Siddharth Rajeev, B.Tech, MBA, CFA Analyst Daniel ... - Baystreet.ca

Siddharth Rajeev, B.Tech, MBA, CFA 

Analyst 

Daniel Iwata, BA 

Research Associate 

May 15, 2013 

IWG Technologies Inc. (TSX-V: IWG) – Revenues rise by 25% on strong unit sales and service growth 

Sector/Industry: Aerospace Products and Services 

www.iwgtech.com 

Market Data (as of May 15, 2013) 

Current Price 

C$0.13 

Fair Value 

C$0.40 

Rating* 

BUY 

Risk* 

3 (Average) 

52 Week Range $0.05 - $0.15 

Shares O/S 

37.70 mm 

Market Cap 

C$4.90 mm 

P/S (forward) 0.7x 

P/E (forward) 5.3x 

P/B 1.6x 

YoY Return 116.7% 

YoY TSX-V -27.1% 

*see back of report for rating and risk definitions 

Highlights 

• Q2-FY2013 revenues increased 25% YOY, from $1.46 

million to $1.84 million. Revenues in the first six months of 

FY2013 were $3.19 million, up 17% YOY. The strong 

growth in revenue was due to growth in unit sales and 

service revenues. 

• Gross margins in Q2-2013 were 54%, an increase over Q2- 

2012’s 50%. 

• G&A expenses continued to drop YOY in Q2-2013. 

• Net income in Q2-2013 was $0.27 million (EPS: $0.01), up 

from Q2-2012 of $0.05 million (EPS: 0.001). 

• IWG’s balance sheet ratios continue to be significantly 

stronger than the Aircraft systems, components and 

equipment industry averages. 

• IWG shares are up 117% YOY versus TSX Venture’s 

negative 27%. 

• We have raised our earnings estimate for FY2013 to $0.93 

million (EPS: $0.025), from our previous forecast of $0.85 

million (EPS: $0.022). 

Financial Summary (YE Sept 30) 

(C$) 2010 2011 2012 2013E 2014E 

Revenue 4,381,894 4,431,148 6,014,067 6,726,500 7,306,750 

Gross Margin 54.35% 57.32% 53.00% 53.00% 55.00% 

Net Income 88,221 323,406 526,310 933,910 1,259,783 

EPS (basic) 0.00 0.01 0.01 0.02 0.03 

Cash 1,122,172 719,937 923,973 1,647,194 2,753,335 

Assets 3,350,627 4,040,614 4,458,266 5,269,186 6,402,438 

Debt to Capital 1.05% 20.55% 14.00% 6.75% 1.53% 

ROE 3.11% 11.33% 17.20% 24.43% 25.24% 

ROIC 6.56% 11.99% 22.65% 28.95% 35.18% 

International Water-Guard Industries Inc. (“IWG”), based in Burnaby, BC, Canada, focuses on the design, manufacture, sale, and service of 

aircraft potable water treatment equipment and systems. IWG has been selling its products to corporate, VIP and military transport 

manufacturers/operators around the world since 1982. 

© 2013 Fundamental Research Corp. “10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com 

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Page 2 

Q2 Revenues 

Up 25%YOY 

Q2-2013 revenues were $1.84 million versus $1.46 million in Q2-2012, reflecting YOY 

growth of 25%. Management attributed the increase in revenues to increased sales of water 

heaters and the IWG-A6 units, and service revenues. 

As mentioned in our previous reports, we feel that the IWG-A6 units will continue to lead 

the growth in revenues due to the increased production of the Gulfstream G650. We also 

estimate strong growth for the water heaters. Management says unit sales grew by 17% in 

the first 6 months of 2013, and service revenues were up 26%. Revenue growth in the first 6 

months was 16%YOY, higher than our expectations of a 12% increase for the entire 

FY2013. Despite revenues being higher than expected, we do not expect similar revenue 

growth in the second half, which typically generates a higher percentage of revenues. We 

have maintained our revenue forecasts for FY2013, and FY2014, at $6.73 million, and 

$7.31 million, respectively. 

Gross 

Margins 

Improving 

Gross margins in Q2-FY2013 were 54%, a strong improvement over the 50% in Q2- 

FY2012. The increased Q2-FY2013 margins raised the 6 month FY2013 gross margin to 

52% (Q1-2013 margins were 49%). We feel that gross margins will remain around the 53% 

mark in subsequent quarters and are maintaining our estimate. 

Margins 2011-Q2 2012-Q2 2013-Q2 Industry Avg 

Gross 51.2% 49.6% 53.7% 15.3% 

EBITDA 2.4% 7.6% 24.7% 11.2% 

EBIT 1.2% 4.8% 24.7% 7.7% 

EBT 0.3% 3.6% 24.2% 

Net 2.6% 3.6% 14.5% 4.6% 

Expenses 

Decreasing 

EBIT and net margins also showed strong increases as expenses decreased YOY in Q2- 

FY2013. Selling expenses, research and development (R&D) and general and administrative 

(G&A) expenses were all lower than Q2-2012, as shown below. 

Expenses / Sales 2011-Q2 2012-Q2 2013-Q2 

Selling Expenses 6.7% 6.9% 4.8% 

R&D 11.2% 13.7% 8.7% 

G & A 30.6% 21.4% 15.6% 

Stock Option Compensation 0.3% 0.0% 0.0% 

Total 48.9% 42.0% 29.1% 

Selling expenses decreased by 12% in Q2-2013 over the same period in FY2012. For the 

first 6 months in FY2013, despite the growth in revenue, selling expenses remained almost 

identical to FY2012, decreasing by just $2,000. Management says the decrease in selling 

costs was the results of not attending any trade shows. As the timing of trades shows do not 

always fall at the same time every year, we anticipate this expense will be realized in a 

subsequent quarter. We anticipate that sales costs will rise in subsequent quarters and have 

maintained our previous estimate of selling expenses increasing by 18%YOY in FY2013. 

R&D costs were down 20% for Q2- 2013 over Q2-2012. R&D costs have decreased by 27% 



Page 3 

YOY in the first 6 months of FY2013. We mentioned in our Q1-FY2013 report that the 

decrease was due to cash received in a development partnership, and capitalized research 

costs. We feel that R&D is in line with our FY2013 estimates. 

G&A decreased by 9% YOY for Q2-FY2013 over Q2-FY2012. Management says that the 

reduction in costs was due to FY2012 (acquisition and new product releases) being higher 

than normal and feels that G&A will not change significantly from current levels. In our 

previous report, we anticipated G&A to rise with increasing sales and forecasted an increase 

of 12% for FY2013. G&A is down 10% in the first 6 months of FY2013, and we have 

revised our current G&A estimate to reflect the decrease, anticipating that G&A will be 10% 

lower than our anticipated FY2013 figure. We have also lowered our FY2014 G&A 

estimate. 

Net Income 

up 71%YOY 

in H1-2013 

With the higher revenue, increased margins, and decrease in operating expenses, IWG posted 

Q2 EBIT of $0.45 million, a significant increase over the $0.07 million in Q2-2012. For the 

first 6 months of FY2013, EBIT was $0.63 million, up 181%YOY. 

For Q2-FY2013, due to currency fluctuations, there was a foreign exchange loss of $83,256, 

compared to a gain of $38,864 in Q2-FY2012. Despite this, net income was $0.27 million 

(EPS: $0.007) for Q2-FY2013, compared to Q2-FY2012’s $0.04 million ($0.001). For the 

first 6 months of FY2013, net income was up 71% to $0.37 million (EPS: $0.01) million. 

Due to revisions to our G&A expense estimates, we have raised our forecasted earnings 

for FY2013 to $0.93 million (EPS: $0.025), from $0.85 million (EPS: $0.022). For 

FY2014, our revised forecast is earnings of $1.26 million (EPS: $0.033), up from $1.05 

million (EPS:$0.028) 

Free cash flows for the first 6 months of FY2013 were $0.07 million. Although funds from 

operations increased substantially in H1-2013, a significant increase in accounts receivable 

decreased cash from operations. Accounts receivable rose due to sales late in the quarter, 

which management expects should be collected in the next quarter. 

2011- 6 mo 2012-6 mo 2013- 6 mo 

Cash Flow from Operation 191,034 113,299 225,106 

Cash Flow from Financing (137,814) (57,668) (67,924) 

Cash Flow from Investing (61,628) (93,896) (154,272) 

Net Change in Cash (8,408) (38,265) 2,910 

FCF 129,406 19,403 70,834 

Strong 

balance sheet 

As the table below shows, IWG’s balance sheet ratios continue to be significantly 

stronger than the industry averages. Their EBIT interest coverage rose due to strong EBIT 

and decreasing interest expense. 



Page 4 

Liquidity Analysis Q2-2011 Q2-2012 Q2-2013 Industry Avg. 

Working Capital $2,184,285 $1,795,605 $2,375,383 

Current Ratio 7.16 4.32 3.95 1.90 

Debt / Capital 0.7% 10.0% 11.6% 27.6% 

EBIT Interest Coverage Ratio 8.29 4.04 48.15 8.60 

Stock Options 

and Warrants 

Valuation 

and Rating 

The company currently has 1.78 million options outstanding with a weighted average 

exercise price of $0.10. Currently, all the options are ‘in-the-money’ – we estimate the 

company can raise up to $0.17 million if all these options are exercised. 

The aircraft systems, components and equipment average (trailing) Enterprise Value (EV) to 

Revenue, and EV/EBITDA ratios are 1.0x and 8.4x, versus IWG's forward ratios of 0.7x and 

3.0x, respectively. 

Our DCF valuation increased from $0.36 to $0.37 as we lowered our G&A expense 

estimates. We maintain our BUY rating and fair value estimate at $0.40 per share. 

Risk 

The following risks, though not exhaustive, will cause our estimates to differ from actual 

results: 

• Growth of the company is highly dependent on the overall health of the aerospace 

industry 

• IWG’s revenues are dependent on aircraft delivery rates and are subject to industry 

cycles and customer adoption of its products. 

• A significant portion of revenues is non-recurring. However, it is worth noting that 

IWG has been getting repeat business from several clients. 

• The company has yet to break into the commercial aircraft sector, the largest market 

in the aerospace industry. 

• Foreign exchange fluctuation risks: Most of IWG’s sales are in US dollars. 



Page 5 

Appendix 

STATEMENTS OF OPERATIONS 

(in C$) 2011 2012 2013E 2014E 

Sales 4,431,148 6,014,067 6,726,500 7,306,750 

COGS 1,891,372 2,809,043 3,161,455 3,288,038 

Gross Profit 2,539,776 3,205,024 3,565,045 4,018,713 

Expenses 

Selling Expenses 384,260 399,951 470,855 511,473 

Research&Development 428,035 719,089 605,385 657,608 

General & Administration 1,152,063 1,026,180 923,562 992,829 

Stock Option Compensation 8,606 - 67,265 73,068 

Foreign exchange loss(gain) 64,726 (118,924) 

EBITDA 502,086 1,178,728 1,497,978 1,783,736 

Amortization 82,476 193,659 197,350 189,599 

EBIT 419,610 985,069 1,300,628 1,594,137 

Interest & Bank Charges 31,455 48,865 30,584 19,408 

Earnings from operations, before undernoted 388,155 936,204 1,270,044 1,574,729 

Share restructuring costs (95,584) 

Government Assistance 

Gains on settlement of notes and accounts payable - - - - 

Gain on sale of commerical division assets - - - - 

Foreign Exchange (102,657) 

Wite-down of assets and costs - - - - 

Extraordinary (294,666) 

EBT 292,571 641,538 1,167,387 1,574,729 

Taxes/(Income Tax Recovery) (30,835) 115,228 233,477 314,946 

Net Earnings for the period 323,406 526,310 933,910 1,259,783 

EPS 0.0085 0.014 0.0248 0.0334 



Page 6 

BALANCE SHEETS 

(in C$) 2010 2011 2012 2013E 2014E 

Assets 

Cash 1,122,172 719,937 923,973 1,647,194 2,753,335 

Accounts receivable 880,150 884,411 909,236 1,079,335 1,172,442 

Inventory 569,976 624,115 897,801 859,181 893,582 

Prepaid Expenses 75,696 88,924 66,197 69,560 72,345 

Future Income Tax 70,000 - - - 

Current Assets 2,717,994 2,317,387 2,797,207 3,655,270 4,891,704 

LT Receivables 94,000 102,164 102,164 102,164 

Equipment & Furniture 213,363 222,913 226,797 229,689 233,356 

Deferred Dev Costs and foreign exchange loss 178,170 334,641 439,946 429,381 360,451 

Future income tax assets 241,100 473,735 358,507 358,507 358,507 

Intangibles 597,938 533,645 494,175 456,255 

Total Assets 3,350,627 4,040,614 4,458,266 5,269,186 6,402,438 

Liabilities & Shareholders' Equity 

Accounts Payables & Accrued Liabilities 409,381 520,753 594,434 632,291 657,608 

Demand / Factoring Loan - - - - - 

Customer Deposits, Bank and Shareholder's loan 

Loans and borrowings 19,231 214,769 228,244 224,915 76,481 

Current portion of notes payable - 

Current portion of royality provision - 

Current Liabilities 428,612 735,522 822,678 857,206 734,088 

Convertible Debentures 

Loans and borrowings 11,566 508,513 312,699 87,915 11,434 

Royality provision - - 

Notes and Loans payable - - - 

Shareholder's Equity 

Share Capital 8,103,112 2,496,322 2,496,322 2,496,322 2,496,322 

Contributed surplus 227,528 2,868 2,868 70,133 143,201 

Deficit (5,420,191) 297,389 823,699 1,757,609 3,017,392 

Total Liabilities & Shareholders' Equity 3,350,627 4,040,614 4,458,266 5,269,186 6,402,438 



Page 7 

STATEMENTS OF CASH FLOWS 

(in C$) 2011 2012 2013E 2014E 

Operating Activities 

Net earnings for the period 323,406 526,310 933,910 1,259,783 

Items not involving cash 

Income tax recovery (30,835) 115,228 

Gain on liabilities and sale of commerical division 

Book value of assets sold 

Unreallized foreign exchange and other gains 11,118 (33,987) 

Compensation related to stock option plan 8,606 - 67,265 73,068 

Write-downs 

Interest accrued(on NP, on shareholer loan) 31,455 48,865 

Amortization and equipment write-down 82,475 193,659 197,350 189,599 

Change in value of forward contracts 197,145 (227,042) 

623,370 623,033 1,198,525 1,522,450 

Changes in non-cash operating working capital 

Accounts receivable (128,424) 27,072 (170,099) (93,107) 

Inventory (27,011) (273,686) 38,620 (34,401) 

Prepaid expenses (13,228) 22,727 (3,363) (2,785) 

Accounts payable and accrued liabilities (55,609) 240,662 37,857 25,317 

Customer Deposits - - - - 

Provisions 

(224,272) 16,775 (96,985) (104,977) 

Cash from from (used in) operations 399,098 639,808 1,101,540 1,417,473 

Investing activities 

Purchase of furniture and equipment (29,256) (22,627) (22,627) (22,627) 

Product development costs incured (185,270) (170,106) (127,580) (63,790) 

Acquisition Costs - - - 

Purchase of Intangible assets (360,750) 

Proceeds on sale of commerical division 

Deferred Development Costs 

(575,276) (192,733) (150,207) (86,417) 

Financing activities 

Proceeds(repayments) of demand loans (4,146) (106,069) - - 

Proceeds (repayments) of payables and leases (17,923) (16,688) (228,113) (224,915) 

Repayment of royalties liability (88,642) (120,281) - - 

Convertible debenture issued 

Issue of common share for cash - - - 

Purchase of capital stock (115,346) 

(226,057) (243,038) (228,113) (224,915) 

Increase (decrease) in cash (402,235) 204,037 723,220 1,106,141 

Cash beginning of period 1,122,172 719,937 923,974 1,647,194 

Cash end of period 719,937 923,974 1,647,194 2,753,335 



Page 8 

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk 

Hold – Annual expected rate of return is between 5% and 12% 

Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk 

Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. 

Fundamental Research Corp. Risk Rating Scale: 

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. 

The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is 

conservative with little or no debt. 

2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive 

to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash 

flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 

3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive 

to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and 

coverage ratios are sufficient. 

4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a 

turnaround situation. These companies should be considered speculative. 

5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. 

Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. 

These stocks are considered highly speculative. 

Disclaimers and Disclosure 

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and 

opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. 

There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares 

of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject 

company. Fees were paid by IWG to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence 

including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts 

may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are 

protected contractually. To further ensure independence, IWG has agreed to a minimum coverage term including four updates. Coverage can not be unilaterally 

terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access 

users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings and are available at 

www.investars.com. 

The distribution of FRC’s ratings are as follows: BUY (67%), HOLD (8%), SELL (5%), SUSPEND (20%). 

To subscribe for real-time access to research, visit http://www.researchfrc.com/subscription.htm for subscription options. 

This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and 

uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are 

not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; 

competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in 

the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making 

these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or 

changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent 

updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. 

Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS 

INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT 

ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS 

TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S 

RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR 

UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN 

YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a 

complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared 

unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available 

upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, 

including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. 

The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity 

in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

Siddharth Rajeev, B.Tech, MBA, CFA Analyst Daniel ... - Baystreet.ca

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?