AEI CORPORATION 

AEI Corporation is not new to me. In fact, since my days in university, this did pop up on the screen then. And that was more than a decade back. Incorporated since 1983, the company’s operations include the import and export of aluminium products used within the electronics industry and also in the buildings and infrastructure segment. As you can guess, it should be considered a cyclical, moving and ebbing with the flow of economic activity. However an operational history of more than 30 years tells an inferential story of management doing an at least okay job at keeping the business alive through 1997 crisis, the dotcom bubble and the subprime crisis of 2008.  

The price to book value currently stands at a paltry 0.35 at the time of this writing. Since then, it has moved lower to 0.27.  This is not going to be an in depth analysis. Neither is it going to be a recommendation to buy or  sell. I suppose what I am trying to drive at is that bargains are beginning to appear and this could be a possible bargain since the advent of the decline in oil prices. The market is always forward looking and of course, not to mention a manic depressive, which should work to the smart investor’s advantage. That being said of course, it is up to investor to recognize opportunities around them.  The recognition of potential opportunities, putting them on watchlist, studying them and waiting for the right entry price which represents a margin of safety is what all investors ought to do. But many don’t.

Delving into the financial statements of AEI Corporation, I would have to say that things do not look too good. If anything at all, this pales in comparison to your so called “moated companies” where you could expect a greater than 10% return on equity. In fact, this company is down in the dumps right now. This is confirmed by what management is in fact saying.  For the 6 months ending June 2016, revenue has fallen by approximately 40% from 10.4 million to 6.2 million as compared to the previous period. This has resulted in a net loss per share that has widened from 5.6 cents to 12.7 cents.

Dividend Policy Matters

Year

2008 2009 2010 2011 2012 2013 2014
Dividends per share $0.01 $0.007 $0.03 $0.01 $0.01 $0.01

$0.005

We extracted some information from the financial statements and the table above represents the dividends paid per share from 2008 to 2014. Let us examine the dividends per share paid from 2008. In 2008, the management paid a 1 cent dividend. And then in 2009, they paid a seven tenths of a cent in dividends. For the years 2010, the company hiked its dividends. Things seemed to be have been pretty good then. In 2011 and 2012, they seem to have resumed paying 1 cent per share in dividends. And in 2014, they paid 5 tenths of a cent per share in dividends. Incidentally, 2009 was a bad year. All of us knew it was. It was one of the most unprecedented moments in financial history. On the back of that, management decided to cut its dividend and maybe be a tad more conservative in conserving its cash. The cut in dividends enabled management to save close to 1 million in cash then.

On hindsight, the best time to get in on this was 2009. If you look at the price of the charts in 2009, the price near the bottom was about 70 cents per share. So to the readers of this blog, I say to you this : Be contrarian. Be firmly contrarian. There isn’t much money to be made on news and corporate events unless you are a special situations type of investor or an an adept at merger arbitrage. The time it hits the news is when all good news has been priced in. In fact, this reminds me of an overused quote but I shall say it anyway. It sounds cliche but here goes. “Be greedy when others are fearful and fearful when others are greedy. Maybe another quote to bore you. “You pay a very high price in the stock market for a cheery consensus”.

Source : FT markets

So the price in 2009 was approximately 70 cents. If you had bought it then, you would have had the opportunity to exit at a price above $1.50 per share in a very short time. But you would have to buy it at a price which the market did not want to buy it at.

Now, we are on the brink of a new year, 2017.

And the price stands at 47 cents a share currently. More information on the company is given below.

Price/Book = 0.27

Market Cap = 13.22 mill

Current Ratio = 9.58

Debt/Equity = 0.11

Cash – Current Liabilities – Debt = 22 mill – 3.35 mill – 5.16 mill

= 13.49 mill

Approximate Liquidation Value = 23.7 mill

At the time of this writing, the current market capitalisation implied that this is what a Grahamite would called a cash bargain. I mean the market capitalization of the company is 13.22 million at the time of this writing. If we compare it to 13.49 million, that is the  amount of cash left in the company after paying off all current liabilities and debt, a grahamite may very well be excited about this as the company is cheap on that basis.

The fact of the matter is that it is indeed cheap on an assets basis. One may look at this and consider this a deep value stock. With cash balances of 22 mill, the market cap is only 13.22 mill. With a net cash( cash – debt ) of 16.84 mill, it may seem that as if the company is almost served up on a platter free of charge. The market is truly a manic depressive animal. Why would a company trade at these levels if it were to be considered a going concern? In any  case, this presents an opportunity. For some reason, the market has not placed much value on the inventory, the receivables and the fixed assets through which it derives its operating income.

A further look at the balance sheet reveals one thing. It is also considered a working capital bargain in the sense that the company’s market cap is less than that of its total working capital, with an approximate liquidation value of 23.7 mill

With a recent share placement completed in 2015, we believe that the company is adequately  capitalised going forward.

According to its 2014 annual report, the company also reported heavy investments into capital expenditures.

In the context of this case study if you will, I’d like to challenge readers to think probabilistically? Could a possible black swan occur? Could the inventory prove obsolete in years to come? What would a resumption in a 1 cent dividend do to the price of the stock? Is there room for a control shareholder to come onboard? This are all very valid questions that an investor may ask. No prizes for getting the correct answer but I leave you with this quote anyway from Seth Klarman.

“Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen. Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty. The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information.”


kingsley

I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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