Celadon Group: A Story That Ends At Chapter 11

Prescience Point profile picture
Prescience Point
1.53K Followers

Summary

  • We believe CGI overstated Q2’17 TBV and LTM profits by an estimated $219m through a series of off-balance sheet transactions (JV with Element, 19th Capital) and other improper accounting.
  • Improper accounting has a terminal financial condition. We estimate CGI's TBV to be no more than $0.42. We expect 2H FY’17 cash burn = $80.1m vs. ~$54m in credit availability.
  • KPMG forced a PP&E restatement in 2012; soon after CGI replaced KPMG with regional auditor BKD. Fees to BKD have increased an astonishing 179.6%, indicating elevated risk of accounting issues.
  • Management used a related party entity (19th Capital) to undeservedly enrich itself, in our view, bilking CGI shareholders in the process.
  • We initiate CGI with a $0 price target.

Prescience Point Research Opinions:

  • Celadon Group (CGI) shares are worth $0.00 per share.
  • Over 95% of CGI's reported tangible book value does not exist. CGI's actual TBV is no more than $.42/share.
  • CGI will restate its historical results because of the issues exposed in this report.
  • CGI will be bankrupt or insolvent within 1-2 quarters; existing shareholders will be wiped out.
  • CGI stock should be de-listed from the NYSE.
  • Regulatory and law enforcement agencies with subpoena power should launch a full investigation of the company, its accounting, and its practices.

Research Highlights:

  • Disclosure of a sham 'daylight loan' transaction in the JV subscription agreement directly contradicts CGI's representations of having collected on a $31.8m receivable; in our view, it amounts to incontrovertible proof that CGI has inflated its financial position and falsified its financial reports.
  • CGI's use of off-balance sheet transactions involving its JV with Element Fleet Management and related party 19th Capital inflated Q2'17 TBV and LTM profits by an estimated $104.2m, comprising 34% of reported TBV.
  • CGI failed to record a $36m estimated loss from Quality equipment sales on its income statement despite its cash flow statement suggesting that such a loss was incurred.
  • CGI's balance sheets and corresponding statements of cash flows do not reconcile. Discrepancies indicate CGI systematically overstated property and equipment by ~$78.8m, comprising 26% of CGI's reported TBV.
  • Divergence between net income and adjusted CFFO has exploded. Net income now exceeds Adj CFFO for the first time in eight years.
  • CGI management appears to have bilked shareholders out of $4.6m when 19th Capital, a related party, was redeemed at an inflated equity value of 4.5x invested capital, just ~1.25 years after its formation. The redemption may have been paid for with cash misappropriated from CGI's balance sheet.
  • CGI's sudden jump (67.4% growth) in Other Revenue from

This article was written by

Prescience Point profile picture
1.53K Followers
Prescience Point Capital Management conducts in-depth investigations of public companies, which often uncover fraud, misleading business practices or significant valuation issues. Unlike conventional investment research, we spend months on our analysis, dig deep into a company’s numbers, speak to industry experts and conduct on-the-ground due diligence to form our views. Our investment opinions are based on verifiable facts, not management’s representation of those facts.

Analyst’s Disclosure: I am/we are short CGI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

More on CGI

Related Stocks

SymbolLast Price% Chg
CGI
--