Rubicon Technology trades at an eensy-weensy discount to net cash, with some real estate thrown in for free. The previous CEO followed a strategy of selling dollars for 80 cents. This strategy was more popular with customers than shareholders. Fortunately, the board of directors fired prior mismanagement in favor of Timothy Brog, who hiked prices and downsized left, right, backwards and sideways.
Rubicon plans to use the losses reaped by prior mismanagement to shield future profits from taxes. Brog milked the legacy sapphire operations for cash, and built up a substantial war chest, with the idea of using it to buy up other companies, which will (hopefully) make tax free profits. The US corporate tax rate is 21%, so the earnings of anyone Rubicon acquires will instantly grow by 27%.
Timothy Brog used to run an investment bank, so I imagine he gets plenty of phone calls about
potential acquisitions, and since he's run a value investing activist hedge fund for 15 years, I doubt he'll overpay for the latest shiny fad.
So far, he has closed on a deal to buy Direct Dose Rx. The purchase price? After a bit of rounding, $0. Rubicon bought Direct Dose off of the corpse of Wellfount Corporation, which raised $50 million from investors, made several "fastest growing innovator" lists and reached peak revenues of $20 million.
Wellfount's main business was putting RedBoxes in hospitals and nursing homes, but with prescription drugs instead of movies. This worked until it didn't - pharmacies caught on and built their own vending machines. Meanwhile, Brog gleefully took Direct Dose off Wellfount's hands. Direct Dose made up only 10-15% of Wellfount's revenue, and it wasn't the part that went bad. Timmy and his BrogBots will need to restart Direct Dose from scratch, so this is somewhere between a startup and a distressed takeover.
And now to the fun part, the Breakdown by Division:
First, let's get the carcass of the old sapphire business out of the way. This is no one's idea of an economic franchise, but at least it spits off more cash than it takes in. In a true stroke of genius, Rubicon's new overseers started requiring positive gross profit margins on new contracts, but that doesn't show up as profits because they're liquidating antediluvian inventory at a loss to free up cash.
The sapphire business uses an unpronounceable technology that creates a quality advantage, but price is all customers care about. The balance sheet shows $2.8 million of inventories and accounts receivable for this division, as well as well as $2.7 million in property plant & equipment. Using highly sophisticated DCF analyses, I arrived at a value of $5.5 million. That might be on the high side.
Second, they own a tract of land in Batavia, and a 65,000 square foot plant in Malaysia. They're trying to sell these, but Batavia isn't the most exciting place to do business, and Malaysia is a bit too exciting. The accountants say it's worth $4 million.
Third, they own 25 million crisp one dollar bills. Take cash, subtract $1.5 million in total liabilities and you're left with $23.5 million in net cash, compared with a market cap of $22.5 million. Add in real estate, inventories, and accounts receivable and you get $33 million. Since they can reinvest the cash tax free, the cash is really worth in the neighborhood of $30 million.
Now, time to talk about the acquisition. Direct Dose Rx mails prescription drugs to sick, dying, and very old people. Specifically, Direct Dose Rx contracts with hospitals and nursing homes to send drugs to patients being discharged, under contracts with the institutions. Timothy Brog's minions check up on these poor people every few days, and when the meds run out, the BrogBots ask the customer if he (or she, you never know) would like the Overlord to send next month's pill pack. From there on out, autorenewal takes over.
Direct Dose conveniently packages drugs by dose instead of by med. Instead of going out of their way to fulfill traditionally packaged prescriptions at Walgreens or CVS, subscribers magically find meds in the mail whenever they run out. Since Direct Dose doesn't have to lease huge stores and hire clerks to populate them, I believe Direct Dose's subscriptions are cheaper than filling prescriptions at traditional pharmacies, though I'm not 100% on this. Direct Dose Rx serves two constituencies:
Sick or chronically ill people
Hospitals and nursing homes
The sick people stick with the service for convenience, but hospitals and nursing homes like it for a different reason. Sick people returning from captivity feel fine enough, after being doctored up. What's another couple of days? Besides, if I start feeling sick again, I can always make a quick trip to Walgreens. I deserve a break, and my favorite Netflix show just released a new season. This line of reasoning sends hospitals straight back to square one, wrecking readmission stats. For nursing homes that want a helping hand, Direct Dose Rx steps in, earning a nice cut.
It doesn't take much capital to grow a mail order pharmacy, so Direct Dose Rx could generate free cash even as it expands. Direct Dose has recurring revenues, nice margins, and an excellent value proposition for both the sick people and the hospitals. Under new management, Direct Dose intends to offer its services to retail customers as well as patients discharged from institutions. This gives it a shot at growing much larger than its predecessor. As Sir Tim said in a press release, “Although this type of transaction was not exactly what Rubicon was looking for, the low risk and high rewards of this investment are compelling.”
Rubicon isn't going to make any of us millionaires, but it's a decent cash replacement, especially with Brog allocating the cash. Rubicon is ideally placed to capitalize on a recession, as it could buy up companies on the cheap and cut out the taxes. We pay for the cash, and get Direct Dose Rx and the real estate for free. Meanwhile, Rubicon is busy buying back shares.
Jeff Gramm, Timmy's pal and the author of Dear Chairman, owns 9.5% of Rubicon through Bandera Partners. My only concern is the BrogBots...
I own shares of RBCN.
Sunday, November 17, 2019
Thursday, November 7, 2019
Never Navios
Who's up for a 200% forward cash flow yield? How about hitchhiking on the growth of India and the Orient, while riding the wave of increasing environmental regulations, and profiting from the US spats with China and Iran? You've come to the right place, but there's a catch. Actually, there are seven.
Navios Maritime Acquisition Corporation (ticker NNA) trades in the $7's, but they own a fleet worth $86 a share based on secondhand transactions. Unfortunately, they owe $86 per share to creditors. Before you blacklist "White Chip Stocks", a few bits and bobs add another ~$8.
I bought in after the latest round of dilution sent the stock below $8. Since then, the stock has fallen to $7.38, and I'm buying every downtick. Judging by my trusty sentiment indicator, Seeking Alpha message boards, tankers are about to tank, Angeliki Frangou is about to run off with the money, and time is running out. Here is a representative comment chain post-dilution:
Grannyscookiejar123 - Stupid People!!!
Stephen - I'm NEVER putting money into anything Navios again.
Rodrigo - Crooks peddling diamonds.
Hot$tocks - Why oh why did I not place a sell at $11. Back to Tesla and safety.
Jacob296 - There goes retirement.
Joanofarc - My mantra from now on - Never Navios!
As revealed in my first post, I'm a big fat tanker bull. Shrinking supply, exploding demand, and untoward operating leverage make for a true roller coaster. Everything Navios has lit money on fire for a decade, but tanker rates are finally breaking out, and new supply is restricted through at least 2021. Pipeline completions will more than double US crude export capacity over the next 18 months, and US exports have to travel twice as far as Saudi crude to get to China, India, Malaysia, and the rest of the gang. Meanwhile, boats are being taken offline for scrubber retrofits.
If you've been following shipping at all, you know that IMO 2020 will crush demand for high sulfur bunker fuels, while multiplying demand for compliant fuels overnight. High sulfur bunker fuels come from dregs at the bottom of the barrel, with little in the way of alternative uses. When demand shuts off, there's nowhere to put it, short of floating storage, which would take even more boats offline. In fact, if all of the excess HSFO went to floating storage, it would fill up the entire global Aframax fleet in three years. Will this happen? Of course not. But the math is tantalizing. Let's say we have 200 million surplus barrels of heavy fuel oil, which would be a few months' worth of the daily surplus. An Aframax can carry 750k barrels of oil. It's easy to see how floating storage could take out a significant portion of the ~700 strong Aframax fleet.
While that's nice, sanctions and scrubber installations are pulling ships off the water today. America recently sanctioned some of COSCO Shipping's boats, after catching COSCO sneaking oil from Iran. Clarksons, a reputable source, says that 26 VLCCs were affected. VesselsValue, another credible source, says that 4 VLCCs were affected. But the real story is that many Western charterers shunned COSCO entirely. COSCO controls over 5% of the VLCC fleet, and panicking charterers pushed headline rates to $300,000 per day as traders panicked to lock in replacement charters, prompting the U.S. Treasury Department to issue a waiver, allowing traders until December 20 to wind down the transactions. Shortly afterwards, rates floated down to $70,000 per day, a measly 20x last year's lows.
As we learned in the latest round of Iransanity, shipping is such a terrible industry that almost any change is for the better. Disruptions in oil supply translate directly into arbitrage opportunities for trading houses, boosting tanker demand. The work of a boat is to resolve supply/demand imbalances between one place and another. Chaos spells disequilibrium, higher demand for shipping, and mushrooming profits. If you don't believe me, take a 10 year chart of oil price volatility and compare it to tanker rates. I rarely leave my statistician's cubbyhole, but it's hard not to notice when Iran is launching missiles left and right (allegedly...) and China and the US are playing "trade war".
NNA owns crude and product tankers, split between VLCCs, LR1s, and MRs. One share of Navios controls almost $100 worth of tankers and assorted receivables - all as spot rates are surging, demand for oil transportation continues to grow, and scheduled deliveries of new tankers as a percentage of the existing fleet remain at the lowest level since Microsoft was a hot stock. With IMO 2020 pandemonium scheduled to break out sometime between now and mid-December, I'm buckling up to enjoy the ride.
Needless to say, Navios has issues. That's why it's down 95% since the IPO. NNA owes more than most competitors even have. NNA's insolvent parent owns a third of the common, and a Greek lady is calling the shots. NNA pays management fees to a company controlled by the CEO. NNA has to come up with $700,000,000 in cash to cover the 2021 debt wall, no mean feat for a company with a market cap barely over $100 million. They don't have scrubbers, forcing Navios to burn high sulfur fuels, which could add significantly to daily operating costs. NNA has diluted investors badly to stay afloat. This is Greece - there are probably loads of dodgy deals we don't know about. And unlike the Greek government, Navios pays a distimctly positive interest rate on its debt (did I mention they have debt?).
If you're still here, it's time for number crunching (also known as "counting your chickens before they hatch"). NNA has 41 tankers. Only God knows how much bunker madness will add to fuel costs, but let's call TCE breakeven ~20k. Let's suppose NNA achieved a $35,000 blended daily rate. Multiply by 365 days in a year x 41 tankers and you get $225 million. Divide by 15.6 million shares outstanding and you get $14 - not to mention free exposure to any increase in vessel values. If NNA earns twice its market cap in a year, I don't think it will be trading at NAV.
Sure, I'm ignoring utilization and plenty of other stuff, but what if VLCC rates stay at $70,000, where they are now? We won't have to wait long to find out.
Angeliki has more brains than she gets credit for. Though she has consistently run Navios into the ground, assured investors the dividend was safe months before slashing it, deftly drained millions into her own pocketbook, and perfectly mistimed every market shift since 2010, she always seems to have an ace up her sleeve. She owns millions of dollars of stock. For now, she's on our side of the table.
If I'm wrong about charter rates, Navios is toast. With rates in the stratosphere and IMO 2020 looming, I think Navios can make it. If not...
Caveat Emptor: This is a Greek shipping company leveraged ten to one.
Navios Maritime Acquisition Corporation (ticker NNA) trades in the $7's, but they own a fleet worth $86 a share based on secondhand transactions. Unfortunately, they owe $86 per share to creditors. Before you blacklist "White Chip Stocks", a few bits and bobs add another ~$8.
I bought in after the latest round of dilution sent the stock below $8. Since then, the stock has fallen to $7.38, and I'm buying every downtick. Judging by my trusty sentiment indicator, Seeking Alpha message boards, tankers are about to tank, Angeliki Frangou is about to run off with the money, and time is running out. Here is a representative comment chain post-dilution:
Grannyscookiejar123 - Stupid People!!!
Stephen - I'm NEVER putting money into anything Navios again.
Rodrigo - Crooks peddling diamonds.
Hot$tocks - Why oh why did I not place a sell at $11. Back to Tesla and safety.
Jacob296 - There goes retirement.
Joanofarc - My mantra from now on - Never Navios!
As revealed in my first post, I'm a big fat tanker bull. Shrinking supply, exploding demand, and untoward operating leverage make for a true roller coaster. Everything Navios has lit money on fire for a decade, but tanker rates are finally breaking out, and new supply is restricted through at least 2021. Pipeline completions will more than double US crude export capacity over the next 18 months, and US exports have to travel twice as far as Saudi crude to get to China, India, Malaysia, and the rest of the gang. Meanwhile, boats are being taken offline for scrubber retrofits.
If you've been following shipping at all, you know that IMO 2020 will crush demand for high sulfur bunker fuels, while multiplying demand for compliant fuels overnight. High sulfur bunker fuels come from dregs at the bottom of the barrel, with little in the way of alternative uses. When demand shuts off, there's nowhere to put it, short of floating storage, which would take even more boats offline. In fact, if all of the excess HSFO went to floating storage, it would fill up the entire global Aframax fleet in three years. Will this happen? Of course not. But the math is tantalizing. Let's say we have 200 million surplus barrels of heavy fuel oil, which would be a few months' worth of the daily surplus. An Aframax can carry 750k barrels of oil. It's easy to see how floating storage could take out a significant portion of the ~700 strong Aframax fleet.
While that's nice, sanctions and scrubber installations are pulling ships off the water today. America recently sanctioned some of COSCO Shipping's boats, after catching COSCO sneaking oil from Iran. Clarksons, a reputable source, says that 26 VLCCs were affected. VesselsValue, another credible source, says that 4 VLCCs were affected. But the real story is that many Western charterers shunned COSCO entirely. COSCO controls over 5% of the VLCC fleet, and panicking charterers pushed headline rates to $300,000 per day as traders panicked to lock in replacement charters, prompting the U.S. Treasury Department to issue a waiver, allowing traders until December 20 to wind down the transactions. Shortly afterwards, rates floated down to $70,000 per day, a measly 20x last year's lows.
As we learned in the latest round of Iransanity, shipping is such a terrible industry that almost any change is for the better. Disruptions in oil supply translate directly into arbitrage opportunities for trading houses, boosting tanker demand. The work of a boat is to resolve supply/demand imbalances between one place and another. Chaos spells disequilibrium, higher demand for shipping, and mushrooming profits. If you don't believe me, take a 10 year chart of oil price volatility and compare it to tanker rates. I rarely leave my statistician's cubbyhole, but it's hard not to notice when Iran is launching missiles left and right (allegedly...) and China and the US are playing "trade war".
NNA owns crude and product tankers, split between VLCCs, LR1s, and MRs. One share of Navios controls almost $100 worth of tankers and assorted receivables - all as spot rates are surging, demand for oil transportation continues to grow, and scheduled deliveries of new tankers as a percentage of the existing fleet remain at the lowest level since Microsoft was a hot stock. With IMO 2020 pandemonium scheduled to break out sometime between now and mid-December, I'm buckling up to enjoy the ride.
Needless to say, Navios has issues. That's why it's down 95% since the IPO. NNA owes more than most competitors even have. NNA's insolvent parent owns a third of the common, and a Greek lady is calling the shots. NNA pays management fees to a company controlled by the CEO. NNA has to come up with $700,000,000 in cash to cover the 2021 debt wall, no mean feat for a company with a market cap barely over $100 million. They don't have scrubbers, forcing Navios to burn high sulfur fuels, which could add significantly to daily operating costs. NNA has diluted investors badly to stay afloat. This is Greece - there are probably loads of dodgy deals we don't know about. And unlike the Greek government, Navios pays a distimctly positive interest rate on its debt (did I mention they have debt?).
If you're still here, it's time for number crunching (also known as "counting your chickens before they hatch"). NNA has 41 tankers. Only God knows how much bunker madness will add to fuel costs, but let's call TCE breakeven ~20k. Let's suppose NNA achieved a $35,000 blended daily rate. Multiply by 365 days in a year x 41 tankers and you get $225 million. Divide by 15.6 million shares outstanding and you get $14 - not to mention free exposure to any increase in vessel values. If NNA earns twice its market cap in a year, I don't think it will be trading at NAV.
Sure, I'm ignoring utilization and plenty of other stuff, but what if VLCC rates stay at $70,000, where they are now? We won't have to wait long to find out.
Angeliki has more brains than she gets credit for. Though she has consistently run Navios into the ground, assured investors the dividend was safe months before slashing it, deftly drained millions into her own pocketbook, and perfectly mistimed every market shift since 2010, she always seems to have an ace up her sleeve. She owns millions of dollars of stock. For now, she's on our side of the table.
If I'm wrong about charter rates, Navios is toast. With rates in the stratosphere and IMO 2020 looming, I think Navios can make it. If not...
Caveat Emptor: This is a Greek shipping company leveraged ten to one.
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