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

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