Lumenpulse may be moving too fast, says Euro Pacific Canada

Recent M&A moves by Lumenpulse (Lumenpulse Stock Quote, Chart, News: TSX:LMP) may be bringing elevated risk to Lumenpulse, says Euro Pacific Canada analyst Andrej Krneta.

Yesterday, Lumenpulse reported its Q3, 2016 results. The company earned $1.6-million on revenue of $35.5-million, a topline that was up 39 per cent over the same period a year prior.

“In recent months, we were active on the merger and acquisition front with the acquisition of Exenia srl based in Italy, which adds complementary LED products in the retail, hospitality and museum sectors,” said CEO Francois-Xavier Souvay. “This acquisition also allows us to access a well-established network of 14 Italian agents and 13 European VARs, which in turn should increase the penetration of our brands in Italy and the rest of Europe. Today, in a separate press release, we announced the acquisition of Fluxwerx for an initial consideration of $60-million, which could reach $85-million based on an earn-out payment, which is subject to certain conditions. The merging of our organizations represents a major milestone, which we believe will be transformational for the Lumenpulse group, creating one of the most exciting and innovative companies in the LED lighting industry. Over the next few quarters, we look forward to the integration of our recent acquisitions as we see tremendous cross-selling and technology synergies, new opportunities via a larger addressable market, expanded geographic access, and the benefit of new management sharing our vision and goals.”

Krneta says Lumenpulse’s Q3 fell short of his expectations. The analyst says he sees the company’s near-term risk profile elevated by the Fluxwerx acquisition. Though he does see upside in the form of pricing power, he has concerns about the fact that Lumenpulse will be simultaneously integrating multiple businesses on two continents.

“Lumenpulse’s FQ316 results came with an announcement of the largest acquisition to date (Fluxwerx Illumination Inc.),” says Krneta. “Mixed FQ316 results might have been overshadowed by the formidable play for market share. We are encouraged by the serviceable available market (SAM) expansion, earnings accretion, and pricing power potential from the bolt-on completed in FQ416e. But, execution shortfalls in the UK speak of risks embedded in recent transactions. Our stand-alone (ex. Fluxwerx) forecast revisions reflect the headwinds in the UK business, phaseout of OMP revenues, and slowdown ex-North America.”

In a research update to clients today, Krneta maintained his “Buy” rating on Lumenpulse, but lowered his one-year price target on the stock from $22.50 to $20.00, implying a return of 33 per cent at the time of publication.

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