MCR.V - Macro Enterprises

[Patmo]

Does this company have a durable competitive advantage of any kind? I don't see one. What is to stop its returns on capital from declining to its cost of capital over the next 5-10 years?

 

Why would you invest in this company for 10 years? Let the value gap close and find something else. This company will earn 1-1.2ish a share in 2 years, the market will put a reasonable multiple on it, and you sell and move on. Basic value investing.

 

 

[Guest wc]

This appears to be an interesting company, but I have a question about the AR. Just by glancing at the trade receivables table it suggests that their clients are squeezing them. This probably explains why the stock is so cheap. Does anyone know if this is standard practice in the industry?

 

Edit: I just looked at Q1 and saw they were able to convert some of that amount to cash in Q2. Doesn't look that bad, but I would like to see more of it turn into cash quicker.

 

On the Q2 2014 earnings call management said they have no collection issues and they're on great terms with all their customers. Also said AR will continue to fluctuate greatly in the future--just a part of their business I think.

[noxalley]

Does this company have a durable competitive advantage of any kind? I don't see one. What is to stop its returns on capital from declining to its cost of capital over the next 5-10 years?

 

Why would you invest in this company for 10 years? Let the value gap close and find something else. This company will earn 1-1.2ish a share in 2 years, the market will put a reasonable multiple on it, and you sell and move on. Basic value investing.

 

Just trying to see what a DCF valuation spits out, which I use as one corroborating measure of intrinsic value. If there isn't some kind of reason for the company to earn economic profits over the long-term, then I usually assume a reversion to industry average returns on capital.

[Laxputs]

A "reversion to industry average ROC" makes investors in Macro a lot of money.

[Fat Pitch]

Just trying to see what a DCF valuation spits out, which I use as one corroborating measure of intrinsic value. If there isn't some kind of reason for the company to earn economic profits over the long-term, then I usually assume a reversion to industry average returns on capital.

 

Yeah this almost seems like a no brainer type of investment. There’s little debt and you have fixed assets that’s in demand. Throw in tailwinds from the infrastructure build out in Canada to bring their energy resources to market and you got the ingredients for out sized returns.

 

As for the intrinsic value, one does not need to run any DCF analysis since what you are paying for is almost for the liquidation value of the company. Management seems okay with skin in the game. That’s good enough for me to toss some coin at them and see what they can do. Great finding opportunities and paying for very little expectations.

 

[Andy Dufresne]

After AR ballooned in Q1 2014 I wrote a bearish post ... I want to revisit some points in light of the Q2 results:

 

1. AR has come down significantly, to 51 million; I also note that Aveda's AR grew from 14.5 mil to 35.7 mil between Q4 2013 and Q1 2014. Still it is not low IMHO - Aveda has AR of 20 mil doing roughly half of MCR's revenue, so I would expect to see AR come down at least an additional 10 mil.

 

2. Management stated it estimates the loss on the strategic project at 8 mil and that it is in talks with the customer to get some compensation - that is good. However, I wish to point out that CFO was 6 mil in H1 2014 compared to 20 mil in H1 2013, so even if we adjust for the 8 mil loss, there was still a 30% reduction in CFO so the stock losing some market cap seems reasonable.

 

3. The bank lowered the interest rate on the revolver, which could be taken as a good sign, or as neutral since even banks need to lend out their deposits in this low interest rate environment, although I do see this as a mild positive.

 

4. I am very disappointed with the massive stock dilution - fully diluted share count has gone up from 23.84 million shares on 12/31/2012 to 33.3 million shares in 6 quarters; yes, I know market cap grew quicker than the dilution and stock price is 3.26 versus 1.39 at the end of 2012 but it makes me feel very uneasy ... at least I would expect upper management to forgo their options due to their massive and expensive fixed price contract blunder, but there was nothing and I get the bad feeling that the CEO is enriching himself at the other shareholders' expense.

 

5. IMHO the company is busier building new offices than telling us how it intends to rebound - company's MD&A is underwhelming to say the least ...

 

I still think this has room to drop, especially if Q3 does not turn out well. I do hope that management stops diluting, and manages working capital better and then I think this can be a good investment but I am not convinced at the moment.

 

WOUld love to get your input on these points!

[jwfm1985]

After AR ballooned in Q1 2014 I wrote a bearish post ... I want to revisit some points in light of the Q2 results:

1. AR has come down significantly, to 51 million; I also note that Aveda's AR grew from 14.5 mil to 35.7 mil between Q4 2013 and Q1 2014. Still it is not low IMHO - Aveda has AR of 20 mil doing roughly half of MCR's revenue, so I would expect to see AR come down at least an additional 10 mil.

 

2. Management stated it estimates the loss on the strategic project at 8 mil and that it is in talks with the customer to get some compensation - that is good. However, I wish to point out that CFO was 6 mil in H1 2014 compared to 20 mil in H1 2013, so even if we adjust for the 8 mil loss, there was still a 30% reduction in CFO so the stock losing some market cap seems reasonable.

 

3. The bank lowered the interest rate on the revolver, which could be taken as a good sign, or as neutral since even banks need to lend out their deposits in this low interest rate environment, although I do see this as a mild positive.

 

4. I am very disappointed with the massive stock dilution - fully diluted share count has gone up from 23.84 million shares on 12/31/2012 to 33.3 million shares in 6 quarters; yes, I know market cap grew quicker than the dilution and stock price is 3.26 versus 1.39 at the end of 2012 but it makes me feel very uneasy ... at least I would expect upper management to forgo their options due to their massive and expensive fixed price contract blunder, but there was nothing and I get the bad feeling that the CEO is enriching himself at the other shareholders' expense.

 

5. IMHO the company is busier building new offices than telling us how it intends to rebound - company's MD&A is underwhelming to say the least ...

 

I still think this has room to drop, especially if Q3 does not turn out well. I do hope that management stops diluting, and manages working capital better and then I think this can be a good investment but I am not convinced at the moment.

 

WOUld love to get your input on these points!

 

1. A/R is a non-issue for me. Agreed the company has a large receivables, but the reality is that these guys are in the construction space and this is par for the course. Comparing to Aveda is tough because it’s a different industry with different payment dynamics (for one, they don’t have to deal with government mandated holdbacks on payments). Macro’s days sales outstanding is around 70-80 depending on the time of year. Shaving off 20% off that I would say is just about near impossible. If you want a point of comparison, Aecon in 2013 was paid in about 75 days and Bird was about 100… and these guys are general contractors (they see the money first) with much more clout.

2. Project delays impacted this as well. We probably won’t see significant improvement here until Q4. Agreed some market cap loss is reasonable – the levels we are at are not reasonable (in my opinion).

3. Definitely a mild positive I would say – I think this speaks towards their positive view towards the future and willingness to help Macro grow

4. You need to dig into how this dilution occurred – options were not the driver. At the end of 2011, share count was 23.9M and at the end of 2013 it was 29.9M. The increase was due to 3 things (options being the smallest), 1) exercising of options was 1,075M, with 0.2M shares repurchased, 2) 1.3M of preferred shares were converted, and 3) 3.7M from a convertible shareholder loan. The largest of this is obviously from the loan. From my memory (correct me if I am wrong), the company entered into the loan with the CEO when the stock was well below 0.30, paid 6.5% and had a conversion option at $1.50. He decided to convert money he loaned the company into stock when it made sense – I wouldn’t consider this enriching himself.

5. I don’t think this is fair at all. First off, the company needs a new facility for the massive amount of equipment they have purchased (these custom facilities are very difficult to find and lease, so purchasing likely makes sense) – they aren’t building a shiny new office tower downtown Vancouver. The company is 30% owned by a CEO who is not a polished Bay Street banker, but a construction worker who has built this company from nothing. More guidance would be nice, but I don’t knock him for not loving the shareholder relations side of things and just wanting to focus on building the business.

 

[yadayada]

yeah from listening to the call, I got the idea he wanted this to get over with quickly. Answering quick and to the point, and not the usual bullshit sweet talking. If you want to dillute it would help to be a bit more of a sales man though.

 

But yeah high inside ownership trumps everything. You would have to assume they are idiots, and destroy value for themselves, if you think dillution would still be a problem.

[Andy Dufresne]

After AR ballooned in Q1 2014 I wrote a bearish post ... I want to revisit some points in light of the Q2 results:

1. AR has come down significantly, to 51 million; I also note that Aveda's AR grew from 14.5 mil to 35.7 mil between Q4 2013 and Q1 2014. Still it is not low IMHO - Aveda has AR of 20 mil doing roughly half of MCR's revenue, so I would expect to see AR come down at least an additional 10 mil.

 

2. Management stated it estimates the loss on the strategic project at 8 mil and that it is in talks with the customer to get some compensation - that is good. However, I wish to point out that CFO was 6 mil in H1 2014 compared to 20 mil in H1 2013, so even if we adjust for the 8 mil loss, there was still a 30% reduction in CFO so the stock losing some market cap seems reasonable.

 

3. The bank lowered the interest rate on the revolver, which could be taken as a good sign, or as neutral since even banks need to lend out their deposits in this low interest rate environment, although I do see this as a mild positive.

 

4. I am very disappointed with the massive stock dilution - fully diluted share count has gone up from 23.84 million shares on 12/31/2012 to 33.3 million shares in 6 quarters; yes, I know market cap grew quicker than the dilution and stock price is 3.26 versus 1.39 at the end of 2012 but it makes me feel very uneasy ... at least I would expect upper management to forgo their options due to their massive and expensive fixed price contract blunder, but there was nothing and I get the bad feeling that the CEO is enriching himself at the other shareholders' expense.

 

5. IMHO the company is busier building new offices than telling us how it intends to rebound - company's MD&A is underwhelming to say the least ...

 

I still think this has room to drop, especially if Q3 does not turn out well. I do hope that management stops diluting, and manages working capital better and then I think this can be a good investment but I am not convinced at the moment.

 

WOUld love to get your input on these points!

 

1. A/R is a non-issue for me. Agreed the company has a large receivables, but the reality is that these guys are in the construction space and this is par for the course. Comparing to Aveda is tough because it’s a different industry with different payment dynamics (for one, they don’t have to deal with government mandated holdbacks on payments). Macro’s days sales outstanding is around 70-80 depending on the time of year. Shaving off 20% off that I would say is just about near impossible. If you want a point of comparison, Aecon in 2013 was paid in about 75 days and Bird was about 100… and these guys are general contractors (they see the money first) with much more clout.

2. Project delays impacted this as well. We probably won’t see significant improvement here until Q4. Agreed some market cap loss is reasonable – the levels we are at are not reasonable (in my opinion).

3. Definitely a mild positive I would say – I think this speaks towards their positive view towards the future and willingness to help Macro grow

4. You need to dig into how this dilution occurred – options were not the driver. At the end of 2011, share count was 23.9M and at the end of 2013 it was 29.9M. The increase was due to 3 things (options being the smallest), 1) exercising of options was 1,075M, with 0.2M shares repurchased, 2) 1.3M of preferred shares were converted, and 3) 3.7M from a convertible shareholder loan. The largest of this is obviously from the loan. From my memory (correct me if I am wrong), the company entered into the loan with the CEO when the stock was well below 0.30, paid 6.5% and had a conversion option at $1.50. He decided to convert money he loaned the company into stock when it made sense – I wouldn’t consider this enriching himself.

5. I don’t think this is fair at all. First off, the company needs a new facility for the massive amount of equipment they have purchased (these custom facilities are very difficult to find and lease, so purchasing likely makes sense) – they aren’t building a shiny new office tower downtown Vancouver. The company is 30% owned by a CEO who is not a polished Bay Street banker, but a construction worker who has built this company from nothing. More guidance would be nice, but I don’t knock him for not loving the shareholder relations side of things and just wanting to focus on building the business.

 

jwfm1985

 

Thanks for your input. I know that the exercising of the conversion option on the preferred shares was the main driver for the dilution and still is - 90% of the potential further dilution comes from them. I am worried for two reasons - first, the additional stock options that are not likely merited given poor, value destroying projects. More importantly, the company had more than 24.5 million dollars in CFO for FY2013 yet it retired not ONE preferred share!!!!

 

Here is what the latest quarterly report states:

 

"The preference shares are entitled to preferential cash dividends of 6.5% per annum, payable quarterly in

arrears. Each preferred share is convertible into 666.67 common shares of the Company at the option of the

holder at any time, implying an effective conversion price of $1.50 per common share. The preferred shares

are redeemable at the option of the Company, in whole or in part, on not more than 60 and not less than 30 days

prior notice at a redemption price equal to $1,000 plus any accrued and unpaid dividends. Payment will be

made by issuing Common Shares at 95% of the weighted average trading price for the prior 20 days. "

 

The share price has been above 5 dollars for long stretches of time over the past year and 6.5% is not the cheapest financing given the company's other sources (P+1% now and P+1.5% which is miles away from 6.5%) - why were none of the preferred shares retired? Even after all payments the company had an increase in cash of over 13 million dollars for FY 2013 - would it not be in the best interests of the company to retire this debt when share price was reasonably high and ensuing dilution smaller and then proceed to buy a similar amount of shares on the market?!?

 

I'm not saying Miles is a crook - nothing like it, but this leaves a BAD taste in my mouth and says very poor things about the BoD and their capital allocation skills.

 

In any case, thanks for making me dig deeper into my thinking :)

 

 

 

 

[noxalley]

Are current pretax margins (roughly 10%) representative of full cycle margins, or is it a cyclical high? Hopefully someone whose knowledgeable about this industry can help me out. There was an article linked to earlier in this thread that the industry in Canada is in the midst of a "supercycle." I apologize if this was addressed earlier in the thread; I didn't see it mentioned explicitly.

[Laxputs]

10% drop today.  Recent data of Chinese slowdown and perhaps this: http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/petronas-threatens-to-call-off-10-billion-bc-lng-project-report/article20783049/

[investor-man]

ugh... I am taking a beating across the board this month.

[cameronfen]

I don't think the Petronas threat is a big deal.  There are 13 proposed LNG terminals and only 2-3 will get approval.  The construction data is based on 2-3 getting approval anyway too.  The fact that one player is maybe pulling out probably doesn't effect long term plans.  I think it's time to back up the truck on this one. 

[Guest 50centdollars]

Petronas is bluffing. Although, I agree with what they say about CDN politics.

[Guest 50centdollars]

Anyone buy under $3 today?

[jwfm1985]

Anyone buy under $3 today?

 

Tied up all morning and kicking myself now unfortunately

[Fat Pitch]

Anyone buy under $3 today?

 

Tied up all morning and kicking myself now unfortunately

 

I added to my position. I’m just wondering what the person who was selling knows… It’s not like we need LNG to happen at these prices.

[jwfm1985]

Anyone buy under $3 today?

 

Tied up all morning and kicking myself now unfortunately

 

I added to my position. I’m just wondering what the person who was selling knows… It’s not like we need LNG to happen at these prices.

 

It's not huge volume so I'd suspect it's panicked selling after all this LNG posturing...

[doc75]

Ah, I love the smell of Friday after-market dilution:

 

http://finance.yahoo.com/news/macro-enterprises-inc-announces-grant-231353983.html

 

An extra 1.5M shares at $3.35.  Pretty hefty in my opinion.  This is definitely cheap, but I share Andy's early concerns regarding management not acting in the best interest of all shareholders.

 

 

[Guest 50centdollars]

Ah, I love the smell of Friday after-market dilution:

 

http://finance.yahoo.com/news/macro-enterprises-inc-announces-grant-231353983.html

 

An extra 1.5M shares at $3.35.  Pretty hefty in my opinion.  This is definitely cheap, but I share Andy's early concerns regarding management not acting in the best interest of all shareholders.

 

 

 

Shit like this does piss me off. I bought some yesterday under $3. This dilutes Frank 33% ownership too.

[investor-man]

Ah, I love the smell of Friday after-market dilution:

 

http://finance.yahoo.com/news/macro-enterprises-inc-announces-grant-231353983.html

 

An extra 1.5M shares at $3.35.  Pretty hefty in my opinion.  This is definitely cheap, but I share Andy's early concerns regarding management not acting in the best interest of all shareholders.

 

 

 

Shit like this does piss me off. I bought some yesterday under $3. This dilutes Frank 33% ownership too.

 

I disagree. This is comforting. Nobody likes dilution, but this shows that management is thinking the same thing we are: this company will double or triple in value over the next 5 years. The options aren't exerciseable until 2019. Management wants to incentivize key employees to stay around and not jeopardize the opportunity that lies in front of them. Yeah it would have been better if they had bought the stock in the open market, but it's not that much stock. I'm not concerned -- in fact happy to see this.

[doc75]

Ah, I love the smell of Friday after-market dilution:

 

http://finance.yahoo.com/news/macro-enterprises-inc-announces-grant-231353983.html

 

An extra 1.5M shares at $3.35.  Pretty hefty in my opinion.  This is definitely cheap, but I share Andy's early concerns regarding management not acting in the best interest of all shareholders.

 

 

 

Shit like this does piss me off. I bought some yesterday under $3. This dilutes Frank 33% ownership too.

 

I disagree. This is comforting. Nobody likes dilution, but this shows that management is thinking the same thing we are: this company will double or triple in value over the next 5 years. The options aren't exerciseable until 2019. Management wants to incentivize key employees to stay around and not jeopardize the opportunity that lies in front of them. Yeah it would have been better if they had bought the stock in the open market, but it's not that much stock. I'm not concerned -- in fact happy to see this.

 

Ummm...  Isn't the press release pretty clear that the options are exercisable *until* 2019? 

 

The problem I have with these options grants it that they usually go to pad the pockets of the people who already have made a killing.  If I had some certainty that the options were going mostly to non-management folks then I'd be much happier with the deal.  And does management really need more incentive here??

 

In any case, the float is 30M, so 1.5M is quite a lot in my opinion.  This is particularly egregious coming after such a precipitous drop. The stock was trading over $5 until July, and these options would've been in the money no more than 2 weeks ago!  Instead of open market purchases, we saw insider selling over $5 and options grants at $3.5.  They are treating themselves very kindly.  I haven't done any computations, but a 5 year $3.5 strike option  on a $3 stock with this volatility is pretty valuable, no?

 

It's not like this is uncommon.  It happens all the time, particularly for companies on the TSX-V.  Still smells.  It's not like these guys are hurting -- $600-700K per year cash in salary/bonus.

[Patmo]

Ah, I love the smell of Friday after-market dilution:

 

http://finance.yahoo.com/news/macro-enterprises-inc-announces-grant-231353983.html

 

An extra 1.5M shares at $3.35.  Pretty hefty in my opinion.  This is definitely cheap, but I share Andy's early concerns regarding management not acting in the best interest of all shareholders.

 

 

 

 

Shit like this does piss me off. I bought some yesterday under $3. This dilutes Frank 33% ownership too.

 

I disagree. This is comforting. Nobody likes dilution, but this shows that management is thinking the same thing we are: this company will double or triple in value over the next 5 years. The options aren't exerciseable until 2019. Management wants to incentivize key employees to stay around and not jeopardize the opportunity that lies in front of them. Yeah it would have been better if they had bought the stock in the open market, but it's not that much stock. I'm not concerned -- in fact happy to see this.

 

I thought they were only exercisable UNTIL 2019, not after. I'm not concerned about this either anyway, there's 30mil shares out right now so this seems reasonable to me so long as it doesn't happen every 3 months. I'm quite content that everybody participate in the wealth that they will create.

[Fat Pitch]

Ah, I love the smell of Friday after-market dilution:

 

http://finance.yahoo.com/news/macro-enterprises-inc-announces-grant-231353983.html

 

An extra 1.5M shares at $3.35.  Pretty hefty in my opinion.  This is definitely cheap, but I share Andy's early concerns regarding management not acting in the best interest of all shareholders.

 

 

 

 

Shit like this does piss me off. I bought some yesterday under $3. This dilutes Frank 33% ownership too.

 

Yeah this looks to be about 5% dilution to shareholders. If I had a cost basis of $5+ I would be extremely pissed. Then again this is cigar butt investing at its best.

 

Another way of looking at it if we want to be cynical is we might have a decent quarter coming up... why else would they grant these options now?  ::)

[yadayada]

I think you gotta look at fundamentals here. It is barely affecting fundamentals. And it is unlikely you lose money on this. You gotta give each piece of information the right weight. And I would not put much weight in this. And since management owns a sizable stake, I trust they will do their best to good value for shareholders.