If Inscape Corporation (TSE:INQ) were trading more in line with its peers it could be worth as much as $8.99 per share
Thomas Chapman | May 25, 2017 | SmallCapPower: Inscape Corporation (TSX: INQ) is an office furniture and wall products manufacturer. The Company operates in two segments: Office Furniture segment and Inscape Walls segment. The Office Furniture segment includes storage, benching, systems and seating solutions, and West Elm Workspace products. The Inscape Walls segment has a manufacturing facility located in upstate New York. Its systems products include Inscape Bench, Domain, Electrified Storage, Inscape System, Veil Collection, Sit-stand solutions and Nuform Worksurface; storage products include Territory, Filing and Workstation Storage; seating products include TurnAround, Crossline, Agia, SweetSpot, OnSpot and Fan, and walls products include Acme 50, Aria, Interval and Reform+. Its products are manufactured in two facilities comprising a total of ~ 438,000 sq. ft.
Source: Inscape website
Past Performance
Inscape’s sales peaked in 2002 and slowly declined until 2015, as the Company dealt with distribution issues as they could not get dealers to lead with their product. In 2015, sales hit an inflection point and began to grow again as management introduced and executed on a new distribution concept, as they convinced many of the largest dealers in North America to lead with the Company’s products. By June 2015, they had signed three dealers, and they now have 19 dealers committed to leading with their products, resulting is sales of $75,230 for the nine months ended Q3-17, a 27% increase from the three months ending the previous year.
Growth Prospects
A report found on IBISWorld claims new office construction is expected to grow at an annualized rate of 4.3% until 2022. This is stronger than the growth in previous years. Furthermore, the number of U.S. businesses is expected to increase at an annual rate of 0.8% and corporate profits are expected to increase by 1.8%, all these factors will result in an increase for office furniture. Furthermore, the Company is committed to strengthening their dealer network, which should result in increased sales as this has proven to work in the past. Inscape also has a cost advantage due to the low value of the Canadian dollar relative to the U.S. dollar as ~80% of their sales come from products manufactured in Canada and sold to the United States. This is essential due to the highly competitive nature of the office furniture market.
Inscape is a relatively high fixed cost business, and they have excess capacity in their plant as stated by management. Meaning as sales increase their full cost per unit will decrease resulting in margin expansion. Due to this, the Company should see an increase in EPS going forward. The Company is also in a healthy position to manage this growth and cater towards changing trends in the office space market as they have no debt, $10.5mm in cash and short-term investments, and great liquidity.
Inscape Corp ratios
Source: Thomson Reuters
Valuation
Inscape is undervalued on a relative basis, the Company currently trades at 7.6x TTM EPS, compared to their peer average of 17.3x. They also trade below the peer average on Price/Book value and Price/FCF per share.
Inscape peer analysis
Source: Ubika Research
Taking the Company’s TTM EPS of $0.50 per share and applying the industry average PE ratio of 17.3x implies the Company is worth $8.65 per share. Furthermore, taking the Company’s MRQ EPS of $0.13 per share and annualizing them to $0.52 per share, them applying the industry average 17.3x PE ratio implies the Company is worth $8.99 per share.
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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