December 2020 Update – $REPH, $PSD.to, $STC.v, XTC.to, $VMD.to, $SYZ.to, $MTLO.v

No new profiles this month. It’s been busy with holidays and Alberta has gone into a second lockdown.

  • Recro Pharma ($REPH)
    • New CEO announced (finally)
      • Has a decent pedigree and looks promising
      • The shares have been running a bit, not sure exactly why at the moment
    • George McCabe (Portolan Capital Management) disclosed a 5.47% position in REPH
      • A quick google search shows that they own many positions and that REPH makes up 0.47% of their portfolio. Not exactly meaningful.
  • Pulse Seismic ($PSD.to)
    • Announced a 3.05 mil data licensing sale
      • That is more revenue from the previous 3 quarters
      • Q4 revs at 5mil
      • 2020 revs at 10.9mil
    • Some language in the news release about debt repayment and extension of the credit agreement
    • I think the story has been de-risked to some degree and shares have not really rebounded, but alas this is energy related
  • Sangoma Technologies Corp ($STC.v)
    • Had a data breach during the month of December
    • an update was provided before the end of the month; some highlights
      • no customer bank information was compromised
      • products aren’t affected
      • CEO took responsibility
      • maintaining transparency
  • Exco Technologies ($XTC.to)
    • Reported fiscal Q4 2020
      • Quarter was better than I expected
        • Auto segment bounced back
        • Aided by wage subsidy
      • Bullish comments about the future on the conference call
    • I am expecting the dividend to be increased next year
    • This goes to show that it is so hard to predict how covid will affect these businesses
      • This team has adapted really well to the new environment
  • Viemed ($VMD.to)
    • Acquired 5% in VeruStat for 600k with cash on hand
      • Sounds like it will be accretive in 2021 and seems like a nice new revenue stream
      • It’s nice to see that they are looking at alternative ways to grow the business other than just adding vent patients
    • Shares didn’t really respond to the news
  • Sylogist ($SYZ.to)
    • Reported fiscal Q4 2020
      • Rev up 10% year over year
      • Margins up as well if you remove acquisition related costs and executive bonuses (it’s up to you if you feel that is fair)
      • Still waiting on some activity on the acquisition front
      • Have $43 mil cash plus access to $40 mil credit line
    • These developments are positive. I will be watching this one closely.
  • Martello Technologies Group Inc ($MTLO.v)
    • Announced some sales wins
      • $375k in bookings
      • 120k in users
      • Over the next 12-36 months

Happy and prosperous investing in 2021!

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November 2020 Update – $CSW/A.to & $CSW/B.to, $OSS.v, $REPH, $PSD.to, $ISV.to $IDG.to, $STC.v, $VMD.to, $SYZ.to, $MCB.to, $FRD, $FRII.to, $MTLO.v

Very busy month. 3 new company’s profiled ($MTLO.v, $DWSN, $SVT) and lots of updates.

Let’s get to it.

  • Corby Spirit and Wine Limited (tse: $CSW/A.to & $CSW/B.to)
    • Reported their fiscal Q1 2021
      • Strong q
        • Rev up 12%
        • Opex down 14%
        • Net earnings up 68%
    • Dividend upped to 0.22/share
      • Yielding almost 6%
    • They have made notes that they don’t expect this to continue for the full year
      • Some pull forward for holiday season but higher than prior consumption may continue due to reinstated lockdowns
  • OneSoft Solutions ($OSS.v)
    • JV to expand presence in Middle East – find it here
    • Released Q3
      • In line with expectations
      • Rev up sequentially and slightly up yoy
      • Best MD&A in the Canadian small cap space
        • New pay as you go sales model being trialed
        • A few customers in the trial phase – likely to be announced in 2021
      • Admitted that doubling of 2019 rev won’t happen this year
  • Recro Pharma ($REPH)
    • reported results – mixed bag
      • rev up from Q2 but still down yoy
    • positive
      • seeing some wins in business development
      • some renegotiated of debt to push out current payments and increased flexibility
    • negative
      • still no new CEO
      • still high cost debt
  • Pulse Seismic ($PSD.to)
    • reported Q3 and was a tough q
    • sales down to 1.8mil
      • still generate 860k for shareholders which shows how little their operating costs are
      • interesting that they had very little traditional data sale revenue and had a transactional sale
    • trading at about 50mil MC and a little more than 14x annualized FCF at the most depressed biz environment in the company’s history
    • You can see how low the active rig count is in Alberta relative to the prior 10 years
  • Information Services Corp ($ISV.to)
    • Reported a pretty decent quarter
    • There was some catch up from previous quarter as the economy in Sask reopened
    • Trading around 12x EV/EBIT and a little over 4% yield
    • It will be interesting to see if they do another acquisition in a couple of quarters and/or increase the dividend
  • Indigo Books & Music ($IDG.to)
    • Reported fiscal Q2 2021
    • Results were better than I was expecting
    • No questions on the call from analysts – I continue to think I’m the only one watching this one
    • Also announced an addition to the board that seems like a good fit
    • The holiday quarter is the most important quarter for IDG, it will be interesting to watch as Canada managed the 2nd wave of Covid
  • Sangoma Technologies Corp ($STC.v)
    • reported fiscal Q1 in line with expectations
      • they really are navigating the current environment very well
    • still looking to deploy cash from recent financing – I’m expecting something soon
  • Viemed ($VMD.to)
    • Reported Q3
      • Revenue was up 22% yoy
      • Still seeing impact from covid getting into hospitals and preventing new customer wins
        • Thinking there would have been even more growth if this wasn’t the case
      • Ancillary sales at 18% and growing fast
        • I liked how they focus not on incremental gross margin as the ancillary side of the business grows, but incremental gross profit in dollars
      • Some temporary PPE and equipment sales due to the pandemic
        • Still see this as a testament to mgmt. being nimble and adapting
        • Really seeing some gross margin compression
      • Prepared remarks had dialogue about a potential acquisition
        • Will be interesting to see if they find a potential company to acquire
        • They have 32mil in cash at this point
      • I continue to hold
  • Sylogist ($SYZ.to)
    • new CEO announced
    • seems well credentialed to execute their M&A strategy
  • McCoy Global ($MCB.to)
    • New credit facility that gives them some additional flexibility and lower borrowing costs
    • Released Q3 results
      • Rev way down
      • Adj ebitda positive
    • Backlog stable at 10.6 mil
    • Continue to wait while things turn around – NCAV is stable to support margin of safety
  • Friedman Industries ($FRD)
    • Reported their fiscal Q2 2021
    • Smaller loss sequentially with some better expectations for Q3
    • Capital expenditure project costs are coming in higher than anticipated but I do appreciate them investing in the business
  • Freshii ($FRII.to)
    • Reported Q3 results
    • Non event as they are just above EBITDA breakeven
    • Closed a few more restaurants
    • Good news is that cash balance (and my margin of safety) is being maintained
  • Martello Technologies Group Inc ($MTLO.v)
    • Released fiscal Q2 2021
      • Numbers were below what the market was expecting and MRR was lower than I thought it would be
      • I believe there was higher expectation for organic revenue growth
      • Will keep monitoring the position
    • Announced a partnership with Rapid Circle (a Microsoft Gold Partner)
      • Further validates their value to customers in my opinion

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Servotronics – $SVT

Another quick and dirty look at a net-net.

I discovered SVT when looking through the Grahamian Value site.

  • Price – $7.35
  • Shares – 2,397
  • MC – 17.6mil
  • EV – 22.6mil

Background

Servotronics, Inc. designs, manufactures, and markets control components and consumer products in the United States and internationally. The company operates in two segments, Advanced Technology Group (ATG) and Consumer Products Group (CPG). The ATG segment provides servo-control components to the commercial aerospace, aircraft, and government related industries; and medical and industrial markets. This segment’s principal components include torque motors, electromagnetic actuators, hydraulic and pneumatic valves, and related devices that convert an electrical current into a mechanical force or movement, and other products. It also offers metallic seals of various cross-sectional configurations to close tolerances from standard and special alloy steels. This segment markets and sells its products to the United States Government, government prime contractors, government subcontractors, commercial manufacturers, and end-users. The CPG segment provides cutlery products, including steak, carving, bread, butcher, and paring knives for household use, as well as for use in restaurants, institutions, and the private industry; fixed and folding knives for hunting, fishing, and camping; and machetes, bayonets, axes, strap cutters, and other tools primarily for military and rescue/first-responder use, as well as for commercial markets. It also offers various specialty tools, putty knives, linoleum sheet cutters, field knives, scalpels, and micro-spatulas; and plastic and metal fabrication, as well as engineering, design, and OEM/white-label manufacturing services to customers in the consumer and commercial industries. This segment markets its products through its sales resources and independent manufacturers’ representatives to big box, hardware, supermarket, variety, department, discount, gift, drug, outdoor, and sporting stores, as well as through electronic commerce. Servotronics, Inc. was founded in 1959 and is headquartered in Elma, New York.

https://servotronics.com/about-us/

The two segments are very different and can be analyzed independently.

ATG

Selling anything on an airplane requires tough to obtain certifications and the relationships are very valuable. Especially if those relationships carry across multiple types of aircraft.

https://servotronics.com/capabilities/

As you can see the ATG segment has grown from it’s base of less than 6 mil quarterly revenue to well over 12 mil before covid. This part of the business is consistently profitable (before covid).

There is some customer concentration risk in the ATG part of the business which is typical of these small parts suppliers in aerospace. This also leads to some lumpiness that can create some opportunity as many orders are delayed not canceled.

Covid has hit this part of the business hard. The last quarter was the first operating loss in 10 years.

CPG

The company designs and manufactures are variety of knives with a variety of applications. Below is the subsidiary’s website.

https://ontarioknife.com/collections/all

I don’t know anything about knives, but the business looks really competitive. I’m not sure of the brand value that this company carries.

they have been losing money consistently in this segment of the business.

The opportunity

5yr chart

Couple to lower expectations of the business with the increase in current assets gives you a net-net. Net-nets obviously have low expectations built into them. The low valuation takes some of the risk of future execution off table as they really can continue to do what they are doing and you can sell for a profit once some confidence returns. Many will argue net-nets are not fantastic businesses. This is completely valid. But there are examples of great businesses today starting out as a net-net that have been transformed into something substantially bigger and better. A good example is Sangoma Technologies, which several years ago was a lumpy product business trading at less than net cash.

Below is the current assets of the consolidated business.

One of the risks I look for in net-nets is the obsolescence risk of inventory. Some quantifiable ratios coupled with qualitative guesswork can reduce this risk.

As we have seen with SVT, the ATG part of the business was growing well. With this growth comes the increase in inventory. It’s worth looking at the Cash Conversion Cycle and overall Working Capital to look for some potential concerns.

Inventory and working capital have grown relative to sales but they are still not what I would call worrisome. Given that ATG has been hit hard from covid lockdowns I feel relatively comfortable with using the current inventory value in my margin of safety. There is currently 25mil of inventory carried on the balance sheet. As well there is 12 mil in PPE carried on the balance sheet which can give an additional margin of safety if we puchase based on a discount to assets.

Split the business?

The obvious thing to an outsider would to split/sell/spin-out/divest the CGP business. Though this is easy said than done, it likely would unlock substantial value.

If we use our imagination and covid lockdowns don’t continue to drag on for longer than the next 2-3 quarters and the aerospace business returns to pre covid levels of profitability of 6-8mil EBIT annually, I don’t think 8-10x EBIT is unrealistic. This leaves a value of 48-80 mil in the ATG business with no incremental growth. That’s at least double the current market cap of SVT.

Valuing the CPG business is harder. What do you think a (non Saas) business that has yet to produce earnings is worth? There are about 10 mil in identifiable assets carried on the balance sheet. This is without considering any liabilities. CPG did 8.2 mil in revenue in the TTM and 6.7 mil in 2019. There has been increased interest in the CPG products recently and the loss in the last two quarters has been the smallest in several years .

Really the value to be unlocked is just getting SVT to be valued based on the aerospace business alone. One could argue that diversification in business lines reduces the risk overall to the entity. I’m not sure that’s fair given CPG has not earned a profit in many years and we (up until 2020) experienced an economy that is growing with minimal inflation.

This is where things are uncertain. What’s the likelihood of the spin/sell/divest catalyst? I have no idea.

The current CEO is also the chair of the board. He controls (personally and from his father’s trust) controls 21% of the shares. He is also the President and CEO of the company’s knife subsidiary (Ontario Knife Company). He’s been with the company since 1993.

The rest of the board controls less than 1%. Harvey Houtkin and FMR LLC control about 20%. The Employee Stock Ownership (ESOP) Trust has another 20%. The participants in the ESOP have the right to vote on the share that have been allocated, while company representatives vote the unallocated shares. 84% of the ESOP shares have been allocated.

Conclusion

SVT is an interesting set-up. Expectations are low, but even with a return to a post covid world there may not be a massive amount of upside in the shares. Even if the economy reopens sooner rather than later, there are no guarantees when the ATG business will return. Of course there is a debt with SVT that adds some risk (although I think that is minimal).

SVT may be a good candidate for a net-net basket.

Anyone else look at SVT recently?

Thanks,

Dean

*the author does not have a position in SVT at time or writing.

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