Sunday, November 16, 2014

Enterprise Group - Q3 Update

Three of my large positions -- Hawaiian Holdings, Future Bright, and Enterprise Group -- have reported quarterly results over the last month. 

Of these, the most attention grabbing has been the set of results posted by Enterprise, in large part because the company has now announced two consecutive quarters of rental volumes and margins that are below its own projections. The pace of delivery of new equipment has been slow, third party equipment has had to be employed, and the outcome hasn't flattered management's ability to deliver according to expectations. 

The discrepancy is, in the grand scheme of things, and over a sufficiently long time horizon, trivial and immaterial. Still, one has to scrap its previous guidance of $33.8 million in 2014 EBITDAS and one has to instead to use the available record to reconstruct one's own estimates for the 4th quarter and beyond.

This is how I see it now: 



and





Some notes:


Within the Utility and Construction segment, we know that the company started with 6 hydro-vac units at the start of the year, had taken delivery of 8 additional units at the end of May, and that it will own another 6 units by the end of the year for a total of 20. These units are apparently in order to satisfy demand under three consecutive multi-period contracts and each fully employed hydro-vac unit generates revenues of $750K per year. I assume that four hydro-vac units are newly empoyed in the 4th quarter at 30% EBITDA margins. 

The company says that it intends to purchase another 15 hydro-vac units units in 2015, for a total of 35 owned units. I assume that an average of 25 units are employed in the course of 2015.

Enterprise has taken delivery of one custom built "direct pipe" unit that it states can generate between $30 and $45 million in revenue per year at 40% EBITDA margins. This unit was immediately placed into service and will show $4.5 million in Q4 revenue. I assume that it generates $30 million in revenue during the course of 2015. 

Hart Oilfield Services has generated an annualized revenue run rate of $17 million at 50% EBITDA margins. I have left this as is. 

The newly acquired Westar Oilfield Rentals generates $8.7 million in revenue at 47% EBITDA margins. I have left this alone, too.



Other more or less comparable companies are trading at ~6x EBITDA. Other things being equal, Enterprise ought to trade at a premium based on its substantially higher margins, improving seasonality profile, and growth trajectory. But ceteris is not paribus and companies that promise one thing and deliver something less can expect to trade at a discount to the peer group.






At 4.5x what I think is a reasonably conservative estimate of EBITDA the warrants will expire worthless. (The $1.21 valuation at the low end uses a diluted share count that excludes these warrants that are presumed to have expired worthless).


Also, only 4% of Enterprise's current revenue base is directly exposed to the oil sands but a prolonged oil price slump will, of course, permanently impair the company's value anyway since much of the economic activity in Alberta and BC is predicated on long-term oil prices that are above, say, $60/barrel.

It's therefore important too insure against such a scenario by having a stake in a security that becomes more valuable when oil prices fall. In my case, it is Hawaiian: the recent fall in jet fuel prices from ~$3.10 to $2.36 ought to add about $10/share to its valuation when its hedges roll off.  

Disclosure: I am long Hawaiian Holdings, Enterprise group, and Future Bright.

56 comments:

  1. You could probably add some cash on dilution with the warrant exercise in the higher multiple scenarios?

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  2. This might be a stupid question, but why is everyone always so focussed on ebitda. It just seems to make a lot of valuations so abstract.

    How does 50m$ translate to earnings? Wouldn't that more then double earnings? Wouldn't you get like 25m$ in earnings? Tax rate is low, low interest, and maintenance capex is very low.

    In that case, isn't something like 10x earnings not reasonable? With possible growth further ahead that seems conservative. And a 10x multiple on 20-30m$ in earnings would be between 1.35$- 2.06$ .

    Depreciation is like 6m$ now. That is probably like 10m$ in 2015? Interest is 2.5m$? And tax rate of 15%? Or is it 20%?

    50-10-2.5 = 30m$ earnings if you assume a 20% tax rate. 25-30m$ in earnings. that is 5-7x earnings multiple if you assume 4.5x ebitda?

    For a company with possible growth ahead, that seems way too conservative?

    What am i missing here?

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  3. Not a dumb question. P/E is no less abstract than an EBITDA multiple, though.

    What really matters is the timing and amount of cash you'll receive and, in this instance at least, that's more likely to be determined on an EBITDA multiple basis than on a P/E basis because this is -- supposedly -- a roll up with a view to a sale and business sales in this space are transacted on the basis of EV/EBITDA multiples.

    Nevertheless, 46 in EBITDA translates to $26.5m in earnings or $0.15 in fully diluted EPS. EBITDA of 50 means $0.17 in FD EPS.

    If the company delivers and the concern of a low long term oil price subsides 10x EPS would be fair to conservative.

    If it proceeds according to its prior stated plan of selling itself when it reaches $150 in revenue. anywhere from 5x to 7x EBITDA is achievable -- or $1.50 to $2.10 per FD share.

    (And yes, if the warrants expire worthless the per share valuation moves up accordingly though it would not surprise anyone if there were substantial options issuances to insiders in that instance).

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  4. Jennings Capital's latest note fwiw:

    "ENTERPRISE GROUP INC. Previous 12-Month Target: C$1.50

    (TSX-E C$0.58) Risk Rating: ABOVE AVERAGE

    REDUCING TARGET ON MARGINS

     Summary: We are reducing our 12-month target to C$1.25 per share from C$1.50 per share. Our valuation methodology is unchanged, and our target reduction is driven solely by our F2015 estimate revisions following the Q3/14 results. We continue to expect margin improvement in Q4/14 and F2015, but have tempered our estimates. While the potential revenue from the Site C project in B.C. and the new Direct Pipe System are significant, we are not specifically including them in our model at this time.

     Q3/14 Results: Enterprise reported revenue of $18.8 million (v. our estimates of $21.1 million), adjusted EBITDAS of $4.5 million (v. our estimate of $8.6 million) and diluted EPS of $0.01 per share (v. $0.04 per share). Our estimates were on the high end, but the results still fell short of consensus (revenue of $20.2 million, EBITDAS of $6.5 million, EPS of $0.02 per share). Margins continued to be negatively impacted by reliance on lower margin equipment sourced from 3rd parties. While the Company has completed a $20 million CAPEX program in F2014, that equipment was not fully deployed until late in Q3/14.

     Balance Sheet: At quarter end, the Company had cash and equivalents of $8.6 million and total debt of $39.7 million, for a net debt position of $31.1 million. In October 2014, the Company increased its credit facility maximum to $45.0 million from $35.0 million. At quarter end, the Company had drawn $27.7 million on this facility, leaving $17.3 million available, of which $5.0 million was used to fund the cash portion of the Westar acquisition completed subsequent to quarter end.

    Valuation Methodology

    We continue to value Enterprise using the average of a 4.5x EV/EBITDA multiple and 10x price/earnings (fully-taxed) multiple, based on our F2015 estimates.

    Recommendation

    We continue to rate Enterprise Group Inc. a BUY, and we are reducing our 12-month target to C$1.25 per share from C$1.50 per share."


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  5. Thanks for posting that. 1.25$/share before direct pipe and with a conservative multiple; and direct pipe guidance is massive.

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  6. They are guiding that a $6m piece of equipment will generate $30m t0 $45min annual revenue or 300%+ cash return (i.e. EBITDA/Cost).

    You can maybe see why the market may be skeptical of these folks' capacity for understatement and conservatism.

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  7. Im curious why management bought warrants right before earnings release... Maybe they will invest capex throughout next year, and that will boost ebitda and give them some killer Q3 and Q4 in 2015?

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  8. I see two parts to this: the fundamentals and the multiple.

    They (1) know what the fundamentals will be and (2) they assign a multiple based on what they think other people would pay.

    They know the story they'll tell is one of excess demand, that comps are trading at ~6x, and that EBITDA next year will be greater than trailing EBITDA.

    So they do the math and buy the warrants. If they had anticipated that the multiple would get compressed b/c of the guidance miss, they maybe wouldn't have bought the warrants though the amounts involved are small enough that it could have just been a microcap optics thing.

    I've never found insider purchases particularly useful at the level of an individual stock, though I do understand that it "works" at a statistical/population level.

    Hopefully, though, they do now understand how important it is to just settle down and deliver results that are better than the (very) low bar set by the market. If they do, sentiment will reverse the discount to peers will narrow, and the warrants will have some value.

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  9. Red,

    On a separate topic, saw in your tracking portfolio that you sold Lombard. Seemed that you had liked the Company a lot, and Moatology continues to hold it. Why the decision to sell?

    Best,
    PSDFinancier

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  10. This comment has been removed by the author.

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  11. Hi PSD,

    I'm being cute and trying to sweat out some short term gains elsewhere with the money that I've withdrawn from my investment in LRM.

    I was and remain bullish on its prospects and FCF profile from 2015 onward. If anything it is better positioned (and ultimately cheaper) than it was when I wrote it up

    But I suspect that there's a chance that the share price won't move meaningfully up until then.

    If it hasn't, I intend get back into it this time next year.

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  12. You seem to trade in and out of holdings a lot? You also look at technicals? Or did you discover something about hargreaves you did not like?

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  13. No "technicals", no.

    HSP will probably return between 40% and 60% of its market cap in cash when it mothballs its under-performing segments and frees up the very substantial working capital associated with them. And this probably within a year.

    So that's that. It was and is a cheap stock. I don't often sell stocks because I've changed my mind about whether they're good value -- Gencorp, Cybergun and now the NAME/Rightside Spin are, I think, the instances that I've done that in the lifetime of this blog.

    The question for me is how well it fits in the context what's going with the other holdings in my portfolio.

    Now I've only been following the AIM market fairly closely for about 8 years or so but it's apparent even to me that headline numbers ("PER", PEG", "P/B") etc or stories + CEO meet & greets are everything to the British punter and that reading filings and extrapolating is something of a blind spot. (Ironically, that's what makes AIM a terrific market for value investors).

    So, like LRM, nothing is, in my judgement likely to move HSP's share price until what's likely to happen has already happened and that's months away, esp now that the AGM has come and gone.

    When my other holdings are hitting the benchmark prices I've set for them, that's fine -- I can wait it out. When they're not, then I start counting the opportunity cost of holding something like HSP (or LRM, or AVS, or THT which are also imho cheap).

    So, you can see here
    http://quinzedix.blogspot.com/2014/06/ordem-e-progresso-half-time-report-part.html

    that my holdings. other than Hawaiian Holdings, Keck Seng and Rain Industries, have not been hitting their marks. Plus, this question: Am I seriously going to go into 2015 with a 0% cash, 100% long posture?

    In the interim, Macro is a week away from reporting terrible numbers which may mean an opportunity to add to that position then; Alliance Healthcare is going to report Q1 numbers that it says should be good; Lanesborough should have sold on of its properties and should have made progress on materially reducing/eliminating its recourse debt as well as refinancing its mortgages; etc and so on.

    There is virtue in patience but the mistake here, I think, is that I should have picked up HSP in the run up to its next interims rather than so far ahead of them.

    Emeco, for example, is not on AIM (and is incredibly well-watched for such a small company) but I bought it well ahead of the date when it will actually report the metric that investors care about (net debt/EBITDA < 3, in this case) and it has been dead money for a year.

    Counter-examples are EVS Broadcast and Ipsos. Low hanging fruit when I bought them at 25 and 18 respectively and not holding on to them for a week longer has had its costs.

    In the end, if one buys a stock at 1/2 price as with HSP, how patient to be with it is a question of judgment. If one buys it at 1/4 or 1/5 the price, as with Hawaiian Holdings which I've now held for three years. it becomes easier to hang on to it since the IRR will be okay even over that length of time .

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  14. A few comments/questions.

    -Why do you expect MCR to report lousy quarterly results next quarter?
    - For Enterprise. When you can't trust management on EBITDA guidance, why do you think they are reliable for other guidance numbers?
    -According to their largest shareholder (First Samuel) Emeco reported utilization rates of 70% at their agm in November. Isn't utilization a more important metric here? If this is true, next 2 half years may become crucial.
    - Why did you prefer Emeco to MacMahon? I had a look at both, but found MacMahon to have a larger margin of safety, and at about the same discount.
    - Have you had a look at APR energy on the AIM? Looks interesting.
    - For a mining services company in Australia. Have a look at Hughes Drilling. Looks to me to be the one of the best opportunities out there.

    Thanks for the answers. Always interesting to read your blog.

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  15. Thanks for the comments & questions:

    -- My notes tell me that Macro said in (I think) the Q2 conference call that Q3 revenue will come in at the $30m range will be represent a YOY decline. Says more about unusually high revenue Q3 2013 than it does about the current state of affairs but it could reinforce the market's skepticism about the company's prospects. The audio of the con call should still be up on their website.

    -- Well, there's a difference between official statements and what one says to the great Canadian newsletter-industrial complex. So, rather than trusting what they say, the I'm thinking that the better approach is to apply turns and margins from the prior record (including pre-acquisition record) to the current asset base.

    When I do this I easily get to 40 EBITDA for FY 15 and 50 is possible.

    E has thus far been trading at a multiple of forward EBITDA and that requires trust in mgmt. This time next year it will trade at multiples of trailing EBITDA and it will require no such faith.

    What's a too-low multiple on trailing EBITDA under the circumstances 3x ? 3.5x ? If so, one breaks even or comes out ahead on the stock. (They raised institutional money at $1 diluting the hell out of the stock is hopefully out of the question).

    -- Right, Emeco has somehow managed to raise global utilization rate back to 70% and appear to be heading toward 75%. Margins are different in QLD v NSW and OZ v Oil Sands v Antofagasta, but I suppose based on the regional utilization breakdown provided at the AGM that we're looking at 74 EBITDA in 2015 (and run rate EBITDA of 120 at these utiliz rates).

    As I think you know or can guess, I chose Emeco over the others because its was spread out across commodities, because I figured that 50 in EBITDA was bare minimum give this diversification (gold, copper, oil, coal, iron ore all down substantially at the same time?), and because I supposed that selling $150m in equipment at some reasonable discount to book -- say 20% -- was not a big ask esp since it has a unit that prides itself on disposal prowess on a global scale.

    So, both CFO AND net disposals working together to generate min $150m in FCF per year until net debt < 2x EBITDA at which point it re-rates.

    And since Emeco is the business that all the major sell side analysts use to guage global mining capex activity there was little chance of it languishing once the EBITDA and leverage numbers looked fine. A seemingly simple "get paid to wait" thesis.

    Emeco vs Macmahon: I like MacMahon better than Boom Logistics, Mmastermyne etc but I judged at the time that Emeco was in crisis now and that MacMahon's time would come. (I acknowledge that it is cheap today and I'm certainly being stubborn in sticking with Emeco for my Aussie freakshow exposure).

    --APR Energy: I haven't. Poor man's Aggreko, I take it? I look into it. Thanks for bringing it to my attention.

    -- Hughes. Ditto and thx again.

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  16. Hey red, what would be a good reason to not buy more enterprise at these levels? It trades at potentially 2-3x earnings! Problem is, it already is a large position.

    Maybe the market confuses it with this company?
    http://www.propertymentorgroup.com/stocks-in-news-public-service-enterprise-group-inc-nysepeg-chevron-corporation-nysecvx-duke-energy-corporation-nyseduk-ericsson-nasdaqeric-sprint-corporation-nyses/1228624/

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  17. Ha, no -- the one thing I can say for sure is that the mkt is not confusing it with PSEG.

    All the oil patch companies - Entrec, McCoy Global, Petrowest, WesternOne etc -- are trading at around 2x to 4x earnings. Oil price freak out. Enterprise may trade at a slight discount for the reasons I've discussed.

    If there's debt as with Entrec, for example, there's no point in messing with it. But 2x earnings with no debt is priced for a pessimistic long term environment. Petronas has put off its FID on the Northern gateway and that has affected the mood.

    I'm well enough exposed to E that if there's upside (and I think there is) I'll benefit from it. But I'm reluctant to double down because E's destiny is not 100% in its own hands.

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  18. Red,

    Hope you're well!

    On sweating your assets and 'playing the game' - how do you feel about the Emeco position from this perspective? I'm still a big fan of the long-term value play and wasn't expecting them to come out as bullishly as they did a couple of weeks back in terms of utilisation and how far through the restructuring and reorganisation of assets that they've managed..

    .. at the same time, they're prepping for a bad set of figures for the first half. They talk about an even more extreme H2 weighted year, reckon they'll make the same EBITDA as last year on a much better run rate (implication being that H1 must be really bad) and say things like this:

    "In summary the first half of FY15 will be characterised as the time we put our assets back to work in all of our regions."

    Which has a pretty good correlation with weak figures IMO. I guess they're going to disappoint vs. last year's numbers - I wonder how much the market will punish them, or if even a slight beat on this bearish prepwork will make people more comfortable.

    Lewis

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  19. Hi Lewis,

    Well I'll separate out the fundies from mkt sentiment b/c the former is reasonably straightforward and the latter is an imponderable in the short term.

    They started the year at 58% utilization and they're now at ~75% so H1 can't be that bad. And, in any case, 2014 was H1 weighted. Not hard to understand why: they were working their way down the utilization slope from 60% to 41%.

    So I think it was just awkward phrasing on Ken's part.

    Run rate EBITDA at 75% utilization on 580 WDV is 170. Assume that OZ rental rates have been cut by 15% and EBITDA -> 130.

    Therefore H1 should come in ~45 and H2 at ~65 ==> full year 110 against 2014 EBITDA from continuing ops of 86. That's close enough for government work and there may be some expenses associated with outfitting the Chile equipment that reduce that figure slightly.

    By extension, and assuming that Canada doesn't fall of the cliff, full year 2016 EBITDA should come in at 130.

    Disposal of held for sale, excess equipment at 50% of book + cash flows from operations should see net debt at end 2016 at 196 -- or under 2x EBITDA.

    So, cash EPS $0.11/share and debt/ebitda sub 2x supports dividend of ~$0.07.

    Put your preferred dividend yield on it and I think that gets us close to the share price in 18 months time.

    Important caveats:

    a) I'm assuming that the ~75% utilization Ken talked about was on approximately $584 WDV -- i.e. that they haven't disposed of a good deal of equipment other than the $40m held for sale items in the last report.

    b) I'm assuming that Canadian EBITDA stays at ~$45. If oil looks like its going to stay below, say, $80 for a long time, that assumption will be challenged. Canadian EBITDA then may go to zero on $20m in revenue, the WDV gets sold at 1/2 book, and $0.15 to $0.20 gets cut from the prospective per share value of the equity.

    c) I'm assuming that a 50% haircut is maximum. I saw rumors of 50% when Queensland was running at 8% utilization. Northgate was easier b/c one could track disposal prices in real time.

    No idea what the mkt thinks of Emeco in the interim. Last time I looked (a few months ago, tbh) sell side had targets in the $0.25 to $0.35 range. That sounds fine for FY 2015 and if my arithmetic is in any way close to reflecting reality, the targets should get refreshed upward, to the $0.70 to $0.80 range when June rolls around.

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  20. Thoughts on RYAM at 23? I think y ou mentioned you would like it at 27$? Personally I think they can fall further.

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  21. I haven't thought about RYAM since the, honestly speaking. My hurdle rate is now higher but I'll look at it again. Thanks for the prompt.

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  22. Red

    How do you prevent going public with an investment idea then weighing into a commitment & consistency bias that then causes you to be more inclined to stick with it when conditions change than might be the case were you alone with the idea?

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  23. Hmm good question, thanks. I don't know if you have specific position of mine in mind but I'll answer in general terms.

    A side benefit to posting one's ideas is that one can look back at the bad ones -- Lojack, for example, or Cybergun equity -- and feel embarrassed/ashamed at how juvenile the thinking behind them was.

    One half-knows at the time that it's not quite right but one wants to BELIEVE. That's no good -- whether the idea ends up working out or not.

    So, you know, that feeling helps prevent one from doing it again.

    Usually though, my larger (7%+) positions are thought through from as many angles as I can think of. If something bad happens to one of these it's because I haven't imagined the cause rather than because I've swept it under the rug.

    Statistical/formula investors prize strategic ignorance but it doesn't work so well in stock picking proper.

    The one thing that's difficult to handicap is management behavior under conditions of stress. As a base case, I tend to imagine that what I would do is what they will do. But it's hard to know and, in my experience, they will shock you as often than they will delight you. So, as the situation unfolds one has the opportunity to reassess the investment in light of this previously unknowable information. The idea should be robust enough that you have the time to do that at least.

    Emeco is a handy example of this and I've cut it down in part because I just don't have a great deal of confidence in the executive team. They're new so I'd like to see what disposals look like in H1 2015.

    My biggest glitch by far is in repeatedly taking small positions in equities like Avesco and GEA that that would be cheap if privately owned but don't have even a soft catalyst attached. (Ditto their close cousins: the stocks with modest, say 50% to 80%, upside like Hargreaves Services).

    As soon as my other, better ideas trade at more attractive prices I curse my indolence and sell them.

    And, judging by the comments section, that can be as irritating to the folks who follow the blog as it is to me. So it's only reasonable that I stop engaging in that nonsense altogether.

    But as far as how the public nature of the blog affects whether or not I add to underwater positions -- it doesn't at all. If I add to an underwater position it's because the context and the arithmetic suggest that doing so is a good idea.

    I don't know if any of that gets to the heart of what you were asking so let me know if there's something specific that I should follow up on.

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  24. Red - thanks. Nothing specific to follow up on.

    Context largely relates to Emeco/E/FB/Macro as we stand today. I have been looking at adding E or MCR in the face of the tax loss selling and the oil hysteria.

    The psychological elements best expounded by Cialdini in “The Psychology of Persuasion” are very strong - insidious dynamics especially where they are working together. So you got to assume that full immersion in the arithmetic is enough to keep objective.

    Rubbing one’s nose in mistakes is bound to be very valuable when one side is wanting very much to believe!

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  25. Ah, okay

    " If people commit, orally or in writing, to an idea or goal, they are more likely to honor that commitment because of establishing that idea or goal as being congruent with their self-image. Even if the original incentive or motivation is removed after they have already agreed, they will continue to honor the agreement."

    Worth contemplating, thanks.

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  26. It'll be interesting to see how Lanesborough plays out before/after year-end (and Macro, Enterprise, etc. too!)...I wonder whether you've looked at Italmobiliare at all, or whether the multiple stay-away signs--Italy/holding company/family-controlled--is enough to give it a pass. Essential investment thesis is that it's cheap, not derangedly- (though still highly-) leveraged, and a cement-focused company, with some natural moat around its products.

    Interesting and fruitful reading, as always.

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  27. Ceo just dumped a ton of shares. Thoughts?

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  28. It seems like the CEO bought some shares to try and get the share price up.. So he could dump more shares at a higher price privately?

    Im starting to lose more and more faith in management. Coupled with some rumors about some analysts really not liking management, and I feel like an idiot for making this a 10% position now. But maybe Im proven wrong, let's see I guess.

    I think in the future I either want a solid moat like HA, or just rock solid management if im not protected by a really solid balance sheet.

    I think there is more to this then just a cheap potential EV/EBITDA number...

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  29. Well it's not model behavior is it? I'm not selling my stake but I can understand the the temptation. Merry Xmas.

    - red

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  30. Hi Red,

    About Hargreaves services.

    60% of operating profits comes from coal trading. With the gas prices going down the coal is loosing the battle against gas at least with this prices.

    Did you still see value in the long term for hargreaves services?

    Happy new year and thanks for sharing this blog with everybody.

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  31. Folks bailing out of Enterprise?

    While I didn't make it a 10% position, I did make it a 5% position, and so the decline has certainly hurt. This has been compounded by my overweighting in energy prior to the decline in oil prices.

    However, this should all be put in perspective...For 2014Q1-Q3, they did 12.8 million EBITDA. This includes the previous crap quarter. During 2013Q4 (before they acquired HART, and thus much of their revenue was derived from non-energy work), they did 10 million EBITDA. That is an 3.8 EV/EBITDA based on TTM quarter's earnings (current EV is $87 million USD). And it looks like it is trading for 70% of BV now...

    Not trying to say everything is peachy...obviously with the decline in crude pricing, we should expect some deflation in pricing for energy service work. (To put that in perspective, BP just instructed their recruiting offices in Aberdeen Scotland to reduce wage offers for offshore work by 15%).

    So the question is how Q4 EBITDA (and guidance for FY2015 EBITDA) will be impacted by recent capex and acquisitions, along with deflation in pricing for energy service work.

    The CEO selling shares obviously adds a wrinkle to this. For the poster who mentioned that there were rumors of analysts not liking management, could you elaborate a little?

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  32. S Hughes,

    It doesn't make sense to sell this particular business at this price.

    I think what you're seeing in the comments above is frustration that things are being made to look murkier than they in fact are. E is on of the better r/r propositions in my book.

    I am particularly encouraged by the popularity of the "oil sands are dead" narrative.

    David,

    You're right to suggest that low gas prices (etc) reduce the appeal of coal. What is interesting about Hargeaves, however, is that they are shutting down the Maltby coal mine, freeing up working capital, and returning that cash to investors.

    A reasonable person could look at the amounts involved and conclude that it constitutes 50% to 80% of the company's market cap.

    One would then be left with a stub that controls an impressively profitable and cash generative coal trading business at a very low multiple.

    Combine this with the company's promise to emphasize sustained capital return to investors (over investments in growth) and one could conclude that a share price of 1100p strikes the appropriate balance between risk and return.

    (And thanks for your earlier comment. I was on vacation and just saw it, Happy New Year)

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  33. Anon,

    Nothing beats buying deeply discounted securities. Macro is complicated -- unfathomable, really.

    I've (unfortunately) been following this particular narrative for a long time. There is a class of persons who, for various reasons to do with personal identity formation, wishes it to come true. It probably won't. If it does you'd have a hard time hiding from its consequences.

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  34. ADL,

    Thanks for mentioning Italmobilare to me. I'll have a look at it.

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  35. Red, would like to drop Civeo on your radar? Lot's of similarities between emeco. Dropped tons in the past. Probably not more interesting then your current three mining/oil names though. But maybe you differ from opinion.

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  36. Looks like it is trading at 6x forward EBITDA guidance? From initial scan, I think I like mine better -- I'd enjoy exiting at 6x EBITDA.

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  37. Have you looked at NRW Holdings? It was recently removed from the ASX 200, is having trouble with a major contract and, like other service providers to the extraction industries, is suffering a general slowdown. The combination of these events has pushed it down from about 1x tangible book to about .33x tangible book in the last fourth months.

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  38. I haven't but I will. Thanks for mentioning it.

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  39. Hi Red,

    About Future Bright;

    2014 has been a bad year for the revenues in Macau gaming with a decline of 2.4%, even in the month of december the decline respect last year was a 30%.

    The reasons of this drops maybe are in the last visit of the president of China to Macau, where he don´t see with good eyes the fast growth of the gaming in this region.

    How do you think this is going to affect revenues for Future Bright?

    Thanks.

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  40. David, I'll be writing about Future Bright and my other important positions in the next few days.

    One can answer the question: How much is Future Bright worth without its casino restaurant operations from the company's financial statements. I remember you saying that you're starting out in your investing journey so, in the meantime, I think you might enjoy coming up with your own answer to that question.

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  41. Hey Red,

    You have probably seen this, but just in case you missed it, the following is a December update from an oil and gas newsletter covering E.TO

    "ENTERPRISE GROUP – E:TSX; ETOLF-PINK   A huge new hydro-electric dam in north-east BC—called Site C—was approved yesterday by the provincial government.  This dam is supposed to power much of any LNG development that may come to the province in the coming years. Enterprise has a lot of leverage to this mega-project.  Their Hart Rentals and more importantly their new Westar acquisition in Fort St. John would be able to supply everything from soup to nuts for this multi-billion dollar dam.  (Of course they don’t sell food that’s just an expression). I had a chat with Des O’Kell, their Senior VP about Site C this morning.  He said they would be need all kinds of light towers, heaters, generators and medic/command centres for first aid, office trailers…and it’s very near their Fort St. John acquisition late this year. Whenever I get management on the phone I try to keep them talking…talk talk talk talk.  About any and everything.  Just keep them talking; you never know what gold will fall out of their mouths. Keep agreeing with everything they say…uh huh..yep…ooooo, tell me more about that sounds really cool….(and they know I don't short...) O’Kell said their NAV is 53.5 cents a share, and generally stocks like Enterprise don’t have that big a discount to their NAV as we see today. He said that so far there has been no turndown for them at all; no projects have gone away.  They like to think they’re in as good a shape as they were four months ago.   Arctic Therm (ATI) is doing really well.  This is the branch that heats up pipelines so they expand before the hot oil or gas goes in them—they have to go through this thermal expansion so they don’t burst.  Last year their small ATI heater rigs numbered 105—this year it’s 175.   Their big ATI machines are the focus for them as they’re unique.  He said they have customers now like Encana, Husky and PennWest.  It’s a very profitable product in winter—the highest I’ve ever heard—but the job now for them is to get these units working 12 months a year, not just in winter.     Hart Rentals is now doing over double per day rental compared to same period last year, in January 2015  Hart and Westar be 100% utilized all through Q1."

    Looks like a strong few Q's this winter season.


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  42. Thanks for this. Des & Keith are the power couple of BS so I tend to ignore what they say.

    Bottom line = this is a business that should generate $0.11/share per year of FCF in a stressed environment.

    The risk is that they'll blow the FCF and dilute.

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  43. It is a bit frustrating dealing with overly promotional management teams.

    I've been looking over a company that may interest you-ESSX. It has been written up recently on SA and VIC. Liquidation story, seems right up your alley. Management does however paint a pretty picture, perhaps worthy of skepticism.

    I also wanted to thank you for your hints on Thorntons, I have taken a small position and ordered some of their products as well. My favorite form of research :)

    Gotta try some Tsui Wah next.

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  44. Results are out, and quite disappointing. Pretty brutal margin compression in util/infrastructure. Hoping mostly due to the items they outlined and less due to pricing. At least they have a conservative capex outlook for 2015.

    Any thoughts on the results?

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  45. Saw it, thx. More excuses. Jam tomorrow, etc. Sleazy stuff.

    The conundrum is the same but more acute:

    -- Margin compression in 2015 and 5 in capex ought to translate to FCF/share of $0.11

    -- on the other hand,these are not people that I trust to do the right thing.

    We know now why they've been tweeting their share price rather than buying.

    I'm going to think about it some.

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  46. What is most likely cause of margin drop in utility section? Seems strange that they invest so much, and then less ebitda then Q1. Or were those extra hydrovac trucks a complete waste? Since revenue is barely up as well.

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  47. Well they're saying now that TC Backhoe expensed a lot of maintenance capex in this Q.

    However they said 3 months ago that this Q was going to be the one where they show us the full force of their earnings power.

    So we are being asked to believe that this MCx was unexpected.

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  48. My guess is mismanagement then? A good sign that their COO is retiring. In principal Jaruszak should have a huge incentive to hire a good COO now and unlock value?

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  49. Nah. More likely that they're looking to issue themselves options on the cheap. They've already wiped out most of the warrants with their previous misses so this would be a logical next step.

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  50. You mean they posted mediocre results on purpose to tank the stock price? That is quite devious.

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  51. Well let's say that it's a theory that fits better than incompetence.

    Remember that each subsidiary is operated by its founders while capital allocation decisions are made at the holdco level.

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  52. Hmm how does the resignation of the COO plays into this? And how likely do you think it is that value is unlocked from now on?

    I guess the implication of your theory is that it is better to hold the shares then, as value being unlocked is probably very likely in the near future then?

    Thanks for giving your thoughts btw, always apreciate it.

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  53. Actually I wouldn't initiate a position at this price. I don't like even the perception of shadiness. I would never, for example, participate in any of John Malone's games so you can imagine how I feel about this. There are cleaner, more honorable ways of making money. (I do understand,however, that Malone's approach is considered heroic and I understand why).

    Now that I've gotten myself involved in E, however, there are four things to weigh:

    1) It is trading at a low multiple, maybe 2x owner earnings;

    2) They say they won't engage in more than 5MM of capex so the truth may be the opposite:they'll blow a lot of money on an acquisition.

    It's unlikely that they can raise equity since bridges must surely (?) have been burned by now and so the acquisitions, if they occur, would have to be funded by debt and cash.

    If O&G doesn't pick up, the stock is toast.

    3) If they issue themselves options we'll have a good idea of what they were up to. If they instead buy stock then maybe their subsequent behavior will be exemplary, at least in the short term.

    4) Most inopportune sell decisions
    happen at moments of maximum fear or disgust. I am not particularly susceptible to fear but I am prone to disgust. So I am giving myself time to process that sentiment before I do anything.

    The thing about these situations -- where one has questions management behavior -- is that the correct course of action for the investor is sometimes not clear cut. This could end up being a 6x and could also easily end up being a zero.

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  54. How do you think high inside ownership plays into this? If they blow a lot of money on a acquisition, and it blows up the company, that would be really bad for insiders as they lose millions? So you would have to assume they are pretty incompetent then.

    If they are only shady and not stupid, they will still look out for themselves and not risk blowing up the company?

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  55. Many examples of insider ownership being no bar at all to pressing the destruct button. If you flip back (in this blog) to Dolan Media, for example, the eponymous owner-manager built it up over many years before hitting the button.

    In the case of E, Len, as you know, is on the Board of more than one other TSX Venture co. If one blows up there are others and there will be still others in the future. The trick (in this scenario) would be to be able to sweep it under "the commodity price collapse" blanket so as to be able to raise Other People's Money in the future.

    Right. Enough about this grubby little company. We'll see how the next few Qs play out.

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