Seeking Alpha

Steven Reiman

View as an RSS Feed
View Steven Reiman's Comments BY TICKER:
Latest  |  Highest rated
  • Entrec Corporation: A 20% FCF Yield And Poised To Grow [View article]
    All,

    Thanks for all the comments, it's great to get the feedback. I think the common theme has been the points on depreciation. My responses are below:

    1. One thing we have to do if we invest in Entrec is trust in management and trust that they will be able to invest the free cash flow the company is generating wisely. Obviously this may not happen but one of the reasons we are buying into this company is the belief that the management team is a competitive advantage. Given they own a third of the company, their interests are aligned with ours.

    2. I am of the belief that any management team worth its salt can make assets last longer than the depreciation schedule estimates through use of refurbishments and other maintenance capital expenditures. Again, we have to trust management here but I think they can sweat the assets longer than the depreciation schedule estimates.

    3. These assets last a long time anyways. Cranes last for 15 to 20 years and the heavy movers last 10 years. Given the young age of Entrec's fleet, it will be a long time before they have to renew their equipment.

    4. I generally believe that depreciation expenses are overly conservative (kind of a corollary to point 2).

    Would be great to get thoughts on this.

    Steve
    Dec 5 08:33 PM | 1 Like Like |Link to Comment
  • Entrec Corporation: A 20% FCF Yield And Poised To Grow [View article]
    Western Canada is pretty big, must need to keep replacing tires.
    Dec 4 07:51 PM | 1 Like Like |Link to Comment
  • Entrec Corporation: A 20% FCF Yield And Poised To Grow [View article]
    Okta,

    Couple ways to think about that. The goodwill is a product of paying over book value for the assets Entrec has acquired. Based on their ability to generate cashflow, it would seem like they paid a reasonable price. When we purchase Entrec, we are also paying much beyond book value (as you mention) due to the assets ability to produce cashflow.

    Why would these assets produce so much cashflow relative to their purchase price (book value)? I think the answer is either the cash flow being generated right now is of a cyclical nature and we are at a peak right now OR the assets need to be married with a certain technical knowledge and scaled up business in order to produce the kind of cash flow I am calculating. I believe that the latter is the main driver but others might think differently.

    Thanks for the thoughtful comment.

    Steve
    Dec 4 07:50 PM | 1 Like Like |Link to Comment
  • Entrec Corporation: A 20% FCF Yield And Poised To Grow [View article]
    http://bit.ly/1g7YqWM

    " Although plans are not yet finalized, the Company anticipates the program will initially range between $35 million and $40 million and will consist of $10 million in maintenance capital expenditures and $25 to $30 million in growth capital expenditures. Growth capital expenditures will be focused on building the mobile crane fleet as ENTREC works to expand its service capabilities in this market."
    Dec 4 07:46 PM | 1 Like Like |Link to Comment
  • Entrec Corporation: A 20% FCF Yield And Poised To Grow [View article]
    Thanks hopefully it works out.

    Steve
    Dec 4 08:38 AM | 1 Like Like |Link to Comment
  • Conduril: My Highest Conviction Pick [View article]
    Sorry, I just meant from the fact that the stock price is denominated in EUR.
    Dec 3 11:00 AM | Likes Like |Link to Comment
  • Conduril: My Highest Conviction Pick [View article]
    Nice find! Only issue seems to be lack of liquidity.

    Are you hedging your EUR exposure on this?

    Steve
    Dec 3 10:31 AM | Likes Like |Link to Comment
  • SAExploration: My Variant Point Of View [View article]
    Christopher,

    Always interested to get the other viewpoint. My responses are below:

    1. As you mention, a large part of our difference lies in the gross margin assumption. I would say that the margin will creep upward as they do more work in more "exotic" locales like Africa, Malaysia and South America and hopefully weight less work in North America. Th reason margins were so low in Q3 was that, besides all of the operational issues, North America was pretty much the only team operating. As you say, the margins on this project were not great given the competitive environment in this market during the Summer season. Based on management's comments and growth plans, I would not expect this kind of work to be the norm in the future.

    A bigger point of contention I have with your analysis surrounds capex and the impact it has on gross margins. The big capex spends are being done to buy equipment that are currently being rented (I think right now the mix is 50% own 50% rental). Rental expense decreases gross margin. Therefore, you are modeling future capex expense but giving them no lift in future gross margin. The gross margin should go up in the future as rental expense decreases as they shift the mix from rent to own. You are somewhat, but not completely, mitigating this effect by adding back depreciation expense.

    Furthemore, if you assume that renting is twice as expensive as owning, then owning should provide a further lift to gross margins overtime as long as utilization is above 50%. Given we are betting on management skill, I am thinking this is a target they can hit.

    2. I think your SG&A expense increases might be aggressive. Almost all of the cost associated with revenue expansion should be variable cost as they hire additional field engineers, contractors etc. The operating leverage of the franchise should be pretty strong as the whole value prop is offering the industrial knowledge that the management team possesses.

    3. Once the company proves that it can make this model work, I expect the debt to be refinanced. The interest expense on their loan is more akin to a bridge financing interest rate than one you would normally expect. I believe they have a chance to refinance next year (just off the top of my head, don't have the document referencing that on-hand).

    4. As I noted in my article, peer comparison is tough with this company as there is no true comparable. For example, I have profiled (and currently own) Pulse Seismic and I can tell you that they have a completely different business model than SAEX.

    5. P/B is obviously skewed because of the rickety balance sheet. Also since we are not buying the company for its assets, this is not a very illuminative metric. P/EV could be better but as you say, it punishes the company for the poor Q3 and gives no credit for the growth the company is expected to experience. Take for example the fact that the company currently has the highest backlog in its history and it is only projected to get bigger with wins in Brazil, Malaysia and Africa.

    Thanks again for the article!

    Steve
    Nov 26 05:50 PM | 1 Like Like |Link to Comment
  • SAExploration: Buy At A Discount To Crescendo Partners And Joel Greenblatt - 110% Upside [View article]
    Gents,

    You have to look at gross margins ex. depreciation which are in the 30%+ range.

    Steve
    Nov 26 01:18 PM | Likes Like |Link to Comment
  • Seacor Holdings: Undervalued With Under-Appreciated Assets [View article]
    This is a great company and a very good article. The only reason I have not picked up shares is that this is a very asset intensive business and, as you note, you are paying a historically high p/b ratio. By doing so you have to hope that Fabrikant can compound at above average rates for a while which has become harder as the company has grown.

    Thanks again for the article.

    Steve
    Nov 26 09:51 AM | Likes Like |Link to Comment
  • SAExploration: Buy At A Discount To Crescendo Partners And Joel Greenblatt - 110% Upside [View article]
    The rest of the world shale boom is just gearing up and it will take years to develop. SAEX specializes in international work so some might say they are perfectly positioned.

    Steve
    Nov 24 11:07 AM | 1 Like Like |Link to Comment
  • SAExploration Holdings: Buy On Recent Weakness For Potential 50%+ Return [View article]
    Thanks for the comment and the idea Mike. Agree on all points, this business has quite a few tailwinds that should be hitting over the next few quarters as long as there are no big operational mishaps.

    Steve
    Nov 23 09:21 PM | Likes Like |Link to Comment
  • SAExploration Holdings: Buy On Recent Weakness For Potential 50%+ Return [View article]
    Carbondale,

    I don't use EV for FCF yield calcs because in my FCF walk, I already deduct the interest expense on their. Therefore, calculating yield based on EV would be double counting the debt in my mind.

    EV/EBITDA somewhat gets you to the same place given that you are not taking into account interest expense so there is no double counting happening. That leaves our only difference being taxes.

    I like FCF because no matter what the stock market is doing, at the end of the day if shares are trading at 20-30% FCF yield they will have to eventually appreciate unless the owners are incredibly bad capital allocaters.

    All of the free cash has to go somewhere, be it through growth capex (which will create even more FCF!), dividends or share buybacks. Therefore, shares have to appreciate at some point - I think of it almost as a law of physics.

    Steve
    Nov 23 02:40 PM | Likes Like |Link to Comment
  • SAExploration Holdings: Buy On Recent Weakness For Potential 50%+ Return [View article]
    Clint,

    Don't have anything substantial to add to your comment. The lenders who are insiders will undoubtedly be flexible in terms of loan covenants.

    My main thought is I believe that the odds of the company running into serious debt issues so soon after the merge seems low...Rosenfeld is not going to let that happen. He spent 2 years looking for this company, he's in this for the long haul.

    Steve
    Nov 23 02:29 PM | Likes Like |Link to Comment
  • SAExploration: Buy At A Discount To Crescendo Partners And Joel Greenblatt - 110% Upside [View article]
    Well Carbondale I have to admit I'm somewhat upset by this article as I literally had one I was about to submit on this company. This evening. In about 6 hours actually. Such is life I suppose.

    Nevertheless, it's a great thesis and I believe the company is substantially undervalued. It's a pretty binary outcome and as long as they can prove they can return to profitability next quarter, which should be no problem for this team, then the stock should pop as they regain credibility.

    Thanks for the article.

    Steve
    Nov 21 01:28 PM | 4 Likes Like |Link to Comment
COMMENTS STATS
348 Comments
146 Likes