnings less dividends.

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Company Valuation Report

Projected Balance Sheet (10 Years)

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Company Valuation Report

WACC Assumptions

CAPM:

Risk Free Rate – 10 year 4.93%

Beta – regressed the small cap index vs. the TSX to get our beta.

Liquidity Premium – we added a 2% because the volume would not allow for any one person to hold a large amount of stock.

Market Risk Premium – used 7% as per best practices article recommendation.

No Debt – the company has no debt so the WACC is 12.07%

Table 3 – CAPM – Cost of Equity

Free Cash Flow – the formula was based on NOPAT minus change in net operating working capital minus change in long term operating assets.

Table 4 – Free Cash Flow Calculations

Share Price Calculations

Free cash flows have been discounted using the previous calculated WACC of 12.07%. The terminal value was based upon a growth rate of 0.5% to infinity and was calculated using the following formula:

Where: TV = Terminal Value

WACC = 12.07%

g = Growth Rate = 0.5%

The price per share was calculated by dividing the present value of the future cash flows by the total amount of shares outstanding. The result was a share price of $1.51 and would indicate that the shares are currently overvalued.

Summary

After an extensive free cash flow analysis we found the share value lied below its current trading price. This was largely the result of extensive investments in Long Term Operating Assets in the first seven years. Such investments are necessary to ensure a strong enough infrastructure to support the growth in subscriber base in the first few years. These investments will generally be associated with the creation of regional headquarters across Canada and in the United States.

The capital structure of the firm is assumed to remain constant throughout the projections, but it can be assumed that if the firm were to take on debt, they may be able to expand more rapidly, and penetrate the American market with greater speed.

We used a very conservative growth rate to determine the terminal value (0.5%), however, when discounted we found that the current share price is generally unresponsive to this value (varying growth rates from 0.5%-3%).

Overall, we feel that Boomerang lies below its current share price and would therefore not be a recommended purchase. There exists a number of risks associated with this firm which hinders its long-run growth potential. One of the greatest risks that Boomerang faces is its ability to expand at a rate quick enough to keep pace with the demand of its product. It is important that the installation of the Boomerang device be accomplished as quickly as possible in order to drive out the possibility of giving any competing firms the ability to develop a technology that would compete with the Boomerang product.

One other factor that must be considered when looking at the future profitability of Boomerang is its cash management. In the coming years they will see a large stream of steady revenues that are inherent with their subscriber base and this will grow to a substantial amount. Whether they are prepared for and have planned for this large sum will begin to show in the coming years. The decisions of management in regard to the distribution of dividends, the degree of investment into long term assets, as well as short term investments will all come into play down the road.

A major flaw in the valuation model revolves around the fact that the firm often receives payment in advance for their monitoring services (i.e. Deferred Revenues), and these are not taken into account as cash flows. If a portion of these were included as free cash flows (total receipts less projected expenses) and are thus available for distribution to shareholders the results would be very different. It would be almost impossible to project what percentage of these revenues would be available as free cash without knowing the average length of the contracts that is associated with these deferred revenues. Ultimately, this portion of potential free cash could have a significant impact on the share price of this firm.

Overall, this firm has a large growth potential and could prove to be a worthy investment (as a long-term investment) if an investor is willing to accept the inherent risks of investing in such a firm. If, however, the investor is risk averse, this would not be a recommended investment.

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