Initiation Report - SSC Security Services Corp. (SECU:TSXV,$2.68|BUY $4.50 TARGET) Deep Value Stock with Solid Roll-up Strategy

SSC Security Services Corp. is a physical and cyber security provider that we believe is trading at deep value levels. The Company has been unwinding its legacy canola streaming business and redeploying the capital into security businesses at <5x EBITDA. The Company is debt-free and the business model is capex-light, meaning SECU can continue with its capital allocation strategy via M&A, dividends and buybacks. The stock trades at 1.6x forward EBITDA compared to its peers that trade at 6.1x. We are initiating coverage on SSC Security Services Corp. with a BUY rating and a $4.50/share target price based on 7.0x 2023E EBITDA.

 

INVESTMENT THESIS

Misunderstood Turnaround Story

Over the last year, SECU has undergone a full restructuring, unwinding its legacy canola streaming business (Input Capital) and acquiring businesses in the physical/cyber security space. The Company started with $90M+ in cash from the legacy business and has rapidly allocated that capital, now sitting with $13-20M left to collect. We think the transition has gone relatively unnoticed by the market despite the Company being profitable and growing. Management aims for SECU to reach $200-300M in annual revenue with $15-25M in adjusted EBITDA within 3-5 years. With its cash and legacy assets making up the majority of its market cap, we think the stock is due for an aggressive re-rating.

 

M&A Strategy

SECU has completed three acquisitions thus far, SRG Security Resource Group in February 2021, Impact Security Group in July 2021 and Logixx Security in June 2022. SRG was acquired for $19.9M using half cash and half stock in February 2021, while beginning the unwinding of its legacy canola streaming business. SRG is a well-established and profitable physical and cyber security business based in Western Canada. SRG’s clients include government organizations, hospitals, airports, utilities and police forces (Figure 2). This business had a $20M+ revenue run-rate as of FYQ2 with 6% EBITDA margins and is expected to grow 10% YoY. SRG recently signed multiple cyber security contracts including a five-year multi-million dollar contract with a major Canadian utility provider. Impact Security Group was bolted onto SRG in July 2021 for $1.35M using cash; Impact Security has 215 employees.

Logixx Security was acquired for $23.95M in cash, implying approximately 3x trailing EBITDA. Logixx operates a physical security company with minimal overlap to SRG’s footprint. Furthermore, there are cross selling opportunities to introduce SRG’s cybersecurity products to Logixx customers. On a pro-forma basis, SECU would have generated $100M in revenue in 2021 with ~6% EBITDA margins. Given SECU’s pro-forma cash balance of $16.5M and the remaining $13-20M to collect from the legacy business, SECU has ample dry-powder to continue rolling up security businesses at 4-6x EBITDA.


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