WEQ.DB.C - Western One Convertible Debentures

[sculpin]

Potential Value Western One Equity

 

This is a quick valuation exercise. Many assumptions including pick up in WCSB activity in next 12 months to bring WIS ebitda back to $20mm+ range (WIS did $24mm and $29.4mm ebitda in 2015 and 2014 respectively). Have significant time to continue improve business, lower debt with below face debenture buybacks, find buyer for both remaining businesses. Seems very good margin of safety at the current share price of $2 and exceptional upside even at lower sale value of ebitda or $0 value on remaining Britco biz.

 

Cash (Sep 30/16) $13,300,000

Sale proceeds $45,000,000

Total cash $58,300,000

 

Less:

 

Operating Line $5,900,000

Capital Loans $38,400,000

Debenture         $51,750,000

 

Total Net Debt after sale proceeds $37,800,000

 

Remaining business sale value:

 

WIS ($20mm ebitda @ 8 times) $160,000,000            @ 6 times $120,000,000

Britco modular (assets & potential) $15,000,000 $0

Total remaining asset value         $175,000,000 $120,000,000

 

Equity value (Asset value - $38mm) $137,000,000 $82,000,000

Shares outstanding               17,100,000   17,100,000

 

Equity value/share             $8.00 $4.79

 

[doc75]

Sure but, it is a downside protection thing. If the oil price doesn't do well, ZAR (equity) could be diluted by a lot in late 2019 if they have no cash or can't replace/extend the convert. ZAR.DB holders would have received 8%+ a year from current price and be calling the shots.

 

I see. I think the play here is to sell the whole company in 3 years. If they can't sell this relatively unlevered company in 3 years than both debenture and equity holders are screwed, the equity holder more so.  I'm just betting with the management who holds more equity than debentures. I thought they got a great deal getting debenture holders to wait 3 years at 8%.

 

Regarding Zargon:  Are either of you concerned at all that insiders have been net sellers over the past year, if one excludes the modest purchases made under their employment purchase plan?  I've noticed a few folks on other boards trumpeting the insider ownership angle at Zargon, but the transaction history over the past year paints quite a pessimistic view, IMO.  (No purchases at all outside of the purchase plan, and the VP operations in particular has been selling any shares that accrue under the plan.)

 

With small companies like this I always question my own analysis when the guys in charge don't seem to view the securities as the same bargain that I do.

 

 

 

 

[Cardboard]

Well, pretty significant insider buying from CEO, Craig Hansen in recent days of the debentures or $430,000 at face. It is almost doubling his stake since he already held $470,000.

 

Also noticed that insiders continue buying shares with their monthly plan. Hansen continues to hold around 2.4 million shares or 7.7% of outstanding.

 

Cardboard

[gokou3]

Potential Value Western One Equity

 

This is a quick valuation exercise. Many assumptions including pick up in WCSB activity in next 12 months to bring WIS ebitda back to $20mm+ range (WIS did $24mm and $29.4mm ebitda in 2015 and 2014 respectively). Have significant time to continue improve business, lower debt with below face debenture buybacks, find buyer for both remaining businesses. Seems very good margin of safety at the current share price of $2 and exceptional upside even at lower sale value of ebitda or $0 value on remaining Britco biz.

 

Cash (Sep 30/16) $13,300,000

Sale proceeds $45,000,000

Total cash $58,300,000

 

Less:

 

Operating Line $5,900,000

Capital Loans $38,400,000

Debenture         $51,750,000

 

Total Net Debt after sale proceeds $37,800,000

 

Remaining business sale value:

 

WIS ($20mm ebitda @ 8 times) $160,000,000            @ 6 times $120,000,000

Britco modular (assets & potential) $15,000,000 $0

Total remaining asset value         $175,000,000 $120,000,000

 

Equity value (Asset value - $38mm) $137,000,000 $82,000,000

Shares outstanding               17,100,000   17,100,000

 

Equity value/share             $8.00 $4.79

 

Sculpin,

 

Thanks for the great info.  I am still researching the company.  I see in the recent March presentation that the company reports a pro-forma net debt of $60.5M (page 4, http://www.weq.ca/sites/default/files/docs/weq_investor_presentation_mar_16_2017_final.pdf), more than your $37.8M figure.  I wonder if you have omitted the $25.7M senior debt that was repaid from the proceeds of the Britco transaction?

 

 

[Cardboard]

There is $3.119 million of Equipment Financing Loan missing in Sculpin's analysis which is hidden under other liabilities on the balance sheet or not a big deal.

 

Then the large difference between $60.5 million of proforma net debt vs what should be $41 million is money that they have allocated for expansion:

 

"Excess cash for working capital management and growth opportunities"

 

This is likely going for the most part into the 6 markets that they have identified on page 9. While this investment will prevent net debt from being lower, I would hope that it will yield good returns. With the Broadview guys on board, I would think that this has been carefully reviewed.

 

Cardboard

 

 

[gokou3]

Thanks Cardboard responding to both this and the Discovery air threads.

[sculpin]

Some inside buying by Directors of WEQ at the $1.50 level...

 

Amended Filing As of 11:59pm ET August 9th, 2017

Filing

Date Transaction

Date Insider Name Ownership

Type Securities Nature of transaction Volume or Value Price

Jul 4/17 Jun 30/17 Matheson, Joseph Lee Grant Control or Direction Common Shares 10 - Acquisition in the public market 13,875 $1.50

Jul 4/17 Jun 30/17 Matheson, Joseph Lee Grant Control or Direction Common Shares 10 - Acquisition in the public market 4,625 $1.50

Jul 4/17 Jun 29/17 Matheson, Joseph Lee Grant Control or Direction Common Shares 10 - Acquisition in the public market 16,875 $1.51

Jul 4/17 Jun 29/17 Matheson, Joseph Lee Grant Control or Direction Common Shares 10 - Acquisition in the public market 5,625 $1.51

Jun 29/17 Jun 29/17 Turner, Thomas Richard Direct Ownership Common Shares 10 - Acquisition in the public market 5,000 $1.53

Jun 28/17 Jun 28/17 Turner, Thomas Richard Direct Ownership Common Shares 10 - Acquisition in the public market 700 $1.53

Jun 28/17 Jun 28/17 Turner, Thomas Richard Direct Ownership Common Shares 10 - Acquisition in the public market 1,575 $1.53

Jun 27/17 Jun 27/17 Turner, Thomas Richard Indirect Ownership Common Shares 10 - Acquisition in the public market 15,000 $1.54

Jun 27/17 Jun 23/17 Matheson, Joseph Lee Grant Control or Direction Common Shares 10 - Acquisition in the public market 38,650 $1.51

Jun 27/17 Jun 23/17 Matheson, Joseph Lee Grant Control or Direction Common Shares 10 - Acquisition in the public market 17,950 $1.51

 

 

 

[sculpin]

Continued strong improvement in both segments of Western One's business (heat & rentals) with 32% increase in revenue this quarter with EBITDA of $10 million ($0.60 per share) and net income of $0.24 per share. Current share price of $1.60. Q1 is definitely their strongest quarter but it appears they could be on track for EBITDA of $20mm for the year. At 6 multiple EV/EBITDA places share price over $3.25 & 8 multiple over $5.50/share. There has been both heavy insider buying & share repurchases over the last 12 months...

 

First quarter 2018 financial summary:

 

Consolidated revenue from continuing operations increased 31.9 per cent to $34.3-million from $26.0-million in the prior-year period. The growth was primarily attributable to continued strong activity in the construction sector and cold winter conditions in Alberta, increasing demand for rental equipment, and construction-heat-related fuel and services.

 

OEC (original equipment costs) on rent (1) increased 10.7 per cent, and dollar utilization (2) increased to 73.1 per cent from 62.5 per cent in the prior-year period due to growth in both heat and aerial rental activity levels and revenue on fleet capital in major heat-related markets, including Calgary, Edmonton and major projects locations in Northern Alberta.

 

Rental and related services revenue increased 22.8 per cent to $21.8-million from $17.7-million in the prior-y

ear period primarily due to increased rental demand for heat-related equipment. Fuel and other product sales increased 51.4 per cent to $12.5-million from $8.3-million in the prior-year period primarily due to a 43.5-per-cent growth in fuel sales volume and generally higher commodity price levels.

 

Gross profit increased 36.4 per cent to $14.6-million from $10.7-million in the prior-year period primarily due to an increased revenue base driven by higher rental volumes and related fuel sales. Gross margin was 42.4 per cent and increased from 41.0 per cent in the prior-year period primarily due to higher operating efficiencies, which stemmed from the rental volume growth.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased 63.6 per cent to $10.0-million from $6.1-million in the prior-year period, and adjusted EBITDA margin increased to 29.3 per cent from 23.6 per cent due to the factors described herein.

 

Net cash from operating activities of continuing operations was negative $1.7-million. Net of cash inflow from operating earnings, the net cash outflow from operating activities was due to seasonal working capital deployment in relation to the construction heat operations. Net change in cash position from continuing operations was negative $3.9-million. Other major factors leading to the net change in cash position included ordinary fleet capital expenditures, loan advances (net of repayments) and related interest, and repurchases of WesternOne's common shares pursuant to its normal course issuer bid announced in late 2017.

 

Net income from continuing operations attributable to shareholders was $4.1-million (24 cents per share), compared with a net loss of $4.8-million (28 cents per share) in the prior-year period. Included in net income or loss were non-cash finance expenses relating to changes in the fair value of convertible debentures at period-end. Excluding the related non-cash effects on an after-tax basis, net income would have been $4.6-million (28 cents per share), compared with a net income of $200,000 (one cent per share) in the prior-year period.

[SafetyinNumbers]

FWIW,  management sounded very constructive on the outlook for the company. They were asked why they are prioritizing share buybacks over the debentures and the answer was pretty interesting especially as they indicated they would likely deal with the 2020 debs in the next 12-15 months. That works out to a very compelling YTM from Friday's close at 88.

 

Question is at the 19th minute mark of the conference call: http://www.weq.ca/sites/default/files/docs/presentations/westernone_q1_2018_-_mp3.mp3

 

That being said, as Sculpin noted, the equity in that scenario might be the most interesting as earnings power might be higher than what the equity indicates currently.

 

I'm also encouraged by the large shareholding and debenture holding of Ewing Morris, that I think would like to avoid the existing debentures being converted into equity.

[bskptkl]

Yet equity per share has declined from $2 a year ago to $1.16 today.

I've been selling a year+ old position for a small profit.

Margin of safety eroding.