BEV - Bennett Environmental

[Cardboard]

This company has had a troubling past, but it now looks like that things will get better. The most recent event is the replacement of the board of directors and CEO by members selected by Second City Capital Partners and supported by another major shareholder or the ABC Funds of Irwin Michael. See the summary of his thesis which was filed prior to the proxy battle.

 

http://www.valueinvestigator.com/en/valuefavourites/bev.php

 

The company is very profitable when it has sufficient material/soil to decontaminate, but it is very very lumpy. It is also a patented technology and meets the criteria of "not in my backyard" so there is some moat to it. Moreover, with around $1.60 per share in net cash, you end up paying very little for this operation which can throw off around $0.40 a year in earnings (and maybe more) when running.

 

IMO, a few things could occur with the new board and CEO:

 

1- Buy a profitable operation or more with the cash. They have already stated this intention and based on the proxy fight documents, they seem to know what is a profitable business and what is not.

2- Sell the high heat soil treatment operation. Veolia or other large environmental firms may be interested in such plant since they likely have better avenues to source material to decontaminate. It could be a very good deal for both parties.

3- Sell the whole company or liquidate following a sale of the existing operation. If nothing is available for them to buy and a good offer comes along, they will return cash to shareholders. Reading once again the proxy documents, that is the sense that you get and they will pay attention to the effect of taxation.

 

It seems to me like a low risk vs good to high reward situation. I say that it could turn to high reward if they buy the right things at the right price and ends up being a small well managed conglomerate. And low risk since the cash will likely be well protected with the intention of cutting overhead costs.

 

Cardboard 

[Baoxiaodao]

Hi CB, I checked the insider trading briefly, only found out insiders are dumping a lot of shares recently. Any comments?

 

 

[Liberty]

I looked at this one a few weeks ago after finding it on ABC's list of new investments. It has some very interesting operational characteristics, but I ended up not going further because it didn't fit my criteria about quality of management. Maybe that's getting better, but I won't take the chance on it with a big position, and I don't really do small positions (8 stocks in my portfolio, with the top 2 representing almost 45%).

[Cardboard]

Baoxiaodao,

 

Shares being dumped are from Jack Shaw, former CEO and Ralph Neville, former director. Both of them got most of their shares from stock options exercised at very low prices. They are being kicked out so I guess they are not helping on the way out, but once the dumping is over there will be little supply available since it is not very liquid.

 

If you are interested, read all the proxy documents from both sides and you will get a good understanding of what has transpired in the recent past and what the future may look like.

 

Cardboard

[lessthaniv]

This is very significant news for Bennett. The lights are turning on again in Q1. And when the plant is operating they are very profitable!

 

Disclosure: I am long BEV.

____________________________________

 

Bennett plans Q1 Saint Ambroise processing

 

2011-10-11 11:52 ET - News Release

 

Mr. Lawrence Haber reports

 

BENNETT ENVIRONMENTAL INC. ANNOUNCES BEGINNING OF NEW SAINT AMBROISE CAMPAIGN AND PROVIDES UPDATE ON STRATEGY AND EXECUTIVE MANAGEMENT

 

Bennett Environmental Inc. expects to begin a new processing campaign at its Saint Ambroise facility, commencing in the first quarter of calendar 2012.

 

The company currently has approximately 20,000 tonnes of invent ory on site stored for processing and currently expects to receive an additional 24,000 tonnes from various jobs which have been awarded but not shipped.

 

For each of these contracts awarded, the tonnage amounts are approximate, and in each case there is no commitment on the part of the client with respect to the amount of material that will be shipped under the contract, or the timing of these shipments. Actual amounts shipped may be more or less than the estimated amounts.

 

The company continues to actively seek further project work.

 

Regarding the company's strategy and executive management, as previously noted in the company's second quarter management discussion and analysis and June 29, 2011, press release, Lawrence (Lorie) Haber was appointed as president and chief executive officer on an interim basis, and was to serve in this position until a new permanent chief executive officer was appointed following a search for his replacement, at which point he was expected to continue as chairman of the Bennett Board. The board of directors has actively continued the process of positioning the company for the future, and is united in its view to enhance the value of the company for the benefit of the company's shareholders and other stakeholders. The transition of the company and its strategic process is well under way, and the board is taking a broad view of the opportunities available to the company, which will include but not be limited to, the environmental sector. In this regard, Mr. Haber has agreed with the board that he will remain as president and chief executive officer during this transition of the company, and will continue to be actively and fully engaged in this role on a full-time basis. Accordingly Mr. Haber's position as president and chief executive officer will be permanent, not interim.

[Cardboard]

Tough to believe the reaction in the marketplace following the announcement... It will trade at net cash after this contract is completed and I think that more work will come. Some posters on the Stockhouse board have done some good homework on potential work coming down the pike.

 

I have bought more, but now I am tapped out.

 

Cardboard

[Uccmal]

I have worked in the waste remediation business in the past.  And I am very familiar with Bennet.  I also did a workup on Bennett in the spring.  The fact they will be trading at net cash after burning the existing soil is not indicative of any value other than what the stock price is reflecting today. 

 

Problems:

- nearly all soil is imported from the US - this brings its own issues which are as follows:

Municipalities are cash strapped in the states and burning soil is last on their agenda right now

A contract promised is a contract not delivered and may get derailed

Huge regulatory burden at multiple levels.  Anything can stop the movement of soil at any time from a Nimby or a political whim.

 

Once the existing soil is processed,and if thereis no more then the cash burn resumes.

 

The plant itself would need to be remediated in a runoff situation.  The plant has negative value regardless of what the balance sheet says.

 

Management history is terrible and consitently corrupt.  This is endemic to the waste remediation business.  To think the new managers will be better is hanging your hat on a promise.  To deal in this industry you pretty much need to be a sleezeball.  Expect new management to be just as bad in your estimates.

 

The industry itself is full of dead companies with big promise.  Surely Cardboard you recall Eli ecologic, Swan hills, Philip env., Laidlaw environmental, Groupe Sanivan, an incinerator partly built in Pq by SNC.

 

I disagree stingently with Irwin Michael on this one.  Irwin is a value investor not a business manager.  He Is out of his league on this one. 

 

My conclusion after looking at this was a definitive no f'n way.  Dont believe the promises and dont think you arethe only ones who have looked at this.  And dont be deceived by the cash on hand.  A couple of stupid acquisitions will take care of that pretty quickly. 

 

 

 

 

[Uccmal]

In this environment right now there are far better opportunities with low risk, high reward.  You may get a quick double on speculation of better things but long term you are dependent on near perfect execution by management in a seriously imperfect business.

[Cardboard]

Hi Uccmal,

 

While I agree with many things that you said, I disagree about the current Bennett. And yes, I do recall Philip Services, Laidlaw, Safety Kleen and many others. They all had some form of governance issues, were saddled with debt and ended up bankrupt. While the founder, Bennett, engaged in bribery, I can't say that I saw anything illegal being done by the former management team following him. They managed pretty well and simply wanted to keep going in the business, but they got kicked out by a hedge fund that saw bigger things for the firm, especially for the deployment of the large cash balance.

 

Regarding Bennett business, there are only a few of these incinerators in North America and they have the only one on the East Coast. These things are definitely not in my backyard type of plants and you will not see too many if any more being put together.

 

The Hudson river clean-up is on-going and being paid by General Electric. Schneider Electric is also on the hook and is the contract that will be worked by Bennett shortly. So big companies are on the hook to pay for clean-up and they have the capacity to pay. The Canadian government is also cleaning up the former radar stations up North. So I think that funding for these projects is not an issue and the pipeline of projects seems deep enough.

 

Personally, I see little risk in the plant itself or its operation. They will get contracts which are very profitable, but the timing is highly uncertain. Very lumpy results from that operation. There is always a possibility for the plant to be shutdown by government order. That is a risk, but I see no evidence or demand for that today. Technology could also change. Overall, I don't think that the plant should be considered a liability even if you add terminal remediation costs. Over time, it makes a lot of money even considering the cash burn during downtime. IMO, it would be a great operation for a much larger concern such as Veolia that could support the volatile earnings vs a firm like Bennett with it being its only operation currently. Even if they were giving it away, you would still end up with a cash pile equal to the current share price in the spring. Minus taxes on a dividend, you would end up with $1.50 which is not a lot of downside from here.

 

Regarding the cash, the new management team has indicated a desire to invest it in operations that will be quite profitable. They are still searching for it. IMO, that is risky, but it is a hedge fund that runs the boat now. They certainly don't want to blow that asset unlike a bad CEO that just makes acquisitions with cash to grow sales and keep his job. The right incentives are in place and it is to make the share price go up or to increase the value of the business to sell afterwards to an interested party. So, I do believe that they can care less about the environmental business. If they don't find the right thing quickly, they will be quite interested to liquidate the whole thing. It is a mini Onex and if you look at their history, they sold 3 businesses since 2004. They buy cheap, fix a bit and sell higher or like any private equity firm.

 

http://secondcitycapital.com/s/NewsReleases.asp

 

Despite my disagreements, I thank you for your response. It helps me understand what are the concerns out there regarding this firm. They are quite valid and yes I could end up losing money. On the other hand, a total loss is really hard to envision IMO. I still see it as a low downside investment with decent (50% upside) to high reward depending on what is done. It also has some recessionary proof characteristics with the kind of business they are in and a recession would likely create opportunities for the cash pile. It adds diversity to my portfolio which is mostly built up with companies that need the economy to do at least decent. No doubt that my other investments have more visible or tangible upside, but they have risk to collapse if we have an economic calamity.

 

Cardboard

[BRK7]

 

March 07, 2013 13:21 ET

 

BENEV Capital Inc. Announces Sale of its Saint Ambroise, Quebec Waste Treatment Plant

 

 

http://www.marketwire.com/press-release/benev-capital-inc-announces-sale-of-its-saint-ambroise-quebec-waste-treatment-plant-tsx-bev-1765617.htm

[fishca]

Guys, I'm currently holding a small position I bought at $1.75 awhile back (mistake - I thought the plant was worth more than $10M), and I am thinking of picking up more shares in the $1.50 range. The way I see it, there's a pretty decent margin of safety at these prices (about $71M - or $1.83 - in net cash on the balance sheet versus $1.50 at the current market price).

 

Risk factors include  the following:

 

1) Ongoing "defamation of character" lawsuit with the founder of the company (which probably has no merit, but you never know in such cases)

2) Risky management - these guys have been promising a "transformational" deal for over 2 years, and haven't delivered on anything other than selling the plant for NBV. I have little or no confidence in their ability to actually do something positive that would cause the company to trade at a value > cash. Every press release tends to have a very negative tone, so something tells me they are trying either trying to active depress the stock, or are just incompetent.

3) Company losing its TSX listing, though it'll probably get onto the TSXV. There could be liquidity issues in terms of trying to buy or sell any significant number of shares.

 

Nonetheless, I'm not going to sell my shares right now. If the lawsuit gets dropped at they liquidate the company, everyone would get ~$1.80 a share, so there's a decent upside with little explicit risk.

 

Does anyone have thoughts, or am I missing the boat here?

[Potato]

I don't care for it at this point.

 

The margin of safety is not too bad with the cash, but that's also the full extent of the upside: it doesn't look like this team is going to be able to take $71M in cash and turn it into $100M of value down the road. And if they take their time making the decision, overhead will eat into that cash (looks like they are burning ~$3M/year in "business development"). They don't seem to be in any hurry to return it to shareholders.

 

It's one I've been looking in on every few months because that cash is sitting there, but never finding it cheap enough. When they do de-list, if there's more a discount on the venture then I'll be interested.

[Uccmal]

My thoughts are above.  Unchanged.  Its a really bad business model.

[Cardboard]

When we first started talking about it, net cash was around $1.50 per share and now it is around $1.80. It went up because of a profitable campaign and sale of the plant minus administrative expenses.

 

The sale of the plant was a disaster IMO. After all, they sold it to the plant manager who they likely see or talk to daily! The price of $8 million plus a potential $2 million is the worst part. You can look at the book value and say it wasn't too bad, but the plant had been written off through depreciation for a while. What counts then is earnings and it generated around $14 million in EBITDA minus maintenance Capex during the last campaign. The payment of $2 million likely bring such a campaign. So even if it runs only one campaign every 3 years, it is a heck of an investment for the plant manager and his full investment gets paid off on the first run!

 

Of course, there is remediation and all that, but this is not a landfill. It is an incinerator. So scrap the whole thing and use the proceeds plus whatever was put into the escrow account for remediation to cleanup the soil if necessary.

 

I also remain deeply disappointed by the lack of progress on their so called "transformative transaction (s)". I do believe now that the sale of the plant was key to get going on that or removing the "dirty" label. They also have $11 million in tax loss carryforwards or $0.28 a share. IMO, the latest lawsuit by Bennett could be all about trying to slow them down in order to extract some settlement. He must have smelled that they were close to something. He lost last time and a new counsel is trying again. For the lawyers there is really no downside: fees along the way, plus remote possibility of some settlement/win. I do hope that Benev will fight this and never settle.

 

So the end game IMO is some reverse take-over. Some operating company that needs to be better funded and that could use the NOL's will merge with BEV. If done right with the proper exchange ratio, BEV could turn into a really big winner. It is not rare for small caps in distress to go up 3 to 10 times in price once their issues are fixed. The only problem is that you are relying on the judgement of these people which has not been proven to date other than the Rockford deal that Second City did before and the plant sale is a big black mark.

 

I would like to think that Second City and Irwin Michael who both have major shareholdings and pretty much control are not totally stupid and will see that the remaining cash is well spent. Michael get asked about this company every time that he is on BNN, so it can't be lost on him. The incentives are well aligned to deliver for shareholders, although progress to date has been at snail pace.

 

Cardboard 

[G2]

What is Second City's reputation and how have their past investments fared on an annualized basis?

 

I'm not familiar with them and feel that is the most important factor in the evaluation of BENEV's future prospects because now we simply have a jockey bet on a shell co that holds $1.80 in cash and $0.28 in NOLs on a per share basis.

 

BEVFF traded most recently at $1.42, so 0.79x cash and 0.68x cash + NOLs.  Between $1 and $2m is generated in investment income off their cash compared to $4-5m in business development and management costs so the underlying assets will shrink at $2-$4m per year but NOLs will increase as a result which is a consolation I suppose.

 

It would be interesting to see what the City I Fund mandate is (esp its expected lifetime) because BENEV is its final current investment and City I will hit its 10-year anniversary in 10/2014 as fundraising had closed in 10/2004 and that is the average lifetime of a PE fund though many will typically continue to operate for a few more years. (http://www.altassets.net/private-equity-news/canadian-second-city-capital-partners-closes-debut-fund-on-100m.html).  So if it completed a deal in the next year it could then operate the investment for a couple years and exit by way of a sale or distribution of shares.

 

Meanwhile, I also noticed that Second City has started to deploy cash from its City II Fund (RE focus in SW and Western US) and started to raise capital in 01/2013 for the City III Fund (energy/event-driven focus) so their focus seems to have shifted into other areas and may be a further incentive to wind down City I in order to focus on the newer opportunities.

 

See their site for City II and here for City III: http://www.pehub.com/2013/01/11/second-city-capital-partners-raising-new-fund-report/

 

One other dynamic is the presence of Irwin Michael--my assumption is that he is keen to realize value on his investment and his interests are aligned with other shareholders other than Second City and I think that may lessen the likelihood of Second City simply holding onto the shell co indefinitely as a source of permanent capital for future use.

 

So I suppose my thinking is that the likelihood of a transformative deal or return of capital is quite high in the next two years based on the above qualitative factors but would love to learn more about Second City.

 

The sole question remains at what price does it represent a worthwhile opportunity?  Intuitively, I think if it drifts into the range of 0.6-0.7x cash, then it may represent an interesting, asymmetric bet.

[fishca]

To be honest, I'd have a big problem if these guys are burning $4-5M a year in "business development costs". It's literally a non-operating cash shell which only needs a part-time CEO/CFO. They can run it out of a horse stable, if necessary. I-Bankers and accountants can take care of the due diligence for any potential deals, and trading on the TSX-V (or NEX) will result in significantly lower listing fees. For the life of me, how does that cost $5M a year?

 

Even the ongoing legal costs with John Bennett couldn't cost more than a few $000's a year, if the case doesn't get thrown out in the next couple of months.

 

There is no reason for them to spend shareholder capital in such an irresponsible manner.

 

I predict that a deal will happen sooner rather than later, because these guys have had their kick at the can for two years already. Two more years to make a deal happen just sounds like they are milking the cow for everything it's worth.