Thesis: NUHC is an electronics distributor. Xilinx (NASDAQ:XLNX) accounted for about 30% of sales and dropped NUHC as a distributor. The net working capital of NUHC is $168m while the company is publicly valued at $62m. Most of the net current assets are in the form of inventory/receivables however with Xilinx out of the picture, it is possible that inventory/receivables will be converted to cash thus providing a catalyst for increased shareholder value.
Company Overview: The electronics distribution business bears thin margins and high competition. NUHC’s returns on equity have been subpar (<7%) and is not a particularly strong company. The company is trying to grow internationally via acquisition and made a Danish acquisition in the past two years. That acquisition has not hit performance hurdles that would result in additional payouts to sellers of the acquisition. Overall, it is a simple and boring business comprising of inventory management and matching suppliers with buyers.
Reason for Mispricing: Xilinx terminated a 23 year relationship that accounted for roughly 32% of NUHC’s sales. NUHC presently holds $41.2m of inventory purchased from Xilinx. NUHC can return all of this inventory at the expense of Xilinx for full price. Market valuation after the announcement subsequently declined greater than 25%.
Valuation: The company is sufficiently liquid with $11.5m in cash and over $30m in credit available. Net working capital (current assets-current liabilities) for NUHC is $168m. The market is pricing NUHC at a 37% of net working capital. Furthermore, net current asset value (current assets-total liabilities) is $128m. Thus, the market prices the company at a 48% discount to NCAV. The $41.2m of Xilinx inventory is expected to be either returned for cash, or sold to customers for cash. We expect the full value to be recovered since Xilinx guarantees it. Although revenues will be substantially lower in the future, we are concerned with the liquidation value. When Xilinx inventory turns into cash, 86% of the market value will be cash (at present prices). The CEO indicated revenue growth exclusive of Xilinx and if they are successful in filling the gap, that is a free option to an owner. The company instituted salary reductions and layoffs the previous year to keep costs constant and that may be indicative that they will not be afraid to do the same in light of lost sales. Our missing link is the cash burn. It seems as though for the 9 latest months, they have burned about $4.5m. This cash burn should increase substantially with the loss of Xilinx unless operating costs are cut.
Investment Opinion: Converting Xilinx inventory to cash is a catalyst to increase public market valuation. The downside of the company is sufficiently protected by current assets. If the company can stop burning cash or possibly grow, shares should be worth substantially more (100%) than where they are valued now. However, without being clear on what the cash burn may be, we are staying put for the moment. Further analysis is necessary.
Disclosure: No positions