I mentioned Bri-Chem a long time ago in this post on net-nets. At the end of the day the majority of the assets (inventory) on the balance sheet were over-stated.
Fast forward to 2019 and Bri-Chem has been hit hard. The share price has fallen 65% over the last year and now trades at 0.33x net-net. It should be noted that they are ebitda positive over the previous 12 months. The market cap is under $3mil CAD and EV is just under $40mil CAD. So debt is the major concern here.
This time is different
Given that the basis of my valuation is price to net-net, it’s important to understand the different moving pieces to their working capital.
The balance sheet assets consist mainly of accounts receivable and inventory, (this is a fluid distributor after all). Other than debt, the largest liability is accounts payable. Given that this is a distribution business (and extremely cyclical) I like using the cash conversion cycle as an leading indicator for a potential write-down. As you can see below the CCC has remained stable throughout the last 2 years.
I spoke with the CFO has led me to believe that the inventory value that is stated is accurate (or at least accurate enough to avoid a write-down). He mentioned how they have been working really hard through the down-turn to move the right product to the right location and that they have never analyzed inventory to this degree before. Since Bri-Chem uses debt to fund working capital (primarily inventory), their lender (TD) will be looking closely for inventory turns and an accurately stated inventory on the balance sheet.
Working Capital And Debt
You can see the working capital fluctuate through the last 12 years.
You can see the debt levels fluctuate with inventory. This was stated as their strategy at the AGM.
One should not expect debt levels to drop materially from here. If anything the debt levels will increase as activity returns to more normalized levels.
One can see that as equity, tangible book and net-net values rise with business activity.
Summing it up
Bri-Chem has been left for dead. There is no appetite for this type of company in today’s market. There isn’t a major competitive advantage, it’s a cyclical industry, there are political headwinds, the market believes we are awash in oil, it’s illiquid, management owns only about 5%, and so forth.
But it trades cheap, it has a resourceful management team and it is not bleeding cash. I think there is substaintially more upside than downside.
Given how debt heavy this company is and that they can do very little to control the demand of their product, I am going to limit my position size to about half of the other energy services company’s that I own.
Disclosure: The author is long $BRY.to at time of writing.