Description
For those interested in micro-caps, here?s an idea. For those who find PYSU too illiquid or small, consider buying the whole company (pocket change anyone?). PYSU is a western U.S. based regional paint and coatings company selling at a shrimpy fully diluted 5 P/E, 2x operating cash flow and .22x sales.
PYSU specializes in low VOC (volatile organic compound) coatings that reduce the amount of pollution that is generated during the manufacturing process of OEMs in the furniture and home building businesses. Increased government regulations regarding the amount of VOCs which manufacturers can emit has helped PYSU gain market share with its specialty low VOC products. An example of a wood stain customer is the Rainbow Play Systems (those redwood backyard jungle gyms).
What?s to like about PYSU:
1) The company has grown sales at an annual rate of 24% over the last five years from $4.9mm in 1997 to $14.6mm in 2002. (Growth was actually down 5% from ?01 to ?02, yet they have reversed the decline and are growing again, albeit, at a much slower pace).
2) All sales have been organic with the exception of one strategic acquisition of U.S. Cellulose which had sales of approximately $3.0mm.
3) Shareholders equity has grown from a negative $1.1 mm in 1997 to a positive $4.9mm in 2002. (Tax loss benefits have helped considerably).
4) Company has delevered balance sheet paying down approximately $1.8mm of capital lease obligations, a bank credit facility and severance obligations (which came with an acquisition) and today sits with $700,000 net cash.
5) Within the next twelve months company will further delever balance sheet by paying down $300,000 in capital lease obligations and severance liabilities that will leave the company with minimal long term liabilities.
6) Company has demonstrated ability to make successful strategic acquisitions. US Cellulose was purchased in 1999 for $1mm which had approx $3mm in sales. Three of four USC facilities were closed down, employee count reduced, all manufacturing was consolidated in PYSU?s existing state of the art plant in Chico, CA and company gained additional distribution channel into retail segment.
7) Current state of the art facility (fully automated) has capability to produce approximately 5 million gallons of product, or about $50mm in revenue with minimal capital expenditures associated with new growth.
8) Company is expanding customer base. Company just landed a potential $1 million customer this past September.
9) Proprietary low VOC coating products geared towards increased government environmental regulations for OEMs.
10) Share repurchase plan in effect.
11) Company has approximately $800,000 remaining of deferred income tax assets.
Here are the numbers: (All based on fully diluted shares)
Fully diluted shares: 10,075,383
TTM sales: $14.7mm
Market Cap: $3.2 mm
EV: $2.5mm
Cash (as of 9/02): $1.2mm
Debt (as of 9/02) $500,000
TTM EPS: $.06
TTM EBITDA: $1.1mm
EV/EBITDA: 2.27
P/E: 5.3
TTM OCF: $1.5mm
TTM OCF Multiple: 2.1
TTM D&A: $305,320
TTM Cap-Ex: $157,891
6 months to date cap-ex, (ending 9/30/02) has been larger than normal ($126,000) due to one time expenses associated with a new computer and software system as well as capital improvements at a newly leased 24,000 square foot sales and technical facility in Ontario, CA. According to management, normalized annual cap-ex is around $100,000.
One thing to keep in mind is that the cash flow has been positively impacted by tax benefits. This will change as the profitable operations utilize all future benefits. However, without the tax benefits and no additional sales, it is reasonable for PYSU to generate $800,000 in free cash flow (.08 cents per share) as a result of having lower capital expenditures as well as lower severance and capital lease obligation payments.
What?s PYSU worth?
According to management, the coatings industry is consolidating (10 companies now account for 80% of the business) and sales have been in the 6 to 8x EBITDA range or .8 to 1.5 x sales. At 6x EBITDA PYSU is worth $10.8 mm. At .8x sales PYSU is worth $12.6mm. Using the lower valuation ($10.8mm) and slicing it by half, a conservative valuation of $5.4mm, or twice its current EV seems reasonable.
Management has done an extremely good job with growth, running operations and paying down debt. One blemish is that management repriced options recently at .26 cents. As bad as this may be, the company actually reduced the number of options from 2,426,397 (priced between .53 and .78) to 816,719 because it wasn?t a one for one repricing. Even with the options now being in the money, PYSU is a compelling investment.
Catalyst
Debt reduction, NOL utilization, continued value creation, and ultimately value recognition