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Ishan Majumdar
Ishan Majumdar
Articles (158)  | Author's Website |

Yunhong CTI: Capacity Expansion Could Lead to Revenue Boost

The company recently increased the capacity of its Lake Barrington plant due to increased demand

November 05, 2020 | About:

Bottom fishing is a commonly used approach by investors looking for stocks with a hidden value that is not yet unlocked in the market. While this approach is risky in micro-cap investing, it can yield particularly good results if the stock selection is done correctly.

One such high-potential micro-cap that is languishing at an all-time low but has definite potential for future growth backed by the recent capacity expansion update is Yunhong CTI Ltd. (NASDAQ:CTIB). There is arguably immense potential for value unlocking taking place in this micro cap, and it could prove to be a compelling investment opportunity.

Company overview

Yunhong CTI is an Illinois-based company that operates in the consumer goods space. Its core products include balloons (both foil and latex), pouches, rolls of film meant for vacuum sealing and storage of products in the home, films for commercial packaging applications and other sealing devices. The company's products help consumers preserve food and personal items and also have immense applications within the industrial space.

Yunhong has a very wide distribution network to support its manufacturing activity and its products are sold in 35 countries around the world other than the United States. The company is currently being led by Yubao Li, who holds the positions of chairman, president and CEO.

Capacity expansion update

In a recent press release, Yunhong CTI's management announced that due to increasing customer demand for its products, they have gone ahead and installed additional production equipment at the company's Lake Barrington manufacturing facility in Illinois.

The purpose of these installations was to increase the Yunhong CTI's production capacity of foil novelty balloons by more than 14% to cater to the demand in the North American market. The press release indicates most of the demand is coming from existing customers. Yunhong CTI already has one out of the two new machines active and fully operational and the increased output from both the machines should serve the company well in terms of meeting the new demand.

Management chose the Lake Barrington facility for the expansion as it has proven to provide excellent efficiency and cost-effectiveness in the production process and is a strategically important facility. It is worth highlighting that Yunhong CTI has trailing 12-month revenue of $35.5 million, which could certainly be on the rise with this additional demand.

Yunhong CTI's journey

Yunhong CTI went public more than two decades ago in 1997, but its journey has not been a pleasant ride for investors. After listing at $14 per share, the stock crashed to around $1 per share in a matter of three years and has not surpassed the double-digit mark ever since.

After the crash, it had a fairly cyclical journey with some high peaks and some really low troughs. However, the good thing is the company survived and managed stable revenue. There has been visible slowdown in the top line over the past three years, however, with the total revenue for 2018 coming in at $49.4 million and 2019 sales reaching $40.5 million. The biggest problem was indicated as its inability to grow its top line.

Investors looked for the company to restructure its operations in order to reduce costs and focus on top-line growth for better value unlocking, which is when the China Yunhung Group invested in the company and changed its name from CTI Industries to Yunhong CTI Ltd. This capacity expansion owing to rising demand comes as the first piece of good news and should start reflecting in the stock price soon.

Final thoughts

The Gurufocus Value Line chart indicates a fair valuation of Yunhong CTI at current levels. However, there is definite scope for multiple expansion once the increased demand for the company's products and the current capacity expansion starts translating into a growing top line. The company's price-sales ratio of 0.24 and enterprise-value-to-revenue ratio of 0.83 appear ridiculously low and should certainly go up once sales start climbing. Overall, I believe the company is definitely worth looking out for in the near future.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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