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Addvantage Technologies ($AEY) update

December 15, 2011 | About:
whopper investments

whopper investments

49 followers
Addvantage Technologies (AEY) released their 4th quarter and full year results, plus their 10-k, today. I’ve yet to review the conference call (it’s actually ongoing as I write this article), but I thought I’d give some updates from my review of the 10-K.

First, the results were decent. Was it a blow out quarter? Absolutely not, but you’re not generally going to say “blow out” quarters by net-net stocks. Instead, the company continued to show solid profitability, good cash flow, signs of their revenue decline ending, and a strengthening balance sheet.

So let’s start talking about some of the interesting developments from the year. If you want an analysis of why I think they are so undervalued, please view my previous write ups.

First, the company is deploying cash in a very (in my opinion at least) efficient manner. The paid $550k for their new acquisition, AGC, this year. AGC turned around and did $1.2m in revenue in the 4th quarter. Assuming margins similar to the rest of the business, that’s ~$165k in EBITDA. Granted, AEY is running some of their old operations through AGC now, probably resulting in an revenue boost, but however you look at it this is probably a gangbusters acquisition. Granted, it’s small compared to the size of AEY, but still- great job.

As a follow on to the acquisition, AEY acquired a warehouse for $1.475m. The warehouses old tenants paid a monthly lease of $10,250 before AEY kicked them out to move AGC in. That means AEY paid a cap rate of 8.34% for the building. Now I haven’t been able to inspect the building and there’s not much more disclosure, but from a 10,000 foot viewpoint that seems to be a decent price for a piece of real estate. At worst, it’s tough to see them losing value on that deal. Again, small- but instructive.

Finally, I think there’s a looming catalyst coming. AEY currently has $10.9m in cash (up from $8.7m at the beginning of the year- and remember, they paid $2m for AGC plus the warehouse and paid down $1.8m in debt) versus ~$12.1m in net debt. The bulk of this debt, $10.2m, comes due in November of next year (plus another $200k or so in principal paydown on a term loan). Obviously, AEY has enough cash to pay all this debt down right now. When you figure they’ll probably generate at least $4m in cash in that time from earnings plus further draw down on inventory, AEY could be looking at a significant net cash position in the next year or so.

Here’s where the catalyst comes in- once AEY pays down that $10.2m note, they’ll be awash in cash, plus they’ll own several unmortgaged properties. In other words, they’ll be flush with liquidity. I think it’s likely that AEY’s management starts thinking about some form of share buyback or possibly taking the company private. If they offered to do a tender at, say, $2.50- it would come at a discount to net current asset value and the company could easily retire 10% of shares. Or maybe management uses the properties and huge inventory position to MBO the 50% of the company they don’t own.

I’m not sure which it is, but with the stock this cheap and tons of debt about to roll off the books- I wouldn’t be surprised to see a catalyst coming soon.


Rating: 3.6/5 (11 votes)

Comments

nielfiel
Nielfiel - 2 years ago
They rolled the debt for another 2 years, so the $10.2 is due November 2014 now. On the conference call is sounded as though they REALLY liked having the cash and will not pay off the debt early, will not institute a dividend (although they are able to pay 50% of NI as a dividend now), and find it hard to buy back shares in the open market. Given what I've heard from management, I don't see a value unlocking event happening. They'll just keep plugging along, generating cash flow every year and increase book value per share. I don't get the feeling they have any end game in sight with their business. The two main guys are both in their mid 60's however. I wonder if they have any retirement aspiration and who will take over.
pravchaw
Pravchaw premium member - 2 years ago
The question is what are they doing with all that cash? Cash return on the business is 20.1%

( Cash Return = (Free Cash Flow + Net Interest Expense) / (Enterprise Value) ). ROE has been consistently declining over the last decade as are revenue's and earnings.

Overall I am thinking the business is being milked - which may be a rational strategy for the majority owners as the business will fetch very low multiples which they can recoup in a couple of years. I see property, plant and equipment on the B/S going up every year - while revenue and ebtida declining. Otherwise I am at a loss to see what they are doing with the retained cash?

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