Tag Archives: CVT

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.


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.


Disclosure: Long CVT.to



Filed under Company Updates

CVTech Group

CVT.to is an easy idea for me to get comfortable with. I believe we have a company with some short term headwinds (one could argue mid-term) that is trading at a discount to its sum of the parts.

I apologize in advance, this post contains way too many charts.

Let’s take a look at a price chart as well as some valuations.

Not a pretty chart. But we are only looking at the numerator. Let’s take a look at some valuations.

So the company is cheap on P/TB and EV/Ebit to its own history. But is that really cheap? Current P/TB is about 1.5x and EV/Ebitda is at 4.67x. Not liquidation cheap, but not pricey.

Let’s break down the two different divisions:


From their website:

“CVTech-IBC inc. manufactures CVT systems serving major manufacturers of recreational and utility vehicles as well as minicars. In addition, CVTech-IBC inc. operates a branch in France in order to serve the aftermarket parts segment and to maintain a proper customer service for the European market.

CVTech R&D inc. is responsible for the design of CVT systems for the clients of CVTech-IBC inc. Its main source of income is derived from royalties paid by CVTech-IBC inc. on the sales of products developed by CVTech R&D inc. CVTech is the owner of the trademarks and CVTech R&D inc. holds the intellectual property on products which are part of its technological solutions.

CVTech-AAB inc. specializes in the rebuilding of industrial crankshafts, cylinders and engines, the plating of cylinders and the sale of engine-related parts.”

Did you get it? What the heck is a CVT?

CVT stands for continuously variable transmission. Meaning these transmissions have no gears. The author knows a little about the technological advancement in automobiles over the last few years that may help.

I borrowed the chart from another site.


It really doesn’t matter where from, but I wanted to illustrate how little fuel efficiency has improved over the last 20 years. What has really happened is cars have remained the same in efficiency, but have done so with much less harm to the environment. It’s also worth noting that cars (on average) require less maintenance than before. Scheduled tune-ups are now being pushed beyond 150,000 kms (100,000 miles), where they used to be every year or 6 months. It has only been recently that cars have become quite a bit more efficient.

There are all sorts of tricks that manufacturers are using. Variable valve timing, multi-cylinder displacement and yes CVTs. By having an infinite ratio of gears to choose from, CVT cars can perfectly match engine load to driver demand. If you need to pass a truck on the highway, you have a gear ratio that allows you to accelerate fast. If you are at a steady cruise, you have a ratio that puts very little load on the engine (and burns less gas).

So there are some nice tailwinds right. Well lets look at the CVT part of the company.

For a product in such demand you would think there would be more profitability here. What’s worse is the corporation has ended its relationship with Tata motors. This is not good news, but they are in talks with another Asian manufacturer to equip their product to the company’s small cars. I am putting fair value of the CVT division at tangible book value or around $0.12/share. I feel this is conservative as it gives no value to the over $8 million in R+D spent over the last 5 years or an additional $0.11/share.

Every financial statement press release through SEDAR over the last year has contained language that management is looking at selling the CVT division.


With the acquisition of Riggs Dislter in 2009, the energy segment has become a decent sized player in the maintenance and construction to the utility and heavy industrial markets. From the website:

“Thirau ltée is a general contracting firm specializing in the construction and maintenance of electrical power houses and substations as well as transmission and distribution lines. Thirau ltée has two wholly-owned subsidiaries: J.J.L. Déboisement inc. and Thirau LLC. J.J.L. Déboisement inc. specializes in the vegetation control on rights-of-way for transmission and distribution lines. Thirau LLC mainly carries out the above-listed Thirau ltée activities. Thirau LLC also owns a wholly-owned subsidiary, Riggs Distler & Company, Inc. (“Riggs Distler”), a leading provider of maintenance and construction services to the utility and heavy industrial markets.”

Better performance even though it is a tough business environment at the moment. Revenue has been flat as major customers have curtailed spending. I think this can only go on for so long as consumption of electricity in the United States will likely grow by at least 1%/year due to population growth.

I mentioned the sum of the parts valuation earlier. CVT lists its competitors in the energy segment. There are really 4 that are public that can be used for comparison:

MYRG, MTZ, PWR and PIKE. All are much larger than CVT. The smallest out of the 4 is about 4x the size of CVT’s energy segment.

Let’s look at the competition…

I took goodwill out of the assets as I though it may have muddied the waters a bit. ROA and ebit margins may be something to pay a little more attention to. I used what was available to me, maybe a better measurement would have been things like CCC and ROIC, but this will have to do.

CVT actually stacks up pretty well to the competition. So what is the energy segment worth if it traded like its competitors? I uses a few different metrics to determine fair value.

I am just using MYRG and MTZ for comparison. The other two companies didn’t show the same level of profitability so I excluded them from the calculation.

Taking the average of the above fair values, I get $1.65 or 73% higher than the last trade. This is without the CVT value which would push fair value to 85% above last trade. We are looking at a discount to the competition that is not based on growth. This is what I like about this trade, I don’t have to be right on the economy in order to make money. Though it would help.

Other valuations

In order to protect myself from looking only at sum of the parts as fair value, I took the company’s previous valuation history and averaged it out. Then I 33% MOS to arrive at a trigger price. Here’s how my trigger price shakes out…


The risk with the CVT division is that they don’t find another customer in Asia (or anywhere). The division will start bleeding cash. Though this could happen, I don’t see this as a major risk unless the company is willing to let the division struggle. With only $0.12/share of value in the CVT division, the bigger risk is if they don’t sell it and it bleeds cash. Once the CVT division is out of the financials, the energy division can be easily compared and priced to its competitors.

The energy segment may face some short term pain as customers are still reluctant to spend. The Canadian dollar swings can muddy the true earnings power of this division as well. I could also be comparing CVT to other companies that are in far better shape.

Management gets paid higher than I would like. Of course my boss probably says the same about me. I think inaction over the next 2 years is a risk. The CEO owns about 10% of the company and a board member owns 14%. I think their fate is tied to mine somewhat.


Disclosure: The author is long CVT.to at time of writing.

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Filed under Company Analysis