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Research Note - SSC Security Services Corp. (SECU:TSXV,$2.83|BUY $4.50 TARGET) Strong Q3 with Partial Contribution from Logixx

Yesterday after market close, SSC Security Services Corp. reported Q3 financial results. SECU slightly beat our expectations on revenue but missed on profitability due to higher competitive pressures in Ontario. The quarter included a one-month contribution from Logixx (supporting 201% YoY revenue growth), and as such, we are expecting another step-change upward in Q4 (Figure 2). We would like to reiterate our conviction in the SECU management team, its M&A strategy, and the resiliency of its business model, while the stock continues to trade at deep value levels.

Highlights from the quarter include:

  • Revenue of $11.8M (+201% YoY, +115% QoQ) vs. our estimate of $11.7M. We estimate that Logixx represented ~$6M in revenue this quarter, implying approximately 5% QoQ organic growth.

  • Gross margin of 16% vs. our estimate of 18% and 18% in Q2.

  • Adjusted EBITDA of $0.4M (3% margin) vs. our estimate of $0.7M (6% margin) and $0.2M (4% margin) last quarter. This equates to $0.02/share compared to $0.01/share last quarter. The miss was driven by lower margins in Ontario for Logixx due to competitive pressures.

  • SECU ended the quarter with a cash balance of $15.3M, loans and mortgages receivable of $4.4M, and legacy contract assets of $8.0M.

Acquisitions: SECU completed the acquisition of Logixx Security on June 1st, contributing one month of financials to today’s print (~$6M assuming Logixx’s $75M run-rate). 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 and does not have a cyber security offering yet, thus providing cross selling opportunities. We are expecting SECU to hold back on M&A over the coming quarters as it focuses on integrating Logixx.

Returning Capital: During the quarter, SECU repurchased 83K shares at an average price of $2.58/share ($214K). The Company has now repurchased 670K shares fiscal YTD, equating to $1.9M. SECU also declared a cash dividend of $0.03/share, representing an annual dividend yield of 4.1%.

20220817 - M Partners - SECU - Q3 Financials
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