Category Archives: Company Updates

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

 

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AEY…Sold.

Just wanted to keep up to date on a few things.

I sold AEY last week before they reported numbers. Revenues without the acquisition of Adams Global are still falling. I was hoping that stbility in the housing market would mean stability in AEY’s revenue. I was wrong.

Inventory is slowly getting sold through the increase in refurbished revenue. This is a good thing as the amount of inventory was always a concern for me.

They are likely to do an acquisition soon as the are net cash.

I think the CSCO agreement changes the profitability indefinitely going forward. I overlooked the severity of this.

I will keep a close eye on the company and jump back in if I see something I like.

Dean

Disclosure: None

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Pethealth Update

To be honest, I am kind of uneasy posting positive updates about companies on the blog. I always feel that as soon as I post something about being correct, something unforeseen will happen.

On that note, I will provide an update on Pethealth (PTZ.to).

Full year 2011 numbers were reported and everything seems to be on track. The reader should feel free to review my previous post on PTZ.

Insurance

The company finished the year off with relatively strong insurance results.

Improved results vs. last year were driven by improved conditions in the UK and restructuring in the US finally showing fruition.

I have modelled a run rate EBITDA of 6.5 million.

Non-Insurance

As promised the company has turned EBITDA positive in Q4 2011 (though barely). 2012 should continue this trend, as ERP expenses wind down and continued traction leads to higher non-insurance revenue.

This has been driven by increased revenue coupled with the decline in expenses.

The company is executing as promised. Though I am impressed with the results, I hesitate to give too much value to this side of the business. PTZ will be going against some intense competition online.

That being said there is a unique company here. They have really done some interesting things with their interactive adoption site. Also the data they collect from the RFID chips could prove to be valuable. They are actually able to have some large customers finance expansion. This is happening now in Petpoint, a management application for animal welfare organizations.

I stole this slide from the most recent investor presentation.

Valuation

I put fair value of the insurance of 6x EV/run rate EBITDA and add a conservative value for non-insurance. Last go around I felt that non-insurance had not proved itself and gave it a value of $0.

This time I give insurance a value of $1.09/share based on mean reversion and no growth. Non-insurance gets $0.25-0.35/share. Based on revenue multiples with comparative companies and a crude asset value. This gives me a very conservative fair value of $1.35-1.45.

I have not sold any of my original shares of PTZ despite the run. Ongoing capital inflows to the portfolio along side a run in other holdings has prevented becoming too overweight PTZ. I will hold on and see what the non-insurance side of the business can produce.

Dean

Disclosure: The author is long PTZ at time of writing.

Latest investor presentation

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