After reading all that, I did some digging. And the company’s definitely interesting. Their CEO draws a reasonable salary and owns 30% of the company, and directors and insiders in total own almost 50%. Revenue has doubled from fiscal 2007 to fiscal 2012, and EBITDA has grown from negative $500k to almost $4m.
I think the most interesting part of the story, however, is that their product seems to have some long term advantages that make them interesting. While they sell at a premium to wood pellets, the total cost of ownership is much, much lower due to a much longer lifespan. From their filings and management, it seems they’ve got some competitive advantages in the plastic pellets market and are currently the largest player, and they’ve got an exclusive contract with MolsonCoors that they should be able to lever to gain additional big contracts.
And given their growth story, and the fact they’re trading under 6x EV / EBITDA, the stock looks pretty dang attractive. Even better, the company has a ton of NOLs that shield them from paying taxes and make that EBITDA even more valuable. However, there are some serious concerns that are keeping me from rushing into the stock.
First, their balance sheet is in tatters. Shareholder’s equity is negative $5.5m versus $11.3m in debt. Plus, there’s $3m in deferred preferred dividends, and the company has $5m in perferred equity outstanding that’s not on the balance sheet. That puts stock holder’s equity at $10.5m versus almost $20m in liabilities in front of them.
Maybe that wouldn’t be a bad thing if the company growing like wildfire, but the growth story might be a bit questionable here, as the last quarter was a disaster. Revenue was down almost 20% in their most recent quarter, and operating income was down over 40%. There were some reasons behind this sure, but given the balance sheet the quarter is extremely concerning.
The balance sheet also amplifies another risk: customer concentration. Molson makes up about 60% of GLGI’s revenue, and while that represents a big opportunity going forward (if they can continue to gain share of Molson’s pallets, there’s a lot of revenue upside in the future), it also represents a risk. If they lose them as a customer or even see any reduced sales, bankruptcy is almost assured.
The other big risk is related party transactions. While I think management is excellent, there are also a lot of questionable related party transactions- leasing transactions, supplier transactions, etc. I’m not going to go through them all, because the 10-k is absolutely littered with them. While some of the transactions are, no doubt, due the fact the company has extremely limited financial flexibility, it still leaves a lot of concern about what management would ultimately prefer: increasing shareholder value, or siphoning it off through related party transactions. Where do I think they fall in that area? Shareholder value, but it is concerning that I have to wonder.
The company also recently issued a glut of shares to directors and management- 1.2m shares. Given the recent increase in revenues and profits, was the reward deserved? I guess so. But that’s 1.2m options against 26m shares outstanding. That’s a heck of a lot of dilution.
Ultimately, it comes down to this. I want to invest. The story is interesting, and the valuation is compelling. But there are two things holding me back.
First, this is certainly a risky story, but the risk seems well outweighed by the reward. But the management questions just make it seem like some of that reward is likely to get taken away by shareholders.
But second, and perhaps more importantly, this is a stock with negative book value. To invest in Greystone, you have to believe it’s a wonderful business given the balance sheet and, as I mentioned in yesterday’s post, I’m much more comfortable with a Graham style cigar butt investment than a “wonderful” business type investment. Even ignoring that lack of comfort on my part, I’m not sure if you can really characterize GLGI as a wonderful business. It’s doing well now, sure, but I can’t decide if they’re just the first players on the scene or if they can actually fight of competitors as the industry grows. If they’ve got a true advantage (perhaps patents, perhaps just economies of scale from being first one in), then this is a wonderful business for sure. But if they don’t have any, then there’s likely a great deal of downside as competitors flood the industry and drive down their profits as the industry grows.
No current disclosure