QIS Update #18 2012 - July 30th 2012
Included in this update:
- Audiotech Healthcare receives going-private proposal (priced at $0.35/share)
- Dalmac Energy announces $17 million finance facility
- In the end, market will recognize value stocks
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Audiotech Healthcare Corporation (AUD:TSX-V)
Current Price: $0.32 (coverage commenced Nov. 8/04 - $0.14)
Audiotech Healthcare Corporation has announced that it has received a proposal from AHC Acquisition Inc. (AHC), a corporation controlled by Osvaldo (Ozzie) Iadarola, Audiotech Healthcare's President and Chief Executive Officer, and his family (collectively, the "Iadarola Group"), for a going-private transaction whereby AHC will acquire all of the outstanding common shares of Audiotech Healthcare (other than shares held by the Iadarola Group) at a price of $0.35 per share. The Iadarola Group currently, directly and indirectly, holds approximately 65.8% of the common shares of Audiotech Healthcare.
Pursuant to the proposed transaction, holders of common shares of Audiotech Healthcare (other than the Iadarola Group) will be entitled to receive $0.35 for each share of Audiotech Healthcare held. This represents a premium of approximately 70% to the closing price ($0.205) of the common shares of Audiotech Healthcare on the TSX Venture Exchange on July 6, 2012, the last day the shares traded prior to the date of the Proposal.
The Board of Directors of Audiotech Healthcare has established a Special Committee of the Board comprised of independent directors, being James T. Gillis and Glen Martin, the Special Committee mandated to determine whether to accept the Proposal and whether the proposed Transaction is fair, from a financial point of view, to Audiotech Healthcare's shareholders (excluding the Iadarola Group). In accordance with applicable securities laws and the policies of the Exchange, the Special Committee will retain an independent expert to prepare a formal valuation of the common shares of Audiotech Healthcare and/or a fairness opinion.
If the Special Committee recommends acceptance of the Proposal to the board of Audiotech Healthcare, it is expected that a special meeting of the shareholders of Audiotech Healthcare will be held to consider the proposed Transaction. Further details of the proposed Transaction, including a copy of the valuation and fairness opinion, will be included in the Management Information Circular to be mailed to shareholders in connection with the meeting.
It is intended that the Transaction will be effected by way of a statutory amalgamation of Audiotech Healthcare with AHC under the British Columbia Business Corporations Act. Completion of the proposed Transaction will be subject to:
- the execution of a definitive amalgamation agreement between Audiotech Healthcare and AHC;
- the approval of not less than two-thirds of the shareholders of Audiotech Healthcare voting at the meeting called for such a purpose;
- the approval of a majority of the minority shareholders of Audiotech Healthcare voting at the meeting, which will exclude votes attaching to shares held or controlled by the Iadarola Group;
- the receipt of all necessary Exchange, regulatory and third party approvals and consents; and
- the absence of material adverse changes with respect to Audiotech Healthcare.
Assuming completion of the proposed Transaction, the common shares of Audiotech Healthcare Corporation will be delisted and no longer publicly traded and Audiotech Healthcare will apply under securities legislation to cease reporting in each jurisdiction where it is currently reporting.
QIS Capital Comments:
As mentioned in the press release, the proposed $0.35 private transaction price represents approximately a 70% premium to the market price and is a 150% premium from QIS Capital’s original feature price. We have at length provided compelling evidence that Audiotech was worth significantly more than the market was giving the company credit for. We will discuss later in this QIS Update how value companies are eventually recognized, but this is just one more example of achieving an excellent return with patience in what are sometimes very boring, poor liquidity companies.
The going private transaction will likely take at least 1-2 months to finalize given the need to complete an independent evaluation, fairness opinion from the special committee, special shareholder meeting, and regulatory acceptance. Of course there are still many things that can happen which are out of our control and out of the control of management, but should the transaction proceed, those continuing to purchase shares in the $0.30-$0.32 range can still achieve a return of 9%-17%, which translates into an annualized return of 36% to 68% even if it took 3 months to get a payout.
Congratulations to those Audiotech shareholders that have purchased shares based on fundamental value and have had the patience to recognize an excellent return.
Dalmac Energy Inc. (DAL:TSX-V)
Current Price: $0.43 (coverage commenced Nov 15/11 - $0.37)
Dalmac Energy Inc., a leading provider of fluid hauling and well servicing to the energy industry, today announced that it has entered into a Commitment Letter with PNC Bank Canada Branch, (PNC), for a senior secured finance facility of up to $17 million, with an interest rate considerably lower than the company’s current loan rates.
In partnership with PNC we are substantially strengthening our balance sheet and reducing our cost of capital, stated John Beasley, CFO of Dalmac. This financing will provide the company with much greater financial flexibility to grow our business without dilution to our shareholders.
The company will use the facility to pay off its existing bank and other long term debt totaling approximately $8.4 million and will have up to $6.5 million available to fund new capital expenditures. The balance of the facility will be available for working capital. Dalmac will have the option to increase the facility to $20 million, subject to lender approval. The facility will have a four year term and is subject to a number of conditions, including completion of security documents and due diligence. The facility is expected to be in place within 30 days.
QIS Capital Comments:
Another strong value company getting recognition in means other than the stock market valuation. PNC Bank Canada has recognized the underlying value of Dalmac in providing senior secured financing which will not only decrease the cost of borrowing for Dalmac (thus increasing earnings) but will also provide funds for growth during this period of strong demand.
Dalmac is poised to announce its fourth quarter results very shortly which should have been a fairly busy period for the company. Dalmac has achieved revenues of $24.7 million and earnings of $1.9 million or $0.10 per share for the 9 months ended January 31, 2012. The company announced in June that it expects to exceed $35 million in revenues for fiscal 2012 which would translate into fourth quarter revenues of at least $10.3 million. Dalmac is presently trading at less than 3.5 times expected fiscal 2012 earnings.
Market Will Recognize Value (Eventually)
As demonstrated by Audiotech’s recently proposed go-private transaction, the market has once again provided an example where an undervalued, arguably “boring” small-cap stock has a significant share price increase due to a takeover or similar transaction. For months, Audiotech was trading in a range of $0.18 - $0.25 per share. The proposed price of $0.35/share to take the company private, represents a gain of 40% - 94% above the company’s 52 week trading range.
Another recent example of a company that had been significantly undervalued by the market prior to a takeover was WGI Heavy Minerals (WG:TSX). This stock was trading between $0.23 to $0.37 per share in the three months leading up to the takeover announcement which will occur at a price of $0.60 per share. In its most recent financial statements dated March 31, 2012, WG’s working capital position was well over $0.50 per share with negligible long-term debt. Once again, this value was eventually recognized.
In January 2012, Jite Technologies Inc. (formerly JTI:TSX-V) announced that the company was being taken over by its majority shareholder, McVicar Industries Inc. (MCV:TSX-V). In the months leading up to this transaction, Jite was trading in the $0.24 to $0.35 per share range despite having a positive working capital position of $0.65 per share and posting at least 8 straight quarters of profitable results. The takeover occurred at a price of $0.60 per share, representing a 100% premium over the share price at the time of the announcement.
More recently, general market weakness had resulted in C-COM Satellite’s (CMI:TSX-V) share price drifting down from the $0.75 range in early May 2012 to about $0.50 by July 19. This decline occurred despite a much improved Q1 (year-over-year) and a working capital position exceeding $0.39 per share. On July 24, 2012, the company announced a solid Q2, an increased working capital position and the implementation of a dividend. By the end of last week, CMI had traded back up to $0.74/share.
Similar to the situation of CMI, Titan Logix Corp. (TLA:TSX-V), an O&G service company, was trading at a 52-week high of $0.74 per share in April 2012. The stock drifted down to $0.55 by the second week of July. The company has since released stellar quarterly results that have sent the stock back up to $0.71 per share. Potentially in this same vein, Dalmac Energy (DAL:TSX-) is another junior O&G service company with its annual results due out soon. DAL was trading in the mid $0.50s in Feb/Mar 2012 and the company has already announced that revenues for fiscal 2012 ended April 30, 2012 will exceed $35 million which means that Q4 revenues will be at least $10.3 million. The company has drifted down to $0.43 per share with Q4 numbers due soon.
All of these are examples of fundamental companies that have been largely ignored by the market and which are (or were) trading at very low multiples of earnings, cash flow, sales, and/or working capital. These are exactly the kind of companies we focus on at QIS Capital and while stock market returns are not always immediate, we continue to believe that true value will eventually be recognized…
Disclaimer: This article is for informational purposes only. The information contained within this article should not be construed as offering investment advice. Those seeking direct investment advice should consult a qualified, registered, investment professional. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The company profiled assumes no liability for the information presented. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock. The author(s) owns directly or indirectly 719,500 shares of Audiotech Healthcare Corporation and 7,500 shares and 200,000 options of Dalmac Energy Inc. QIS Capital may have a financial relationship with these companies and may trade in the stocks mentioned. No stock exchange has approved or disapproved of the information contained herein. Copyright © 2003 - 2012 QIS Capital Corporation.