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<![CDATA[ELEMENTARY VALUE - Home]]>Tue, 02 Jun 2026 23:30:06 +0100Weebly<![CDATA[In The Style Group PLC (ITS.L) - Betting on the Jockey]]>Sat, 18 Feb 2023 00:00:00 GMThttps://www.elementaryvalue.com/home/in-the-style-group-plc-itsl-betting-on-the-jockey

In The Style Group PLC (ITS.L) has been in a death spiral since its IPO and now hovers just above its all-time low. Yours truly has been accumulating since it found support.

ITS operates as an e-commerce womenswear fashion brand in the UK, Europe and internationally. It sells its products through its e-commerce websites, app, and via digital retail wholesale partners.

Numbers then chart.

Market Cap = £3.356 Mil
Share price = 6.4p
Common outstanding = 52.5 Mil
Public float = 40.4% (As of Jan 30th 2023)
TBV = £5.276 Mil
TTM Rev = £57.3 Mil
TTM Op. Income = (1.5 Mil)

ITS.L Price Chart since IPO

What a blood bath, down 50% YTD, and 97% since floating.

This is a prime example of why you should never consider buying an IPO unless the State is selling.

Let's zoom in and take a look at the 3 month chart.

ITS.L 3 Month Chart

The stock hit an all-time low of 5.9p in late January, bounced to a high of 8.3p in early February and then retested the low a few days ago at 6p. Notice the extremely heavy volume here, between 10 and 20 Mil shares changing hands each day over the last few weeks.

Lombard Odier Investment Managers have been dumping their position along with Causeway Capital who were involved in the IPO.

The primary reason for this selling is the fact that the company announced a strategic review in December. Maybe they are worried that the company will get sold off on the cheap given the present negative market sentiment toward it.

Despite this heavy selling the stock appears to have bottomed out with buying pressure now building a floor.

On to the latest financials.

As always balance sheet first.

Intangible assets here are comprised of software, stuff like the website and app. Whilst these are an important part of an e-commerce business I don't much care to include them in valuations since I lean much more heavily on tangible assets. If we are talking about a strong brand name, patents, unique datasets etc then maybe I'd consider them. In this instance I'm more interested in the tangible assets.

TBV = £5.276 Mil net of £2.405 Mil of intangibles

I'm not much interested in the PPE here either, it's mostly some fixtures and fittings and computer hardware. If it were buildings and land I'd be looking more closely.

Let's scrub that off too.

Adj TBV = £4.477 Mil vs a market cap of £3.356 Mil

Given the company is currently loss making one can reasonably make a case this discount is justified.

£1.011 Mil of liabilities are contract liabilities/deferred revenues but the lion's share are comprised of payables.

Let see what has been happening on the income side over the last few years.

ITS.L Revenue, Op. Income & Net Income FY2018-2022

The thing that jumps out here is that revenues have been growing like a weed.

ITS was only founded back in 2013 and since their IPO in 2018 they've grown revenues from £14.7 Mil to £57.3 Mil in 2022.

They've only managed to turn a profit in 2021 with op. income coming in at £519k and adj. net income (net of income tax credit) of £125k.

At this point you are probably asking yourself, why am you telling me about a loss-making company whose stock has collapsed 97% since IPO with institutional players dumping their holdings since the strategic review was announced?

Let's take a closer look at what they say in the review.

ITS Strategic Review

The three key points for me are as follows;

Firstly , the board believes the current market cap does not accurately reflect the value of the business.

Secondly, a possible sale of the company could be on the cards, though management notes that at present there are no parties expressing an interest.

Thirdly, the founder is returning to the role of CEO in an effort to address the current situation.

This third point is the most interesting to me.

The founder, Adam Frisby, started the business with £1k in seed capital back in 2013 and has delivered 8 years of consecutive growth, growing revenues from £0 to £57 Mil.

Not only this but he has significant skin in the game, owning around 23% of the common outstanding.

ITS Shareholder Register as of 30 Jan 2023 (Note: Lombadier Odier have since reduced their holdings to 2.54%)

I'm willing to bet the founder is going to be pretty darn motivated to right the ship here.

Not only that, if a sale is on the cards I'm inclined to think he is going to want to fetch a much higher price than the current market cap.

The latest filing, FY 2023 interim results, reveals both the good and bad.

Bad news first;

1st half Revenues are down 11% due to negative consumer sentiment. Fears of a looming recession and rising household costs are clearly impacting discretionary spending.

The firm is still loss-making, printing an operating loss of £3.1 Mil in H1 2023.

On an more positive note we have the following;

ITS H1 FY2023 Strategic Highlights

The key bullish points for me are the relocation of operations to a larger warehouse, implementation of cost control measures including a reduction in headcount, and a focus on reducing discount sales in favour of higher price point items.

What do I think ITS is worth?

It's currently loss-making so valuing it based on discretionary   earnings is out the window.

I'm assuming a sale is on the cards and a potential buyer would be likely valuing the business based up revenues and inventory.

We know revenues are down by 11% in H1 FY2023. Assuming full year revenue is down by the same percentage we are likely to see annual revenue of around £50 Mil.

What % of revenue might a buyer be willing to pay here?

10%, 15%, 25%?

That would be roughly £5-12.5 Mil.

How about the inventory?

In the latest report management claim that replacement cost of inventory would not be materially different to stated book value.

Assuming the buyer pays stated book value for the inventory that's £7 Mil.

Being a fan of Graham and Schloss inventory is my least favourite of current assets so I'm inclined to mark it down by 50% to £3.5 Mil for a more conservative valuation.

With all this considered my range of value is as follows;

Optimistic value is 0.25 x projected annual revenue of £50 Mil + inventory at stated BV of £7 Mil = £19.5 Mil

Conservative value is 0.15x projected annual revenue of £50 Mil + 0.5x inventory at stated BV of £7 Mil = £11 Mil

Pessimistic value is 0.1x projected annual revenue of £50 Mil + 0.25x inventory at stated BV of £7 Mil = £6.75 Mil

This is obviously a pretty wide range of value with a blue sky upside potential of 6.6x, a more conservative   assumption of 3.3x and a pessimistic assumption of 2x.

I'll admit 6.6x is highly unlikely here but a double or triple is not out of the question if the thesis plays out.

What are the risks here?

First and foremost is the risk that the founder doesn't manage to right the ship. What he has achieved with the business thus far is pretty impressive but as the old saying goes;

'Past performance is no guarantee of future success'.

One could also cite multiple headwinds for the company.

The switch in market sentiment from growth to value, the inflationary environment squeezing margins and further depressing sales, rising interest rates impacting borrowing costs. The list goes on...

Maybe the situation continues to deteriorate and the company ends up getting sold at fire sale prices.

Maybe no buyer emerges and sales keep dropping, if losses persist and cash runs out it could be lights out.

Thus far there's no sign of insider buying, I'm watching to see if this changes going forward as this would be a key bullish indicator that the situation is improving or that insiders truly think that the stock is significantly undervalued as they assert in their filings.

Talk is cheap, I want to see them put their money where their mouth is.

Time to wrap things up.

ITS is currently hated by the market, down 97% from its IPO price.

Institutional players have been running for the exit since news of a strategic review broke and sales have started to contract after a period of impressive growth.

On the flipside we have the founder returning to the helm with significant skin in the game and his personal pride at stake. If anyone is going to fix the situation it is going to be him.

An asset based margin of safety is minimal here and yet the massive growth over the last several years can't just be disregarded.

Things look pretty bad right now but that is exactly when I like to buy. Sentiment toward the company is almost universally bearish and yet most of the bad news looks priced in to me.

The stock looks to have found a floor as buying pressure soaks up the downward force of the sellers. I expect the stock to just move sideways on choppy action as the market waits for news with bated breath.

As always the thesis is simple, in this case I'm betting on the jockey.

Thanks for reading,

David

Disclosure: Long ITS.L

]]><![CDATA[Iofina PLC (IOF.L/IOFNF) - The bigger the base...]]>Sat, 30 Apr 2022 23:00:00 GMThttps://www.elementaryvalue.com/home/iofina-plc-iofliofnf-the-bigger-the-base

There's an old saying among those who study the price charts;

“The bigger the base, the bigger the rise; the bigger the top, the bigger the drop.”

A key thing I look for when sifting through stocks is to find those which have been building a base for several years on the long-range price chart. The numbers, capital structure and the situation are all important too but I always begin with the chart.

Iofina PLC (IOF.L/IOFNF) was recommended to me by a reader of the blog a few months ago and I initially passed on it due to the market cap and share count being higher than I usually favour, but I found myself coming back to the chart on several subsequent occasions and digging deeper into what was happening with the company.

Time for a closer look.

IOF is an AIM/OTC (Also listed on the French and German exchanges) listed specialty chemicals holding company, their subsidiaries are primarily engaged in the E&P of iodine as well as the production of halogen based chemical products. They claim to be a low-cost producer of iodine and use a somewhat novel extraction process.

Unlike other producers who extract iodine from ore IOF partners with O&G companies to get access to brine water, they extract the iodine from the water and then it is sent back to their partners to be disposed of.

Numbers then the chart.

All figures in USD as IOF reports in this currency.

Market Cap = $51.50 Mil (£40.96 Mil)
Share price = 26.84 cents (21.35p)
Common outstanding = 192 Mil
TBV = $27.13 Mil
TTM Revenue = $34 Mil
TTM Op. Income = $3.37 Mil
TTM Net income = $2.36 Mil (Net of PPP loan forgiveness)

Doesn't look cheap on the current numbers.

IOF Long-range chart

One look at this chart and my mouth starts watering.

The stock has been building a base for nearly 6 years now. The message boards are populated by despondent shareholders waiting for something to happen. Some of them bought in at much higher prices only to see their investment fall in value.

Buying in the mark-down phase is a recipe for disaster as negative momentum carries the stock lower.

Management has not delivered on a bunch of things, mistakes have been made, and of course they have had to contend with the pandemic, lockdowns and subsequent supply chain disruptions.

Some investors have given up on IOF altogether and sold out in disgust or simply due to impatience.

This quiet price action is highly disconcerting to most.

For others, this is the ideal time to be buying, when the stock is out of favour and languishes in the accumulation zone it begins to change from weak to strong hands.

Why has the stock been sat down in the low range all this time?

For one it's fortunes are somewhat tied to the O&G industry, when E&P activity is limited so are the supplies of brine water to extract the iodine from.

More recently there's been a bunch of issues related to a lack of production increases to capitalize on rising iodine prices. IOF is in the process of building a new plant but the project has been stalling for a while now.

Another blunder which warrants a mention is management's bizarre foray into the hemp industry.

They sank $900k into a purchase of organic hemp seeds with a view to hemp plant/cbd production. Unsurprisingly this financial escapade has been an abject failure and they are now looking for buyers to take the seeds off their hands.

After reading about this debacle I though of that apt word coined by the legendary fund manager Peter Lynch

Diworsification!

How about the large write-down in the value of their Montana Atlantis Field holding?, down from $5,841,415 to a net carrying amount of $235,979. Oof!

They eventually sold it for $255,308, not the sort of thing you want to see as a shareholder.

*Correction; the $225k sale was of equipment and not the lease which they still hold. Whilst it has been impaired it could potentially be economically viable if gas prices climb high enough. Thanks to @Hbenoliel for spotting this error.

Things are now starting to look up for IOF.

Much like many other commodities, iodine prices are on the rise. The current global spot price for iodine stands at $60/kg, up 20% since the start of the year.  Inflation looks like it might not be quite so 'transitory' as the central planners have been claiming, this is bullish for commodities like iodine.

I think there's a good chance iodine price keep on rising for a number of reasons.

The heightened potential for nuclear conflict has prompted a rise in demand for iodine tablets. If the conflict intensifies or spills over into a full blown NATO/Russia war then demand will keep growing.

Demand for iodine used in the health care industry has been increasing as many parts of the world have opened up. There's a big backlog of medical procedures to get through, iodine is used in x-rays and antiseptics among other applications.

A large amount of iodine production comes from Chile, I'm not betting on it but there's a good chance that Chilean production gets impacted by rising energy prices. Factories in numerous countries have had to halt production or ask for government assistance to keep running due to rising energy   input costs.

It's also worth mentioning that rising food prices have been prompting civil unrest in developing nations. Food riots and civil unrest could also effect exports.

One other potential bear case on Chile,  they just elected a far left candidate who is unlikely to be a net positive for private companies operating in the country. Maybe taxes get hiked and labour unions organize strikes.

Source: Statista, Iodine production by country.

We are starting to see strikes and logistics delays in Chile effect iodine exports with the market already in deficit.

https://www.indmin.com/Article/5085519/Chilean-strikes-logistics-delays-push-iodine-spot-prices-upward.html

Another bullish development for IOF is that they appear close to striking a deal with a new brine water supply partner. Once the deal is signed they can get on with building the new plant and increase production. You can read more about it in the Q1 2022 update.

IOF Q1 2022 update

As I mentioned earlier, the stock doesn't look cheap on the current numbers;

P/S = 1.51
P/E =21.8
P/TBV = 1.9

Not what you'd call a classic value stock.

Much like my O&G plays this investment is based upon my belief that we are in the early innings of a commodities bull market. I think inflation will be around for a while and prices will keep rising.

Take a look at the following chart taken from this book written back in the 1940's.

Approximate timing of 4 major cycles in the American economy. Source; 'Cycles -the science of prediction'

It shows the approximate timing of four major cycles in the American economy.

The one I want to draw your attention to is the top one. This 54 year cycle last peaked in 1981 when interest rates topped out around 15%. It then bottomed out around 2008 and the next peak should arrive around 2035. The upward arc of this cycle is characterized by rising wholesale prices and interest rates. In an inflationary or stagflationary environment commodities stocks tend to do very well.

Now to another chart taken from my favourite investing book.

The 4 phases of the stock price cycle. Source; 'How to make the stock market make money for you'

Take another look at the long range chart for IOF.

It is still sat down in the accumulation zone and the mark-up phase is ahead of us. The 6 year base and quiet price action has prepared a sound foundation for a large rise as the stock has gained a great deal of technical strength.

Let's look at how the numbers have been trending.

IOF 10-year financial history. Source; Morningstar.com

The trend looks positive to me. Revenues have grown from $16 Mil in 2011 to TTM $34 Mil. Operating and net income have turned positive and are growing. I'm not a big fan of the dilution that has taken place with a share count up from 113 Mil in 2011 to 193 Mil. Thankfully this dilution seems to have tailed off in recent years.

If iodine prices keep rising and we get another plant coming on line this growth should continue. If Chilean production gets seriously disrupted things will start to get very interesting.

Time to look at ownership.

Despite the share count being higher than I normally favour the public float is pretty tight.

31.87% of the common is held by private investors and insiders including the businessman Arron Banks, former IOF Interim CEO & Pres/Co-Founder Jeffery Ploen and retired fund manager Richard Sneller. The latter has been building his position for several months now and recently added another 1.7 Mil shares. I share his bullish view of IOF and have been buying too.

What risks do I see here?

The thesis is fatally impaired if my commodities bull market call is incorrect.

If O&G prices collapse we can kiss goodbye to all that brine water to extract iodine from.

Maybe iodine prices top out much sooner than I expect.

Maybe revenues stall out and profits stagnate, if so paying the current price wouldn't seem like such a bargain after all.

The stock might just drop back down and keep building a base for several more years. FULO build a near two decade base before it finally exploded into the mark-up phase. Often an investment thesis can take longer to play out than we think, sometimes being early is just the same as being wrong.

Time to wrap it up.

IOF doesn't look cheap on the current numbers but if revenues and earnings keep growing then the current price will turn out to be a good entry point.

After years of mistakes, mis-steps and delays things finally seem to be looking up for the company.

The stock recently hit a new 52-week high and my reading of the chart leads me to conclude the accumulation phase is coming to an end and the mark-up phase is on the horizon.

Like they say, the bigger the base...

Thanks for reading,

David

Disclosure: Long IOF

]]><![CDATA[Energy & Environmental Services Inc (EESE) - Down in the low range]]>Sun, 30 Jan 2022 00:00:00 GMThttps://www.elementaryvalue.com/home/energy-environmental-services-inc-eese-down-in-the-low-range

Energy & Environmental Services Inc (EESE) is sat on the pink-sheets building a base and the market has left it for dead.

I've been buying.

EESE is a pico-cap holding company with a bunch of subsidiaries primarily engaged in the business of O&G services.

Market Cap = $4,576,391
Share price = $0.085
Common outstanding = 53,839,893
Float = 28,597,661
TBV = $6,420,100 (Net of all liabilities, Goodwill and Deferred Tax Assets)
TTM Revenue = $11,211,200
TTM Op. Income = $12k
TTM Net Income = -$107k (Net of PPP Loan forgiveness and Tax benefit)

Here's a company description from the latest quarterly report;

"The Company, headquartered in Oklahoma City, manufactures specialized liquid and solid chemicals used primarily in the oil and gas industry and high-tech specialized protective coatings for oil and gas and other industrial applications. It also has products under development using enzyme technologies for animal feed supplements and odor solutions. The Company’s operations are maintained and occur through its wholly owned subsidiaries: Enduro-Tech Energy Services, Inc. (formerly EES) (“Enduro-Tech”), Patriot, EnduroBond Manufacturing Company, LLC (“EMC”), EcoZyme System Technologies, LLC (“EST”) and Celex. Enduro-Tech, Patriot, EMC and EST were formed in the state of Oklahoma. "

EESE started out life back in 1989 as Energas Resources Inc. in British Colombia, Canada. In 2001 the company registered as a Delaware Corporation and then in 2002 they filed with the SEC and began trading on the OTC Bulletin Board Market.

Fast forward to 2011 and they delisted and moved to the pink-sheets. In 2012 they changed their name to Enerlabs Inc. and conducted a 10-1 reverse split. In 2015 they redomiciled to Colorado and then in late 2016 they signed a share exchange with the sole shareholder of Energy & Environmental Services Inc (Est. in 1991).

He got 32 Million shares of Enerlabs in the deal and EES became a subsidiary, then the parent changed names again to Energy & Environmental Services Inc. (EESE).

After going back through the financials it's pretty clear that Energas/Enerlabs was a badly managed business that destroyed a lot of capital.

Since the merger in 2016 the new management have been making acquisitions which have grown revenues from just shy of $2 Mil in FY2016 to around $8.5 Mil in FY2020 and $11.2 Mil for TTM. It should be noted that within this period they've only turned a profit in 2018.

Since the pre-merger EES was a private company I've not been able to find any historical financial data to see how they performed in past energy bull markets but in a 2018 presentation they said their chemical manufacturing segment (Enduro-Tech) did around $30 Mil in Gross Revenue in 2014.

EESE 2018 Investor Presentation

There's a 2020 Investor presentation on their website which shows the subsidiaries they own and gives a rough break down of their operations.

Chart time!

EESE Long-range chart

This is the kind of long range price chart I like to see.

Quiet periods where a stock is just sat drifting along at support followed by huge upward moves.

The big run up to a high of $1.50 in late 2016/early 2017 was the result of the merger announcement. Tiny stocks which have been left for dead can print massive moves when they emit signs of life. It can be a merger announcement, a change of CEO, a swing to profit, a big contract win. Anything which changes the market's sentiment toward a stock and creates interest is a potential catalyst.

I initially bought EESE after it bottomed out in late 2020 then sold into the little stock spike in March 2021 when it ran up to a high of 43 cents. When it dropped back down I began buying again as my sentiment on the O&G industry grew increasingly bullish.

These kind of companies are highly cyclical and their fortunes are tied to the price of the underlying commodity which their business is dependent upon, they can go for years without turning a profit and just sit among the detritus struggling to survive until things improve.

Then once a blue moon the skies clear and they have their day in the sun.

I'm betting that at some point in this energy bull market EESE stops bleeding red and books a decent profit, I'm betting it prints another big upward move as its fortunes temporarily improve and the market's attention is drawn to it once again.

On to the balance sheet.

EESE Q3 FY2021 balance sheet

The cap stack is pretty clean, no pref's, convertible debt or warrants outstanding, just some stock options.

Tangible book value is $6,420,100 net of all liabilities, Goodwill and Deferred Tax Assets.

As well as the cash and receivables EESE carries a bunch of properties. It looks like these account for around 40% of PPE so if my calculations are correct their depreciated value looks to be around $2.1 Mil.

Here's a break down from the 2020 Annual report since the quarterly doesn't list it.

EESE FY2020 Annual Report, PPE break-down

Here's a list of EESE's facilities.

EESE facilities listed in FY2020 Annual Report

I managed to dig up some valuations on the properties on various county tax assessment sites.

R&D Lab/Fertilizer Plant at 6300 Boucher Drive = $502,740

Oilfield Chemical Plant at 6701 Boucher Drive = $466,872

2 Acre lot at Boucher Drive = ? (Couldn't track this down)

Enduro-Bond coating facility at 1728 Frisco Avenue = $862,986.00

80,000 sqft Snyder, TX building = ? (Scurry County tax assessment site wouldn't work)

Abilene ,TX property = ? (Couldn't track this down)

By the looks of it I'm guessing the current carrying value of the properties is below fair value. I'm willing to bet the 80,000 sqft building they own in Snyder, Texas is worth $1 Mil or more.

Add in the other 3 properties I managed to find a value on plus the Abilene, TX property and the 2 Acre lot on Boucher Drive, I bet far value for their properties is closer to $3 Mil or more.

I think the Balance Sheet is strong enough for EESE to keep going till business picks up. Revenues are growing and I think they have a decent chance of swinging to a profit pretty soon.

Here's a break-down of current ownership

EESE Shareholder break-down

Melvin Smith, the Gentleman who owned EES which merged with the public company formerly known as Enerlabs, owns a quarter of the stock. Insiders have skin in the game too though they only hold relatively modest amounts of stock.

The public float is reasonably tight with all those shares locked up. That's how I like it to be.

What's the stock worth?

For me it's hard to say. In a sense it's justified that the market is pricing the stock below book since it is loss making. On the other hand revenues are growing, we could see EESE book a profit pretty soon if oil prices keep climbing. With situations like this I prefer to just see how things develop, without having any data on what the private pre-merger company was earning through past cycles I'm reluctant to start throwing numbers around. Instead I'll wait and watch.

What are the risks?

It's a minuscule company trading on the pink-sheets. It's accounts are unaudited. All kinds of bad things can happen.

Current management is trying to grow market share via mergers and acquisitions, this can be a risky move if not executed well.

Maybe this energy cycle ends sooner rather than later, maybe revenues stop growing and start to contract. Maybe EESE doesn't turn a profit and has to dilute to keep the lights on.

Maybe the oil price keeps climbing but the E&P's decide not to ramp up production.

Maybe larger competitors get all the business and the little minnows like EESE are left trying to survive off the scraps.

Maybe the stock goes dark

This is a speculative play based upon the rising price of a commodity lifting all boats. Risks abound!

Time to wrap it up.

EESE is sat way way down on the long-range chart and selling below TBV. No one really knows its earnings power potential at peak cycle since none of that pre-merger financial info is in the public domain. We know Enerlabs was a garbage business from the public filings but there are hints that the current incarnation of the company has some potential.

When a stock is left for dead you only need a bit of good news to move it up, there is plenty that could go wrong here but if one or two things go right then the upside can be big.

That's why I like to buy a stock when it's sat down in the low range.

Thanks for reading,

David

Disclosure: Long EESE

]]><![CDATA[Westell Technologies Corp (WSTL) - Holding on for brighter days]]>Sat, 20 Nov 2021 00:00:00 GMThttps://www.elementaryvalue.com/home/westell-technologies-corp-wstl-holding-on-for-brighter-days

Today's market doesn't care about Westell Technologies Corp (WSTL). Most market participants are either repulsed by it, ignoring it, or have just forgotten about it altogether. Aside from a few net-net investors and some bottom fishers there's little attention being paid to it right now.

The less attention being paid to a stock, the more I am attracted to it. There's plenty of reasons why WSTL is sat trading below NCAV on the pink-sheets but where others see risk I see opportunity.

WSTL was founded back in 1980 and operates in the telecommunications industry. The company website describes their business as follows;

'Westell Technologies, Inc., headquartered in Aurora, Illinois, is a leading provider of high-performance network infrastructure solutions focused on innovation and differentiation at the edge of communication networks where end users connect. We enable service providers and network operators to improve performance and reduce operating expenses via a comprehensive set of products and solutions. With millions of products successfully deployed worldwide, we are a trusted partner for transforming networks into high-quality, reliable systems.'

Their markets include In-Building Wireless Solutions, Intelligent site management and Communications Network Solutions. The stock has been pounded down into oblivion in recent years for a variety of reasons including declining revenues and chronic unprofitability.

Charts then numbers.

WSTL 5 year chart

The stock is down from over $4 in late 2017 to $1.11 today. It bottomed out in early 2020 and is now building a base. It has ticked up of late after it emerged that Congresswoman Debbie Wasserman Schultz has recently bought a few shares. Someone get Pelosi on the phone!

Lets zoom out a bit.

WSTL 10 year chart

Now we can really start to see the value destruction that has taken place. Back in late 2013 and early 2014 the stock was trading above $16. Whoever was buying up there has surely sold out by now . A decade of brutal share price decline will test the resolve of even the most diamond handed market participant!

Time for the big picture.

WSTL long-range chart

The long-range chart shows the tumultuous history of WSTL in all its ugly glory. Back in 2003 the stock traded over $43. In the dotcom boom it breached the $150 zone, and back in the mid 1990's it even traded in the low $200's.

And now here we are, bouncing along support on low volume at just over a buck. No wonder pretty much everyone has given up on the stock.

Management decided to delist in 2020 and did a reverse/forward split cash-out at $1.48 for holders of less than 1000 shares. It was the right thing to do given the firm had racked up an accumulated deficit of over ($350 Mil ) and was bleeding red in most years.

The stock now resides on the 'limited info' tier of the pink-sheets and volume is light.

On to the numbers.

Market Cap = $12,391,350 (OTC Markets lists this wrong as Class B shares are not included)
Share price = $1.11
Common outstanding (Combined Class A & B shares) = 11,163,378
Float = 6,877,675
TBV = $23,522,000
TTM Revenue = $31,531,000
TTM Operating Income = ($2,851,00)
NOL's = $40 Mil

On an assets basis WSTL is cheap and for good reason, several years of declining revenues and unprofitability will do that to a stock.

How cheap is cheap?

WSTL Q2 Report (Sept 2021)

The latest quarterly reveals the following;

Current assets =$31,241,000
Total Liabilities =$10,199,000

NCAV =$21,042,000 or $1.88 on a per share basis.

Once a few adjustments are made it gets even cheaper.

Lets scrub off the current and non-current deferred revenue of $398k since they relate to maintenance contracts (services) and not inventory (physical products).

We can also scrub off around $1.64 Mil in liabilities since another PPP loan was just forgiven.

Adj. NCAV thus stands at $23,077,522 or $2.06 per share.

At this price the stock is trading at 0.59x NCAV and 0.53x Adj. NCAV

Now the obvious argument here is that the discount is justified since WSTL is a melting ice cube. The company's financial history certainly supports this assertion.

WSTL Historical annual financial performance. Chart courtesy of TIKR.com

Revenue down from $236 Mil in 2004 to TTM 31.5 Mil.

Negative Operating Income for the last 10 years.

The picture looks bleak but the descent into the abyss appears to be coming to a halt.

Here's the quarterly financial performance for the last few years.

WSTL Historical quarterly financial performance. Chart courtesy of TIKR.com

Notice how the downward trend in revenues seems to stop in 2019?

Since then they appear to have stabilized and the operating losses have narrowed.

In fact WSTL has posted a modest operating profit for the past two quarters. $10k in Q1 and $17k in Q2

Whilst I was going though some old filings and press releases I noticed that WSTL had appointed a new CEO in Sept 2019. Perhaps his appointment has led to a stabilization in the company, I can't say for sure but something positive seems to be happening.

I know next to nothing about the Telecommunications industry but I figure WSTL might pick up some business from the continuing roll-out of 5G. I've also noticed the growing trend toward smart buildings, Internet of Things (IOT) and the deployment of autonomous monitoring systems. Maybe WSTL benefits from that, maybe some of those Biden infrastructure dollars trickle down to them too.

It doesn't take much to move up a stock that's been left for dead.

What are the risks here.

The most obvious one is that the apparent stabilization of the company's financial performance is merely 'transitory' and the descent into the abyss will resume in short order.

Losses could continue and the asset base could keep on melting away.

Another major issue is the dual class structure and insider control. One of the directors, namely Robert W. Foskett, owns 100% of the Class B shares which carry 4 votes for each 1 vote that the Class A shares carry. This means that insiders are in control and shareholder activism is off the table.

With that kind of voting power the board could pull all kinds of nefarious stunts and minority holders would be powerless to stop them.

Maybe they just decide to take the company dark or private and rig it so minority shareholders get screwed in the process.

There's all kinds of ways this could end badly.

As is customary for me, I let the long range chart and balance sheet lead the way. WSTL is cheap on an assets basis and I'll hang my hat on that. The stock is sat close to its all time low on the long range chart and has begun to build a base on low volume.

The strength of the balance sheet creates a window of opportunity for the company's fortunes to improve. The chart shows what's possible if business picks up.

My average cost basis is in the 90's and I've recently bought a little more above a buck, now the buying is done it's a question of holding on for brighter days.

Thanks for reading,

David

Disclosure - Long WSTL

]]><![CDATA[Capital Employed Podcast]]>Tue, 08 Jun 2021 21:14:33 GMThttps://www.elementaryvalue.com/home/capital-employed-podcast8443407

I was recently invited back on to the Capital Employed Podcast to have another chat with Jon Kingston. We chatted about recent developments at MYX.L and I pitched the tiny AIM listed firm HDT.L.

You can listen to the show on Spotify, Youtube, Apple Podcasts and Google Podcasts.

Cheers,

David

Disclosure: Long MYX.L and HDT.L

]]><![CDATA[Holders Technology PLC (HDT.L) - Too cheap to ignore]]>Mon, 07 Jun 2021 23:00:00 GMThttps://www.elementaryvalue.com/home/holders-technology-plc-hdtl-too-cheap-to-ignore

Holders Technology PLC (HDT.L) is selling below liquidation value and building a base on the long-range chart. It's only a matter of time before the stock begins to break out and I'll be there when it does.

Here's the business description and some numbers then we'll move on to the main course.

"Holders Technology plc, together with its subsidiaries, supplies specialty laminates and materials for manufacturing of printed circuit board in the United Kingdom, Germany, and internationally. The company also operates as a lighting and control solutions provider. Its products include heatsinks, LED drivers and PSUS, LED light sources, lighting tracks, and optics and reflectors, as well as provides wireless lighting control, and smart lighting and building solutions. Holders Technology plc was founded in 1972 and is based in London, the United Kingdom."

Market Cap = £1.86 Mil
Share price = 44p
Spread =18%
Common outstanding = 4,224,164
Public Float = 41.43%
TBV = £3.62 Mil
TTM Revenue = £9.84 Mil
TTM Net Income = (£0.26)
Div Yield = 1.18%

The first thing I do when I look at a stock is to check the chart.

HDT.L Long-range chart

Let me tell you what I see.

The stock is sat in the accumulation zone and has been building a base for over 5 years. Rather than a flat or rounded base HDT.L is forming what 's known as an ascending triangle.

You can see the support level rising as buyers become more impatient to build a position and sellers relinquish their holdings under the assumption that the stock is just dead money because it hasn't moved up yet. If you look closely you'll also notice a false break-out that quickly fell back down, this is a bullish signal that adds technical strength to the stock.

The other thing I notice is that the stock has the potential to trade at a much higher level if its prospects improve or the market's sentiment toward it changes. All it takes is a year or two of rising revenues, or a swing from loss to profit to move these tiny illiquid stocks up significantly.

Once demand overwhelms supply and the stock successfully breaks out , resistance will flip to support and an up-trend will be underway as all the pent up energy is unleashed.

Okay, we'll take a look at the most recent financials now, as always starting with the balance sheet.

HDT.L Balance sheet (30th Nov 2020)

Current assets = £4.873 Mil
Total Liabilities = £1.855 Mil

NCAV = £3.018 or 71.4p per share

A stock trading at 0.62x NCAV sounds like a good deal to me.

TBV = £3.606 Mil or 85.3p per share if you net out the intangibles and deferred tax assets.

On a revenue basis the stock trades at 0.19x TTM revenue, again this is too cheap to pass up.

Lets take a peek at historical revenues and earnings.

HDT.L Historical revenue and net income (Chart courtesy of TIKR.com)

You can see revenue took a hit due to the pandemic. In the prior three years it was trending around £12 Mil. HDT.L also booked a loss of (£260k) for the last financial year but was profitable in the prior 3 years.

I'm willing to bet now that the pandemic is subsiding and a trade deal between the UK and EU has been struck business will pick up going forward.

One thing I'm pretty excited about is the potential of 2 new joint ventures the company is involved in.

HDT.L Joint venture info (Source; FY2020 Annual report)

No only is the firm expanding it's lighting control solutions business into several new markets but they are also branching out into data analytics.

I'm no tech expert but I hear a lot of talk about the 'Internet of Things' and 'Smart Buildings'. I can see a lot of growth potential in an area like this and it's an interesting potential catalyst to drive future revenues and earnings.

Okay, time to look at ownership.

HDT.L Shareholder register (Source; www.holderstechnology.com/investor-information/)

Founder and Exec. Chariman Rudi Weinreich owns 44.98% of the common and aggregate director holdings stands at 46.26%.

58.57% of the common is not in public hands meaning the public float is tight, exactly how I like it to be!

What risks do I see.

The first is that these two JV's don't work out and it ends up being a waste of time and money, it's a fairly common occurrence and can't be ruled out here.

Another risk is that revenues don't recover and the firm remains unprofitable eroding the asset base and acting as a drag on the share price.

Maybe the company decides to delist, the share count has remained pretty static since HDT.L went public and a major reason for floating is to access capital in the markets. I don't see this as a likely scenario given the ownership by other entities and individuals who would probably oppose it.

Another one is the potential for a buyout coming in below fair value. Again, I see this as unlikely but the boss-man is 74 now and may decide it's time to retire soon. There would need to be approval from other shareholders for this to happen though and I doubt they would be willing to accept a low-ball offer for their stock.

Time to summarize the thesis.

HDT.L is selling below liquidation value and at a fraction of annual revenues.

It has a good chance of swinging back to a profit and growing revenues.

The 2 JV's embarked upon in 2020 could act as potential catalysts

From a charting point of view, the stock has been building a base for several years and is primed to break-out to the upside soon.

The set-up looks right to me here, the capital structure, tight float, price chart and fundamentals all make me bullish. HDT.L is too cheap to ignore.

Thanks for reading,

David

Disclosure: Long HDT.L

]]><![CDATA[Tricorn PLC (TCN.L) - A chart is worth a thousand words]]>Mon, 24 May 2021 23:00:00 GMThttps://www.elementaryvalue.com/home/tricorn-plc-tcnl-a-chart-is-worth-a-thousand-words

Most of my investment decisions happen very quickly now. It's rare that I labour over an idea to figure out if it's a buy or not. Tricorn PLC (TCN.L) is no different to the rest,

Everything lines up;

The market cap, share price, public float, price chart and situation. All just how I want them.

Here's a quick company description and some numbers;

"Tricorn Group plc manufactures and supplies pipe and tubing assemblies for companies worldwide. It operates through two segments, Transportation and Energy. The Energy segment provides manipulated tubular assemblies for use in power generation, oil and gas, and marine sectors. The Transportation segment offers ferrous, non-ferrous, and nylon material tubular assemblies for use in on- and off-highway applications. Tricorn Group plc was incorporated in 1986 and is based in Malvern, the United Kingdom."

Market Cap = £3.814 Mil
Share price = 7.75p
Spread = 21%
Common outstanding = 49,219,285
Public Float = 46.44%
Est. BV = £2.5 Mil
Loss-making

Now to the main attraction, price chart time!

TCN.L Long-range Price Chart

One look at that long-range price chart and I've already got one foot through the door!

Look at the cyclicality present in the chart, every 6-7 years the stock bottoms out before going on a monster run.

2003; Bottoms out at 3.86p before topping out at over 40p in late 2008. A 10-bagger in 5 years.

2009; Bottoms out at 5.78p before topping out at around 35p in 2011. A 6-bagger in 2 years and 3 months.

2016; Bottoms out 7.63p before topping out at around 35p in 2018. A 4.6-bagger in 2 years and 2 months.

The long term support and resistance levels are clearly evident, the accumulation zones, periods of consolidation, mark-up phases, distribution tops and mark-downs. All of them are there for those who choose to look for them.

Sadly, very few do. Many are fixated on quarterly earnings and trying to capture short-term gains.

Those of us who take the time to study the long-range charts are rewarded for our dedication to this peculiar obsession. We get to observe the footprints of money. We get to peer through the window into the collective mind of the market and gauge it's sentiment toward a stock, both past and present.

Let's zoom in a bit and see what else we can discern.

TCN.L 5-Year Price Chart

The 5 year chart reveals that the stock has bottomed out after its most recent decline from mid-2018 to early-2020. It is now firmly sat in the accumulation zone where strong hands are quietly building a position in preparation for the next rally.

This is how support is created, an equilibrium is formed by those selling in disgust or capitulation, and this selling is met by those buying with one eye on the past and the other on the future.

Sentiment toward the company is currently bearish, chatter on the stock boards is light and bears outnumber the bulls.

As you can imagine, the global pandemic and accompanying lockdowns have not done the company any favours.

Let's dig into the business.

The company has been granted permission to delay publication of audited results till June 30th so we'll have to make do with the unaudited accounts they released on March 31st. The report covers an 18 month period as the company has recently changed its accounting reference date.

We'll start with the balance sheet.

TCN.L Balance Sheet (30th Sept. 2020)

You can see that there have been some big write-downs on goodwill and intangibles, there's also been some write-downs associated with inventories, debtors and loss of contracts etc.

There's been a shake-up in management recently including the appointment of a new CEO. Management also instigated an internal review of the company and it was revealed that there was a balance sheet risk identified. By all accounts the last captain of the ship wasn't big on effectively implementing internal controls. My interpretation of the accounts and the accompanying statement from the new CEO leads me to believe that there isn't an issue with fraud at the company but rather the accounting anomalies uncovered were a result of incompetence and poor management.

You may think differently so don't take my word for it, as always do your own research.

Since the issuance of these financials TCN has been awarded further funds for its US subsidiary under the PPP loan scheme

In April the company issued an RNS noting that it's cash balances stood at £1.5 Mil.

We'll have to wait for the audited results to hit in June but I calculate BV to stand at around £2.5 Mil though the firm will not doubt have burnt a little cash on wages etc.

I normally like to buy at a discount to tangible assets but I'll make exceptions depending on the situation. I like the set-up here so I'm willing to pay above book.

With that cash balance the firm should be able to keep the fires stoked till business picks up. I also think there's a good chance the 2nd PPP loan gets forgiven like the first one did. The UK Government is also backstopping credit extended to the UK subsidiary and maybe that gets forgiven too.

Either way, I don't see the firm going under, now the lockdowns are lifting and business is improving I'm willing to bet brighter days are ahead for TCN.

What about revenues and earnings?

TCN.L Annual revenue and net income; 2004-2020 (Chart courtesy of TIKR.com)

The last column in the chart represents the most recent unaudited financials and covers an 18 month period so revenues are a bit higher than they would be on an annual basis. For the prior two years revenues were coming in at around £22 Mil

I don't know about you but I'll happily pay £3.8 Mil for £22 Mil in revenue for a company that's been left for dead and has decent business prospects going forward.

As with all cyclicals you can see earnings are lumpy. The most recent column for net income shows that the firm lost a huge chunk of money resulting from the pandemic and write-offs etc.

Prior to that you can see that TCN swings from profit to loss every few years. When times are good the firm pulls in between £0.7-1.0 Mil in net income.

Assuming we return to these levels in short order that's a P/E of between 3.8-5.4. I'll take that bet.

Okay, what about ownership?

TCN.L Shareholder Register

Notice anything interesting?

Okay, I'll go first.

Nearly 54% of the float is tied up, the stock is highly illiquid and the spread is wide. What do you think happens if and when the firm puts out a bullish press release or strong results?

Who's R. Allsop?

He's a Non-Ex Director and the former CEO. Little chance of this guy having paper hands and aside from the odd sale here and there he's been a net buyer over the years.

Canaccord seem in no mood to sell either. They bought in way back in Sept 2017 around the 20-22p mark. I don't see them selling out down here unless it's a forced liquidation.

Those of you who've read the book 'Free Capital' will know who the Swedish gentleman is.

Peter Gyllenhammar is a private investor based out in Sweden who has a long track record of investing in the AIM market. He has a penchant for taking positions in tiny firms that are down in the dumps. He'll often push for change if management are not running the company in the best interests of shareholders.

I've noticed he's scaled back his position a bit over the last month or two, I don't know if this is because he was pushing for change and met with resistance from management or if he is just reallocating capital. Either way it's not a huge position for him.

Right, we should talk about risks.

A big one is the amount of debt, despite the possibility of some loans being forgiven by the US and UK Governments there's still plenty of liabilities relative to assets.

Another risk is the possibility that there are more skeletons hiding in the accounting office. It can't be ruled out.

How long will it take for business to pick up? Maybe it's a long drawn out affair and TCN runs at a loss for the next few years.

As well as the UK and US subsidiaries there is a Chinese joint venture to think about. Maybe it works out well but you can't rule out political risks. These could come directly from the CCP or deteriorating relations between China, the US and the UK.

For me the potential rewards outweigh the risks here.

The stock is sat way down in the accumulation zone, the public float is tight and shares are thinly traded. It's hard to see how business can get worse from here given the pandemic is receding and lockdowns are lifting.

There's a new guy in charge and thus far he seems to be focused on fixing past problems and moving the company forward.

If TCN swings to a profit or secures some big orders sentiment can quickly change. The price chart shows that the stock has sold several hundred percent higher in the past and yet here we are back down near the low again.

This is exactly when I like to do my buying, as the stock languishes in the shadows and few care to pay it any mind.

All that's left to do now is wait and watch.

Thanks for reading,

David

Disclaimer: Long TCN.L

]]><![CDATA[Learning Tree International Inc. (LTRE) - Playing the waiting game]]>Fri, 02 Apr 2021 23:00:00 GMThttps://www.elementaryvalue.com/home/learning-tree-international-ltre-playing-the-waiting-game

Learning Tree International Inc (LTRE) issued its last financials in late 2018 and then went dark in early 2019. Since then there's been very few updates regarding the company's fortunes other than the occasional news release on their website. The market hates uncertainty and the stock price has responded in kind.

I first came across LTRE whilst rooting through old nano-cap pitches on V.I.C. I found it along with AFFY, MYRX and ORGN . It didn't take much digging to pique my interest.

The V.I.C. write-up garnered zero responses, bearish to most but bullish to me. (Big thanks to zach721 for writing it up, his write-up has a lot of great info and is worth a read.)

I checked the stock message boards and twitter for any chat, nothing but bot chatter for years, my excitement grew.

Then I pulled up the long-range chart and began to salivate like Pavlov's dog.

LTRE Long-Range Chart

What a chart!

Four years ago the market thought the stock was worth $2-3. Ten years ago it was priced at $9-10.

And now it sits at $0.75. After bottoming out at $0.20 in early 2019 the stock has been building a base on low volume for the past two years.

The 5 Year chart shows a little more detail.

LTRE 5 Year Chart

You can see clearly that the stock has moved from the mark-down phase into the accumulation zone. It is currently bouncing along in a narrow range between support of around $0.37 and resistance of around $0.75.

Some numbers and then we'll get to the backstory;

Market Cap = $9.918 Mil
Share price = $0.75
Common = 13.22 Mil
Float = 2.46 Mil

Some blurb on the company from OTC markets;

"Learning Tree International is a leading worldwide vendor-independent provider of training and education to business and government organizations for their IT professionals and managers. In addition to training, we support our customers by providing a suite of skills enhancement services which help the companies assess, identify and remedy skill gaps within their IT infrastructure."

Okay, here's the scoop.

LTRE was founded back in the early 1970's by a guy called David C. Collins who evidently had a lot of success and grew the company to a market cap of a few hundred million dollars (It briefly touched $1 Bil around the peak of the dotcom bubble). Unfortunately he didn't keep up with the changing times and was still doing stuff like mailing out physical catalogues whilst his competitors were adapting to the shifting sands beneath them.

Take a look at revenues and earnings before the firm went dark.

LTRE Annual Revenue 1996-2018.

LTRE Annual Net Income 1996-2018

Back in the late 1990's LTRE was pulling in annual revenues of $150-200 Mil and Net Income of around $10 Mil. Things started to turn sour as the company didn't adapt to the changing economical and technological landscape.

Prior to going dark in early 2019 the firm was still pulling in $64 Mil in annual revenue but was losing a couple of Mil a year. The trend was decidedly negative.

Here's where it gets interesting.

In June 2018 an 8-K was released announcing that the founder was going to sell his majority ownership in the company and resign from the board.

"On June 29, 2018, Learning Tree International, Inc. (the “Company”) entered into a Securities Purchase Agreement (the “Purchase Agreement”) with The David C. Collins 1997 Trust, The Mary C. Collins 1997 Trust, DCMA Holdings, L.P., The Adventures in Learning Foundation, The Collins Family Foundation, The Collins Family Trust, The Collins Charitable Remainder Unitrust No. 97-1, Dr. David C. Collins and Mary C. Collins (collectively, the “Collins Parties” which collectively represents the owners of a majority of the outstanding shares of common stock of the Company), and The Kevin Ross Gruneich Legacy Trust, as the buyer (the “Trust”). The Purchase Agreement generally provides for the sale by the Collins Parties to the Trust of the Collins Parties’ beneficial ownership of 7,495,332 shares of the Company’s common stock, par value $0.0001 (the “Common Stock”), for a purchase price paid by the Trust of $7,495,332 or $1.00 per share (“Sale Transaction”). The Company became a party to the Purchase Agreement for the limited purposes specified in the Purchase Agreement, which includes providing certain disclosures to and post-transaction nomination rights for the Trust. The Company received no proceeds from the Sale Transaction."

A guy called Kevin Gruneich took control of the company buying 7,495,332 shares (57% of the common out) at $1 a piece. He also got a directorship and became Chairman of the board.
As part of the agreement he also entered into a credit agreement with LTRE guaranteeing them financing of up to $5 Mil.

Turns out Gruneich has some pedigree;

"Mr. Kevin Gruneich serves as chairman at Learning Tree International, Inc. He served as an Equity Analyst of Bear Stearns Companies Inc., Research Division; Vermeulen-Raemdonck SA, Research Division; Oppenheimer & Co. Inc., Research Division and Crédit Suisse AG, Research Division. Mr. Gruneich served as Senior Managing Director, Senior Publishing/Information Analyst and Co-Head of the Global Media Research Group at The Bear Stearns Companies in New York. He served as Managing Director (highest designation) and Publishing/Information Analyst at CS First Boston for 14 years. During his career, Mr. Gruneich was named to Institutional Investor Magazine's All-America Research Team for 20 consecutive years and in many of those years was ranked number one in his sector. He is a member of Impact Partners, focused on social-impact documentary filmmaking. He serves as Director of Questar Assessment Inc. He serves on the Advisory Board of Ivy Asset Management. Mr. Gruneich sits on the Boards of The University of Iowa Foundation (as well as its Investment Committee), and Spy Hop Productions (one of the country's leading youth media arts programs). Mr. Gruneich graduated with an MBA in Finance from The Wharton School, University of Pennsylvania and earned a BBA (double major: Finance and Industrial Relations; minor: Political Science) from The University of Iowa."

One thing that caught my attention was;

"He serves as Director of Questar Assessment Inc."

After a bit more digging I found another press release that noted;

"Mr. Gruneich served as a Director of Questar Assessment beginning in 2008 until its sale to ETS (Educational Testing Service) in 2017."

So, it sounds like Gruneich has some experience with education companies and has probably bought LTRE to right the ship, modernize the business, and then sell it for a profit.

Back in 2012 Mill Road Capital put out an offer to buy the company at $5.80 a share so there's past evidence that outside buyers perceive some value here.

Whilst I'm not exactly sure how the turnaround is going the business doesn't appear to be in terminal decline. Various press releases on the company website note awards, contracts and new offerings.

A new CEO also joined the firm in March 2020 so it seems plenty is happening behind the scenes.

I contacted their IR dept. to see what they had to say but the secretary was pretty cagey with me. Hey, at least I got a response!

As always, I focus most of my attention on the balance sheet. I like to make sure the company can keep the lights on till the situation improves.

It's a few years out of date now but let's look at the last publicly available financial statements, namely the FY2018 10-K, to see what the balance sheet reveals.

LTRE FY2018 10-K

It doesn't look good at first sight with a Stockholder's deficit of ($13.916 Mil) and a negative Working Capital position to boot.

Looking closer though and $16.459 Mil was deferred revenues. This is one of my favourite liabilities to look for as it tells you that company is getting paid up front before providing the product or service. Much better than a business where you do the work and then have to chase up the receivables.

Cash was $4.732 Mil and receivables eclipsed payables by a decent margin. We also know that the firm had a credit line of $5 Mil to draw on and it has probably received some funds under the CARES act which will end up being written off too.

There was no sign of prefs or warrants but there were 600k in stock options.

LTRE also had NOL carry-forwards of $27.473 Mil.

How to value this one?

By going dark the firm is likely saving $500k-$1 Mil in annual fees and there's a good chance their rent obligations will have gone down if they have been moving toward a more blended approach with a greater focus on online courses. Perhaps the pandemic will have hastened this transition.

Assuming the firm was no longer bleeding read we could maybe value it at 0.75-1x annual sales.

Assuming they are still around $60 Mil and that would be 5-6x the current price, or roughly $3.40-4.50 per share.

We don't really know if revenues have been declining though, if we assume they've dropped to $30-40 Mil it should still be worth $2.25-3.0 per share if they're breaking even or turning a profit.

Without current figures these are all just shots in the dark but I'm willing to bet that the stock is worth more than $0.75. We know the new owner thought it was worth paying $1 per share for and he doesn't strike me as the type of guy to pay over the odds. If he is successful in stabilizing the business and returning it to profitability I don't see why this can't fetch a 0.75-1x Sales multiple.

What are the risks?

The firm is dark, we don't know much about what's been happening to the finances these last few years. LTRE was loss making and looked in decline prior to moving into the shadows and there's no guarantee that this negative trend has since turned positive.

Gruneich owns a controlling position and I've not seen any evidence thus far that he has the interests of minority shareholders in mind, maybe he does but the picture is unclear at present.

The stock could always drift back down to support and just keep building a base for years if no news or catalysing event emerges.

The flipside is that Mill Road Cap, Osmium Partners and a few other outfits are still holding shares so I'm guessing they think this investment has legs.

For me the thesis is simple;

a) The stock is trading below the price the new owner paid
b) It's likely trading at a fraction of annual revenues
c) It's trading way lower than the offer price Mill Road Capital put out in 2012
d) Going dark will have lowered the firm's operating costs.
e) The stock has bottomed out on the long-range chart and is building a base

I don't see the stock moving much lower here, it's bottomed out and volume is light. The public float is very tight and any hint of good news, a big contract win or a return to 'current reporting', and the stock moves up.

For now it's just a case of playing the waiting game...

David.

Disclosure: Long LTRE

]]><![CDATA[PASSUR Aerospace Inc. (PSSR) - Buying when the future looks bleak]]>Sun, 14 Mar 2021 00:00:00 GMThttps://www.elementaryvalue.com/home/passur-aerospace-inc-pssr-buying-when-the-future-looks-bleak

PASSUR Aerospace Inc. (PSSR) is at a multi-year low on the long-range price chart and the market is not interested in it.

Worth a look.

PSSR was founded back in 1967 and operates in the aerospace industry. The firm provides software tools for airlines and airports to help them manage the huge amounts of information they have to deal with. This, in turn, allows their customers to make better decisions and to run more efficiently.

Their latest 10-Q provides the following description;

"PASSUR® Aerospace, Inc. (“PASSUR” or the “Company”), a New York corporation founded in 1967, is a leading business intelligence company, providing predictive analytics and decision support technology for the aviation industry primarily to improve the operational performance and cash flow of airlines, airports, fixed based operators (FBOs) and air navigation service providers (ANSPs). The Company is recognized as a leader in providing a cloud-based platform, ARiVA™, that manages and optimizes operations for our customers."

I have a penchant for looking at tiny companies that are currently distressed yet have some potential. PSSR fits my niche like a glove.

One of the first things I do when looking at a new stock is to pull up the longest range price chart I can find to get a snapshot of the market's sentiment toward a given company, both past and present. An observation of price action, volume, support and resistance can tell you a lot about both the company and the market's view of it.

PSSR Long-range chart

The first thing that jumps out is how much the market hates this stock right now. It has been down here before in the '90's and the '00's, each time building a base before making major upward moves. It's pretty obvious that PSSR's operating history has been lumpy and that the situation is not good right now. Hardly surprising given that the company operates in the aviation industry.

Let's zoom in a bit and take a closer look.

PSSR 5-year chart

The stock started its most recent downtrend in early 2017, falling from around $4.2 (ignoring the stock spike to $7 on low volume) to a low of 22 cents in the tax loss selling season of late 2020/early 2021. Since then it has moved up 2.6x and is currently sat at 58 cents. Despite the move up the stock is still well ensconced in the low range.

I'll throw out a few numbers and then we'll dig in.

Market Cap = $4.47 Mil
Share price = $0.58
Common outstanding = 7.71 Mil
BV = (11.175 Mil)
TTM Rev = $9 Mil
TTM net income = ($11.585 Mil)

No prefs or warrants but there's some stock options out.

Clearly it doesn't look cheap on an assets or earnings basis given both BV and net Income are negative. All we have is the discount to revenue and that's justified given the current state of the finances.

Along the way I've been learning that it sometimes pays to dig into seemingly bad situations to see if they are rotten to the core or if there are some seeds of potential to be found beneath the bruised flesh.

Balance sheet time!

PSSR Q1 FY2021 balance sheet

After a little digging the situation appears less dire than first expected.

They've got $1.9 Mil in cash to keep the lights on for now, $1 Mil of which appears to be stimulus funding which shows up under their current liabilities. After rooting about in the notes I noticed that they received a "top off" disbursement of $875k in Feb under PSP1. They are also due another $1.31 Mil from PSP2, $655k of which they received on 8th March.

That's around $4 Mil in total to keep paying the wages till business picks up.

PSSR Q1 FY2021; Notes to financial statements

Another $1.47 Mil of liabilities is deferred revenue.

Then we have the Note payable of $10.692 Mil to a related party, better that the debt is owed to an insider rather than the bank who usually call it in at the worst possible time.

It turns out the insider bankrolling the company is the Chairman, majority owner and former CEO. A gentleman by the name of G.S. Beckwith Gilbert. Here's some blurb on him I found on the company website;

"Mr. Gilbert is Non-Executive Chairman of the Board of Directors of the Company, and has served as the Chairman of the Board since his election in 1997. Mr. Gilbert also serves as the Chairman of the Executive Committee. Mr. Gilbert was appointed Chief Executive Officer in October of 1998 and served as such until his retirement from that post on February 1, 2003. Mr. Gilbert is President and Chief Executive Officer of Field Point Capital Management Company, a merchant-banking firm, a position he has held since 1988. Mr. Gilbert is also Chairman Emeritus of the Board of Fellows of Harvard Medical School, a Director of the Yale Cancer Center, and a member of the Council on Foreign Relations. Mr. Gilbert’s current service as Chairman of the Board of the Company and Chairman of the Executive Committee and prior service as Chief Executive Officer of the Company, as well as his prior board and executive management experience, allow him to provide in-depth knowledge of the Company and other valuable insight and knowledge to the Board."

Mr Gilbert is a wealthy guy and seems pretty content to just keep rolling the debt over, that's fine by me too. Keep this ship sailing till it reaches richer waters Captain!

He currently owns around 53% of the common and insiders as an aggregate own around 61% (inc. currently exercisable stock options). That means the public float is pretty darn tight. Just how I like it.

PSSR Insider ownership

Mr Gilbert is not only rolling the debt over but he is also guaranteeing financial support to the company until the situation improves.

Q1 FY2021 Report; Note 5

Right, we'll take a look at revenues and earnings to see what's been happening.

PSSR Annual revenue and net income; Chart courtesy of TIKR.com

PSSR Quarterly revenue and net income; Chart courtesy of TIKR.com

There's a few things to mention here.

You can see on the quarterly chart how revenue falls dramatically when the pandemic hits, we should see some recovery here as the vaccine roll-out continues and the aviation industry starts to recover. Management have stated that they expect business will pick up in the 2nd half of the year.

You'll also notice that huge net loss that hits in 2020. This was, in part, due to a large asset write-off relating to a legacy business segment.

PSSR used to operate a network of sensors for aircraft surveillance but new rules brought in by the FAA now mandate all aircraft to be fitted with ADS-B (Automatic dependent surveillance - Broadcast) technology.

This technology allows the aircraft to determine its position via satellite navigation and then periodically broadcast that data in order for it to be tracked.

The new rules essentially rendered PSSR's network obsolete and huge write-downs followed.

In my opinion this is actually bullish for PSSR's prospects as it can now focus all its efforts on pushing its data analytics platform to build up subscription revenues as the aviation industry recovers.

Another chunk of the write-downs related to software development assets which took a hit once it became clear that contracted revenues would be impaired due to the pandemic.

One last thing before we move on, after booking losses for the preceding several quarters it looks like PSSR has turned a corner and swung back to a profit.

Not quite yet though, were it not for the utilization of stimulus funding credits and PSSR would still be bleeding red.

I'm not overly concerned though, the firm has around $4 Mil in stimulus funding on hand or due in the coming months. Add to that the financial commitment provided by the Chairman and I think PSSR can keep going till the economic gloom dissipates.

For those of you that would like to learn a bit more about the stock I recommend reading @longcastadviser previous excellent write-ups on the company which you can find here.

Okay, what risks do I see?

The most obvious one is the lack of margin of safety. The large negative equity position and recent history of unprofitability are big risk factors and a serious cause for concern.

Another risk is that Mr. Beckwith could just decide to call in the debt, the note payable is secured by the assets of the company and so minority holders could get wiped out. He's currently 76 years old so who knows how long he will keep rolling over the debt. Maybe he might just decide to take full control and then just sell the company.

Customer concentration is a major risk too. The last 10-K noted that 3 customers accounted for 36% and 55% of total revenues in FY2020 and FY2019 respectively.

PSSR is a tiny firm, they've got some larger competitors which offer similar services. These include "Sabre, Saab-Sensis, The Weather Company/IBM, Harris Corporation, Amadeus, Thales, IDS, Metron, FlightAware, and Mosaic ATM."

Imagine what might happen if one of the big tech firms decided to move into this space!

To say there's a lot of hair on this stock is an understatement but the flipside is that it has significant upside potential if just a few things go right.

If the firm can keep going long enough for the aviation industry to recover maybe it can start to grow revenues and earnings again.

Buying when market sentiment toward a company is so bearish means you don't need much to go right for the stock to start moving up.

I like the set-up here, I like buying when the future looks bleak.

Thanks for reading,

David

Disclosure: Long PSSR

]]><![CDATA[MyCelx Technologies Corp (MYX.LON) - Buy assets, sell earnings]]>Sun, 14 Feb 2021 00:00:00 GMThttps://www.elementaryvalue.com/home/mycelx-technologies-corp-myxlon-buy-assets-sell-earnings

MyCelex Technologies Corp (MYX:LON) is currently sat way down on the long range price chart and selling at a discount to tangible assets, that's enough to get me interested.

MYX is an AIM listed nano-cap firm involved in the O&G services market, they've developed a patented polymer which is able to remove hydrocarbons and other pollutants from water and air. Like many of the tiny companies I invest in, MYX swings between profit and loss and now is not exactly a good time to be an O&G services firm.

We'll start with some numbers (All figures in USD since MYX reports in this currency);

Market Cap = $7.27 Mil
Share price = $0.37 (£0.27)
Common outstanding = 19.44 Mil
BV= $17.1 Mil
Cash = $4.255 Mil
Total Liabilities = $5.547 Mil

Now on to the chart.

The stock is currently sat at £0.27 ($0.37), down from an IPO price of £1.98 ($2.74) and a 2019 high of around £2.70 ($3.74). The market is not interested in the O&G industry and these tiny O&G services firms have been left for dead. MYX is so hated it's priced below a reasonable estimation of liquidation value. Sentiment is decidedly bearish and many think the industry is in secular decline.

Fine by me, these are the types of stocks I look for. I want to find tiny companies whose shares are thinly traded and are sat way down on the price chart. I don't care if they are currently losing money, I'm looking to buy assets and sell earnings. Provided debt is at a reasonable level and the share price is backed by some hard assets I'm willing to bet that at some point the situation will improve. All I need to know is that the firm has enough supplies to wait out the storm till the good times return.

As usual we'll start with the balance sheet.

MYX reports bi-annually and their annual report isn't due till the end of May. We'll have to make do with the interim report for the period ending June 30th 2020 and take into account the potential for further cash burn.

Current Assets stood at $13.756 Mil.

Netting out the Total Liabilities of $5.547 Mil gives us a NCAV of $8.209 Mil

If you want to be more conservative you could net out the restricted cash 0f $500k and prepaid expenses of $485k too.

That would get us to an adjusted NCAV of $7.224 Mil.

P/NCAV = 0.89
P/adj. NCAV = 1.00

Some of you Ben Graham fans have probably noticed that a decent chunk of the NCAV is comprised of inventory, you could mark that down by 50% to be ultra conservative but I'm not that picky anymore.

We'll look at the PPE now.

I'm not much interested in the machinery and other equipment, I'm only really looking at the land and building for valuation purposes.

MYX is carrying land and a building, it's HQ, on the books at $709k and $2.724 Mil respectively.

I looked up the property on Instant Street View to take a look.

I then used the Gwinnett County tax assessor website to look up the tax parcel info.

Total appraised value for 2020 is coming in at $3.569 Mil vs a combined stated value for the land and property of $3.433 Mil in the interim report, not much variance there so we'll stick with the lower of the two figures.

MYX still has a note payable out on the property to consider.

Netting out the note payable gets us a net asset value of $1.74 Mil for the property. Adding that to the adjusted current assets of $12.771 and then netting out the remainder of the liabilities, $3.855 Mil exc. the note payable, and we end up with a pretty conservative estimate of adjusted tangible BV.

Adj. tangible BV = $9.090 Mil vs a market cap of $7.27 Mil

Depending how you see it you could always add back in the restricted cash of $500k too since that is being held back under the terms of the note payable.

Given the NCAV and adj. BV figures are based upon the interim report for the period ending June 2020 they should be taken with a pinch of salt. MYX booked a loss of nearly ($2.78 Mil) in H1 2020 vs a profit of $87k in H1 2019. Revenues and earnings are lumpy and the next report could reveal that the firm is continuing to bleed red ink.

That's fine by me, I not anticipating a liquidation scenario here and just want to know that the firm can get by until revenues and earnings increase.

Management has stated that they have a $1.88 Mil line of credit and can also pursue a sale/lease back of the property if they need additional funds.

They are also carrying a PPP loan of $401k under other current liabilities which has a pretty good chance of being forgiven.

All this makes me reasonably confident that the company can get by till its fortunes improve.

Now well take a look at revenues and earnings over the last several years. I'll repost the price chart for comparison.

Chart courtesy of TIKR.com

Revenues rose from $4.3 Mil in 2010 to $21.4 Mil in 2013 and the stock responded rising from £1.98 ($2.74) to a high of £5.50 ($7.62) despite the fact that the firm only turned a profit in two of those four years. You can then see the share price collapsed through 2014-2015 before bottoming out in 2016 following a few years of declining revenues and rising losses.

The stock then sat at support of around £0.20-0.25 ($0.28-0.35) through 2016 as it built a base before consolidating through 2017-2018. By late 2018 it had risen to around £2.40 ($3.32), all based upon a change in market sentiment as revenues once again grew and the firm swung back to a profit.

That's a 10-12-bagger in 2 years depending on where you would have bought in.

And now here we are back down in the doldrums sat around long term support with the market looking elsewhere. Things could get worse before they get better but I think downside is limited here.

Let's take a look at share ownership.

CEO Connie Mixon owns 12.81% and Founder/CSO Hal Alper owns 6.49%. They've not been buying more down here but at least they've got skin in the game.

You'll also notice that the public float accounts for only around 40% of the common out. This is music to my ears. Any sign of new contracts or other positive developments and demand will far outweigh supply. These illiquid stocks don't need much good news or change in market sentiment to have big upward moves.

What are risks here?

Maybe O&G prices remain depressed or drift lower, I think it's unlikely but who knows.
Perhaps prices do move up but MYX loses out to larger competitors with competing products. Maybe they do score some more contracts but SGA costs run high and they keep bleeding red.

Anything is possible but when the picture looks this bleak it doesn't take much to change market sentiment.

I like to buy near the point of maximum pessimism and sell when the future looks bright.

Buy assets and sell earnings.

Thanks for reading,

David

Disclosure: Long MYX.AIM

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