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  • TPCS 2010 Results – Is the Canceled Order Behind Them?

    Techprecision, Corp (TPCS) reported fiscal fourth quarter and full year results last week – the stock has been hammered in the week since.  Yearly results still reflect the order cancellation from the Company’s largest customer, GT Solar, in April 2009.

    Although orders have picked up again from GT Solar, this event threw off the Company’s numbers for the entire year.

    Financial Results

    Sales decreased 25.7% for the fiscal year, with EPS dropping from $.23/share to $.15/share, primarily driven by lower sales and margins.

    As part of the order cancellation in April 09, TPCS sold off a large chunk of raw material at much lower margins than usual. I’m anticipating gross margins should return to near 2008/2009 levels, with the Company reported 4th quarter margins of 40.3%.

    Total debt to equity has dropped slightly from .7 to .63. The Company also reduced diluted shares outstanding by almost 5m:

    On August 14, 2009, the Company entered into a warrant exchange agreement pursuant to which the Company agreed to issue 3,595,472 shares of Series A Convertible Preferred Stock to certain investors in exchange for warrants to purchase 9,320,000 shares of common stock. The warrants carried exercise prices ranging from $0.44 to $0.65 per share.

    Owner earnings came in at 1.5m for the fiscal year.

    Key Metrics

    Revenue Composition

    TPCS Revenue Breakdown

    Defense and Nuclear were both up a decent amount in 2010 on a percentage basis. Nuclear was one of the exciting growth prospects I identified in my original writeup of TPCS, so it’s encouraging to see an increase there.

    Despite the Company’s efforts to broaden their sales composition, Alternative Energy still makes up 52% of total sales.

    Backlog

    Order backlog stood at $21.5m on March 31, 2010, an increase of $5.8m from the previous quarter.

    TPCS Backlog

    Although the raw numbers are down, non-GT Solar backlog has increased significantly, both in dollars and percentage of total backlog. This is a very good sign as the Company tries to mitigate the risk of being dependent on such a large customer.

    Conclusion

    The market has not treated TPCS kindly this year, as it is very easy to focus on the sharp decrease in sales and income.

    Could an order cancellation happen again? It’s possible, but, I think it was largely a one-time event that unfortunately affected the Company for the entire year.  In any case, TPCS’s future outlook is better positioned to handle such an event.

    On the positive side, quarterly results show signs of stabilization, with increasing demand from not only GT Solar, but also the other business segments.

    According to TPCS’s CEO,

    “We have seen three consecutive quarters of steady improvements throughout the industries we serve and increased activity including requests for proposals and expanded sales activity.”

    Based on 2010 numbers, I will probably lower my intrinsic value target, but I still think TPCS offers at least 50% upside at its current price. After TPCS reports Q1 numbers, I think the stock will get a boost, as the results will show a much cleaner picture of how the business is executing its strategy.



    Disclosure: Long TPCS
    Jun 29 11:13 PM | Link | Comment!
  • Unraveling the AHOM Going Private Transaction

    American Homepatient, Inc. (AHOM), announced on April 28th that it will be bought out and taken private by its largest shareholder, Highland Capital Management.  This is another example of a special situations investment (see my writeups on the CHDN/UBET merger and VR tender offer as well)

    History

    The Company has been in financial straits since August 2009, when it effectively breached the covenants for repaying its senior debt.  Since that time, the Company has been acting under short-term forbearance agreements with its lenders.

    If the going private transaction is approved, the lenders have agreed to a substantial restructuring of the existing debt, allowing the Company to avoid bankruptcy.

    According to this article, Highland Capital offered to buy the company in 2006 for $3.40 per share but was unsuccessful. Now, with the Company’s continued struggles, it doesn’t look like shareholders have much choice but to approve the offer.

    Why the Attractive Spread?

    Even though this looks like the only option if shareholders want to avoid being wiped out in bankruptcy, the merger still offers attractive an arbitrage opportunity. Why?

    The transaction seems more complicated on the surface than a typical going private transaction. I’ve broken down the steps below:

    Steps for Merger Completion

    1.“This repurchase would not be possible if the Company remained incorporated in Delaware. A Delaware corporation is prohibited from repurchasing its own shares if after giving effect to such purchase its net assets would be less than its capital. Nevada law differs and would permit such a repurchase. Reincorporation in Nevada is, therefore, a necessary step in carrying out the repurchase as contemplated by the Restructuring Support Agreement.”

    Under the terms of the merger agreement and restructuring, AHOM cannot legally repurchase its shares as a Delaware corporation. The vote on reincorporation will occur at the company’s annual meeting of shareholders on June 30, 2010.

    2.“Conditioned upon approval of the reincorporation by our stockholders, we agreed to carry out the reincorporation.”

    Highland owns 48% of outstanding shares and has voted to approve the transaction. With this in mind, the reincorporation is almost guaranteed.

    3.“If the reincorporation is approved and carried out as described above, we agreed that AHP Nevada will then commence a self-tender offer to you at $0.67 per share.”

    The tender offer will expire after 20 business days.

    4.“In the event the self-tender offer is accepted by a number of our stockholders other than Highland and its affiliates holding shares that together with the shares owned by Highland and its affiliates represent at least 90% of the number of its outstanding shares, and subject to other customary closing conditions, AHP Nevada agreed that it would repurchase all of the tendered shares.”

    The voting numbers from the shareholder meeting should be watched closely, but I’m assuming this will pass as well.

    5.“If the self-tender offer is completed, Highland has agreed to initiate a follow-on merger at the conclusion of the self-tender offer pursuant to which shares of common stock in AHP Nevada not tendered and not held by Highland and its affiliates would be cancelled in exchange for $0.67 per share.”

    Any additional shares not tendered will be cashed out at $0.67 per share.

    Timeline

    The annual meeting of shareholders will occur on June 30, 2010. If shareholders vote to approve the reincorporation, the tender offer will be initiated within 5 business days, and remain open for 20 business days.

    Assuming the votes are approved, I’m estimating the transaction should close the second week of August – consistent with the terms of the merger agreement: “if the Merger Closing shall not have occurred on or before August 10, 2010 (the “Merger Deadline)

    Return

    AHOM Going Private AnalysisThe stock has been trading under $0.60 over the past month, and as low as $0.56.

    Final Thoughts

    If the transaction is not completed, substantial risk remains, as the stock was trading under $0.20 before the merger announcement.

    Although I’m sure some of AHOM’s long-time shareholders are disappointed by this result (especially when compared to the offer from 4 years ago), I think it is the only option for the Company. Several executives have been exercising stock options in the past month, a sign they expect the transaction to go through.

    Documents
    Document Link Date Filed
    Merger Press Release 04/28/2010
    Shareholder Meeting Press Release 05/25/2010
    Proxy Statement 05/25/2010



    Disclosure: Long AHOM
    Jun 22 8:56 PM | Link | Comment!
  • CHBU – Growing & Profitable, but Selling at Less than Net Cash?
    Company Description

    China Agri-Business Inc. (CHBU) sells “Green Food” certified fertilizer, primarily in the rural areas of China:

    “China Agri-Business, Inc., through its operating company in China, manufactures and sells non-toxic fertilizer, bactericide and fungicide products used for farming in the People’s Republic of China (the “PRC”). Crops grown with our products are eligible to qualify for the “AA Green Food” rating administered by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC.”


    Fundamental Numbers

    Since inception in 2006, the Company has maintained impressive margins across the board. Median gross margins of approx. 70%, operating margins of 40%, and net margins of 38.8% are very solid.

    Tangible stockholder equity has increased from 4.5m in 2006 to 10.3m in 2009. Median ROE and CROIC of 16.5% and 13.7% are decent as well.


    Growth Plans

    Although the Company has outstanding margins, top line sales have stalled around $3m for the past three years. Management is trying to counter the slowdown in their traditional sales network by rolling out a new growth initiative, the “Super Chain Sales Partner Program”. The initiative has two parts underway:


    Super Chain Stores

    The “Super Chain Sales Partner Program” is an initiative whereby the Company agrees to provide a $3,000 advance payment to participating retailers in exchange for their commitment to purchase and sell approximately $14,000 worth of the Company’s products per year. Each participating retailer must also agree not to sell any competing products. ”

    Total Chain Stores: 100


    Direct Stores

    “The direct sales stores are controlled and managed directly by the Company.”

    Total Direct Stores: 250

    The Company is opening new stores at a very rapid pace, and expects almost 500 Direct Stores by the end of the year.

    Since these direct stores also sell 3rd party manufactured products, they have much lower gross margins than the other sales channels. For the most recent quarter, margins for the direct stores came in at 32%, much lower than the 70% historical gross margin average for the traditional business.

    However, the initiatives are certainly adding to revenue and net income, as both tripled from the same period last year.


    Liquidation Value

    I was originally drawn to CHBU as a net-net investment. It is very rare to find profitable, growing company that is trading for less than NNWC, especially less than Net Cash.

    CHBU Net-Net Calculation

    However, a line item buried in the 10-K caught my eye:


    Land Purchase

    “On October 21, 2009, Xinsheng received an approval letter from the Bureau of Foreign Trade and Economic Cooperation of Lantian County of Xinsheng’s application to purchase land use rights in Lantian County to establish “Xinsheng Centennial Industrial Zone”. Xinsheng intends to purchase the land use rights for 66 acres for a term of 30 years. The land use right purchase cost is expected to be approximately $4.1 million (28,000,000 RMB).”

    The purchase has been delayed by the local government but is a huge cash outlay for the Company, over 40% of the current cash balance. I emailed Investor Relations about this transaction, and the CFO replied that they plan on increasing capacity and expanding their sales networks on this land – hopefully, I get some further clarification.

    This purchase will remove the margin of safety from a liquidation perspective, so it’s necessary to evaluate the business as a going concern:


    Stock Valuation

    CHBU Valuation

    As with all micro-cap stocks, entry point is crucial.  Despite the recent surge, the stock was trading at $0.50 last week.


    Risks

    -The land purchase seems like a very risky move for a company that does not have access to a bank line of credit. A downturn in demand or backfire of the expansion plans could place a major strain on the Company’s cash position.

    -The Company could over-extend with these expansion plans, especially considering they have little prior experience in the retail business. Over-emphasis on the direct stores method will hurt gross margins, one of the most attractive statistics in the traditional business.

    -As a commodity company, CHBU is at the mercy of weather patterns and other economic disasters such as earthquakes. These are the sort of one-time events that are outside of investor control and could change the economics of the business in a hurry.


    Conclusion


    Although I entered the investment as a net-net play, I’m comfortable with the growth potential that the stock offers. If management can deliver on the expansion plans, results for 2011 could be very impressive. I’ll be watching Q2 numbers closely.
     

    Disclosure: Long CHBU
    Tags: CHBU
    Jun 17 6:44 PM | Link | Comment!
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