NEW COVERAGE - TOP IDEAS: Noble Iron Inc. (TSXV: NIR) presents an early investment opportunity in a microcap stock with a growing recurring revenue base derived from the sales of its cloud-based software solutions for the equipment rental industry.

We would bet that not many investors have heard about Noble Iron. In fact, at first glance, given its corporate name, we thought it was a junior resource company. But no, Noble Iron is a Software-as-a-Service (SaaS) business and it has become one of Investorfile’s Top Ideas, whose focus is to identify small and microcap growth stocks trading at a value price to maximize appreciation potential over the longer term.

Noble Iron Inc. (TSXV: NIR - C$0.25) was a different company several years ago. Back then, the Company operated directly in the equipment rental business. Since, Noble Iron sold its equipment rental business to develop and sell cloud-based and on-premise software for construction and industrial rental equipment owners and users.

Since 2017, Noble Iron, through its wholly owned subsidiary Texada Software, has been focused on investing in scaling its software business by developing and deploying new SaaS products to existing and new customers in various construction and industrial service sectors. Texada’s strategy involves establishing a platform ecosystem, comprised of multiple software applications and services, to make its customers’ work easy and instant. Texada Software is based in Guelph, Ontario.

Currently, Texada’s offering comprises of cloud or client-based software for equipment rental companies, equipment dealerships, construction companies, contractors, and customers who own or use construction or industrial equipment. The Company’s flagship product is a rental management software application called Systematic Rental Management (SRM), which automates the functions for an equipment rental business in the areas of inventory management, purchases orders, counter operations, work orders and maintenance schedules.

Texada continues to invest in developing its software products and growing its customer base by adding new products as stand-alones or add-on options to its existing SRM. Some of the new software products include: FleetLogic, Gateway and Texada Pay. FleetLogic is a work order and logistics platform for increasing communication and productivity for service departments to enhance workforce productivity with mobile work orders, delivery tickets, and dispatch consoleS. Texada Pay provides Texada’s rental and asset management software customers with the capability to process credit card and ACH payments directly within their own applications, as well as through Texada’s e-commerce store and Customer Portal solution, which is its Gateway product.

Texada’s sales are primarily derived from recurring license revenues that include user license fees, server license fees, SaaS subscription fees, plus contract development and upgrade fees. In addition to these fees, Texada Software generates maintenance, service revenue and contract revenue.

According to Management, customers in the construction equipment rental sector currently account for approximately 78% of the Company’s software revenue, with the largest customer currently representing 10% of total revenues. Product and service satisfaction is high, as Texada has had very little customer turnover over the years, according to Management.

Management estimates that there are more than 200 providers of rental management software. The industry is highly fragmented and most companies in this sector are privately owned. Texada does have a few direct competitors, but there are no dominating industry players. Just as fragmented is Texada’s addressable customer base, the equipment rental market in North America. There are an estimated 12,000 businesses comprised of owner-operator rental operations and larger rental dealers like ERS Caterpillar (a current Texada customer) that manages large quantities of construction and industrial heavy equipment inventory.

As stated in Noble Iron’s most recent Management Discussion and Analysis (MD&A) filing, Management is of the view that increased adoption of cloud-based software and mobile applications among the Company’s existing and target software customers presents significant growth opportunities. The Company anticipates an upward trend for rental companies to increase the use of the Company’s cloud software solutions both through conversion from on-premise customers to the cloud offerings and through uptake of new customers. Management expects that its products may gain additional traction in the foreseeable future.

From the first look at the financial reports, it appears that Noble Iron’s total revenues have declined slightly over the past two years, which is true. But, during this period, there was the ongoing migration of Texada's existing customers from customized software products to its current standard cloud-based version, converting on-premise software clients to Texada’s SaaS cloud-based offering, which thus generates larger monthly fees. As such, Noble Iron’s Annual Recurring Revenues (ARR) have been trending higher during this same period and now make up a majority of the Company’s total revenues.

We note as of late that sales momentum is building. In August 2020, the Company announced the signing of a large customer contract with New England, MA-based Milton Rents. It will be deploying Texada's Systematic Rental Management, FleetLogic mobile field service and logistics application, and GateWay e-commerce suite in all of its rental locations.

Based on Q3 results for 2020 and the Company’s reported backlog of ARR revenues, we estimate that Noble Iron has a current ARR run rate of about C$5.5 million. Given the Company’s stock price, this is equivalent to about 1.25 times its ARR, which is a very inexpensive market valuation for a growing SaaS company.

For the nine months ended September 30, 2020, Noble Iron reported adjusted EBITDA of C$151,000 on revenues of C$4.35 million. We note during this reporting period that the Company did receive some COVID subsidies from the Canadian and US governments, which helped offset some expenses to generate the positive adjusted EBITDA results. Excluding these subsidies, the Company would have reported an EBITDA loss, though the loss has been diminishing over the recent quarters. We forecast that Noble Iron may still report an EBITDA loss for 2021 to account for spending in R&D. But we also estimate those losses will turn to an EBITDA gain of about C$250,000 per quarter sometime in 2022, based on a 12-month revenue run rate of about C$8 million.

Based on our forecast, we see great value and opportunity to accumulate the shares of Noble Iron from its last traded price of C$0.25 to a stock price up to C$0.60 per share. At an average cost base of C$0.45, an investor is paying less than 2.5 times the Company’s current ARR, which will continue to grow. Also, based on our forecast for 2022, a C$0.45 per share cost base implies an Enterprise Value (EV)/EBITDA valuation of about 7 times, which is not expensive for a SaaS publicly traded company. This share price acquisition cost base valuation looks even more attractive beyond 2022.

Investorfile acknowledges Noble Iron is a very under-followed and small public company. New investors in this stock should have at least a two-year investment horizon to account for the expected illiquidity. But, investors who begin to accumulate this stock early could gain the advantage to earn very large investment returns over time.

There is also a margin of safety for investing in this stock today. As of September 30, 2020, the Company had working capital of $5.3 million, of which C$5.2 million was in cash. Noble Iron also has no long term bank debt. The strong balance sheet will allow this Company to fund its internal growth for the foreseeable future without the need for dilutive equity financings.

Last reported, insider ownership in Noble Iron is high. Management and Directors own about 56% of the outstanding shares. The founder and CEO is the largest shareholder in the Company, with about 37.5% in stock ownership.

Noble Iron Inc. has approximately 27.3 million shares outstanding.

Company website: www.nobleiron.com

Author Ownership Disclosure: TSXV: NIR - Yes

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This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

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The author of this article has acquired and may trade shares of Noble Iron Inc. through open market transactions and for investment purposes only.