Food Technology Service, Inc.: Growing With A Catalyst

May. 8.13 | About: Food Technology (VIFL)

Overview

Food Technology Service, Inc. (NASDAQ:VIFL) operates a gamma irradiation facility out of Mulberry, FL. They have been in operation since their factory opened in January of 1992, and they utilize Cobalt 60 for the sterilization of medical, surgical, pharmaceutical and packaging materials. In addition to these services, VIFL disinfects fruits, vegetables, oysters and meat products to enhance safety or eliminate insect pests. While the name of the company is Food Technology Service, the majority of their revenue is derived from the sterilization of medical products and devices. VIFL possesses value, as well as a near term potential catalyst.

Trading at a price of $5.02 per share, with 2,919,425 fully diluted shares, VIFL has a fully diluted market cap of $14.656 million. VIFL released their annual report on March 29, 2013, and the year was a significant financial improvement for the company. The company announced net revenue of $3,958,629 for the year ended December 31, 2012. This represents a 5.7% increase in revenue over 2011, as well as a revenue CAGR of 16.31% from 2009 - 2012. The company consistently produces EBITDA margins of approximately 50%, as well as EBIT margins of approximately 36% per the table below:

Enterprise Value and Valuation

VIFL has no interest bearing debt. Their only liabilities on the balance sheet are accrued liabilities and accounts payable that totaled $452,455 as of December 31, 2012. With a cash balance of $2,336,814, VIFL has an Enterprise Value of $12,318,700. This equates to a 8.65x EV/EBIT ratio, and a 6.12x EV/EBITDA ratio.

The company is FCF positive, and has grown their cash position over the last four years, and currently hold almost 16% of their market cap in cash. They have sizable deferred tax assets on their balance sheets, as well as $2.71m remaining in NOL as of the end of 2012.

The company currently trades at 1.61x TBV, and they have grown TBV at a CAGR of 15.42% from 2009 to 2012. For the year ended December 31, 2012, VIFL produced a ROIC of 13.66%.

Take-Private Transaction

For numerous years, Nordion [TSE:NDN] has been VIFL's supplier of Cobalt 60. The two companies share a very close business relationship, as outlined per the quote from their 2011 10-K:

Until February 25, 2011, Nordion (Canada), Inc. ("Nordion") owned approximately 16.8% of the Company's outstanding shares of Common Stock and had representation on the Board of Directors. Nordion, in addition to being a substantial shareholder, has assisted the Company since its commencement of operations in 1990. It aided in the design and construction of the irradiation facility, loaned money to the Company during the 1990's when we were not profitable and has been our supplier of Cobalt. ... According to reports filed with the Securities and Exchange Commission, on February 25, 2011, Nordion sold its interest in the Company to Fort Ashford Holdings, LLC, a California private equity firm.

After this transaction, Fort Ashford Holdings became VIFL's largest shareholder. Since February of 2011, they have continually increased their position in the business. Fort Ashford released a form 4 on May 7th, 2013 and after their most recent purchases, they now own 841,845 shares (approximately 30%). In the 2012 10-K, the agreement explicitly states that they are able to expand the size of their current position. As the company currently has no long term debt, the possibility exists for Fort Ashford to lever up the business and take VIFL private at a premium valuation. The table below shows the return a shareholder would receive at various take-out prices:

As VIFL owns their operating facility and land outright, these assets could allow Fort Ashford to utilize leverage take the company private. While the company is not without flaws, the value that currently exists within the company, as well as the significant upside potential, makes VIFL a compelling investment.

Disclosure: I am long VIFL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.