Premier Holdings Corp (OTCMKTS: PRHL)
CNA Finance is no stranger when it comes to seeking out emerging opportunities in the markets. While the CNA research team generally covers stocks that have valuations in excess of $100 million in market cap, we do entertain investor queries about stocks that are showing signs of having the ability to become a leader in a given sector.
Premier Holdings Corporation (PRHL) is a company that has attracted CNA Finance investor attention, with the CNA Finance team being challenged with covering PRHL to address that investor interest. While the team does not generally cover stocks that are priced at $0.08 cents per share, that does not mean that we ignore investor interest, nor do we avoid stocks that may be on the verge of delivering significant shareholder gains in the relative near term. We believe that PRHL holds potential.
With that said, the CNA Finance team reached out to PRHL, and allowed the management team an opportunity to re-introduce the company, one that has been in business since 1971. In doing so, PRHL addressed the past, present, and future strategies of the company, and explained how some of the past strategies, and most recent strides forward, have helped to shape the direction of the company for 2017 and beyond.
Following, is a transcript of our exclusive interview:
CNA: First, let me start by saying that investor interest in PRHL is emerging, and while the sentiment is unequivocally positive, investors still have questions about legacy issues from the past few years. In 2014, PRHL entered into a proposed acquisition for 85% of Lexington Power & Light. Did that deal close and can you explain the history of that deal?
A: Yes, the deal indeed closed and we were well on our way selling their product. But soon after completion we learned that certain representations were not accurate. Their debt service (cost of capital) was much higher than represented and made their business impractical for us and as you would expect, there was a resulting lack of confidence in the management of LP&L. So, we unwound the deal.
CNA: Did this unwind actually provide some ultimate benefit?
A: Absolutely. In the short time we were operating we proved that the concept was sound. We sold a product, the “reset,” at a higher price than the market and we were successful in doing so. And our topline revenues showed this. But LP&L management and cost of cash we not suitable for us. For full transparency: when the credit facility for buying power is put in place it is typically for 3 years. LP&L’s $2,000,000 line cost them over $600,000 in interest and fees. We believed we could re-negotiate the line and did have a new term sheet in hand. However, LP&L had an administrative issue and they were unable to get an updated credit facility. This, we believed, would prohibit profitability. Necessitating our decision to unwind the deal.
But our initial success in sales indeed indicated that, with a more competitive, industry-standard cost of cash and a professional management team, we should achieve the projected 8 -10 % EBITDA on our AIC business. And let me just add that with a better-than-average credit facility and more expert management we could achieve 12% EBITDA… which we believe we are the path to achieving.
CNA: And, as to the second concern, the current outstanding share count: Do you think that having in excess of 300 million shares outstanding should be of concern to investors?
A: It is the market value of those shares which is the issue. With our 200,000 accounts alone, valued at $300 each, our portfolio value would be at $60 million (as we move existing customers, former customers and new sales to the supplier), which is more than double our current market Cap. So once we place the majority of these accounts and future accounts, into the Supplier, the stock price should reflect this. We anticipate it will take about 2 years to accomplish this. This does not take into consideration the real enterprise value of the company which can generate thousands of sales per month.
CNA: Over the past few years, PRHL has entered into some potentially lucrative deals. Back in 2012 and 2013, PRHL entered into a purchase agreement with The Power Company (TPC) to purchase 80% of the that company. How has that deal benefited PRHL?
A: TPC has been the catalyst for the growth of our company and PRHL was the catalyst for their growth. As we provided capital, TPC grew from 11,000 sales to over 200,000 and should produce an additional 80,000 this year (not accounting for expansion). These are not only customers for deregulated power, but become candidates for our other businesses, E3 (efficiency products and services) and of course AIC. This pure marketing machine is critical and fundamental to our business and has been successful beyond our projections.
CNA: So, with that deal allowing PRHL to benefit from a deregulated energy space, is PRHL now fully prepared to capitalize on an estimated $300 billion US market and what synergies has PRHL already realized from that deal?
A: PRHL has benefited tremendously from acquiring the majority of TPC. TPC has proven to be one of the TOP resellers in the nation. In Illinois, one of the most competitive markets in the nation, we have about 2% of the market already. As a comparison, there is another well-respected company that took 12 years to achieve 200,000 contracts, we did it in 3 years. They do over $100 million a year as a supplier and we expect to exceed their performance by our second year. Although our projections show slower growth, we have no way of knowing the impact of the portal but we expect it will be a game changer. This is very similar to what happened to Telecom. Do you remember years ago when everyone had to use Ma Bell for their long-distance telephone service? That changed when the telecom industry deregulated, which gave customers a choice and created a huge opportunity for the “baby bells.” Which created industry giants like Sprint and Verizon and made their thousands of investors rich. Not only those companies, but as the entire industry was rolled up, hundreds of companies benefitted. What were they buying? Customers. The same is now true in many states with the deregulation of electricity.
CNA: Can you explain deregulation in simple terms? Is PRHL already benefiting from the program?
A: Simply put, deregulation is a government program to protect consumers by assuring competitive pricing. Think how the telecom deregulation changed telephone charges – now understand, energy deregulation is estimated to be 11x bigger! Are we benefitting? Yes. We believe we are among the top 5% of resellers in the nation if not higher. We expect to maintain and grow our piece of this massively expanding market. We have proven this by our ability to capture about 2% of the Illinois market, again, one of the most competitive in the nation. We should only do better in other markets. As we obtain our licenses in other states and then launch our door-to-door and call center strategies we expect similar results. When we add our Energy Services Portal (ESP) and it’s affiliate marketing functions, we should see increased traction.
CNA: So, where exactly is the opportunity for PRHL?
A: We have a running start over our competitors. Opening “Deregulation” has been the only marketing strategy for many suppliers. They wait for the utility customer to come to them. We have been aggressively marketing to customers. We do not rely on others to control our fate. As each state opens, we have the ability to go in with our systems and rapidly deploy out strategies. We have only scratched the surface.
CNA: You mentioned and described The Power Company, but, there are two other subsidiaries within the Premier Holding Corporation portfolio, E3 and American Illuminating Company. Each of these subsidiaries offer distinct value propositions. Can you explain the role of each in delivering and building scale for PRHL?
A: AIC is the linchpin for financial success. While TPC has been garnering these 200,000+ contracts, they receive only a commission on those sales. As we migrate those contracts to the power supplier (AIC) we should see a 20x increase in topline revenue and a doubling of profitability on the same effort we are expending to gain only that commission. It is with the supplier where the portfolio value of the contracts is realized. This is where the $60 million in contract value would be shown.
E3, with its relationship with Sustainability Partners is a natural fit. After we have sold our existing clients their deregulated power, they become a trusted client for additional efficiency sales. SP will be offering products and services to our thousands of commercial clients. E3 will be offering Smart Home and other efficiencies to our residential clients.
CNA: E3 has a strategic partnership already in place with Sustainable Partners LLC., a Blackrock portfolio company. This sounds like a significant opportunity to imbed a large footprint in the space. How can PRHL leverage off this partnership?
A: Yes, this requires further discussion. Sustainability Partners has a model we believe will be just as disruptive to this market as Uber has been to taxi’s and Airbnb has been to hotels. We are proud to be among the select few to be able to offer their product to our commercial clients. They value our marketing expertise and we have inundated them with leads. We have over 5,000 commercial clients we are vetting for them and we expect this number to grow to between 30,000 and 50,000 in the ensuing years, especially with the roll out of ESP.
CNA: American Illuminating Company also deserves more attention, especially in that the relationship can position PRHL to benefit enormously from a revenue standpoint. What are you expecting AIC to deliver?
A: Right now TPC distributes its contracts among 30-40 different suppliers and those suppliers are reaping the benefits of TPC’s efforts for topline revenue and additional profitability. We plan to have 80% or more of residential and commercial customers to move over to AIC where we will then garner the entire utility bill as revenue and experience additional profits for the work TPC performs.
CNA: In examples that we went over, you described how the leverage from the AIC subsidiary may deliver exponential amounts of increased revenue. How can that happen?
A: Remember that TPC does a herculean effort to earn a commission on a sale. Let’s keep it simple and say that one residence consumes $100 of power each month. Our commission might be $2 - $5 per month. Not much, but it adds up. If we supplied that power we would record the entire utility bill as revenue… $100 as opposed to $2 - $5. In addition, if AIC makes 10 - 12% profit that’s an additional $10- $12 PROFIT, again compared with the $2 -$5 we were getting from one residential sale. Can you think of another industry where just by adding an entity in front of what you are already doing you can change the value proposition so dramatically? We have been making our current suppliers very rich. Our plan has always been to do that for ourselves and our shareholders.
CNA: Perhaps one of the most interesting aspects of PRHL is the Energy Sales Portal, which is truly a remarkable asset. Before we get into the benefits of the portal, can you provide an introduction of this technology?
A: Of course. The industry right now depends mostly on paper to perform these transactions. Each supplier has its own version of a contract and there is a time-consuming and laborious process of contacting a prospective customer, going back to a supplier and getting a quote based in their profile, awaiting the client to say yes, hand sign contracts and get third party verification. This method is fraught with inefficiencies and potential for errors. ESP automates this process, streamlining it, and providing rapid turn-around of quotes and compliance. This is a web-based tool that the sales person uses, either at their desk when they are on the phone with a prospect, or on a hand held device when they visit them at home, and it takes a process that might take 30 minutes and a few days for approval, to mere minutes and immediate approval.
CNA: I've heard investors say that the Energy Sales Portal can do for energy what Lending Tree did for the mortgage industry. How so?
A: Just as Lending Tree automated the loan processing function and disrupted how all loans are processed today, so should ESP impact the deregulated power sales industry. There is no universal sales tool for the industry. There are bits and pieces out there but no-one has put it all together, especially the “last mile” which is automating the communications between the sales person and the client. ESP could be the first universal (covering all suppliers and also the entire sales process from prospect identification to close and compliance verification), tool to accomplish this.
CNA: So, the portal can deliver web-based automated sales, as well as delivering enormously competitive efficiencies. From a competitor standpoint, does the Energy Sales Portal provide a significant competitive advantage for PRHL, maybe even keeping competitive threats to a minimum in the markets you serve?
A: There is a need for such a product and we have been testing and refining ours for years with the original intent of making it robust and available to all resellers, not just a narrow internal tool. We plan to offer the technology to ALL resellers. Now this may sound crazy to give our competitors our proprietary technology, but think it through. Instead of trying to acquire all these businesses, they, in essence, work for us. Not only will we get a piece of every transaction regardless of what supplier they use, but we will own the database. Protecting their client for deregulation is a given, but that database can be used for other non-power sales. Such as selling E3 products and services, or selling the information to solar companies or others who value knowing the energy profile of a prospect. And finally, since our supplier is among the offerings they present to their client, AIC can have “last look” and decide if they want to price to win. In that sense, it is like Progressive Insurance. We will show you our competitors’ prices and our own, creating a higher likelihood of winning the contract.
CNA: Of course, management is the key to driving all of the company's strategic initiatives. PRHL has built quite a respectable and diversified team of talent. Can you highlight the members of your team, and explain how the diverse nature of this team is equipped to deliver near and long term success?
A: We have an impressive Board that is very involved in the strategic direction of the company. Dr. Woodrow W. Clark, II, MA3, Ph.D. was a contributing scientist to the U.N. IPCC that won the 2007 Nobel Peace Prize. He served as Manager of Strategic Planning for Energy at the Lawrence Livermore National Laboratory and was Senior Policy Advisor for Energy Reliability to then California Governor Gray Davis with a focus on renewable generation, advanced technologies and finance.
Board member Mr. Lane Harrison advised large multi- national corporations such as Bicoastal Corporation, (Formerly Singer Corp.) where he served as Director, and Bicoastal Financial Corporation, serving as President/Director. Mr. Harrison has over 30 years of business consulting and sale/marketing experience. He has lectured extensively to the professional advisor community.
Mr. Robert Baron is a director and committee member of various public companies, including PRHL. Prior public boards include, Hemobiotech and Suburban Bancorp. Mr. Baron was also owner and president of various companies including a subsidiary of Tultex Corp with over $200 million in revenues, and a privately held company with $80 million sales country wide.
Our Management team has decades of experience, and just to mention one. Mr. Patrick Farah who most recently co-founded U.S. First Energy (USFE). As CFO and CMO of USFE, Mr. Farah was instrumental in establishing the company’s exclusive partnership with Suez Energy – one of the 100 largest companies in the world. Mr. Farah’s company was the exclusive retail sales vendor for Suez Energy in the United States, where he oversaw the development of a total contract value with Suez of over $400 Million – more than 15 times the volume of Suez’s previous vendor. While procuring a residential base of 50,000 customers, USFE achieved the prestige title of top First Choice Power’s sales broker. USFE has subsequently enhanced its business model, and is now branded as The Power Company.
CNA: Let's change course and discuss investment considerations and opportunity. How would you answer an investor if asked why he should buy PRHL stock?
A: If we are able to convert our portfolio value we should double our market cap within 3 year and this is not considering our enterprise value. Again, 200,000 contracts valued at $300 each is $60,000,000… and that is not counting the revenue that these contracts generate during their term. And that is using todays performance. We plan to continue to grow this number of contracts. If only at the current pace, that is 80,000 contracts a year. If we scale by expansion and the use of the portal, we should see even greater performance. We are poised to continue to build revenue and profits on a scale that is rarely seen in most industries.
CNA: If that same investor, after liking the considerations provided, asked about cash on hand and access to future capital, how would you answer that question?
A: We have over $2 million cash on hand. We have a PPM issued though WestPark Capital and we have investors standing by offering us up to $10 million should we need it when we execute our planned up-listing to Nasdaq. Cash is not an issue for the time being and foreseeable future.
CNA: Along those same lines, financial projections are a vital consideration for investors. Can you provide some financial projections, and in turn offer a projected asset valuation based on those projections?
A: By the end of Year 2 we expect AIC to do over $67 million topline, TPC will add $9 million and E3 $8.5 million. That totals around $85million in topline revenue, resulting in $3.5 million to the bottom line. Mind you this is still a ramp up year for AIC and shows only a 3% EBITDA for that unit. In the future, we will experience over 8 – 10, to maybe 12% on that business line. But even with only a $3.5 million EBITDA at 18x multiple, that’s a $64 million valuation. I hesitate to go beyond year 2 because it grows so rapidly it seems unbelievable, but the math is there.
CNA: Finally, many investors work hard to search out potential breakout stocks. Based on the known variables already in the PRHL arsenal, can you provide a best-case snapshot of PRHL five years from now?
A: Just adding the suppler will change our business dramatically on the same level of work we have been performing for 3 years. With our plans to expand into additional states, launch our sales portal, and partner with Sustainability Partners on additional large scale sales, our 5 year projections seem too good to be true. Just for AIC we go from $7 million in sales in Year 1 to $67 million in year 2. You can see the potential is tremendous for growth in the subsequent years.
Stock price does not always reflect what a company is doing, and in the case of PRHL, this statement may prove true. Based on what management has told us, PRHL is positioning themselves to take advantage of a potential boon in the energy space. Once the company begins to gain momentum, taking advantage of its strategic and proprietary advantages, PRHL may very well emerge as a powerful player in the deregulated energy space. PRHL already has strategic partners in place, and has the trust from regulatory commissions across the United States. All that is left now is for PRHL to synchronize all of its initiatives together to produce a reliable and recurring revenue model. Once they do that, the share price and valuation will find its proper place, offering shareholders significant potential upside from current levels.
Like all investments in the micro and nano-cap world, investors should keep a focused eye on breaking news and company filings. Based on management’s remarks, PRHL is worthy of investment consideration for investors with a high risk, high reward trading strategy.
Disclosure: This article was written by Kenny Soulstring, and it reflects my own opinions and unique articulation. This article is not intended to offer investing advice, guarantee 100% accurate predictions or to be interpreted as providing a personal recommendation.
Additional Disclosure: I have no position in any stock mentioned, but may initiate a long position in PRHL within the next 72 hours.
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