Addvantage Technologies (AEY) released their 4th quarter and full year results, plus their 10-k, today. I’ve yet to review the conference call (it’s actually ongoing as I write this article), but I thought I’d give some updates from my review of the 10-K.
First, the results were decent. Was it a blow out quarter? Absolutely not, but you’re not generally going to say “blow out” quarters by net-net stocks. Instead, the company continued to show solid profitability, good cash flow, signs of their revenue decline ending, and a strengthening balance sheet.
So let’s start talking about some of the interesting developments from the year. If you want an analysis of why I think they are so undervalued, please view my previous write ups.
First, the company is deploying cash in a very (in my opinion at least) efficient manner. The paid $550k for their new acquisition, AGC, this year. AGC turned around and did $1.2m in revenue in the 4th quarter. Assuming margins similar to the rest of the business, that’s ~$165k in EBITDA. Granted, AEY is running some of their old operations through AGC now, probably resulting in an revenue boost, but however you look at it this is probably a gangbusters acquisition. Granted, it’s small compared to the size of AEY, but still- great job.
As a follow on to the acquisition, AEY acquired a warehouse for $1.475m. The warehouses old tenants paid a monthly lease of $10,250 before AEY kicked them out to move AGC in. That means AEY paid a cap rate of 8.34% for the building. Now I haven’t been able to inspect the building and there’s not much more disclosure, but from a 10,000 foot viewpoint that seems to be a decent price for a piece of real estate. At worst, it’s tough to see them losing value on that deal. Again, small- but instructive.
Finally, I think there’s a looming catalyst coming. AEY currently has $10.9m in cash (up from $8.7m at the beginning of the year- and remember, they paid $2m for AGC plus the warehouse and paid down $1.8m in debt) versus ~$12.1m in net debt. The bulk of this debt, $10.2m, comes due in November of next year (plus another $200k or so in principal paydown on a term loan). Obviously, AEY has enough cash to pay all this debt down right now. When you figure they’ll probably generate at least $4m in cash in that time from earnings plus further draw down on inventory, AEY could be looking at a significant net cash position in the next year or so.
Here’s where the catalyst comes in- once AEY pays down that $10.2m note, they’ll be awash in cash, plus they’ll own several unmortgaged properties. In other words, they’ll be flush with liquidity. I think it’s likely that AEY’s management starts thinking about some form of share buyback or possibly taking the company private. If they offered to do a tender at, say, $2.50- it would come at a discount to net current asset value and the company could easily retire 10% of shares. Or maybe management uses the properties and huge inventory position to MBO the 50% of the company they don’t own.
I’m not sure which it is, but with the stock this cheap and tons of debt about to roll off the books- I wouldn’t be surprised to see a catalyst coming soon.
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On AEY’s most recent 10-k, why does it say the 2nd term loan is due November 2012, but then you look at the maturity schedule on page 32 and it appears that the bulk matures in 2013?
Also, I am trying to figure out why they need a chairman that makes $360k and a CEO that makes $360k. Also, any idea what kind of succession plan is in store? Both Chymiak’s are getting older. I suspect they want to keep the company so long as they can collect $720k/year combined, plus monthly lease payments on one of the buildings (though it doesn’t appear to be egregious payments.)
Their fiscal year ends in September- the maturity statement is by fiscal year- November 2012 falls under fiscal 2013.
The chairman and CEO are brothers and the founders of the company. Not sure what the succession planning is, and i agree the comp is a bit high- but I think they’re probably underpaid relative to how much value they bring to the company in terms of their decades long contacts and connections. Remember, they own 50% of the company, so their interests are very aligned with shareholders. That ownership is worth multiples of the rent and salary they get from the company.
Yeah, my oversight on the maturity. Meant to look at the fiscal year but I guess that’s what you get for reading 10-ks at 2am.
Tried to join you in LAKE today, but didn’t get filled on my order. Thinking about AEY some more.
Hi,
I wonder how you get to ~165k. In the statement they are talking about 30% operational margin.
Thanks for the update.
At least management is doing “something” in the tough environment and not sitting on their hands with a cash hoard. Also nice to see the inventory winding down slowly, reduces my fear of obsolescence.
We will have to be patient on this one.
Dean