FAX Capital Quick Update – $FXC.to

A little over 3 months ago I wrote about FAX. Since then they have reported Q4 2020, Q1 2021 and held a (virtual) AGM.

Since the initial mention of FXC, shares have returned 12-13%. This compares to the TSX 60 return of about 8%, bitcoin is about flat, lumber is up 59%, and dogecoin is up about 400%. So I give my 1 quarter performance a B-.

We now have 6 quarters to compare the book value of FXC and measure the capital that has been deployed.

Of course, this is just a snaphot at the end of the quarter.

They have done quite well with the capital that has been deployed so far. The growth in book value given the drag of having a large % in cash has been impressive. Of course, there is no guarantee that this will continue.

There is still a fair bit of cash to be deployed, so I would expect to see continued deployment over the next quarters.

AGM Update

At the AGM the amended voluntary measures by-law resolution was approved. This allows FAX the ability to have more than 25% of assets in a position, which is up from the previous two portfolio investments be maximum 25% of assets (each). They state that the added flexibility will broaden the investible universe.

From the MIC

By removing the Investment Concentration Restriction, the Company will have access to a larger universe
of potential investments and the Company will be able to make larger investments in current Portfolio
Companies, if determined to be in the best interests of the Company. While no specific investment
opportunities have been identified by the Company that would necessitate an investment in an amount
greater than what is currently permitted under the Investment Concentration restriction, the Company
believes that the removal of the Investment Concentration Restriction will provide management of the
Company with increased flexibility to execute on the Company’s business objective and investment
strategies should one or more investment opportunities be identified and be determined to be in the best
interests of the Company.

Given the track record, I’m not concerned about concentration. I also have other positions in my portfolio, so really if FXC becomes concentrated the effect on my overall portfolio is muted.

They also provided quite a bit of detail on the first private company transaction. I don’t think I appreciated the market position of Carson, Dunlop and Associates. It would be nice to see a few more of these in their portfolio.

Valuation

Based on what has been disclosed in the filings, I have book value of $5.30. This doesn’t take into account any trading fees or frictional costs that may have occurred post Q1. The site is free, so I wouldn’t be surprised if I missed something. At the last quoted price ($4.22) the P/B is 0.80. This seems reasonable to me.

Founder Warrants

For some extra leverage to the upside in the near term, you could take a position in the Founder Warrants. They expire Nov 21, 2021 and strike at $4.50. The shares are close to that now and you have 180 days until they expire. The last quoted price for the warrants was $0.15 so the shares would have to be higher than the strike price to make some money on the warrants.

Be careful as these could expire worthless and are extremely illiquid. Although the could be a multi-bagger in half a year and you could be the most popular person at your kid’s friends birthday parties. Potentially even more popular than a crypto investor. Ok, maybe I’m getting a little carried away.

Conclusion

I still like this idea and continue to hold my shares. The investment team and management seem very conservative deploying capital and are not going to speculate on anything short term. They have executed very well and do not seem to be slowing down. A gradual deployment of capital, continued growth in book value, and buyback program could close the discount to book value.

Anyone else in $FXC.to?

Dean

*the author is long $FXC.to and (an extremely small amount of) $FXC/WT.to

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April 2021 Update – $OSS.v, $REPH, $ISDR, $PSD.to, $ISV.to, $FTG.to, $XTC.to, $RELL, $MTLO.v, $DWSN, $SVT, $URB/A.to

TIKR

I use TIKR to quickly look through ideas and check comparable companies. Would recommend. Referral code below.

https://app.tikr.com/register?ref=smob7c

Thoughts on Market Activity

This month seen a bounce in the markets to some degree. Hearing more and more mention of inflation on conference calls from companies and some larger companies have implemented cost increases due to rising input costs. I am not a macro guy but thinking about how a business will perform with higher input costs feels more prudent than ever. There seems to be a big disconnect on what I hear on Twitter vs. how the indexes are performing. I do consistently hear “it’s a tough market for microcaps” and “these aren’t getting the attention they deserve”. It seems to be a story of what worked in 2020 isn’t working in 2021. Is it a temporary phenomenon or something longer lasting I’m not sure.

On a personal note, my portfolio has been treading water for a few months. Keeping up with the Russel YTD will have to be good enough. I have been deploying into more and more smaller bets as some companies have reached large portions of the portfolio and not sure if the valuations warrant very large positions. This will make it harder to substantially outperform by a wide margin but could lead to less volatility. Also, I’m expecting that the churn in positions will lead me to underperform in the short term.

Posts this month

Developments on Companies Mentioned

  • OneSoft Solutions – $OSS.v
    • Announced another client
      • Nice to see some continued traction
  • Recro Pharma – $REPH
  • Issuer Direct – $ISDR
    • Announced a 1% pledge
      • I like the concept and how ISDR is an entity that gives back to the community
  • Pulse Seismic – $PSD.to
    • Reported Q1 2021 and held AGM
      • 3.8 mil in sales in April
      • They have now booked 77% of the entire year of 2020 rev (although depressed) in the first 4 months
      • I have tried hard to purchase additional shares, but the share price has run away from me
  • Information Services Corp – $ISV.to
    • Filed a shelf prospectus to raise up to 200mil over the next 25 months
      • Interesting development and something to monitor
  • Firan Technology – $FTG.to
    • Reported fiscal Q1 2021
      • Results were impacted by covid from a demand and operational standpoint
      • Trading quite cheap based on trailing numbers with some uncertainty with commercial aerospace returning
  • Exco Technologies – $XTC.to
    • Reported fiscal Q2
      • Results were above my expectations and outlook given was strong
  • Richardson Electronics – $RELL
    • Reported Fiscal Q3
      • Things are looking positive
      • Trading at about NCAV
  • Martello Technologies Group Inc – $MTLO.v
  • Dawson Geophysical – $DWSN
    • Adopted a shareholder rights plan
      • Expires in 2022
      • Not a fan
  • Servotronics – $SVT
    • Released 10-K
      • Not a ton of details that we don’t already know
      • Revs down 10% in 2020
        • ATG down 16% as they are tied to commercial aviation
      • CPG up 34% as they shipped more units
    • Still interesting to follow
  • Urbana Corp – $URB/A.to
    • NAV is slowly creeping up

The author is long $OSS.v, $ISDR, $PSD.to, $URB/A.to

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Macro Enterprises – $MCR.v

Here is a quick idea for those interested.

Company: Macro Enterprises

Ticker: $MCR.v

Price: $2.40

MC: 75 mi CAD

EV: 80 mil CAD

Background

Macro Enterprises Inc., together with its subsidiaries, provides pipeline and facilities construction, and maintenance services to companies in the oil and gas industry in western Canada. It is involved in the construction, alteration, repair, and installation of pipeline and facility pressure piping, and structural steel facilities, as well as provision of pipeline integrity digs services. The company was founded in 2006 and is headquartered in Fort St. John, Canada.

As noted above, they are heavinly dependent on Western Canada. Construction activity here relies on more traditional O&G, pipeline, and LNG facilities and related infrastructure.

Managment & Operations

Frank Miles founded Macro in 1994. He is the current CEO and comes acrross as quite conservative on how the business is run. They traditionally have low debt loads and reinvest cash generated into the business.

Compensation seems reasonable for a company this size.

The company is based in western Canada and has a local presence. They employ local workers including unionized and first nations. The company has worked in western Canada for many years and has experience with the terrain, seasons and various building conditions.

Large construction company’s must have a strong safety record which MCR possesses. The repeat business with large clients is a testament to the work they have put in build relationships. The specialized work can lead to margins above industry peers.

Construction companies like this are interesting as they can be lumpy and tend to provide an opportunity.

You can see the share price take off in 2013. This corresponds with the increase in business activity and the company’s profitability. The company’s earnings continued until 2016 when construction activity in western Canada dried up. It loosely tracks the price of oil produced in Alberta, Western Canadian Select (WCS) which is delivered at Hardisty as well as the natural gas price.

For those unfamiliar, Alberta’s oilsands produce nearly 3 million barrels per day. The oil produced is “land-locked” and is sent via pipeline, rail and truck. Continued production with limited pipeline capacity and the heavy crude being less ideal for refiners to process has led to WCS trading at a discount to WTI.

Ownership

The CEO owns 9.2 mil shares or about 27% of the outstanding shares. Mike Nielsen (VP) also owns over 1% of the company. Other holders of note are Gate City Capital at 11.7%.

Balance sheet

As expected the majority of assets are comprised of fixed assets. PPE (net of depreciation) has historically been over 40% of stated assets. I think it’s important to monitor working capital as well.

In order to win business, MCR needs a large modern inventory of equipment. Though salvage prices likely fluctuate during boom/bust times, the use of tangible book value I believe provides a decent proxy for replacement value at a minimum. They also have significant real estate and maintenance facilities that it likely understated on the balance sheet.

Income Statement & Cash Flow

Now that we have that out of the way, below is a quick look at the income statement in ttm for MCR. I don’t think looking at this business (or really any business) on a quarterly basis is a good idea.

Earnings are lower than the recent peak but are not quite as low as the previous downturn when the was EBIT negative. As with many cyclical companies, there tends to be floor in the valuation based on trangible assets.

Downside Price

The chart shows the company can trade at well under tangible book value during downturns. It goes as low as 0.50 P/TB in 2016, but hovers around 0.60. I think this represents the downside potential if activity does not return (or return for some time).

Though the company does lose money, they do not tend to bleed a ton of cash for an extended period.

At a stated value of $3.32 per share and a multiple of 0.60 gives us a downside potential of $1.99 or approximately 20%.

Upside

I think it’s important to make an estimate of what the potential is if activity returns. Looking at previous cycles to get an indication of where MCR could trade provides an upside scenerio.

In 2019 EV/EBITDA hasn’t been much higher than 3x. It’s pretty much the same story for 2014/15. The chart is hard to read as they trade at high multiples of EBITDA in downturns.

EV/Rev can be another indicator and also apears to be trading below mean, but higher than the lows.

The company recently stated that they anticipate 2021 to have at least 250mil in rev. We can take an estimate of what EBITDA will be based on history. I get about 36mil using previous gross margins and operational cost requirements. There are few estimates from analysts stating 32-34mil in EBITDA in 2021. Any additional increase in revenue will mean even more upside.

TMX Pipeline Expansion

The Canadian government purchased the in 2018 from Kinder Morgan.

Therer has been some interesting developments frecently with their JV and Trans Mountain. MCR has written off the JV in the quarter ending Dec 2020. They are still entitled to recieve 20 mil in cash by end of Q2 2021. I have no opinion on the matter other than what has been stated by MCR management. There was a contract signed with Trans Mountain in Feb 2021 for an initial value of over $50 mil CAD. I think this bodes well for their ability to win contracts as the expansion continues.

I believe that the TMX expansion continues (even if it’s over budget). There really isn’t a reason to replace MCR as a contractor at this point in the project. The increased capacity will be a major benefit to Canada as a country as oil is a largest portion of our trade and the oilsands are the 3rd largest proven reserve of oil in the world.

Risks

  • Activity could remain lower (or go lower), particularly in western Canada.
  • The business could perform well, but may not reach the multiples that I have indicated.
  • The tangible book value of the assets that I am relying on for my downside scenerio could be worth less than stated.
  • MCR may win contracts with the TMX expansion, but margins may be lower than previous projects that I am using to benchmark my analysis on.
  • One must acknowledge the polical risk with pipelines and hydrocarbons in general. Decisions made by political leaders are not always based on sound economic decisions and you never know if the TMX could end up in the political crosshairs.
  • Environmental reasons specific to the work MCR provides specifically. Here is a recent example.
  • There is no dividend to support the share price if earnings don’t materialize.
  • There is not a meaningful NCIB presence.
  • The CEO (Frank Miles) has been at this for 30 years. If he decides it’s time for a transition, there could be some additional uncertainty in the business.

With a 4:1 upside to downside ratio, I think MCR is worth a position here. The CEO runs the business conservatively and has skin in the game.

NGTL is of particular interest to MCR as will connect natural gas from BC and AB to major LNG export points. I think a project win from the NGTL pipeline project(s) would propel the shares higher as this would ensure meaningful equipment utilization for MCR.

Big thanks to UV for the collaboration on MCR.

Anyone else own or have an opinion on MCR? Stockhouse has some good information on MCR.

Thanks,

Dean

*the author is long shares of MCR.v at time of writing.

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