Nutrastar International: Compelling Undervaluation And Getting Closer To Take-Off

Aug. 5.14 | About: Nutrastar International (NUIN)

Summary

Nutrastar International stock sells at 35% of net cash per share and 1.6 times trailing E.P.S.

Recent stock transactions portend increased activity in domestic and international business expansions.

As a first result, the company signed first distributor for new Cordyceps powder solution product.

Additional positive developments should occur in 2014 to drive the stock higher.

ELEVATOR PITCH

Investors face a compelling buying opportunity in the shares of Nutrastar International (OTCPK:NUIN) due to the current extremely low valuation coupled with a series of positive announcements and developments that should take place over the next several months. Recent private stock transactions suggest that increased activity will occur regarding expansion of domestic distribution and initiation of international business opportunities. The recent announcement of the signing of the first distributor for the new Cordyceps powder solution product is the beginning of this increased activity.

At its most recent closing price of $2.10, NUIN is selling at 35% of its $6.00 net cash per share, 30% of its $6.95 book value and 1.6 times estimated 2014 E.P.S. of $1.33. The stock will provide a 186% investment return if it simply trades up to its net cash per share (giving no value to its highly profitable underlying business).

We expect a series of positive announcements and developments to occur during the remainder of this year, including new product introductions, new personnel hires, details regarding international sales expansion and increased investor relations efforts.

Our most likely scenario calls for a $12.22 stock price target over the next year; if achieved, this would translate into a 482% investment return.

COMPANY DESCRIPTION AND INVESTMENT THESIS

For those investors who are new to Nutrastar International the following is a summary of the company description and our investment thesis (for a more detailed presentation please refer to our prior Seeking Alpha article here).

Nutrastar is a Nevada corporation with a VIE relationship with an onshore Chinese operating entity. The company produces and distributes premium consumer herbal and food products in China. Most of the revenues are generated from products based on Cordyceps Militaris "Cordyceps", a fungus that is prized for its uses in traditional Chinese Medicine; see here and here. While difficult and expensive to obtain in its natural state, Nutrastar commercially cultivates its Cordyceps in a high quality, low cost process that the company has licensed and subsequently improved upon. Only three people in the company know the entire production process chain. The Cordyceps is packaged and sold through several product offerings including large and small batches of dried Cordyceps, beverages based on Cordyceps and a water-soluble powdered formulation. NUIN also distributes specialty and organic food products.

Our investment thesis is based on three factors:

1. At its current price of $2.10 the stock is substantially undervalued. Book value is $6.95, net cash is $6.00 per share, no debt, trailing 12 month fully diluted E.P.S. are $1.28.

2. Future growth prospects are bright. Currently, all of the company's business is conducted in China. The company is planning on international expansion starting in 2015 based on a combination of capsule and tablet formulations of Cordyceps and development of new sales channels.

3. Investor confidence should increase and cause a significant revaluation of the stock price. International expansion will generate foreign exchange, thereby providing the capability to repurchase stock. Seeing the company's products sold in the U.S. will further establish credibility with the U.S. investor. More investor relations activities will increase the company's visibility.

RECENT DEVELOPMENTS PORTEND INCREASED ACTIVITY TOWARD INTERNATIONAL EXPANSION

Nutrastar recently expanded its strategic partnerships with two shareholders by effecting private share transactions with these strategic investors. See the press release here.

On June 23, 2014 the company's Chief Executive Officer, Ms. Lianyuin Han, sold 300,000 of her shares to Accretive Capital Partners, LLC ("Accretive Capital"). The price was a previously negotiated $1.40 per share. All the shares are restricted for six months. This is similar to the original transaction of December 26, 2013 when Ms. Han sold 700,000 of her shares to Accretive Capital. Accretive Capital is a highly successful activist investor, targeting small undervalued public companies that are often take-private candidates.

Also on June 23, 2014 Ms. Han completed the sale of 1.6 million of her shares to a new strategic investor group. One million shares were bought by Beijing MLTH Fortune Investment Management Co., Ltd. ("MLTH") and 600,000 shares were bought by two affiliated investors. The negotiated purchase price was $2.00 per share and all shares are restricted for six months. MLTH is a China-based investment fund management company that specializes in establishing relationships with pharmaceutical and nutraceutical companies in China.

Upon completion of these transactions, Ms. Han owns 6.349 million shares or approximately 36% of the total 17.4 million shares outstanding on a fully diluted basis. Accretive Capital owns 2.038 million shares or approximately 12% of the shares outstanding on a fully diluted basis. MLTH and its affiliates own 1.600 million shares or approximately 9% of the shares outstanding on a fully diluted basis.

We believe these recent developments have significant favorable portents for Nutrastar's outlook. Both share transactions were meant to strengthen their strategic relationships in order to capitalize on the partner's acumen and associations as Nutrastar undertakes expansion internationally, as well as extends its distribution domestically in China.

Accretive Capital is helping Nutrastar formulate and initiate its international expansion. Richard Fearon, Accretive Capital's Managing Partner and member of Nutrastar's Board of Directors, said "We are pleased to increase our investment at this pivotal point in Nutrastar's evolution into a global nutraceutical supplier. Our team is focused on helping Nutrastar penetrate new markets internationally…"

Similarly, (MLTH) will be helping Nutrastar extend its distribution in China and possibly initiate expansion in other Asian countries. Mr. Baiqing Su, General Partner of (MLTH), said "…We look forward to working with Nutrastar as they expand domestically and to supporting them as they enter western markets and begin competing internationally…" The press release announcing these transactions also referenced a few examples of the pharmaceutical and nutraceutical companies in China with whom (MLTH) has developed strategic relationships and partnerships. While the companies mentioned will not necessarily be working with Nutrastar, it is perhaps noteworthy to be aware of their current activities. One company, Dalian Hui-Li Biological Health Products Co., Ltd. is involved in direct marketing consumer health products in China as well as retail store distribution. Such store distribution capability is an important aspect to successfully competing in China as the "drug stores" in that market are largely local in origin, unlike the large chains found in the United States. Another company, Heilongjiang Beiqshen High-tech Health Products Co., Ltd. provides manufacturing capability for nutraceutical products in a variety of formulations including tablet, capsule and liquid form.

Of further note is the additional comment by Mr. Su that (MLTH) had approached Nutrastar to inquire about effecting the transaction "after careful consideration and extensive due diligence".

The implications of the transactions discussed above are that Nutrastar's efforts to expand its domestic distribution of Cordyceps-based consumer products are continuing and that it considers initiating international expansion to be a major priority for the company. Such international expansion is especially important for Nutrastar as it would generate foreign exchange that could then be used to repurchase shares. This would be highly accretive to remaining shareholders' value at prices anywhere near the current low share price.

THE SIGNING OF THE FIRST DISTRIBUTOR FOR THE CORDYCEPS POWDER SOLUTION PRODUCT SIGNALS THE BEGINNING OF THIS INCREASED ACTIVITY

On July 31, 2014 Nutrastar announced the signing of its first distributor for its new Cordyceps powder solution product. The company entered into a contract with Hubei Quandu Aiwan Health Industry Co., Ltd ("Aiwan") whereby Aiwan committed to purchase up to $3.2 MM of the powder solution product only. The contract is for an initial one year period and is subject to additional extension or renewal thereafter. See the press release here.

This news is very important for four reasons:

  1. It highlights the launch of the new powder solution product. Most Cordyceps-based product sales to date have been the dried product which requires soaking in warmed water before ingesting. The water-soluble powder is quicker to prepare as well as easier to ship and store. Importantly the powder product is likely to be one of the new products to be used in the planned expansion into the United States.
  2. It expands Nutrastar's marketing reach into Central China for the first time. The Hubei province has a population of 57 million.
  3. It confirms the value created by the new strategic investors. This contract was a direct result of Nutrastar being introduced to Aiwan by Beijing (MLTH) Fortune Investment Management Co., Ltd, the new strategic investor discussed earlier in this article.
  4. It provides additional evidence of a viable and thriving company.

2014-2015 OUTLOOK IS FOR ACCELERATING GROWTH

The company has publicly stated that it expects 2014 revenues to fall in the $47 MM to $50 MM range, representing an approximate 8% to 15% year-over-year top line growth. We are taking a bit more of a conservative stance in estimating 2014 revenues of $46 MM with fully diluted E.P.S. to be flattish at around $1.33.

2015 should prove to be a pivotal year for Nutrastar. Initial shipments of the capsule, tablet and powder formulations of Cordyceps to international markets could be a break-through milestone. As the company's plans solidify we will attempt to estimate the earnings impact of these moves.

VALUATION

At its current price of $2.10, NUIN stock is extremely undervalued based on its $6.95 book value, $6.00 net cash per share (cash of $6.13 per share minus a total of $0.13 per share of tax payable, payments due and preferred dividend payable) and its trailing 12 months E.P.S. of $1.28.

In our prior Seeking Alpha article, we detailed our specific valuation methodology for the cash on hand and the future earnings prospects and estimates. Basically, we discounted the value of the cash holdings in half (which may be too severe and we will re-examine that in future articles) and then assigned a 7 P/E multiple on the next year's earnings. For the purposes of this article, we simply update that methodology with our current estimates. Our current stock price target for NUIN is $12.22.

CATALYSTS

While we expect flattish earnings in 2014, we believe the stock will perform exceptionally well as it begins to anticipate the break-out year in 2015. The following developments are likely to occur in 2014 and should serve as catalysts for this stock price outperformance:

  • Rebound from Q1:14 results.
  • Continued solid earnings quarterly results.
  • Results of initial marketing of water-soluble powder formulation of Cordyceps.
  • Introduction of Cordyceps-based capsule and tablet formulations
  • Announcements of new personnel hires, specifically for the international expansion strategy.
  • Announcements of international sales channel partners
  • Increased investor relations activities. In this regard, we note the increasing interest of the company in keeping shareholders apprised of corporate developments. We expect to be greeted with more press releases over the coming months. Over the last two months the company's CFO, Robert Tick, held a series of investor meetings in the United States and Europe. Hopefully, Ms. Han, the company's CEO, will schedule a similar series of investor meetings in the U.S. later this year.

RISKS

We are usually apprehensive when stock sales are made by a company's top management team. In this instance, the company's CEO, Ms. Han, and CFO, Robert Tick, have both made stock sales over the last two months.

Ms. Han's stock sales were what prompted this article updating our thoughts on NUIN. We believe that Ms. Han is taking a long-term view toward value creation and deems her forgoing of short-term profits as an important lever with which to engage the support and assistance of the strategic partners.

Mr. Tick's sales fall into another category in our opinion. Mr. Tick registered with the SEC on May 8, 2014 to sell up to 132,500 shares. During the period of June 16-June 24, he sold a total of 48,100 shares at an average price of $2.30. At this point, he will be "blacked-out" from selling additional shares until after the second quarter earnings release (probably mid-August). Since his Form 144 filing is good for 90 days, our understanding is that he will need to re-file another Form 144 to sell additional shares. We believe that Mr. Tick had personal reasons for his stock sales and they reflect neither the company's outlook nor his view of the company's value. We note that both strategic investors had to be aware of Mr. Tick's Form 144 filing before they purchased their shares.

Disclosure: The author is long NUIN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own shares of NUIN for my personal and family accounts.

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