Recession Resistant Nano-Cap Returning Significant Sums of Capital
Own a company that completed a heavy Capex cycle, raised price, integrated a key acquisition and will drive revenues higher and costs lower through efficiencies at a deep value price.
This is the fifth issue of “Weird OTC Stocks” I find by going A-Z.
The previous issues are here:
Today’s issue is just as interesting.
The market cap is only $12.8 million
$5.5 million of cash on the balance sheet and zero net debt (per last annual report)
Recently purchased a businesses for $2.5 million which should accelerate sales and lead to cost efficiencies.
Management has a history of returning almost all free cash flow to investors through dividends.
7.94% dividend yield in 2024 — including special dividends.
The company is trading around book value with owned real estate and equipment held at historical cost.
Gross value of the real estate is $2.1 million and I think it could be worth $4-5 million. Gross value of the equipment is $7.4 million. Significant margin of safety.
I expect costs to continue to go down and potential for top line growth. The EV/EBITDA of 6.5x is adjusted for the recent large special dividend and acquisition and should come down next year as cash flows accelerate.
In 2023 a new regulation kicked in which allowed the company to raise price by 8%. I expect most of these price increases should drop right to the bottom line.
The company recently bought significantly more equipment and moved their operations to a new building. The equipment should lead to cost efficiencies and the building has a lower lease cost. Margins should drive higher.
The recent capex cycle has been complete and free cash flows should be stronger in forward periods, leading to higher dividend payments.
A new contract has been signed and secures high margin revenue for the next three years. The company should make almost all of their enterprise value back within these three years — and if the contract is not renewed in the future — the company should be able to liquidate their owned assets for substantially higher than the current valuation less next three years free cash flow.
The thesis is pretty simple when you break it down. You are purchasing a business for a $9.8 million enterprise value (adjusted for the acquisition and special dividend) and you get at least three more years of cash flow. Historically the company has generated around $1.5-2.0 million of net income. But because the company recently spent $2.5 million on an acquisition and they also spent an additional $2.6 million on new equipment and moved to a bigger and more efficient facility, they could generate more revenue at a lower cost.
For conservative purposes let’s say the company can only generate $2 million of free cash flow over the next three years. At the end of year three, the enterprise value will be $3.8 million. Let’s then assume the company does not renew the contract and they are forced to liquidate. Then the company is forced to sell their owned real estate at $4-5 million and auction off their equipment, which the gross value is over $7 million for 25% on the dollar. We then end up with $5.75 million of excess value that can be sold and returned to shareholders, compared to a $3.8 million enterprise value.
But, if the company is able to renew the contract for additional years — which I don’t see why they can’t as the company has been in business for over 100 years — then we are buying a real business that generates significant cash and a management team who has returned almost all free cash flow in the form of dividends and special dividends.
I see this investment as a low risk way to compound capital with a management team who is working hard for shareholders.
Oh, and by the way, the company has historically done extremely well during recessions. So this might be a recession beneficiary that no one is looking at.
Let’s dig in.