Ceres Global Ag (CRP): 4th Quarter and Fiscal 2012 Update

A reader of my blog recently asked me to do a quick update on Ceres Global Ag now that full year 2012 (year ended 3/31/12) numbers are posted. Considering that there are only 4 of you out there that follow my blog (Mom . . . is that you?), I thought I should comply . . . especially since, as they noted, not many people seem to be following this stock. If any other blogs are following this stock, or if any of you have some research on the company, shoot me an email, I’d love to talk.

What follows are my brief notes on the 2012 financial statements and MD&A. I am still reading through the filings and going through all the details, but what follows are my initial reactions.

The Balance Sheet 

Looking at the balance sheet on a year-over-year basis, CRP saw a drop in current assets of $33.4 million (mainly accounted for by decreases in cash [-$17mm], investments [-$7.7mm], due from brokers [-$8.2mm], and inventories [-$2.8mm]). Where did all of these funds go?

• $15.3mm went to Property Plant and Equipment. 
• $13mm went to liability decreases, mainly: 
• $14.7mm of debt pay down (long-term debt, repurchase obligations, and bank indebtedness).
• $5.4mm is accounted for by a drop in equity. This further breaks down as: 
• $4.1mm in share buybacks. Because CRP is buying back shares below book value, it actually bought back $6.3mm worth of “book value” stock, with the difference ($2.1mm) being allocated back as retained earnings [in essence, CRP made money from buying back its own shares if you believe book value is a good proxy for economic value]. 
• A $1.3mm full year loss (net income of -$3.8mm plus a $2.5mm foreign exchange gain). 

All of this results in a book value (NAV) of $10.69 per share and a net current asset value (NCAV) of $5.22 per share. Compare both to yesterday’s (6/14/12) close of $5.66.

The Income Statement 

I already delivered the punchline above – CRP lost $3.8mm in fiscal 2012. This works out to -$0.25 per share.

Despite a positive tone in the annual report and MD&A, as well as what seems a loss of “only” $0.02 a share in the quarter, this is masking what was truly a horrendous 4Q. Without factoring in finance income of $2.2mm, we see a gross margin of 2% on the operating business. Compare this with 21.5% in 3Q12 and 11.8% in 2Q12. Is this some sort of capitulation? Management is certainly building it up as that as they cite a host of positive catalysts in fiscal 2013 with the removal of the Canadian Wheat Board (an untapped production source for Riverland’s grain terminals), a return to contango in key futures markets (easier for merchandisers to extract storage profits), and a strong start to the northern U.S. and Canadian small grain belts (Riverland lives and dies on inventory turnover – witness 2012’s low capacity utilization and ensuing poor financial performance).

Management is also – for the first time that I’ve seen – making a big deal about Stewart Southern Railway. This is an 81 mile (interestingly, a Canadian company talking about distance in miles, not kilometers?) short-line in south eastern Saskatchewan that runs from Stoughton to Regina. CRP holds a 25% interest in SSR. The line is benefitting from an oil boom in the area, as well as a lack of pipelines to carry the oil – making rail the best logistical alternative. As I mentioned last quarter – I continue to view CRP’s rail interest as a nice call option for the company.

The Statement of Cash Flows

Cash Flow from Operations grew by $15.8mm, but most of this ($13.1MM) came from changes in non-cash working capital accounts. If we want to think about Owner’s Earnings, this first step is taking net income and adding back depreciation/amortization. This would be -$1.1mm (-$0.08/share for fiscal 2012).

Cash Flow from Investing was -$9.7mm, but the most interesting part of CFI was the $16.4mm capex spend. The overwhelming majority of this ($12.8mm) went into buildings and silos/elevators. $3mm went into land. I’m a little disappointed that management didn’t give at least some color on where these funds went (we know they purchased the Manitowoc facility and have been doing some needed updates on other facilities) – making it difficult to determine just what is “maintenance capex.”

Without a good estimate of maintenance capex, it’s tough to determine a good owner’s earnings number. For my analysis, I’m going to assume that depreciation/amortization is equal to maintenance capex, so net income is a good proxy for owner’s earnings is a good proxy for free cash flow.

Cash Flow from Financing was -$23.1mm. The biggest issue here was the swap of repo obligation into long-term debt, the general paydown of debt, and the share repurchases.

Bottom line

There was very little we didn’t already know / expect in the annual financials of CRP. We knew it was going to be a bad year (well, maybe we didn’t know how horrendous the 4Q would be). We were fairly positive that NCAV would continue to erode as management invested those assets lower on the balance sheet (PP&E).

What came as a surprise, at least to me, was how much stock management bought back in fiscal 2012 (they spent $4.1mm – equivalent to an almost 5% net payout yield at today’s price) and how upbeat they are for the short-term. They are certainly hanging their hats on the break-up of the CWB, as well as specifically pointing out the return to contango on the futures market and the strong early growing prospects for northern tier production areas.

At a premium of only ~8% to NCAV, with the potential for increasing market penetration (CWB break-up), strong growing conditions, recent industry consolidation (Glencore for Viterra, Marubeni for Gavillon [Marubeni already owns Columbia Grain]), and a still healthy balance sheet, I continue to like the long-term prospects for CRP at these levels. I am maintaining my position, and will become more accumulation minded on any pullbacks below NCAV.

One last item – still the biggest issue facing CRP, in my humble opinion, is the dual management structure. A low margin business in a commodity industry cannot sustain the SG&A expense of maintaining two management teams (Riverland Ag and Front Street Capital). This is a key factor to watch going forward.

Full Disclosure:  Long CRP


Harvest Investor © 2012. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advices, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

George Risk Industries: Better Late Than Never

(Editor’s Note: I wrote this post several months ago before I began accumulating shares.  Apparently I’m not the only blogger who has been sniffing around RSKIA as Whopper Investments beat me to the punch with a very well done post on May 25th. Enjoy!)

I have to admit that I anchor on prices. Missed opportunities weigh on my mind and my analysis. I see what I could have paid for a stock 6, 12, or 18 months ago, and it clouds my “value” judgment. It must not be a good value if the stock is now up 50%, 100% or even 200%, right? This is a dangerous habit for long-term value creation, and one I try to keep in check, but what can I say – I’m cheap!

For this post, I’m suppressing that tendency and pressing forward with an analysis of George Risk Industries (RSKIA). Sure, you could have bought RSKIA for less than $4.00 in 2009 or less than $5.00 in 2010, but it’s still a good opportunity (in my humble opinion) at today’s $6.00 quote.

I’ll try to be brief in this post – for one reason RSKIA is a fairly simple business. For another, there’s been a fair amount of ink spilled on the subject of RSKIA by other, more talented value investors (not all of whom agree with my analysis):

January 21, 2010 piece at The Rational Walk
July 30, 201 piece at The Rational Walk
February 5, 2011 piece by Geoff Gannon (see the second half of the article)
August 2, 2011 piece at Oddball Stocks

RSKIA makes electronics products such as computer keyboards, push button switches, burglar alarm components and systems, pool alarms, thermostats, EZ Duct wire covers, and water sensors. Security products comprise the overwhelming majority of sales (~88%). Although George Risk has over 4,000 customers, 1 distributor (a subsidiary of Honeywell) accounts for nearly 42% of total sales. To get a feel for just what it is RSKIA manufactures, check out the company’s website – they build some cool gadgets (www.grisk.com).

A couple of quick tidbits about George Risk industries. Management typically pays 1 dividend per year (last year ex-date of 9/28/11), which at $0.23/share comes to a yield of 3.8%. Management is also actively searching for “lost” shareholders of the stock to repurchase shares. I think this indicates how closely held and how long some of these shares have been sitting out there – George Risk management is actually out there calling people who forgot they own those stock certificates locked up in their safe deposit boxes. Through this and other efforts, management has repurchased 10,855 shares in the last 12 months (~0.2% of outstanding – not exactly burning up the certificates, but not bad considering avg. daily volume is somewhere around 300 shares).

Although the dividend and the buybacks are interesting, the crux of RSKIA is in its profitability and cash balances. As of most recent quarter end (1/31/12, 3Q12) the company had cash and marketable securities of $4.94 per share. This puts a value on the operating business of just $1.06/share ($6.00 market price less $4.94 in cash – we can quibble over how much cash the company needs to operate, but I’m assuming $0 for this analysis).

Last year, RSKIA had EPS of $0.40. However, much of that came from earnings on investments (the interest, gains, and dividend income on the cash and marketable securities). If we net out this non-core income, the firm generated EBIT of $1,7650,000. At an assumed tax rate of 35%, this equates to EPS of $0.23. At an operating business value of $1.06, this equates to a P/E ratio of 4.6x. An earnings yield of 21.7% (inverted P/E = E/P = earnings yield) is nothing to scoff at.

Over the last 3 years - which include the worst downturn in the U.S. housing market since the Great Depression, a rough time for a company that makes electronic and security products targeted at residential real estate – George Risk Industries has had an average, adjusted core ROE of 16.1% (netting out the investment income and assuming a 35% tax rate). At quarter end 1/31/12, netting out cash, RSKIA had a book value of $0.80 per share. A 16.1% ROE equates to “normalized” EPS of $0.13/share. I say “normalized,” but I may go so far as to say “depressed” given the housing environment of the last 3 years. At $1.06 in residual value, RSKIA is priced at 8.2x earnings, or an earnings yield of 12.2%.

I could spend lots of time laying out the case for RSKIA, but it would all be repetitive of what I’ve just shown – net of cash/securities, RSKIA looks remarkably cheap.

This isn’t to say there aren’t risks - Ken Risk in fact (I know . . . a pun on the name risk . . . but come on, it was right there, I had to throw it in). Mr. Risk is the CEO, the son of the company’s founder, and the owner of slightly more than 58% of outstanding shares. He and his management team have shown little interest in returning the nearly $25 million in cash and securities to us as shareholders. Many analysts will cite this as a lack of catalyst – or even a weakness of the company. Management could squander this asset, do a silly acquisition, or invest poorly. All of that’s true, but do we really think the Risk family is going to intentionally squander an asset they’ve been building since 1967? At the end of the day, I find myself asking “so what” if they don’t immediately monetize the cash and investments?

With a stable operating company generating consistent ROE, I’m happy to go along for the ride and be a claimholder for whenever and however management decides to monetize the on-balance sheet cash/securities. If, in the meantime, you can find me $4.94 in cash with an operating business attached that generates an average ROE of 16% (through a generational market downturn) and that sells for less than $6.00/share, let’s talk. No seriously, let’s talk. I mean it; operators are standing by, because just like George Risk Industries, that is a business worth looking at.

Full Disclosure: Long George Risk Industries (RSKIA). If, after conducting your own due diligence, you decide to buy shares of RSKIA, watch the bid/ask spread - share volume is sporadic and very low. Proceed at your own caution!

Harvest Investor © 2012. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advices, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.