CVTech Update…

I have a few companies in the portfolio that deserve more of my attention. CVT.to is one of them.

I originally bought CVT.to (see here) at the start of 2012 with a sum-of-the-parts valuation being the a major driver to unlock hidden value. There were a few others (EV/S, EV/EBIT, and P/B) that I compared the larger division (energy) to its competitors. My thinking was that the company would get rid of the CVT (continuously variable transmission) division and what was left would trade at a higher valuation as a stand-alone entity.

Maybe the author deserves (some) credit as the company did sell the CVT division less that a year later. And for slightly more than I had though it was worth. However, I remain divided on what to do with my shares. Even though my original catalyst did happen, it didn’t drive share prices higher like I had thought.

There has been a colorful history at CVT.to related to a now former board member (Aubert), the board, and executive management. The former board member initiated a proxy fight in 2013. It was then that the public was made aware that there was a offer for the company at $1.90 at the end of 2011. It was that bid that initiated the strategic review of the company that resulted in the eventual sale of the CVT division.

Some may be asking why I still hold shares. This is a question I have been asking myself and hopefully have an answer to in short order. When the sale of the CVT division happened, the energy division was showing renewed signs of life posting annualized EBITDA of over $24 million or $0.33/share on a share price of $1.10 and pro-forma EV of $1.75/share. Giving a valuation of just over 5.25 EV/EBITDA. Given that it seemed like revenue would grow moderately organically and with some strategic acquisitions, I felt it worthwhile to hang onto my shares.

Fast forward 2-3 quarters and revenue has been flat and margins have been hammered. Some have been from what could be one-time items (recent q has many costs from a project in the financials, but not all the revenue) and others are obviously execution.

As for normalized earnings…my best guess would be to take average margins and just paste that onto the current revenue base with some annual additions from acquisitions. I don’t think the nature of the business has changed dramatically and the future looks similar to the past regarding the need to upgrade and maintain our electrical infrastructure.

CVT_TTM_margins

Taking the historical data (even with the CVT division muddying the waters) you could use a 10% EBITDA margin. Which would bring EBITDA to $0.37/share and give you about 4.5 EV/EBITDA. Cheaper than peers and cheap enough for the portfolio at the moment.

Now that my original catalyst has been removed I have been looking at current management with a little more scrutiny to try and understand if they can execute on their business plan and increase shareholder value.

My current concern is that management is not equipped to compete in the marketplace against it’s larger competitors in the United States. From what I have been monitoring, CVT.to is really the only company that has had it’s margins hit over the last 2 quarters. When I look at the cast of characters on the management team, I see a ton of experience at CVT.to not anywhere else. Having said that, they just announced a new manager for a large part of Canadian operations.

The CEO pay seems high for a company this size, but with him owning 10% of the company and the share worth 10x his pay, I think interests are aligned.

The previous director has been selling shares. It should be noted that he owned almost 14% of the company and still has 5 million shares or about 7% of the shares outstanding. If he continues to sell, it will be a drag on the share price.

I continue to hold a small position and await the next few quarters earnings to see if they gain any traction on margins.

Anyone is more than welcome to comment if they have thoughts on the name.

Dean

Disclosure: Long CVT.to

 

3 Comments

Filed under Company Updates

3 responses to “CVTech Update…

  1. Wei Chen

    I sent you an e-mail, but just in case it does not reach you, let me comment in your post:

    Hello Dean,

    I read your article about CVTech. I am also a shareholder and a little bit doubtful at the moment, like any other shareholder of CVT after a dreadful Q3.

    Do you still own their shares today, after the Q3 earnings report? Desjardins, Laurentian, and LB Securities still give them an upside to $1.10 or $1.25. I am expecting $0.02-0.03 EPS for Q4, but I believe that they should work towards a consolidation play in the coming year and really start to acquire companies; they need to raise cash-on-hand.

    What do you think about their current situation?

    • Thanks for the comment and email.

      I sold my shares recently after the Q3 earnings release. I was disappointed in where the company is heading and without the announced acquisition, I worry that we may be looking at a new normal for profitability. My largest concern (and what I should have been concerned with from the start) is lack of assets for a margin of safety. With ROIC trending down, the company appears to struggle to earn it’s cost of capital, meaning I would buy on the replacement value of assets. Tangible book is at $0.67, at that price I would revisit the company again.

      Sorry I couldn’t be more help.

      Dean

      • Wei Chen

        Thanks for the reply and your take on their metrics! I have neglected to look at that in my DD.

        I think that management has done a poor job with what is there. They have a backlog worth $300M. They even have lots of expected payments from their clients due soon.

        I’m glad that you got out of the headache that is CVT, but I’m waiting on the settlement of some payments due and at least a strong quarter sometime down the line to provide an exit strategy,which I’m supposing is everyone’s plan (those who held on).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s