Tag Archives: SVT

March 2021 Update – $OSS.v, $REPH, $ISDR, $PSD.to, $ISV.to, $STC.v, $FTG.to, $VMD.to, $SYZ.to, $MTLO.v, $DWSN, $SVT, $FXC.to, $PZA.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

Podcast

I was a guest on In The Market Trenches podcast this past month. Have a look/listen.

YouTube

Podcast

Thoughts on Market Activity

Once a month I write in my investment journal to attempt to capture my current thoughts on the public markets. It’s not a forecast and I am not a macro guy. It is a quick snapshot of what is happening in real time and how I’m processing it.

This month I made note of how the broader market seems to continue to rotate out of “what worked in 2020”/SaaS/lockdown names and into “recovery” companies. The S&P ended up 7.4% YTD, while the TSX ended up 6.7%. The Russel 2000 has now outperformed the Nasdaq comp over the ttm. The disordered pace of covid vaccine distribution seems to be creating lots of noise. As well, there are many that are very concerned about variants and their implications on the healthcare system. It is interesting to experience in real time. This goes without even mentioning NFT, crypto, EVs, etc. Such things I have no business commenting on.

I continue to find some interesting opportunities in more cyclical companies, although these usually amount to more and smaller positions. As always looking for businesses with long term potential, with incentivized management and a reasonable valuation is the main goal and will constitute the largest amount of my energy. Of course, building positions in such businesses takes continuous effort on the bid as they tend to be illiquid.

Building wealth in the most reasonable way for me is not always the optimal way in the short term.

Posts this month

Quick Notes on Companies Recently Mentioned

  • OneSoft Solutions ($OSS.v)
    • Announced an acquisition of IP
      • Not a ton of details
      • They are usually very thorough on MD&A’s so likely to get more color then
    • Posted Q4 2020 results
      • In line with my expectations
      • MD&A is a must read to understand the value proposition
  • Recro Pharma ($REPH)
    • As mentioned before, I have sold but continue to monitor
  • Issuer Direct ($ISDR)
    • Released Q4 2020
      • Results were good
      • Continue to hold my position
  • Pulse Seismic ($PSD.to)
    • Reported auditor change
      • Non event as it was board approved
    • Lots of volume on March 12
  • Information Services Corp ($ISV.to)
    • Released Q4
      • Business is holding up well
      • Margins have ticked up a bit
      • With the Paragon acquisition they are getting more revenue from services
      • Some delays due to covid, but it didn’t sound like anything major
      • Interesting company
  • Sangoma Technologies Corp ($STC.v)
    • Officially closed the acquisition of Star2Star
  • Firan Technology ($FTG.to)
    • Polar Asset Management sales
      • 528k shares sold from Jan 8 to Feb 12
      • About 50% of the trading volume
      • They now own about 9% of the outstanding shares
  • Viemed ($VMD.to)
    • Reported Q4
      • Still executing well
      • The covid related one time revenue will run off
      • Call indicated that they can return to historical growth rates once we are fully reopen
  • Sylogist ($SYZ.to)
    • Received conditional approval to list on TSX from TSXV
    • Acquisition of MAS (Municipal Accounting Systems) and new credit line
      • 37.8 mil in cash
      • 7.4 mil rev
      • 4.3 mil ebitda
      • Will be immediately accretive
    • Held a call after the acquisition
      • Will list on TSX shortly
      • Integration of MAS 90-120 days
      • Key employees staying on post integration
      • Investing in sales and marketing to expand MAS geographically
    • Announced they will list on TSX
  • Martello Technologies Group Inc ($MTLO.v)
    • They announced a private placement concurrent with the bought deal
      • This was closed and mgmt. participated for about 1 mil
    • I have sold my shares at a small loss and will move on
      • I will continue to monitor for a few quarters
    • Announced strategic sales win
      • It sounds quite positive
  • Dawson Geophysical ($DWSN)
    • Reported Q4
      • As expected rev way down
      • Potential to recover further with O&G activity
  • Servotronics ($SVT)
    • Filed a notification of inability to timely file their 10-K (deadline was March 31)
      • Micorcaps are fun
  • FAX Capital ($FXC.to)
    • Announced a placement with QUIS
      • 16 mil shares at $1.25 for 20mil total
      • 1 year lock up
      • Able to nominate a board member
      • They should still have lots of cash left over after this
    • Closed Carson Dunlop acquisition and placement with QUIS
      • Also appointed a president (graham Badun) of a new platform company
      • Was president of Alarm Force
    • Q4 results posted
      • No surprises
      • Estimating they have about 45% cash in book value after the acquisition of PEO
  • Pizza Pizza Royalty Corp ($PZA.to)
    • Reported Q4 2020 – Not much to report
      • Ontario and Alberta have been under fairly strict lockdowns during the back half of the quarter
      • Non traditional is hurting
      • Payout ratio was 84%
      • They feel they can grow store count by 5% in 2021

The author is long $OSS.v, $ISDR, $PSD.to, $STC.v, $VMD.to, $FXC.to at time of writing.

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Servotronics – $SVT

Another quick and dirty look at a net-net.

I discovered SVT when looking through the Grahamian Value site.

  • Price – $7.35
  • Shares – 2,397
  • MC – 17.6mil
  • EV – 22.6mil

Background

Servotronics, Inc. designs, manufactures, and markets control components and consumer products in the United States and internationally. The company operates in two segments, Advanced Technology Group (ATG) and Consumer Products Group (CPG). The ATG segment provides servo-control components to the commercial aerospace, aircraft, and government related industries; and medical and industrial markets. This segment’s principal components include torque motors, electromagnetic actuators, hydraulic and pneumatic valves, and related devices that convert an electrical current into a mechanical force or movement, and other products. It also offers metallic seals of various cross-sectional configurations to close tolerances from standard and special alloy steels. This segment markets and sells its products to the United States Government, government prime contractors, government subcontractors, commercial manufacturers, and end-users. The CPG segment provides cutlery products, including steak, carving, bread, butcher, and paring knives for household use, as well as for use in restaurants, institutions, and the private industry; fixed and folding knives for hunting, fishing, and camping; and machetes, bayonets, axes, strap cutters, and other tools primarily for military and rescue/first-responder use, as well as for commercial markets. It also offers various specialty tools, putty knives, linoleum sheet cutters, field knives, scalpels, and micro-spatulas; and plastic and metal fabrication, as well as engineering, design, and OEM/white-label manufacturing services to customers in the consumer and commercial industries. This segment markets its products through its sales resources and independent manufacturers’ representatives to big box, hardware, supermarket, variety, department, discount, gift, drug, outdoor, and sporting stores, as well as through electronic commerce. Servotronics, Inc. was founded in 1959 and is headquartered in Elma, New York.

https://servotronics.com/about-us/

The two segments are very different and can be analyzed independently.

ATG

Selling anything on an airplane requires tough to obtain certifications and the relationships are very valuable. Especially if those relationships carry across multiple types of aircraft.

https://servotronics.com/capabilities/

As you can see the ATG segment has grown from it’s base of less than 6 mil quarterly revenue to well over 12 mil before covid. This part of the business is consistently profitable (before covid).

There is some customer concentration risk in the ATG part of the business which is typical of these small parts suppliers in aerospace. This also leads to some lumpiness that can create some opportunity as many orders are delayed not canceled.

Covid has hit this part of the business hard. The last quarter was the first operating loss in 10 years.

CPG

The company designs and manufactures are variety of knives with a variety of applications. Below is the subsidiary’s website.

https://ontarioknife.com/collections/all

I don’t know anything about knives, but the business looks really competitive. I’m not sure of the brand value that this company carries.

they have been losing money consistently in this segment of the business.

The opportunity

5yr chart

Couple to lower expectations of the business with the increase in current assets gives you a net-net. Net-nets obviously have low expectations built into them. The low valuation takes some of the risk of future execution off table as they really can continue to do what they are doing and you can sell for a profit once some confidence returns. Many will argue net-nets are not fantastic businesses. This is completely valid. But there are examples of great businesses today starting out as a net-net that have been transformed into something substantially bigger and better. A good example is Sangoma Technologies, which several years ago was a lumpy product business trading at less than net cash.

Below is the current assets of the consolidated business.

One of the risks I look for in net-nets is the obsolescence risk of inventory. Some quantifiable ratios coupled with qualitative guesswork can reduce this risk.

As we have seen with SVT, the ATG part of the business was growing well. With this growth comes the increase in inventory. It’s worth looking at the Cash Conversion Cycle and overall Working Capital to look for some potential concerns.

Inventory and working capital have grown relative to sales but they are still not what I would call worrisome. Given that ATG has been hit hard from covid lockdowns I feel relatively comfortable with using the current inventory value in my margin of safety. There is currently 25mil of inventory carried on the balance sheet. As well there is 12 mil in PPE carried on the balance sheet which can give an additional margin of safety if we puchase based on a discount to assets.

Split the business?

The obvious thing to an outsider would to split/sell/spin-out/divest the CGP business. Though this is easy said than done, it likely would unlock substantial value.

If we use our imagination and covid lockdowns don’t continue to drag on for longer than the next 2-3 quarters and the aerospace business returns to pre covid levels of profitability of 6-8mil EBIT annually, I don’t think 8-10x EBIT is unrealistic. This leaves a value of 48-80 mil in the ATG business with no incremental growth. That’s at least double the current market cap of SVT.

Valuing the CPG business is harder. What do you think a (non Saas) business that has yet to produce earnings is worth? There are about 10 mil in identifiable assets carried on the balance sheet. This is without considering any liabilities. CPG did 8.2 mil in revenue in the TTM and 6.7 mil in 2019. There has been increased interest in the CPG products recently and the loss in the last two quarters has been the smallest in several years .

Really the value to be unlocked is just getting SVT to be valued based on the aerospace business alone. One could argue that diversification in business lines reduces the risk overall to the entity. I’m not sure that’s fair given CPG has not earned a profit in many years and we (up until 2020) experienced an economy that is growing with minimal inflation.

This is where things are uncertain. What’s the likelihood of the spin/sell/divest catalyst? I have no idea.

The current CEO is also the chair of the board. He controls (personally and from his father’s trust) controls 21% of the shares. He is also the President and CEO of the company’s knife subsidiary (Ontario Knife Company). He’s been with the company since 1993.

The rest of the board controls less than 1%. Harvey Houtkin and FMR LLC control about 20%. The Employee Stock Ownership (ESOP) Trust has another 20%. The participants in the ESOP have the right to vote on the share that have been allocated, while company representatives vote the unallocated shares. 84% of the ESOP shares have been allocated.

Conclusion

SVT is an interesting set-up. Expectations are low, but even with a return to a post covid world there may not be a massive amount of upside in the shares. Even if the economy reopens sooner rather than later, there are no guarantees when the ATG business will return. Of course there is a debt with SVT that adds some risk (although I think that is minimal).

SVT may be a good candidate for a net-net basket.

Anyone else look at SVT recently?

Thanks,

Dean

*the author does not have a position in SVT at time or writing.

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