Category Archives: Company Analysis

Pulse Seismic (

I recently purchased some shares in Pulse Seismic. I have been loosely following Pulse for several years but never in any detail. It has been profiled on a couple of blogs some time ago.

I mentioned on twitter way back in August that I was looking at O&G service companies again.


Thankfully I didn’t have to look far. My thought process for investing in oil and gas companies in the current environment is:

  1. Must have the ability to cut expenses and run at or near break even (on a full year basis) at the current level of activity
  2. Must have a clean balance sheet so the company can use the downturn as an opportunity to expand the business
    1. The last thing I want is to have the company do a large dilutive share raise and multi-year lows in the share price
  3. Must have a capable management team with high integrity and spacial awareness to understand where the current opportunities are

The idea is to find a company that can ride out the downturn and be a larger business providing more value for all stakeholders during the eventual recovery. If I am able to find a company that meets all three of these, then I should theoretically be hoping for a long pronounced downturn as it will only expose more opportunities for the business to grow.

Brief description of Pulse

Pulse Seismic Inc. is a Canada-based seismic data library company. The Company is engaged in the acquisition, marketing and licensing of two-dimensional (2D) and three-dimensional (3D) seismic data for the energy sector in Western Canada. The Company has a seismic data library in Canada, which includes approximately 28,600 net square kilometers of 3D seismic and 447,000 net kilometers of 2D seismic. The Company’s library covers the Western Canada Sedimentary Basin (WCSB). The Company’s seismic data is used by oil and natural gas exploration and development companies to identify portions of geological formations that may to hold hydrocarbons. The Company’s seismic data is used in conjunction with well logging data, well core comparisons, geological mapping and surface outcrops to create a map of the Earth’s subsurface at various depths. It designs, markets and operates participation surveys and grants licenses to the seismic data acquired to parties that participate in the surveys.

Let’s take a closer look at Pulse to see if it ticks all the boxes.

  1. Ability to cut expenses to get to breakeven.

Given the nature of their product and the overall cost of the survey relative to the large expense of drilling for oil, they are able to maintain high margins regardless of activity. Their product is a very minor expense relative to the overall cost to drill. They are not interested in racing to the bottom in regards to pricing. That only damages their brand and will be very hard to claw back in the eventual upswing. Pulse has less than 20 employees and most costs for shooting the surveys are contracted out. As you can see below they have been able to maintain their margins with less business activity. The last chart shows that they have reduced opex to align with business activity. It’s reassuring that they are not sitting on their hands waiting for a recovery. They have also cut their dividend to preserve cash.




2. Clean balance sheet to leverage as opportunities arise.

The company has paid back all the debt it took on from a large acquisition in 2010 and is now in a net cash position. They have also purchased shares and used to pay a dividend.


Given the ability to mirror opex with business activity, this company could take on a decent amount of debt without concern.

3. High integrity management team with ability to see opportunities.

This part of the due diligence process is subjective. The qualitative part of an investment is always the trickiest. The board is completely independent, experienced in the industry, versed on capital markets, and together own over 30% of the company. They also give a skill matrix in their MIC.


Management compensation is reasonable for a company this size. Their competition is global, were as they are not. So they need to know the geography inside and out. As well, the sales team needs to know the ins and outs of every project in the territory.

They have a couple of levers in regards to business growth.

  1. They can make a straight up purchase from E&Ps directly. The value of the contract may not be material to the overall costs associated with drilling for oil. Having said that, during a downturn all options are explored to be monetized.
  2. They could buy surveys from a competitor. Though not likely, it is always possible.
  3. They could conduct another participation survey. They help by doing some pre-funding but most initial costs are paid by end users.

Summing it all up

I think Pulse ticks all three boxes. In order to invest in this company you have to get comfortable to their exposure to oil and gas.


  • able to mirror expenses with activity quite easily
  • high value add product to customers
  • no debt


  • given how unique the business is, growth opportunities may not present themselves
  • they never really get expensive on a P/E or EV/EBITDA valuation
    • It’s likely from the fact that their revenues are not recurring and they have exposure to an industry which is extremely cyclical

Let me know if you are finding any value out there.




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Why I Sold MUEL

I recently sold Paul Mueller Co. I thought I would go into a little detail on the decision. The decision relates to how I have evolved as an investor. For those who want the history, please read my previous post.

Paul Mueller Company is a provider of manufactured equipment and components for the food, dairy, beverage, transportation, chemical, pharmaceutical, and other industries, as well as the dairy farm market. Overall I think that the company has done a decent job running the business. Of the four segments (Dairy Farm Equipment, Industrial Equipment, Field Fabrication and Transportation); Dairy and Industrial make up the majority of the top line for the consolidated company.


Dairy has been stable  since the acquisitions post 2007-08. I was hoping for the Industrial segment to post some sort of turnaround in 2015. That has not happened.


The company’s valuation is still quite cheap without any contribution from the Industrial (or Field Fab and Transportation) segments.


So there are a few questions to get comfortable with the company as an investment:

  1. Does the Dairy segment continue to do well?
  2. Does Industrial turn around?
  3. If yes to the first two, does the valuation of the company improve?
  4. And aside from all 3 of those, is this a business run by quality mgmt?
  5. Lastly, does the pension liability on the balance truly reflect reality?

I honestly can’t really answer any of the above. I never really could. My original thinking was that if I buy shares cheap enough, I don’t really need to answer any of these questions. That’s not a bad way to invest, it’s just not the way I have gotten the most comfortable with.

When you buy a business like MUEL, you are buying a business with low(ish) product differentiation, capital intensive, and the business is subject to shocks that are beyond the control of the current management team. As well, you aren’t getting a ton of communication with the outside investor world. When buying microcaps, you hope for a business that is somewhat nimble, you aren’t getting that with MUEL.

It should be mentioned that MUEL has recently announced a share buyback. With such low volume on the stock, it could really move the stock higher.

In order to properly accommodate all the specific risks with MUEL you would need a portfolio that has 20-30 names. As well the amount of churn in the portfolio would have to be high. Something I don’t have time nor the personality for.

You may think that I will shun commoditized businesses or a business with little product differentiation to end users, that is not entirely correct. I have been putting a lot of thought into whether or not you buy companies that are part of a market that is commoditized or with little barriers to entry, and the answer of course….it depends. I’ll try and get some thoughts down to encourage conversation.



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Paul Mueller Co (MUEL)

Microcaps are not for the faint of heart. The same thing that can give a small investor like myself an edge also leads to volatility around earnings time. Many small and microcaps don’t do much to keep investors in the loop regarding business updates (especially when they are negative). They also lack institutional following to assist in the information dissemination process.

I was recently reminded of such volatility when MUEL reported earnings a few days ago. The share price responded by dropping nearly 30% on the day. Since the shares started the week pretty much where I originally purchased them, I am essentially down 30% on my position. I need to re-evaluate the position and make a decision to add, maintain or sell.

Here is a quick rundown on the business segments.

  • Dairy Farm Equipment
    • Milk cooling and storage for dairy farms
    • Processing and storage tanks
    • Refrigeration products
    • Heat transfer equipment
  • Industrial
    • Standard and customized stainless steel and alloy processing and storage tanks
    • Pure water equipment
    • Heat transfer products
    • Over the road tank trailers
  • Field Fabrication
    • Large field erected tanks/vessels
    • Equipment installation
    • Process piping
    • Retrofit and/or repair of process systems
    • Turnkey design and construction of compete processing plants
  • Transportation
    • Delivery of products and components to customers and field fabrication sites
    • Backhauls of materials and contract carriage

Company Website

The original thesis was a function of a few different factors (those interested should check out OTC Adventures latest post on MUEL):

  1. Continued deleverage of the balance sheet, including:
    1. minimal impact from the company’s pension liabilities
    2. pay down of debt (or at least not increasing leverage)
    3. management of working capital
  2. Execution of the largest reporting segments (Dairy and Industrial), including:
    1. continued execution on the Dairy segment
    2. progress on turning around of Industrial segment
    3. overall margins on a consolidated basis
    4. strong message from CEO on the other segments

Balance Sheet

Pension Liabilities

I am no expert on company pensions. Over the years I have strayed away from companies that have large pension liabilities. For the most part, they have a ticking time bomb feeling to them. But that is truly an unfair statement. There are companies that have defined benefit pensions that are not underfunded or at the very least are not dramatically underfunded enough to be a worry.

What I have decided is good enough for me in order to pursue an investment in the company is:

  1. pension that is not enormous enough to distract the company’s management team from executing on growing the business. it should be mentioned that the size of the obligation can be crudely modelled into a fair value for the stock
  2. conservatively valued (low discount rate and return expectations)
  3. underlying investments are not “junky” or high risk
  4. most importantly, management recognizes the potential risk and puts appropriate measures to mitigate risks involved

MUEL seems to have this part under control in my mind. The size of the obligation is high, but there is little mention of it by the CEO in the letters to shareholders and (due to the next few points) I don’t think it consumes a ton of management attention.

Discount rates currently at 5.34% and expected return is 6.78%. Seems reasonable over the long term. It should be noted that both have been trending down over the last 6 years.

Investments in the plan are a mix of equities and fixed income. Equities include a broad range of publicly traded securities (including US listed and ADRs). Fixed income is made up of high quality corporate debt and government debt. Currently 61% of the plan is in equities and 38% in fixed income. It passes this test for me.

Lastly, there has been some initiatives put into place to reduce the total liability over the long term. There is a couple of moving pieces here, here’s the language from the latest 10-k.


You can see the initiative bearing fruit as the service cost under the benefit obligation summary has been zero for the last 3 years.

Overall, I am mindful of the pension liability, but feel the right measures are in place to simply include some form of the obligation into the valuation of MUEL.

Pay Down of Debt

Given the pension liability, I view this as important to minimize balance sheet leverage. In this instance management has been executing for the last number of years.


Working Capital Management

There have been stories of some businesses running into hard times simply because they don’t manage their working capital. Here I look at 2 metrics; CCC and working capital as % of TTM rev. To be fair, I haven’t smoothed these numbers out to take an average amount over the course of a year, so they are not perfect. But from my vantage point, they are enough to show that the company is not in a risky position with it’s working capital.



Overall I am happy with MUEL deleveraging the balance sheet. The main sore spot over the last year has been the pension obligation increasing on the liability side of the balance sheet.

Business Execution

The Diary and Industrial segments have been 80-90% of revenue for the past 6 years. So if you wanted to see what will move the needle, you need to understand the underlying mechanics of each and have confidence in execution.

Dairy Segment

A couple of acquisitions in 2008 changed the segment dramatically. Sales rose dramatically due to the acquisitions. Since 2008, sales have been between 70-90 mil with EBITDA slowly expanding to the 15 mil mark in 2014. This is the most valuable part of the business by far. Having said that, starting in 2015 there will no longer be a quota on mild production in Europe. This will impact the Diary business to a large degree. At this point, it seems to be a short term non-event with a medium term tailwind. You can read about it here. Something to monitor for sure.

Industrial Segment

The other large segment is the Industrial segment. Results have not been good over the last 10 years.


There is no surprise something labelled Industrial is cyclical. Part of the reason I invest in small companies is that expect them to be nimble to a certain degree. The other part is that I would the CEO to be able to make change to culture of the business in shorter order than a larger company.

Processing Equipment is the largest part of this segment. In 2013 the Processing Equipment portion earning 6.3 in pretax profit on better efficiencies and margins, meaning the remaining parts of the business lost around 8.1 mil. In 2014, the Industrial segment as a whole lost 0.652 mil and the Processing Equipment had a “small loss”. One can infer that the other Industrial portions of the segment were around breakeven. That’s quite an improvement. This is confirmed in the letter to shareholders with the statements being generally positive with the other parts of the Industrial segment.

I do have a concern with the Industrial segment on a consolidated basis. I would assume that some tough decisions are in order for this part of the business as the CEO has now been in place for 2 years and yet the Industrial segment is not performing.

Overall Margins

Gross margins are down in Q4 2014 from a year ago. As the chart shows, given the low gross margins inherent in the business, one needs to be really comfortable with the management team’s focus on doing business that makes sense financially and not “making work” to stay busy which is a struggle for many production related businesses with unionized labour.


CEO Message Around Business Culture and Shareholder Interests

The company doesn’t have quarterly conference calls, and doesn’t participate in investing conferences. However, the annual letter to shareholders does set a tone of accountability by naming the various manager of the various divisions. It also mentions revenue and margins to some degree, but does not give exact numbers for analysis purposes. Also, managers compensation is more closely tied to the business segments in which they are responsible for.

There is mention of efficiencies in processes and right sizing of headcount a few times. For this to be talked about openly is a positive and gives at least some confidence that the management team can make tough decisions if needed.

Other things of importance

  • The other 2 segments (field ops and transportation) are performing well except an accident at a customer site with a field fabricated unit where the company has taken a 2.9 mil reserve against the accident
  • MUEL used to pay a dividend, but stopped in 2009
  • Lower Euro hurts the Diary operations in Europe
  • Backlog is down from a year ago, but within is last 3 year range
  • David Moore has taken over as CEO in 2013, he has been with the company since the late 90s


I think the best valuation metric for this type of potential investment is either EV/EBIT or EV/FCF.


Including the pension in the calculation is up for debate. Something should be included in my opinion. How much, I’m not sure. Given the way pensions are calculated leads to wild swings in value. This is why it makes no sense to use book value as a metric for this business. I think given the ROC potential (20%+), even just the crude measure of including the entire liability still makes this company cheap.

As far as upside goes, one could paint a picture with continued strength in Dairy and some modest profit from Industrial. Couple this together with some operating earnings from Field Ops and Transportation, I could get to 16 mil in operating earnings. This would put current shares at 4.14 EV/EBIT or 6.35 EV/EBIT if you include the pension obligation. If the business is earning those kinds of margins, I would think a valuation almost double today’s would be fair.


There are some things I need to understand before making any sort of a move:

  1. Increased context on the pension calculation and more information on the employees on the defined benefit plan. What does this look like on a go-forward basis
  2. More information on the accident that caused the 2.9mil provision. Specifically, what is the company’s risk mitigation strategy when one accident can make up a reserve charge that equal to 20% of the segment’s revenue
  3. What is going to be done with the Industrial segment and when can we expect some sort of stability in that business
  4. Additional context on the milk quota removal and what it means to the dairy segment
  5. Some color on the backlog

I plan on attempting to contact management over the next week or two to get this information over the phone.

Feel free to comment.




The author is currently long MUEL, but that can change at any moment, so do your homework.

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Superior Industries International

Superior Industries (SUP) has been on my “to research” pile for over a year. I never got around to spending some time on the company until the last 2 weeks. There are a few others that have opinions on SUP, so check them out.

I though I should share my thoughts to timestamp my research and potentially get a discussion going around the name.


From their website:

Superior Industries International, Inc. is engaged in the designing and manufacturing of aluminum road wheels for sale to original equipment manufacturers (OEMs). The Company is a supplier of cast aluminum wheels to the automobile and light truck manufacturers, with wheel manufacturing operations in the United States and Mexico. The Company operates five manufacturing facilities in the United States and Mexico. Products made in its North American facilities are delivered to automotive assembly operations in North America, both for domestic and internationally branded customers. Its OEM aluminum road wheels are sold for factory installation, as either optional or standard equipment, on many vehicle models manufactured by Ford, General Motors (GM), Chrysler Group LLC (Chrysler), BMW, Mitsubishi, Nissan, Subaru, Toyota and Volkswagen.

Here is a quick summary of how the business has performed over the last 10 years.


You can see a tough time before the Great Recession and a decent recovery. Now lets take a look at the income statement.



The previous 2 charts are further evidence of a rough time during the recession and hint at the nature of how tied the business is to the new auto market.

Once you get a glimpse of the company over a business cycle, you can see how little they control their fate if there the ultimate end user stops purchasing products. Having said that, the purchase of new autos can really only be delayed as eventually cars and trucks wear out and need to be replaced.

Another chart will give some additional context to the business. This is from their latest conference call presentation.


You can see that the company shipments of wheels tracked the NA vehicle production closely until the end of 2011. The main reason for this is that they have hit their peak capacity from their current PPE while the NA production continued to grow. They even operated above capacity for a few quarters, but that is unsustainable.

Remember those negative gross margins in the last downturn? That is the price you pay to keep capacity idle during a downturn. If you read Frank Voisin’s post, it mentions how they shut down some plants due to lack of demand from end users. Though the idea likely seemed good at the time, I wonder if given the hindsight of today they would have made the same decision.

Currently, the company is building a new facility in Mexico that will give them an additional 20% capacity jump when finished.

Some of the characteristics mentioned and some not mentioned:

  • limited top line by PPE capacity
  • for the most part a price taker
  • historically has had a tough time earning excess returns on invested capital

Given these factors, I would think the valuation of choice would be some sort of earnings power value (EPV). Buying at a discount to EPV or buying at a replacement value and selling at EPV (if the gap is large enough to provide a margin of safety) makes sense to me for a company where the dynamics of their business does not change dramatically over 10 years.

Earning Power Value (EPV)

Before I get to my interpretation of EPV for Superior, I should make note of capex. For a business with a large portion of assets being fixed, capital expenditures are important to analyze. Here is a quick summary. Capex

Nailing down maintenance capex is important to properly understand EPV and a distributable cash flow or owner earnings. We know what revenue took a dive during the recession, so one could assume that only the most basic expenditures were being made. But maybe there were under-investing in the PPE and would eventually pay the price for it. Either way I assumed 3% of rev or 20% of average net PPE must be spent on maintenance. Here is what those numbers look like relative to Depreciation. The conference calls and annual reports I researched didn’t give a hard number for maintenance capex, so I have to take an educated guess.


You can see how close they have tracked each other over the last 5 years. So I took the average of the 2 and used that as maintenance capex.

Here is what I get for EPV.



You can see a strong recovery in EPV after the recession. But is struggles to eclipse NAV (which I have kept as tangible book value). This coincides with ROIC being little more than their likely cost of capital outside the really low interest rate environment.


I ended up passing on SUP. Even with some cheap(ish) valuations based on EV/EBITDA and P/TB. I see 3 reasons why I want more margin of safety:

  1. Tangible book and EPV haven’t moved much over the last 10 years for a business that doesn’t pay a huge dividend. Meaning that they won’t grow additional margin of safety for me.
  2. Very low gross margins will lead to operating leverage that cuts both ways.
  3. My history with large capacity expansions has not been positive. There can be something that goes wrong that spooks the market and presents opportunity.

Some Potential Positives I haven’t Mentioned

I mentioned that they are building a new plant in Mexico. There is some additional scale in the fixed SG&A costs that may bring up EBIT margins.

There is also a large cash balance on the books that can give them additional flexibility if needed.

I have taken a rough stab at what the income statement could be like with the successful integration of the new plant and eventual scale from lower SG&A spread out over the entire business. This is based on a jump in revenue, 11% gross margins, and 3% of revenue spent on SG&A. The business could see a run up to 82 million in operating earnings. That’s dramatically higher than the current 36 million. But with a more normalized 9% gross margins we get 62 million in operating earnings. If a person put a 10x EV/EBIT on these numbers you would get around $36 and $28 as a rough estimate of where the share price could move to. At around $20 today, I would like a little more room for error given that we are likely 18-24 months away from full operation of the new platn.

I would look at SUP again in the mid teens. It may never get there, so do your own research if you like the name.


Company Website


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New West Energy Services (NWE.v)

I won’t spend a bunch of time on the post for NWE, only go over the highlights…

Oil production in the United States is rising dramatically. Couple that with ever increasing production out of the WCSB and limited refining capacity has created a condition where Western Canadian Select trades at a massive discount to WTI. Over the last 12 months oil transport by rail has increased dramatically to compensate for Alberta oil being land-locked. I think this is a trend that continues until pipelines are eventually built. Several Alberta based projects just got the green-light. And I also think that production in the U.S. continues to rise. I mentioned most of it in a previous post. I wanted to find out who would benefit and build a basket of a few names. I ended up looking for companies that met the following criteria:

  • Under-followed by the analyst community
  • Exposure to WCSB and/or Bakken oil production or exploration
  • Cheap valuation TTM and NTM

NWE made the cut even though it has only really earned sustainable economic profit after 2011 with the acquisition of Bearstone from Newalta. This is when the newest (Kerkhoff) CEO took over after the previous CEO stepped down. At the same time William Rand (director) purchased 15% of the company. The current CEO owns a little more than 1x salary in common stock.


You can see the company turning into something sustainable in late 2010. I get about 20-25% ROC over that last 3 years. So it looks like they are adding value.

I should mention that the last few acquisitions have been paid at a reasonable price. There are opportunities for these little companies to move the profitability needle without having to shell out a ton of cash or pay a huge premium price to gain critical mass.

Another note is that in June there was a bunch of warrants that expired that would have been extremely dilutive.


  • Obviously oil prices (and the spend on services)
  • Also with these small companies is the lack of a moat. They may provide a niche, but that doesn’t mean they have a moat.
  • Execution of the integration of recent acquisitions.
  • And of course, potential general corporate governance.


  • 0.75x tangible book
  • 3.2 EV/EBITDA ttm
  • likely less thatn 2.0 EV/EBITDA once run rate revenue flows through the financials from recent acquisitions

I should be able to post the other ideas in the coming weeks.


Disclosure: Long NWE.v

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Sangoma Technologies

I recently took a position in Sangoma Technologies (STC.v). Here is a very brief explanation of my thoughts on the company.

I have followed Sangoma ever since it was mentioned by Nate at Oddball Stocks here. It fell onto mine (and his) radar due to it being cheap, see below.


The plunge in valuation was not without merit.


You can see that the company really started struggling in 2011. Margins and ROC went one way while the capital invested in the company went the other. It looks pretty ugly.

I can’t really speak to the products themselves and their spot in the marketplace. What I am hoping for is enough margin of safety that I don’t need to know much.

Margin of Safety – Asset Value


*here is what I used to calculate liquidation value


You can see that the NCAV hasn’t changed much. That’s because most of it has been cash rolling into inventory. So you need to get comfortable with that if you are looking at Sangoma. But there is $0.12 in net cash on the balance sheet. When the CEO took over in 2010, he made it clear he is focusing his effort on growing the company and said that many costs will be incurred now while revenues recognized later.


As Saj Karsan points out in this post, there are risks involved. He is 100% correct in identifying them. They have been there for at least 2 years and for at least 2 years business owners have been disappointed.

Why Am I Buying?

I keep hearing a sentence in my head from The Manual of Ideas, “Acceptance of discomfort can be rewarding in investing…”. Many net-nets aren’t liquidated, but are turned-around (even temporarily). Annual results should be out very soon and a recent news release has pointed to growing revenue. Hopefully we will be free from write-downs, or at least only a small write-down if there is one.

Lastly, as with any investment position sizing should be taken into consideration. This company would likely fit into a basket of asset based valuation stocks as a portion of your portfolio. If Sangoma does turn out to be a winner, don’t get greedy. This is not a wonderful company at a wonderful price.


Disclosure: Long STC.v


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HNZ Group

As the markets continues to march higher, I keep looking for companies that have fallen off the radar. I stumbled upon HNZ group ( running for a screen with negative 52 week return and some basic profitability metrics (high ROE, decent margins, etc.).

Company description (from their website)

HNZ Group Inc., formerly Canadian Helicopters Group Inc., is an international provider of helicopter transportation and related support services with operations in Canada, Australia, New Zealand and regions of Southeast Asia. The Company operates in three segments: helicopter transportation services, helicopter repair and maintenance business, and flight training. It provides helicopter services to a range of utility and special operations, including both offshore and onshore oil and gas, marine pilot transfer, mining, and provides military support in Afghanistan. Charter operations are provided under two brands: Helicopters New Zealand (HNZ) and Canadian Helicopters Limited (CHL). It provides third party repair and maintenance services in Canada and in the United States and operates two flight schools in Canada.

The company has over 800 employees and 130 aircraft.

Operating Performance



Looks pretty good. Nothing super smooth, but certainly nothing that would scare me away at first glance. Margins have come down a bit from their peak in late 2011 and so has revenue. Something to watch, especially since it’s coupled with increased CCC, which could indicate increasing pressure on ROIC on a marginal basis. What’s nice is to see the revenue and margin growth through the recession.

One thing that is really important with a company that has the majority of its assets in PPE is to look at how it is managed. 2 ways to do this are to monitor turnover and the relationship between depreciation and capex.


The drop in fixed asset turn in late 2011, relates to the acquisition of Helicopters (N.Z.) Limited. You can see the integration of all the equipment was not seamless and on an incremental basis it was a poorer performer than the previous core business. That doesn’t necessarily mean it’s bad, but not as high of turnover. FWIW, the acquisition was not outrageous at the time, but hindsight shows the purchase price was at the very least high.


You can see that capex has been increasing since the acquisition. There are likely a couple of reasons for this (other than the obvious – to purchase more PPE). The assets of the acquired company where in worse shape than previously expected requiring more maintenance capex, the company is looking to expand/diversify requiring growth capex or the company’s fleet is aging requiring more maintenance capex.

Either way, it looks like capex will exceed depreciation. Something that will weigh on my decision. Something that I should mention is how seasonal the business is. Working capital requirements vary dramatically over a calendar year.


Though some customers were mentioned previously, it wasn’t clear how much concentration there is.

The VFR (Visual Flight Rules) type of helicopter services primarily consists of lighter copters with 3-6 passengers. End Users consist of mining, utilities, offshore oil and gas and some government services. This part of the business has low barriers to entry and operates under short term contracts, hourly, daily or monthly rates.

The IFR (Instrumental Flight Rules) type of service consists of the larger copters with 25 or so passangers. This part has longer term contracts (3-5 yr) committed to specific aircraft and has a higher barrier to entry.

The company has some pretty high customer concentration, with USTRANSCOM (United States Transportation Command) making up 37% of revenues. This relates to services performed for the war in Afghanistan. I will let the reader draw their own conclusion regarding the future of American presence in Afghanistan. Obviously, if this contract ends (which it could in a year or so) it would be devastating to the company. With such high amounts of PPE sitting idle, utilization (and profitability) would drop.


Current valuation is 5.8x EV/EBIT, 1.1x book and 1.4x tangible book. Pretty cheap. What worries me is the slow decline in margins and the customer risk.

Final Verdict

I am passing on HNZ due to the large customer concentration risk mentioned and given that the other end users are quite sensitive to large capital expenditures relating to base metals and oil and gas. I would purchase if the contract loss was completely priced into the company or the risk of losing the contract was off the table.


Disclosure: The author has no position in the company mentioned.

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