Seeking Alpha
Long-term horizon, deep value, dividend investing, research analyst
Profile| Send Message|
( followers)  

Summary

  • A recent article suggests serious problems for Aemetis; the article suggests excessive leverage and an impending downward spiral.
  • The article overstates the amount of debt owed by AMTX and exaggerates the degree of difficulty AMTX will have in repaying the debt.
  • AMTX is generating strong cash flow and should be able to pay off roughly $35 million a year of the outstanding debt.
  • With EBITDA of some $45 million and debt of roughly $42 million in July 2015, AMTX will have many alternatives for dealing with the remaining debt.
  • With debt fully paid down in less than 2 years, AMTX can generate $2 a share in earnings and support a share price in the $20 - 30 range.

I recently wrote an article suggesting that Aemetis (NASDAQ:AMTX) was a sound investment at $7.75. More recently, there has recently been an article suggesting serious problems at AMTX, which may lead to some concern among investors. I welcome a healthy debate on investment recommendations because I think that a thorough analysis of a security will help investors make sound decisions.

My enthusiasm for AMTX was driven by the company's strong cash flow. AMTX does have considerable debt and it is paying high interest rates on the debt but I am reasonably confident that the company will be able to continue paying down the debt rapidly.

The article questioning the soundness of AMTX suggests that the debt level is $90 million. In fact, a review of the company's latest 10-Q reveals that, as of the end of the latest quarter (6/30/14), the total debt level is $77.4 million. I welcome any comment substantiating the higher level and explaining how it is calculated, but a careful review of the 10-Q appears to support the $77.4 million number unambiguously.

My enthusiasm for AMTX is due to the strong cash flow demonstrated by its recent financials. The table below provides various data for the last six months (the period between 12/31/13 and 6/30/14) for AMTX in millions of dollars and based upon the latest 10-Q.

ItemAmount
Net Income$10.4
Depreciation$2.3
Amortization$4.7
Capital Expenditures$.5
Interest$5.5
Tax$0
Debt Pay Down$19.1
Debt Reduction$14.4
EBITDA$22.8
Cash Flow

$16.9

On a fully diluted basis, AMTX has 20.9 million shares and a market cap of $167 million (this article is being written with AMTX trading at $8.01 per share). With net debt of $73 million, AMTX has an enterprise value of $240 million or a bit less than 5 times annual EBITDA.

A few points are important to understand. AMTX is paying down its debt rapidly but not quite as fast as may appear on the surface. Although AMTX devoted $19.1 million in cash flow to net debt pay down, its debt declined by only $14.4 million. This is largely due to the fact that AMTX has had to agree to provide creditors with "kickers" in exchange for extensions of existing debt and these kickers show up as additional debt tacked on to the principal which was extended. The amortization expense is debt related and is the accounting treatment of amounts charged initially as fees for extending credit as spread over the term of the loan. AMTX has a large tax loss carry forward and is not paying taxes currently and will not have to for a considerable time.

The article, which is critical of AMTX, correctly points out that a large amount of the AMTX debt will become due on July 1, 2015. Using the above numbers, we can make some projections about the situation, which will prevail at that time. If AMTX generates the same level of operating cash flow for the next year, which it generated in the first six months of 2014, it should be able to reduce its debt by $30 - 40 million. I am assuming the $14.4 million per six-month rate of debt reduction, which prevailed this past six months and then adding an additional $1.5 million for interest expense reduction as the debt level goes down. Since most of the debt doesn't come due until July 1, 2015, it is possible that AMTX will not incur the debt-increasing impact of "kickers" over the next year, which would have the effect of increasing net debt reduction above the $30 million level toward $40 million.

At any rate, net debt (debt minus roughly $4 million cash) should be between $33 million and $43 million by July 1, 2015. With EBITDA of $45.6 million, AMTX will then be on track to pay off debt within one year and should be able to negotiate more favorable terms with existing or new lenders. It should be noted that the largest creditor, Third Eye, is also a large shareholder in AMTX and, as the debt level is reduced, may perceive its interests as more driven by an enhancement of the value of its equity rather than immediate repayment of its debt.

There are a number of factors, which could lead to a variation from this scenario. On the negative side, AMTX is in a commodity business and its results could be negatively (or positively) impacted by changes in the prices of its feedstocks or of its end products. On a positive note, AMTX's facility in India operated at levels substantially below capacity in the first six months of 2014 and the results over the next year may benefit from operations at higher levels of capacity utilization. In addition, AMTX has qualified for a program under which foreign nationals can obtain visas by lending the company money at a low interest rate. Funds obtained this way could be used to offset other debt and reduce interest expense significantly.

Assuming AMTX continues paying down remaining debt after July 1, 2015, all debt would be paid off in roughly two years. At that point, net income would be enhanced by the elimination of interest expense and debt related amortization charges. Using the data from the first six months of this year, this would increase income by some $10.2 million per six months leading to annual income of $41.2 million. Based on current share count, this would produce income in the range of $2 per share (and, at a price earnings multiple of 15, a share price of $30) and is the basis for my three or four bagger projection.

There are risks here but I do not think that foreclosure, massive dilution, or insolvency are among them. Operating earnings could be choppy and this could slow down debt repayment but the general direction will be positive. Investors should monitor the situation each quarter and track the company's financial progress, which, as of the most recent quarter, is on track to meet my projections.

The article questioning AMTX's viability points out that AMTX has had to agree to onerous terms on its debt and has often had to agree to substantial concessions in order to obtain debt extensions. To the degree that this has happened in the past, it was happening at times at which AMTX was not generating substantial free cash flow and presented a risky situation to creditors; I would concede that the creditors' position may have been reasonable. Until the plants were up and running, there was substantial execution risk associated with AMTX.

Now that AMTX is generating solid cash flow, the expectation should be that creditors will be more reasonable in terms of revising due dates and other aspects of loans. On the other hand, we are still living in the shadow of the worst financial crisis since the 1930s and the impact of that crisis is still with us. I have seen a number of situations in which sound companies in this size range have had considerable difficulty obtaining credit on reasonable terms. The banks are very gun shy about lending money and are, in fact, depositing large sums at the Federal Reserve. Business development companies ((BDCs)) are still able to impose tough terms on loans (which is one reason I still think BDCs are a good investment here). Despite their recent growth, the total assets of all BDCs is still a very small number compared to bank assets and there is simply no way for them to pick up the slack left by the banks in the area of small and middle sized business lending.

I am still very disturbed to see a company with solid cash flow having to borrow under such onerous conditions. AMTX is still paying double-digit interest rates and has still been required to make substantial concessions for every extension. In a world with high yield bond interest rates in the six percent range, this situation demonstrates that the "healing" of our credit markets still has a long ways to go. I am confident that AMTX can ride this out and that patient investors will be well rewarded. On the other hand, we will not have robust economic growth unless and until we have a healthier business lending climate. AMTX does not have an established relationship with a conventional lender and this may be one reason for the high interest rates it is still paying. Another reason may be that AMTX has only a 6 month track record of generating cash flow and lenders may be awaiting more financial results. A major turning point for AMTX will come when it obtains credit on more reasonable terms and/or pays down the debt to levels at which the retirement of the debt on schedule is not problematic and will not require extensions. At that point, AMTX should trade up to more normal multiples, which should take the stock into the 20s. Needless to say, I am long AMTX and I have used the recent dip to load up some more.

Source: Aemetis Still Looks Like A Winner