Richardson Electronics – $RELL

I noticed that Richardson Electronics was listed on the Grahamian Value site here.

I thought that since that I couldn’t find any write-ups, it would be a good opportunity to share some unbiased thoughts.

Overview

Market cap almost 60mil and EV under 20mil.

Background – from the website

Richardson Electronics, Ltd. is a leading global provider of engineered solutions, power grid and microwave tubes and related consumables; power conversion and RF and microwave components; high value flat panel detector solutions, replacement parts, tubes and service training for diagnostic imaging equipment; and customized display solutions. We serve customers in the alternative energy, healthcare, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. The Company’s strategy is to provide specialized technical expertise and “engineered solutions” based on our core engineering and manufacturing capabilities. The Company provides solutions and adds value through design-in support, systems integration, prototype design and manufacturing, testing, logistics, and aftermarket technical service and repair through its global infrastructure.

The company is bumping around break even and has been that way since 2011.

They sold a part of the business in 2011 (RFPD) for close to 240mil.

Business Segments

There are 3 distinct business segments. PMT is by far the largest.

PMT

Power and Microwave Technologies Group (“PMT”) combines our core engineered solutions capabilities, power grid and microwave tube business with new RF, Wireless and Power disruptive technologies. As a designer, manufacturer, technology partner and authorized distributor, PMT’s strategy is to provide specialized technical expertise and engineered solutions based on our core engineering and manufacturing capabilities on a global basis. We provide solutions and add value through design-in support, systems integration, prototype design and manufacturing, testing, logistics and aftermarket technical service and repair—all through our existing global infrastructure. PMT’s focus is on products for power, RF and microwave applications for customers in 5G, alternative energy, aviation, broadcast, communications, industrial, marine, medical, military, scientific and semiconductor markets. PMT focuses on various applications including broadcast transmission, CO2 laser cutting, diagnostic imaging, dielectric and induction heating, high energy transfer, high voltage switching, plasma, power conversion, radar and radiation oncology. PMT also offers its customers technical services for both microwave and industrial equipment.

This part of the business has been quite consistent. They consistently generate stable gross margins and revenue has slowly risen over time.

Canvys

Canvys provides customized display solutions serving the corporate enterprise, financial, healthcare, industrial and medical original equipment manufacturers markets. Our engineers design, manufacture, source and support a full spectrum of solutions to match the needs of our customers. We offer long term availability and proven custom display solutions that include touch screens, protective panels, custom enclosures, All-In-One computers, specialized cabinet finishes and application specific software packages and certification services. Our volume commitments are lower than the large display manufacturers, making us the ideal choice for companies with very specific design requirements. We partner with both private label manufacturing companies and leading branded hardware vendors to offer the highest quality display and touch solutions and customized computing platforms.

They have worked hard to grow this part of the business since 16/17. Revenue is up and gross margin is heading in the right direction.

Healthcare

Healthcare manufactures, repairs, refurbishes and distributes high value replacement parts and equipment for the healthcare market including hospitals, medical centers, asset management companies, independent service organizations and multi-vendor service providers. Products include diagnostic imaging replacement parts for CT and MRI systems; replacement CT and MRI tubes; CT service training; MRI coils, cold heads and RF amplifiers; hydrogen thyratrons, klystrons, magnetrons; flat panel detector upgrades; pre-owned CT systems; and additional replacement solutions currently under development for the diagnostic imaging service market. Through a combination of newly developed products and partnerships, service offerings and training programs, we believe we can help our customers improve efficiency and deliver better clinical outcomes while lowering the cost of healthcare delivery.

This is the smallest and least profitable part of the business. On the last conference call it was made clear that this part of the business will run operating losses while the invest in growing the business. They are looking to grow their presence in CT and MRI tubes. They expect to lose 4-5 mil per year for the next year or two.

Balance Sheet – Current Assets

When you look at these net-nets it’s important for me to take a look at the make-up of the current assets. I want to make sure the business isn’t just building inventory or accounts receivable that won’t be converted into cash eventually.

Cash has come down substantially since 2012.

You can see that the cash has slowly dwindled over the years after the sale of RFPD.

Share structure

They have 17mil common and 3mil B shares approved. There are 11.1mil and 2.1mil currently outstanding. B shares hold 10 votes and get 90% of the dividend of the common stock.

The CEO owns all the B shares and controls voting outcomes.

CEO & Compensation

The compensation does not seem very high relative to the amount of revenue. The CEO gets a little over a 1mil per year on a business that does 150mil annually in revenue.

The CEO (Edward Richardson) is 78 and has been CEO for over 40 years.

He is also the Chairman of the Board.

Per Share Numbers

When looking at these asset based valuations, it’s important to make sure that the asset base is not falling dramatically. As you can see, we have seen the NCAV has gone from over $10/share to $7.28 currently.

You can see the drop in revenue per share after the sale of RFPD/

5 Year Summary

When looking for some mean reversion in sentiment (and the business performance) I think it’s important to take a look back over a reasonable timeframe to see how the business has performed.

  • Bus Perf fiscal 2016-20
    • Divis – 15.5mil
    • EBIT – (-)11.5mil
    • EBITDA – 3.2mil
    • CFFO – 6.6mil
    • FCF – (-)14.4mil
    • WC change – 20mil removed

On the most recent conference call it was made clear that there will be no large buyback or special dividend.

Conclusion

Many proponents of net-net investing will reference back-tests showing how well the strategy works. I can tell you that I am drawn to buying cheap business and have a natural contrarian streak. Having said that, I have to be honest with myself. I don’t think I would be able to hold RELL for another 12-24 months while it continues to lose money and eat into the cash balance in the hopes of a turnaround.

Anyone else look at RELL before?

Thanks,

Dean

*the author has no position in RELL

Leave a comment

Filed under Company Analysis

Bottom Fishing in Freshii – $FRII

I’ve been following Freshii for a few years. It’s a good example of busted IPO. It may provide an opportunity for investors with a strong stomach.

Share Performance

Freshii went public at $11.50 in late 2016. Below is how shares have performed since then.

Look out below. It’s easy with hindsight to criticize those early investors. There was a lots of hype for the business. The CEO is the founder of the company who started the first few stores and grew the franchise quickly. Growth was fast and the establishment was popular. Needless to say there were many positives.

Initial capital was brought in to grow store count rapidly. The inital goal was between 810 and 840 stores with EBITDA of 20-22mil by end of 2019. They ended 2019 with 470 stores. If you purchased shares at $11.50 and everything went according to plan, you were paying 15x ebitda 3 years out. Doesn’t seem that expensive for a franchise with low capital requirements, good growth prospects, incentivized management and a decent economy. Perhaps paying up for growth when it doesn’t materialize can be damaging.

The company invested in talent to source and assist franchise partners in store operations. They had 9 to support 240 stores in 2016. It became evident in early 2018 that they weren’t on track to to have as many stores open as the initial offering documents mentioned. The SSS started to break the previous positive trends and the app was subpar. Eventually in Q3 2018 the company pulled it’s guidance and shares tanked from $4 to about $2.50. The SSS underperformance continued in 2019 and shares continued to languish. Then covid.

Right now shares are not much above the March 2020 lows and trades at market cap of 30-35mil USD and EV of 0-5mil USD. If you purchase shares today, you are getting the business that does 18-22 mil in revenue with low capital requirements for essentially nothing. This of course is assuming that the cash isn’t squandered.

Their franchise fee is 6% of gross store sales. They require franchise partners 1.5% that must be spent on advertising. They use a Master Franchise Agreement for International locations. They have 70 locations internationally.

Part of the value proposition to franchise partners is that the upfront captial required is lower than other potential choices due to lower kitchen equipment required.

Looking Back at Income and Cash Flow

Below is the income statement since they have reported numbers.

Like most franschise companies, FRII has high gross margins. They have been bumping around operating break even since going public.

CFFO (before working capital invesment) has been positive every quarter except Q1 2020.

Risks

It’s important to understand the risks with FRII. The share price wouldn’t be where it is without some hair. All you have to do it enter the cashtag into the search bar on twitter and get a sentiment check on how negative things are.

  • The company’s brand does not carry the same brand value as competitors like Subway, Chipotle, etc
  • The food is quite expensive given it’s simplicity. They have minimal kitchen equipment which means that the food is not cooked fresh and can lead to a poor user experience. The company averages 3.5-4/5 on google reviews.
  • The cash could be spent on things that don’t add value to stakeholders.
  • They may have little or no interest in new franchise partners or existing partners opening new stores.
  • covid
  • The management team is young and has limited capital market experience.
  • There are dual class shares and the CEO owns the voting shares.
  • There are some change in control measures to make it costlier to do a takeover.

Positives

  • The CEO started the company from the first store and knows how to operate a store.
  • If there is a take over initiated, the voting shares only carry the same weight as the common store.
  • The have some CPG partnerships that can move the needle in revenue and customer reach. These include Shell and Air Canada.
  • Expectations are very low and it won’t take much news to move the share price.
  • Despite the challenges, the company has maintained the level of cash on the balance sheet. The company is debt free.

Conclusion

Despite the negativity, I think FRII presents an interesting opportunity. Expectations are low, the business is captial light and management has skin in the game.

Anyone else crazy enough to own this one?

Thanks,

Dean

*the author is long (a very small amount) of FRII

2 Comments

Filed under Uncategorized

Friedman Industries – $FRD

Net-net investing is not in fashion right now and hasn’t been for a long time. It’s quite interesting how things seem to go in cycles. 12 years ago when I started there were many more investors in net-nets. I’ve been poking around a few names and finding some things of interest.

Friedman has already been mentioned by Saj here and Ben here. I don’t have much to add, but nevertheless I like the sound of my voice so here we go.

Background

The industry has not gone through a bunch of change over the last decade. Below is the income statement.

You can see they have bumped around profitability, but they have managed to keep opex fairly stable while business activity has been volatile.

The business has generated cash off and on through the last decade. You can see the large capex initiatives that have been made to drive efficiencies in operations. It’s hard to tell how much value the previous investment in capital equipment added in value.

The business is working capital heavy, primarily in inventory. It’s important to monitor turns and conversion on this business.

Current Assets

As mentioned previously FRD is heavy in working capital, but they do also have some cash on the balance sheet.

The good news is that the there is not much obsolescence risk with FRD as the finished products will likely be used and purchases will just be delayed and not eliminated permanently.

Net-Net pitfalls

There have been many critics of net-nets. They are notoriously hard to hold as they are usually bad businesses, poorly run businesses, have misaligned incentives or management that doesn’t understand the value of capital allocation (or all of the above). There are many back tests that demonstrate that having a solid net net strategy can produce above average returns. It’s a simple strategy but not easy. You need a black belt in patience to invest in net-nets. Holding onto some business that bumps along while all your fintwit friends are getting rich off crypto, SaaS, cannabis, etc. is so hard. I like to have a business where the management team is not just sitting on their hands from either an operational or capital allocation standpoint.

Friedman’s new CEO has shown a willingness to spend some excess cash on equipment to improve the business. Also, a share repurchase program for up to 15% of shares outstanding was initiated. Finally, they announced that they are going to try price hedging for the price of steel. I’m happy to see some action being taken rather than just sitting on excess cash.

Previous valuation

I took a stab at the valuation each quarter going back to fiscal 2009 for FRD. You can see that though NCAV has come down from over $8 to about $7.50, the price to NCAV has also dropped.

Purchasing at a discount to NCAV and waiting for some positive news (and a likely higher valuation) seems low risk to me. However, there is so much uncertainty with covid that things may get worse or not rebound as quickly as anticipated.

Anyone else hold FRD?

Thanks,

Dean

*the author does not have a position in FRD at time of posting, but may initiate one at any time.

Leave a comment

Filed under Uncategorized