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It is sometimes hard to make big money investing in BDC's because even though the dividend payouts are generally large, the price appreciation can be painfully slow. That is why when a special situation appears in the BDC world, we should take a look.
CPTA just reported Q2 numbers, and the initial reaction by the street was negative and why not. Both earnings and book value (NAV) were down (again) from the previous quarter.
Earnings were down to $.33 per share from $.37 in Q1. But NII really had to be down because in early Q2, CPTA issued 3.5 million new shares, a 27% increase in the share count which puts a lot of pressure on Earnings per Share. If would have helped if CPTA could have immediately invested the $64 million they received from the stock offering, to offset the new shares with new NII, but that is never the way it works. They did get it all invested by the later part of Q2 which will be a big boost to Q3 NII.
The book value dropped by $.40 per share being impacted by unrealized losses of $16.2 million. But $15.8 million of that was simply from the reversal of $15.8 million in unrealized gains as required by GAAP accounting. That reversal occurred because CPTA recorded $15.8 million in realized capital gains in Q2($.99 per share) from the sale of positions in Boot Barn($7.7 million), Corporate Visions($7.1 million), and KBP Investments($0.9 million). And remember, that $.99 per share, or some portion of it, could in time wind up in the shareholders pockets.
There is nothing new about all of the above as CPTA has presented the investment world with lower earnings and lower book for several quarters now and the stock price has reflected that. We should also note that at the same time, the Company has been paying lots of money to its stockholders in the form of dividends, which the stockholders get to keep forever. So if stockholders can now see the stock price rise while still collecting the generous dividends, we will get to the promised land.
Stockholders need to see a couple of things happen to make that wish come true. First, the monetization program must end or slow down to preclude any further "unrealized gain" reversals. That will allow the book value to resume its growth or at least stabilize, depending on other factors. Second, the NII must grow to cover the basic dividend, because that is what both the Company and stockholders want. The total dividend (regular plus extra) is now being so well covered by NII and Net Capital Gains, that extra dividends may come our way this year or next. In the first six months of this year, CPTA paid out $1.14 in dividends while earning $2.44 in NII and Net Capital Gains. Remember, they must pay out NII (Net Investment Income) and NCG (Net Capital Gains).
So can the Company boost NII to cover the dividend in a reasonable short period of time? In Q2, as previously mentioned, CPTA invested all $64.1 million from the equity offering in the second half of Q2. That money is all postured to grow NII in Q3. Also in Q2, CPTA received $20 million from non-income producing equity investments and reinvested it in interest bearing securities. Year to date the Company deployed about $219 million yielding 12.4%. Q2 was a strong deployment quarter and Q3 is shaping up the same way with $49 million invested so far with a robust pipeline of several hundred million dollars. And from the CFO: "The execution of our strategy to rotate out of equity and into debt, coupled with the investment of the equity offering proceeds during the second quarter, positions the Company well for future growth in NII per share in the second half of 2015. Managements highest priority is to cover regular distributions with NII." From the CEO: "Now that we have completed this equity rotation over the past few quarters, management is very optimistic about NII for the final two quarters of 2015".
Has CPTA sufficiently curtailed the monetization program so that NAV can stabilize and grow? On the CC the CEO said: "Effectively completed the monetization program", and,
"The monetization of Corporate Visions last quarter effectively completed our rotation out of equity securities and into yield".
Keep in mind that CPTA is not out of equity holdings even though their plans to monetize these holdings has diminished. The cost bases of their current equity holdings is $54.6 million. These same holdings have a market value of $82.8 million. Also, new investments keep on coming with equity positions.
So CPTA appears to have reached the point where the coming quarters can finally show growing NII and better NAV. So far, since the CC, I have seen just three broker analysts (Oppenheimer, MLV & Co, and Deutsche Bank) comment on CPTA. They have lowered their target prices (which was expected with the lower Q2 book and lower earnings) but all three reiterated their "Buy" ratings. Oppenheimer said: "Bumpy quarter but solid outlook and great value".
A poster on this board, following the Q1 release, posted the Barclay report on CPTA. Could you please do that again for Q2. I ask because the Barclay estimates were very close to the actual CPTA Q2 results. If you are uncomfortable posting the entire report, perhaps you could post the new Barclay forward estimates. Thanks.
Speaking of value, at a $15.00 share price, CPTA is selling at a price to book of .836 with a dividend yield of 12.53% (without the $.05 extra through December), and 16.53% with the extra. Total Return estimate will have to wait until we get the new average target price from the many analysts. Since last Friday, the average target price has dropped from 19.65 to 19.05. However, if the average target price drops from the current $19.05, say down to $18.50 (as more analysts report), the total return would still be a compelling 39.86%. At last count, of 11 analysts, 10 had a "Buy" with 1 "Hold". That is almost a unanimous positive vote.
So with CPTA we have a company that has been severely penalized because they chose to implement a monetization program and also chose to do a follow-on stock offering. The monetization program hurt NAV and the follow-on temporarily hurt NII per share. The Company has now turned to normal operations with plenty of investable cash and a strong pipeline, and is committed to rapidly grow NII and is postured to stabilize and grow NAV . At the same time, the CPTA stock price is very undervalued relative to dividend payout. The CPTA dividend yield of 16.53% compares with the BDC Industry average yield of 10.3%, and CPTA may have some extra payouts coming down the road.
Finally, today, John McGlinn, the Chief Operating Officer, bought 3410 shares at $14.65 per share. He now directly owns 74660 shares.
Just one opinion.
Jan
To t2four4:
Yes, the SLRC 6.75% senior notes (Symbol SLRA) are higher on the SLRC capital structure, but if an investor is confident in the SLRC management team why not take the much higher dividend yield of the common over the interest yield on the notes. We buy BDC's for the high dividend yields coupled with the expectation of capital gains from an increase in price of the stock. Just my opinion.
To all:
On an unrelated subject, I put some words on TCPC over on the Yahoo board if anyone wants to go over there and take a look.
Also I looked at the four new BDC's that recently came public in the last three months and considering size, investment advisor, underwriting team, initial dividend declaration, pro forma price to book, etc., I found WhiteHorse Finance (WHF) to be most interesting. And this morning, five analysts came out with initial coverage on the stock. They were all "buys" and the target prices averaged $15.90. (stock is at $14.75). If anyone is interested I can tab the ratings of each analyst and each target price.
Happy New Year.
Jan
Concerning the acquisition of Crystal Financial by SLRC, it is difficult to evaluate the buyout because Crystal is a private company and we know little about the terms of the merger and less about the Crystal portfolio of investments. So judge carefully my comments that follow.
On the other hand, Mike Gross (CEO) and Bruce Spohler (COO) have proven track records and both have been in the leveraged lending business for twenty five years. We have to believe this buyout will serve SLRC well.
We think we know that SLRC will pay the $275 million acquisition cost from available liquidity including draws on its credit facility, possibly increasing its total borrowings to about $526 million or a debt to equity ratio of around .60 from the recent .28. Note that one analyst suggested that SLRC could add about $.10 per share to its' quarterly NII if it increases its debt to equity to .65.
Also, in the news release, SLRC said: "Solar Capital expects its investment in Crystal Financial to generate a cash yield consistent with other assets in its portfolio". The words "cash yield" may have a primary affect on the "investment income" level, while the "investment cost" levels between SLRC and Crystal may differ somewhat. The operating costs could be higher at Crystal, but also could be lower. So we may not be able to say that the NII brought to SLRC from Crystal will be brought at the same rate of return that SLRC earns NII. Nevertheless, and because Crystal earns higher loan yields than does SLRC, I am going to present some numbers which assume Crystal can deliver NII to SLRC at the same return rate on portfolio size. Because this may not be the case, I will call it the "maximum maybe" theory.
We know that in Q3, SLRC brought 1.9% of the loan portfolio value to NII. ($22.258 million NII divided by $1171 million portfolio value = 1.9%). If the $400 million Crystal loan portfolio brings a similar 1.9% to NII, it will add $7.6 million to the quarterly NII ($400 million x 1.9% = $7.6 million) or about $.20 on a F/D 38.7 million shares. Using the SLRC current price of $23.66, the dividend yield with a $.80 quarterly dividend is 13.52%. To match the recent run rate average yield (10.5%), the stock would have to move up to $30.48 or 29% higher than $23.66.
But let's switch from the "maximum maybe" theory and get conservative and say that SLRC will add just $.10 per share from this merger and in time increase the dividend by $.10 to $.70 per share. Then the yield based on the current price of $23.66 would be 11.83% ($.70 x 4 divided by $23.66). More importantly, if the stock price moves up to reduce the SLRC dividend yield to its average run rate (again 10.5%) then the price will have to advance to $26.67 ($.70 x 4 divided by .105) or 12.72% above the current $23.66. That kind of a potential capital gain coupled with a ten per cent plus dividend yield, will make for an extraordinarily attractive investment.
I find a great deal of comfort with the positive aspects of this acquisition when I read things from the SLRC news release like:
a) Solar Capital expects the acquisition to be immediately accretive to NII.
b) "We expect that our Crystal Financial investment will move us toward our target debt-to-equity ratio while increasing Solar Capital's net investment income."
c) Solar Capital expects its investment in Crystal Financial to generate a cash yield consistent with other assets in its portfolio.
Also, following the news release, Ladenburg Thalmann reiterated their "Buy" rating and increased the target price from $23.50 to $25.00.
Evercore Partners, while reiterating their "Overweight" rating and increasing their 2013 earnings estimate to $2.55 per share, made the following comments:
a) Large Accretive Deal Supports Dividend Growth.
b) The deal will 1) increase leverage to enhance SLRC's profitability; 2) be accretive to earnings immediately; 3) support our above-consensus NII estimates; and 4) indirectly diversify SLRC's investment portfolio towards senior secured lending from a sub debt focus.
c) Crystal is an asset-based lender to private middle market companies, but commands higher than normal yields due to its market focus and structuring.
My notes to the Evercore comments: 1) The FY 2013 $2.55 estimate takes into account the cost of the November $100 million note offering and includes the effect of a Evercore projected equity offering in 2013, an equity offering which may or may not happen. 2) If Crystal indeed commands higher than normal investment yields, that may lend some support the "maximum maybe" theory of the earlier paragraph, which does not include an equity offering in 2013.
We should also remember that not only does this acquisition provide a significant, immediate thrust to the growth of SLRC, but the pre-acquisition growth strategies of SLRC are still in place, and are now enhanced by a meaningful new, continuing (and hopefully growing) income stream from Crystal.
All of this good stuff may take a quarter or two since there may be some onetime costs associated with the acquisition. We will know more as more details of the terms are available. But if the above valuations are near correct, we as investors have been handed a nice year end gift. And because details are lacking, and the market place cannot yet grasp the full impact of this buyout, the stock price may not yet reflect what is occurring. Therefore, it is a gift that may keep on giving well into the future. In the meantime, we will continue to collect a handsome dividend while the rest of the world gradually comprehends the value of this acquisition.
Just one opinion, as always.
Jan and The Shadow.
Never forget, "The Shadow Knows".
mthiker2004,
Correct me if I am wrong, but the $145 million debt absorption by SLRC is a liability addition to the balance sheet and is a productive liability because it is that debt that helped fund the loans issued by Crystal which in turn produce the NII and subsequently the dividends. The actual cash outlay by SLRC for this acquisition is $275 million and they have plenty of dry powder to pay that $275. Now, in the accounting world there may be an adjustment to the income statement to get that liability on the SLRC balance sheet, but given the growth to SLRC this acquisition will provide, we shouldn't be too bothered.
I have been doing a few numbers with what little information we have, and this looks like a sweet deal to me.
Jan
mthiker2004,
How did you come up with the cost of the Crystal aquisition of $420 million?
Jan
mthiker2004,
I also recall the discussion, several quarters ago, concerning the practice you refer to. However I have not heard anything or read anything suggesting this borrow/payback strategy is being done on a continual basis. I would think this is the kind of thing the professional analysts would jump all over if it was being done at the expense of the stockholders. Additionally, such a practice may not be totally transparent to us, but would certainly be visible to the accountants. I would like to think that fiduciary responsibility alone, of management to its' stockholders would preclude any excesses in this type of activity. But I really don't know.
Thanks for your comments.
Jan
Since we are approaching the SLRC x-dividend date I thought it might be time for a follow-up to my Oct. 18th post. At that time I suggested SLRC might be one of the most attractive BDC's for the months ahead. In my judgment, that continues to be the case.
In the recent Q3, SLRC reported NOI of $.60 per share which was the best since Q1 of 2010 when they had 32.5 million F/D shares outstanding versus 37 million at end of the latest quarter. That $.60 NOI covered the Q3 dividend and the Company said the Q4 NOI will also cover the Q4 dividend. The street NOI consensus quarterly estimates for the next five quarters are all at $.60 or higher.
NAV advanced over both the previous quarter and the year ago quarter. Realized Gains and Unrealized Gains were both positive. Despite record portfolio growth in Q2 ($186 million net growth), Q3 saw negative portfolio growth as prepayments and exits exceeded originations as loan markets tightened. There is nothing too disturbing here as we know the origination of new loans can be lumpy and the schedule of loan closures can be difficult to predict. Also, tightening markets require more discipline when evaluating new loans. The portfolio credit quality remains strong. Over 98% of income producing assets are performing, and the two remaining loans on non-accrual status are expected to come off of non-accrual in this current quarter. The pipeline is healthy and SLRC has plenty of dry powder to fund whatever opportunities that pipeline presents.
Here are a few SLRC numbers with comparisons to the BDC peer group. Using a recent close of $22.87 per share, the current dividend yield is 10.5% versus the BDC peer group median of 9.4%. The price to NAV is 101% versus the peer group median of 107%. The potential total return (dividend yield plus capital gain to the analysts' consensus target price) is 20.78%.
In my last post I talked about the catalyst to drive the SLRC price higher in time. On this post, I will re-visit that concept but with a slightly different approach. At the end of Q3, SLRC had some $322 million available for new investment against a portfolio value of $1171 million. So there is lots of portfolio growth coming which will eventually result in earnings/dividend increases. Their debt was running at a low .28 of equity versus an industry average of .55 debt to equity. One of the industry analysts calculated the quarterly earnings potential if SLRC ran its' portfolio at a .65x debt to equity ratio, which is the SLRC stated target. That earnings potential calculated out to upwards of $.70 per share, per quarter. That is a nice advance from the current quarterly NOI.
It is sometimes helpful to get from the analyst community a valuation of SLRC management. The analyst community I refer to are the major brokerage firms and not the letter writers or the amateur analysts who populate the internet. Since the last SLRC earnings release I have seen reports or excerpts from four analysts. Their general comments below may give us some reassurance that as investors, we have a competent partner in SLRC management.
a) "SLRC is managed by a quality team"
b) "We continue to like SLRC and view management team as strong"
c) " We expect that as the company adds additional leverage SLRC should be able to expand its NII and grow the dividend"
d) "Solar Continues to Shine: We continue to view SLRC as one of the most appealing mezzanine strategies in the BDC space given our outlook for opportunistic portfolio growth over time, along with book value upside."
So what we have in SLRC is an experienced management team committed to investing in recession resilient, stable companies that can generate cash flow and reduce leverage throughout an economic cycle. We also have a Company generating an exceptional current dividend yield, selling at a price to book well below its' peers **, and positioned to deliver a high total return when coupling the dividend yield to the potential stock price movement. But most importantly, SLRC, with its' large amount of available investment capital and low leverage profile, is poised to ramp up the quarterly NOI and dividend amount thus giving us some forward looking comfort. This forward visibility coupled with the historical stable performance, makes SLRC an attractive BDC. It's the kind of stuff we look for as investors.
** Peer group consists of those BDC's with a market capitalization of $500 million or more.
Note 1 : For those of you who may wish to capture the coming $.60 dividend, the x-date is 12-18-12 which is just around the corner. An investor must buy/own the stock prior to that date. Buying the stock on 12-18-12 will not get that dividend on those new shares.
Note 2 : Should SLRC, in time, pay a $.70 quarterly dividend, the dividend yield based on the current price and a $.70 dividend run rate would be 12.36% and there currently is just one other BDC (a small BDC well out of the peer group) that returns that level of dividend yield.
Note 3 : If the SLRC stock price advanced to match its' current 10.5% dividend yield while paying $.70 quarterly, the stock price would go to $26.67 per share which is 16.6% higher than the current price. That may be why two analysts have the SLRC target price at $27 per share and a third analyst has a target of $26.50. The report I saw from one of those analysts has NOI quarterly estimates as follows: 2012 Q4 $.60; 2013 $.60, $.62, $.62, $.64; and 2014 $.65, $.66, $.68, $.71.
Note 4 : We haven't talked about institutional ownership of BDC stocks but I am aware of one firm that does track this metric and SLRC ranks 6th highest of 33 BDC's monitored for institutional ownership.
Note 5 : All of this is just my opinion but I do get the help from "The Shadow" and he knows everything.
"Who knows what evil lurks in the hearts of men? The Shadow knows!"
Good Hunting to you all and happy holidays.
Jan
jackmaster20,
After reading your last couple of posts I concluded you put a lot of thought into your work and that is a good thing. But we have some differing opinions. For example, DS Waters is not on "non-accrual" status and the preferred stock position and its' PIK income (resulting from the re-structure), is not particularly troubling because the previous DSW notes were also PIK. So the current PIK income status of the DSW position has little to do with SLRC's ability to pay its' current $.60 dividend. It has always paid its' dividend from taxable income (no return of capital) and expects to continue to do so regardless of the old PIK income or the new PIK income from DSW. SLRC is not paying a "Phantom Dividend". Yes we would prefer NON-PIK to PIK income, but we have what we have. Current indications are that DSW is performing in line with current expectations and is increasing revenues. We may have to wait longer for payment of the PIK funds, but we could have even a bigger payday if SLRC monetizes that loan in the near future as they suggested they might do when conditions permit.
Also, and as you point out, Granite and Direct Buy are on non-accrual. But they both should be back to accrual status this quarter. But to assume these two will go on PIK status after the re-structure is tough to justify. Neither was on PIK to start with. SLRC has not suggested they are going on PIK and none of the analyst comments I've heard or seen have hinted at PIK status for these two investments. In fact, SLRC has said that Granite Global will pay interest in Q4 as it comes off of non-accrual which tells us it is not headed for PIK status.
In any event, thanks for your work. It has inspired additional activity on this board. I continue to have a very good feeling about SLRC and I will convey that sentiment by updating my October post.
Just one opinion.
Jan
I can understand the concern about the future of SLRC portfolio company DS Waters. AINV got into difficulty when one of its very large holdings, Innkeepers USA Trust, went on non-accrual, and subsequently entered Chapter 11 bankruptcy in July of 2010. InnKeepers exited bankruptcy 15 months later. I am not sure AINV has fully recovered from that mistake. But there is little evidence, at this point, that DSW is an "InnKeepers".
I have not tried to quantify the affect on SLRC's NAV or earnings should DS Waters get into serious trouble because I don't think DSW is in any real trouble. Yes, DSW had to refinance the maturing debt, and because they gave up a lot to get the new package, things were obviously not as smooth as one would hope for. But the refinancing is done and DSW is moving forward. DSW is a big Company. It has been around a long time and appears to have stable and improving operations, and it has a strengthened management team. One could take the worst case (total loss) and get a rough estimate of the affect on SLRC NAV by taking the current fair value of the DSW investment and dividing that number by the SLRC shares outstanding. Earnings would be a bit more difficult because we have to consider both the forward losses to NII (PIK is an income statement item even if not yet collected) and the realized capital loss. But, in my judgment, DSW is a survivor and SLRC will monetize that investment sooner than later, and on favorable terms. So even though vigilance is appropriate, to speculate on DSW's demise at this point, may not be very realistic or productive.
Also consider this. SLRC is expected to deliver one of its best quarters (in Q2) from a portfolio growth standpoint. Not only should this performance subsequently result in increased earnings, but it will also reduce the concentration risk of the DS Waters holding in the portfolio.
To editorialize a bit, I think too many folks are too concerned about the risk involved with investing in BDC stocks. During the 2008 market collapse, BDC's were under price pressure as were most other companies. But not one BDC filed for or went into any bankruptcy chapter. Yes, there were take over mergers (ARCC bought ALD; PSEC took out Patriot Capital), and there were restructures (GNV to SAR and HCD to non-BDC HCF), and four withdrew from BDC status (KED, TTO, UTK, and MACC). All BDC's survived either in a different format or as part of another company. None caused a total loss to their investors as did so many other non-BDC companies.
So from a safety standpoint, what have BDC's got going for them?
1) BDC portfolio companies often have two sets of management teams. One is the management team that runs the portfolio company and the second is the BDC managers themselves or the sponsor managers for sponsored loans. That is a lot of brain power.
2) leverage is limited by regulation. A high debt structure can become a difficult burden. The BDC's debt to equity restrictions do not permit the BDC's to accumulate excessive debt.
3) Because of the high dividend payments, BDC's tend to recover from down periods faster than most. And the high fixed income provided by the right BDC's, makes it much easier to ride through economic and stock market downturns.
4) Yes, BDC's invest in younger companies and younger, smaller companies are often considered more risky companies. But not only do these portfolio companies have advisory help (see item 1 above), but the BDC's themselves have numerous companies in their portfolios representing a variety of industries. SLRC has 34 of them. And these portfolio companies sell a huge variety of products to countless customers. So no one product failure or even a particular industry slowdown, will be that troublesome for a BDC. If one believes in diversification, BDC's are your game.
Like any other industry, you must pick the right BDC. There are 37 of them out there and many are not worthy investment candidates. There are those which are very small and go nowhere. Some have had erratic operations with many dividend cuts. Others fail to demonstrate an ability to grow or grow at a very slow pace. Some pay no dividend at all which tend to defy the BDC model.
On the other hand, there are many fine BDC's out there. For example, PNNT is solid and steady and has never cut the dividend. ARCC may have the best management team in the BDC industry. At present my two favorites for near term appreciation are (a) SLRC because of its' high dividend yield and because its' current quarter is off to a great start and (b), MCC because of the recent strong increase in the quarterly dividend and because management has effectively said that Q2 will show increased earnings and an even bigger dividend.
One way to make money with BDC's is to find a new, young, well managed BDC and invest in it as the Company puts its new IPO funds to work thus setting the stage for increasing earnings and increasing dividends. Note that a new/young BDC does not necessarily mean a new/young company. Many firms convert from a different structure to the BDC structure and bring with them existing portfolios and lots of experience. One such entity is TCPC (IPO on April 4th). It is about to issue its first quarterly report, and has already declared its first quarterly dividend of $.34. The prospectus is available on the SEC web page. The quiet period is about to end so we should see a lot of comments from the various analysts. There were ten brokerage firms in the underwriting/selling group. We will learn much more about TCPC in the coming week.
Well, I have gone on long enough. Good hunting to all. And, as usual, all of the above is just one opinion.
Jan
The recent quarterly SLRC news release made for good reading and the CC made for good listening. Any concerns about the SLRC portfolio being in any trouble were, in my judgment, greatly diminished. The Q1 numbers, especially the realized and unrealized gains, which are good indications of a portfolio's condition, were just outstanding. And the discussion on the CC of both DS Waters and Direct Buy (Direct Buy being the only non-performer in the SLRC portfolio) were comforting. The credit quality of the overall portfolio remains high. Direct Buy is valued at $4.4 Million in a $1.008 Billion dollar portfolio which is why SLRC can say that over 99.5% of the portfolio is performing. Direct Buy is in restructuring and even though SLRC says they do not expect to recover par value, they do expect see Direct Buy at values above the current mark.
Turning to DS Waters. DSW is now coming off the recapitalization and is also integrating the coffee business acquisition. Since the last update from SLRC, DWS is continuing to outperform its budget, and customer growth in Q1 was the best DWS has seen in nearly ten years. The market is currently valuing the DWS loans at approximate par value. SLRC says it expects DWS to take the next couple of quarters to integrate the coffee business acquisition after which SLRC will begin to investigate the monetization options for the DWS investment. With SLRC now in control of the DS Waters board, the timing and terms of any monetization will be under the control of SLRC management.
In Q1, SLRC reported NOI of $21.1 million or $.58 per share, realized gains of $9.2 million or $.25 per share, and unrealized gains of $15.9 million or $.43 per share. It was the first time ever at SLRC that all three of those categories were in positive territory for any quarter, which speaks well not only for the current shape of the SLRC portfolio, but also gives us hope for even better portfolio marks as the U.S. economy continues to improve.
SLRC believes the realizable value of its portfolio is currently north of $24.50 per share. And that value should improve as we go forward.
Redemptions and sales did exceed new investments in Q1. All prepayments in Q1 were at or above par and all were above the prior quarters mark. The equity sales ($29 million worth) were not only profitable, but the realized funds which were non-yielding investments, can now be put to work as yielding investments. Management said it has to date, not received notice of any redemptions for Q2. With the pipeline strengthening in the last half of Q1 and to date in Q2, and the increased originations so far in Q2, SLRC is already positioned for an excess of 10% net portfolio growth in Q2 (all of which should enhance Q2 earnings).
Since the CC, several analysts have commented on the SLRC Q1 performance. Here is a summary of the five I could find.
Ladenburg Thalmann reiterated their "Buy" rating with a target price of $23.50.
Evercore Partners said the investing outlook is bright at SLRC. They say a strong outlook on investments, NAV growth, and a stable dividend make SLRC attractive. They reiterate their "Overweight" rating.
Deutsche Bank expects portfolio growth to drive earnings growth highlighting the approximate $376 in unused borrowing capacity. They reiterate their "Buy" rating and increase the target price to a hefty $27 per share. (They are not alone with that target price. See below).
The folks at Stifel Nicolaus had a lot of complimentary things to say about SLRC but stayed with their "Hold" rating. Their single concern dealt with DS Waters. Stifel said that even though SLRC gave an improving report on the DSW business, they (Stifel) would like to see continual improvement as the restructuring takes hold. Stifel also said Q1 portfolio growth was below expectations, but added Q2 could see the largest portfolio growth in SLRC's history. Stifel commented on the $375 million available for future investments; increased the 2012 and 2013 earnings estimates; said the credit quality remains solid; suggested SLRC's investment grade rating from both S&P and Fitch was a powerful driver for the recent repricing of the Wells credit facility and will also help SLRP drive the Citi pricing down; said if SLRC lever's its balance sheet to its target level of 0.65x it will provide a meaningful boost to earnings and added that SLRC is managed by a quality team.
RBC Capital says the SLRC outlook remains positive and the Company is poised for growth. RBC raised its earnings estimates to $2.38 for 2012 and $2.53 for 2013. The RBC rating is "Outperform" and the target price is $27. On the subject of DS Waters, RBC said that despite recent investor focus on the SLRC's DS Waters position as a result of an S&P ratings release, "we do not anticipate any meaningful negative impact". RBC went on to say that they continue to view SLRC as one of the most appealing plays in the BDC space given the outlook for healthy origination activity ahead.
None of us know where SLRC will take us from here. But we have to like the results of this last quarter, especially from a Company which is already delivering such an attractive dividend. It is what makes BDC investing so much fun.
As always, all of the above is just one opinion.
Jan
thewisejman,
Thanks for trying to post the write up on Yahoo. Sometimes they will take the content and sometimes they won't. I guess we are dealing with a Yahoo computer program because there never is an explanation.
jdb_1234,
You are welcome. Here is one more indication that the DS Waters operations may be in pretty good shape. Kelso, considered putting DSW up for sale in October of 2010. This was prior to DSW's last four acquisitions so DSW should be performing with higher operating numbers now than back then. Nevertheless, here is what Businessweek had to say about the possible sale:
DS Waters Reportedly Up For Sale
Oct 29 10
DS Waters of America Inc. will be divested in an auction expected to fetch up to $700 million, people close to the situation said. The people stated that a private equity company is most likely to acquire DS Waters. They added that the auction was still in its initial stages and the company may not be sold if the offers are too low. Buyout groups may be interested in the company, as it has steady sales and regular cash flow, the people said.
I'll try to answer your specific questions. It is tough to try to guess what kind of capital gains may be realized from the preferred equity as we don't know all the terms associated with the preferred. We think we know they are five year issues with a 15% rate, with no conversion features. So their value may be governed by interest rates coupled with the fortunes of DS Waters. So even though the capital gains on the preferred may be limited, the 15% coupon makes for a great return. And yes, PIK income is reported quarterly on the income statement even though it is not received quarterly but instead added to the principal amount. And PIK income is included when satisfying the annual distribution requirements of a RIC (Regulated Investment Company). That is why we don't want to see too much PIK income coming from the portfolio companies. But keep in mind that the restructuring did not add any new PIK income to the SLRC income flow since both the old notes and the new preferred both were PIK income loans and in the same amounts.
We should get an update on the DSW situation when SLRC reports Q1 on May 1st which is just eleven trading days from now. There should be no material fallout from this refinancing. I say that because in a recent update to a SLRC N-2 filing SLRC said:
"Recent Portfolio Developments
Subsequent to December 31, 2011, DSW Group, Inc., our largest investment, announced it is seeking to refinance its capital structure. Until the terms of the recapitalization have been finalized, we cannot fully assess the impact on our portfolio; however, at this time, we do not believe the impact will be material.
I agree with both of you that the current SLRC stock price is at an unusually attractive level. Relative to book value, SLRC hasn't been this low for six months and that was back when the Dow was more than 2200 points lower. As of yesterday's close the SLRC dividend was yielding 11.72%; was selling at just .93 times its' $22.02 book value; and had a potential total return of 34.86%.
st3ve27,
Thanks for your kind words. I'll try to put some words together on MCC in the next few days.
Jan
S&P did revise the "outlook" (not the rating) for SLRC to "negative" because of the restructuring of DS Waters. That restructuring is not a new development. Stifel Nicolaus addressed the DS Waters issue in a February 17th report saying the restructuring certainly heightens portfolio credit quality risk at SLRC, but Stifel also reminded us that the annual EBITDA at DS Waters covers the payments due on the debt and preferred equity. That means that if things don't get materially worse at DSW, this loan will continue to perform as expected.
S&P did not change its' credit rating on SLRC. It affirmed the current rating.
Looking further at the DSW restructuring, it was necessary to refinance its' maturing capital structure which matures in a few months. The SLRC PIK notes were exchanged for PIK preferred equity (same principle amount). The resulting equity will have a dividend rate consistent with the old notes. In addition, SLRC achieves voting control and board control of DSW allowing SLRC to control the forward corporate actions of DSW such as future financings and exit alternatives. All of that helps SLRC hasten the future monetization of DSW.
And not too many folks got too nervous about the DSW restructuring. After the restructuring information became available, and after the discussion of DSW on the SLRC conference call, Evercore Partners, on February 23rd, conceded that "credit quality weakened modestly" but also said they are comfortable with SLRC's ability to expand its NII going forward. Additionally, Evercore pointed out the significant borrowing capacity of SLRC ($303 million) for future investment. On February 23rd, Deutsche Bank, increased their target price of SLRC to $26.50 while also pointing out the $300 million of capital SLRC had available for investment. Also on February 23rd, Stifel said that because the DSW debt above SLRC in the capital structure is now more expensive, the SLRC investment in DSW is now a higher credit risk. But Stifel also said that SLRC is managed by a quality team and SLRC is viewed as a quality player in the BDC space.
Let's look at DSW itself. This is an aggressive Company formed in 2003. Some of its acquired brands (from acquired companies) have been serving customers for over a hundred years. It supplies a valuable product, clean water, along with coffee and tea services and water filtration systems. DSW recently (March 23rd) purchased The Standard Companies, Inc. It also bought Deep Rock Water Co. last December (a Colorado Co.); bought Mount Olympus Waters, Inc. in November of 2010 (a Utah Co.); and bought the bottled water delivery service of Echota Beverage Group, Inc., also in November of 2010, (a Tennessee Co.). DS Waters operates 28 manufacturing facilities and provides its products and services across the United States. DS Waters not only operates in most major markets in the U.S. based on population, the company also maintains a significant market share position in most of the markets in which it operates. In late 2005, when DSW was sold to investment equity fund Kelso, DSW revenue was at about $800 million, and DSW has made a lot of acquisitions since 2005. DS Waters looks like a well positioned company with a needed product. And it now has a strengthened management team. It is also somewhat ironic that S&P said that if the restructuring closes as contemplated, it will RAISE the credit rating of DS Waters.
"We are placing our 'CCC+' corporate credit rating on DS Waters on CreditWatch with positive implications."
"We intend to resolve the CreditWatch listing when DS Waters completes the proposed recapitalization transaction. At that time we expect to assign a 'B' corporate credit rating based upon terms of the currently proposed recapitalization. If the company does not complete the proposed refinancing and balance sheet recapitalization, we would withdraw the new issue-level ratings for the proposed refinancing, and reevaluate the direction of the CreditWatch listing given the substantial near-term debt maturities that would remain at DS Waters."
So does the recent price hit on SLRC (because of the time dictated recapitalization of DSW) provide a current buying opportunity for SLRC. Well, each investor will have to decide that for himself or herself. But here are a few statistics based on Friday's closing numbers. Three of the best valued BDC's right now are MCC (young and growing), PNNT (solid and stable but with slower growth), and SLRC (proven player and undervalued). The dividend yields on each BDC in the order mentioned are 10.35%, 10.90%, and 11.48%. All of these yields, especially the 11.48% of SLRC, are well above the median yield of the BDC industry which is 9.3%. The potential total gains (price gain to analysts' target price plus dividend yield) are 23.35% for MCC, 27.74% for PNNT, and 32.15% for SLRC. Regarding NAV, PNNT is selling above book with MCC and SLRC selling below book. But SLRC is selling at a greater discount to the average peer group book than are the other two. (I use two BDC peer groups based on market capitalization. One group consists of those BDC's with a market cap. of greater than $400 million and the second group of $100 million to $400 million). Remember, all of these numbers are as of Friday's closing prices, but today, the SLRC stock price is down again and thus making the metrics even more compelling.
A couple more points of interest. Even after the completion of the DWS restructuring, 99.4% of the SLRC loan portfolio is on a "performing" status. And SLRC has stated that the realizable value of its' portfolio is north of $24 per share.
As always, the above is just one opinion. Good hunting to you all.
Jan
Posted a message over on the Yahoo board a few minutes ago. If you wish to read it:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_N/threadview?m=te&bn=111191&tid=18653&mid=18653&tof=1&frt=1#18653
Jan
The utilization of tangible assets, not intangibles, will determine the fate of this Company. And NEWN has plenty of useful tangible assets.
NEWN has put out pro-forma numbers showing income statement and balance sheet configuration as if E'Jenie and NewPower had been sold prior to 2010.
In NEWN's case, intangible assets are such things as Customer Relations, Designs, Proprietary Technology, Land Use Rights, and Patents. Currently, intangible assets at NEWN amount to $11.6 million, pro-forma. These intangible assets are generally amortized over time even though they could be subject to an impairment adjustment as was the case in 2007. NEWN has since been amortizing its intangibles to the accumulated tune of $6.4 million. Since amortization is a normal GAAP function and is not a cash item, the amortization of assets generally do not draw much attention either at NEWN or most other companies.
Pro-forma goodwill at NEWN is $47.3 million. Goodwill is the excess of the purchase price over the fair value of acquisitions. It is not amortized but periodically tested for impairment. If Anytone and Kim Fai perform as hoped for, there may be no reason to ever impair the current goodwill. It could stay on the balance sheet forever. So if one believes the future operations of Anytone and Kim Fai will be positive, one need not concern oneself with the NEWN goodwill. Nevertheless, let's take the worse possible case that could occur at NEWN in regards to goodwill. If the entire $47.3 million were impaired and written off, the book value of NEWN would still be about three times the current stock price. Yes, the income statement per GAAP requirements would show a loss, but since this is not a cash item, it, in itself, would not cost the Company a penny and the "adjusted net income" would show no loss due to the impairment.
We saw a drop in the stock price following the release of Q3 numbers which included the $13.6 million impairment of goodwill associated with E'Genie and NewPower. That impairment certainly contributed to the stock price decline. But this lingering low price may be the result of something else, other than the non-cash impairment charge. Looking at the Q3 numbers, if we back out the three non-cash charges, (stock based compensation; amortization expenses; and impairment), we still had a net loss of $2.4 million. It was this $2.4 million loss from basic operations which, understandably, frightened investors. That loss, was partially the result of the dollar losses at E'Genie and NewPower, and partially from legal costs and remarketing costs associated with the piracy problem at Anytone. But now, E'Genie and NewPower are gone. The piracy difficulties in China are being worked but we don't yet know to what degree that problem is solved. We do hope to see an announcement of a United States sales program for Anytone products which hopefully would be free of pirate activity. Kim Fai, continues to operate profitably. So the Q1, 2012 numbers, which we should see not too long after we see the FY2011 numbers, should show us a much improved earnings flow, and a Company that is worth much more than the current stock price. In any event, and in my opinion, goodwill is not the obstruction to price performance.
I just don't think any stockholder should lose too much sleep over the goodwill on the NEWN balance sheet. Its' impairment, if ever required, would adjust book, but as the $13.6 million impairment of Q3 did not cause one dime to flow out of NEWN headquarters, neither will any future goodwill impairment charge result in any operating costs to the Company.
Just one opinion.
Jan
Apple growth in China. Morning article:
http://www.appleinsider.com/articles/12/01/30/apple_predicted_to_sell_as_many_as_40m_iphones_on_china_mobile_china_telecom_in_2013.html
Jan
Perhaps it is time to take another look at NEWN. We haven't seen this kind of a stock price since early 2009 and that was way before the acquisition of NewPower (now gone), Anytone and Kim Fai. With the sale of E'Jenie and NewPower, we have a different Company. But is it really worth just $.75 per share? Well, the stock market says so, but maybe not.
I have been making positive comments about NEWN over the last couple of years, and like many of you, have been disappointed by the performance of the Company. But management has faced some incredible difficulties. They have had to deal with the Reverse Merger Trauma, false hit pieces, fraud accusations, product piracy, excessive competition in the battery industry, over production in the solar industry, and a customer law suit. Through it all, they kept the Company in the ballgame. As we emerge from a 2011 we would like to forget, Jack Yu and his people could yet add some real value to the price of this undervalued stock. He has the products, the industry ties, and certainly the huge customer base to make it happen.
We should not forget, that despite the piracy problems in China, the China market for NEWN products is incredibly large. Here are a three recent articles that remind us of the sales growth possibilities in China: (Keep in mind, NEWN already has sales agreements with China Unicom).
http://online.wsj.com/article/SB10001424052702304223804576447963332660164.html?mod=WSJ_hp_LEFTWhatsNewsCollection
http://www.businessweek.com/news/2012-01-25/apple-didn-t-bet-high-enough-on-china-iphone-demand-cook-says.html
http://www.businessweek.com/news/2012-01-10/apple-moves-closer-to-offering-iphone-for-china-telecom.html
Even with the restructuring of the Company and the pirating issue at Anytone, the Company is still projecting profitability for full 2011 (on an adjusted EPS basis) to the tune of about $.45 per share. At a $.75 per share stock price, that equates to a PE of 1.67. That is cheap. Of 94 "U.S. listed China stocks" with positive earnings, only one has a trailing PE of less than 1.67 (per China Analyst).
NEWN will probably not report FY 2011 and Q4 numbers until early to middle March. As mentioned earlier, full year is expected to be profitable even though Q4 will be a small loss. But those numbers will be less important than the corporate guidance for FY 2012. That guidance will tell us how well management has positioned the Company for the future. Q1 could be reported as early as mid May, just one and a half months after FY 2011 is reported. The Q1 numbers should give us our first actual quantitative view of what the new NEWN is all about.
China has been on holiday (like shut down) all this past week so we really couldn't expect any words from NEWN. But they will be back to work soon and investors are waiting to see the results from the NEWN visit to the CES in Vegas. We could be seeing the renewal of an effort to sell backup power supplies to users of Apple products, and others, in the United States. NEWN, back in mid 2010, announced its' intent to launch the MeePower Brand in the U.S., but it did not happen.
But remember the words in the recent news release:
"Mr. Weihe "Jack" Yu, Chairman and CEO of New Energy Systems Group along with New Energy sales staff and agents will be meeting with potential distributors and customers during the three-day trade show event."
We could learn the outcome of those meetings in the next week or two. Apple has an enormous presence in the U.S., and as we know, the backup power systems manufactured by NEWN are certified to be interoperable with Apple's mobile digital devices and can also be used with other (Motorola, Samsung etc.) portable electronics. If NEWN can get Anytone product flowing through the U.S., either using the MeePower brand or local brands for local manufacturers, it could be a game changer, since Anytone could realize a second major revenue stream, and this one would not be encumbered by piracy costs.
It may not take much to move this stock beyond $.75 per share. This is a profitable company with plenty of working capital. There is insider buying. The Company has restructured to eliminate the weaker subsidiaries. As Anytone works to defuse the piracy problems in China, it continues to issue new products, and NEWN may be in the process of launching a U.S. sales effort for Anytone products. Also, we are seeing good news from the solar sector which could benefit Kim Fai:
http://www.businessweek.com/news/2012-01-29/solar-ceos-see-boom-in-china-will-ease-glut-in-2012-energy.html
Maybe, just maybe, with this very low stock price, and a reconfigured Company, NEWN may, over the next couple of quarters, deliver the success story we have long been expecting. And yes the stock price is at $.75. But adding just another $.75, results in a 100% gain.
As always, just one opinion.
Jan
You are welcome.
Jan
Looks like NEWN settled the suit against it getting one more problem out of the way before we get into 2012.
From the 8K filing:
Item 8.01. Other Events
On December 7, Shenzhen NewPower Technology Co., Ltd. (“NewPower”), a subsidiary of New Energy Systems Group (“Company”) entered into a settlement agreement (“Settlement Agreement”) with Shenzhen Zhongte Industry and Trade Co., Ltd. (“SZIT”) resolving the action filed by SZIT in Longgang District People's Court in Shenzhen, China on October 24, 2011. Pursuant to the Settlement Agreement, SZIT shall return certain products it purchased under a sales agreement, dated May 9, 2011 between NewPower and SZIT(“Sales Agreement”). NewPower shall return RMB 9,720,000, the purchase price of the products, to SZIT. In addition, NewPower shall pay RMB 139,205 to SZIT by January 5, 2012. The Sales Agreement shall be terminated immediately and SZIT releases any and all of its claims arising out of the Sales Agreement.
Jan
10atious, you are welcome and I also feel the 2012 quarters will be much better than Q3 and Q4 of 2011. Management did the house cleaning they think is necessary to get this Company back on track. We should be able to judge their success rate in just a few months.
Jan
Thanks NEWN,
And it is good to hear from you from so far away.
Jan
This past quarter was discouraging, especially after having to deal with the "RTO/Fraud" syndrome for so long. We expected better results from the quarter. But it wasn't all that surprising given the enormous pressures on the Lithium Battery industry as a whole and the chaotic state of the Solar industry (enormous competition and collapsing pricing). NEWN had to deal with all of that plus the counterfeiting of many of its products which is terribly costly to the Company both from the standpoint of legal costs and the necessity to reduce product pricing. The difficulties with the Battery and Solar industries aren't over so the turnaround will take time. NEWN is dealing with the pirate issue by going after the current perpetrators both legally and with product price adjustments. NEWN is also developing products that are less susceptible to counterfeiting while at the same time returning greater profit margins. The last three products announced fit that bill. So despite the very difficult circumstances (industry over capacity relative to product demand), NEWN is still selling product as it is working through its troubles.
When we look at EPS we must focus on adjusted net income because that is what we and NEWN have been historically focusing on. In Q3, NEWN lost $.17 per share (after backing out non-cash stock-based compensation expenses, amortization expenses, and the non-recurring impairment charge). An EPS loss is never good but NEWN still has a trailing (last four quarters) gain of $.90 per share. Even if we assume that NEWN will lose another $.17 in Q4 (which is higher than the Company projects), the FY gain (adjusted EPS) will still be $.38 which deserves a higher stock price than we have today. As we move into 2012, hopefully the Lithium Battery and Solar industries will have improved their conditions (through consolidation and increased demand) - (these are still promising industries) and NEWN will have a fix on its piracy difficulties, all of which will give us a decent shot at success in 2012.
The CC provided a good explanation for the poor third quarter performance and additionally there were a couple of important points made. First, it sounded to me that Jack Yu (CEO) was never confident in the success of the battery business (think NewPower and E'Jenie). He indicated he was consistently uneasy on the future of the battery component business. The Company has since announced the sale of the two subsidiaries and will concentrate on the Anytone and Kim Fai businesses. Jack expressed confidence in the new products coming out of Anyone and he seemed especially comfortable in the progress at Kim Fai. Second, Jack made it clear that management will immediately make arrangements to begin the purchase of the $700.000 worth of stock. But, "making arrangements" to buy the stock and getting the stock bought can be two different things from a time standpoint. Those shares will be bought by management on their schedule and their terms. And that is the way it should be. It is their money. Remember, they are not allowed to buy stock when there is any pending news of a material nature. So given the major changes at the Company in these past few months, it is not surprising the stock buy-back has been delayed. And if the Company is now in negotiations on any other transactions, the buy-back could be delayed still further.
So yes, Q3 was lousy, but it was just a bad quarter, not a Company killer. We are, once again, being asked to extend our patience. And yes, I know that the market prices stocks mostly on the future outlook and less on the past. But as the Lithium Battery and Solar industries cycle back to normal, and as NEWN defuses the piracy issue, this Company should do just fine. For those of you who have found a more promising $.50 stock, you should transfer to that stock. But many will stay with NEWN, at least for a couple more quarters or at least until the industries in which NEWN operates recover. And these important industries will get well.
As the new guidance tells us, NEWN is operating profitably. Adjusted EPS estimate for 2011 is $.41 to $.48 despite all the difficult conditions NEWN has had to face. And even though Q4 will show a loss of about $.10 adjusted EPS, the Company has set the stage for a much better 2012, which should move the stock price well above the current oversold and unwarranted level. Of course, we must first get through the yearend "tax loss" selling period as many investors have capital losses on this stock. But that too will end as December fades into history.
NEWN management itself may have had enough of its U.S. listing. It must be tired of all the cynics with their unjustifiable accusations of lies and fraud. Maybe a buyout and a return of the Company to China is in the best interests of both management and the stockholders. We shall see. For more on that subject, see the following link:
http://blogs.wsj.com/deals/2011/11/23/take-privates-capture-asian-bankers-fancy/
Just one opinion.
P.S. to 10atious
Rodman will not be coming out with a "Hold" rating or any new target price. Rodman has ended research on all U.S. listed China companies. So for now, NEWN has no investment firm following the stock.
Jan
See the Yahoo board for the sad news on NEWN Q3.
Jan
10atious,
Yes, I did see this mornings' news. I guess we will just have to increase our level of "patience" and see how this all plays out.
Jan
Rodman & Renshaw issued an update report today on NEWN. The analyst lowered the revenue estimate for Q3 to $24.2 million with adjusted earnings of $.29. Revenue estimate for full year is $100.1 million with the adjusted EPS estimate at $1.30. He attributes the lowered estimates to the Q2 results and an unclear revenue visibility.
Rating has been maintained at "Market Outperform". Target price has been lowered from $12 to $6.
Jan
Thanks 10atious.
I am also looking forward to a nice Christmas and New Year.
I put up another couple of posts over on Yahoo if you care to take a look.
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_N/threadview?m=te&bn=111191&tid=16975&mid=16975&tof=2&frt=1#16975
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_N/threadview?m=te&bn=111191&tid=16976&mid=16976&tof=1&frt=1#16976
Jan
Over on the Yahoo board I posted three messages on NEWN. If interested, here are the links:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_N/threadview?m=te&bn=111191&tid=16930&mid=16930&tof=6&frt=1#16930
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_N/threadview?m=te&bn=111191&tid=16931&mid=16931&tof=5&frt=1#16931
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_N/threadview?m=te&bn=111191&tid=16933&mid=16933&tof=3&frt=1#16933
Jan
Hi 10atious,
I think the article about Apple making its' iPhone product available to China Mobile carried a lot of significance. NEWN is currently selling its backup power systems via several distributing outlets, including China Unicom, which is the second largest mobile carrier in China. China Mobile, is the WORLDS largest carrier by subscribers and thus will open vast new opportunities for the sale of NEWN products once the Apple iPhones get to the China Mobile product line. That is big time stuff.
Jan
Good Morning All.
1) Earlier in the past week the continuing bad press about China RTO'S was somewhat tempered when HRBN confirmed it is taking the Company private at $24 per share, and I especially liked the comment from the HRBN CEO:
"While the events that negatively affected the company's stock price over the past few months have left all shareholders unhappy and frustrated, I believe that the approval of the transaction by the board of directors will lead to shareholder approval and the return of value to all our shareholders who did not lose confidence in the company and its management"
Even though there is no evidence that NEWN is part of this "RTO/Fraud" syndrome, it is comforting to see that both U.S. and China officials are looking at the problem:
http://www.straitstimes.com/BreakingNews/Money/Story/STIStory_684519.html
2) NEWN has been added to the Russell Microcap Index. Any fund that tracks that index will have to add NEWN shares to the fund to keep the fund in balance with the Russell Microcap Index. In this case, that would, for example, include the "iShares Russell Microcap Index Fund" (an ETF), symbol IWC.
Although many Chinese stocks are being removed from the various Russell Indexes, NEWN is being added, once again indicating that NEWN is separating itself from the troubled Chinese companies. A small amount of buying by funds may have occurred in the last 10 minutes of trading on Friday, but it wasn't much,
if any. We could see some fund buying of NEWN stock this week, but it is difficult to know what the price impact may be.
NEWN management still has about $700,000 worth of stock to buy in the open market, and another chunk of that buying should occur before the end of this month. That could help the stock price. And since management is using its' own money (not Company money) to buy the stock, those purchases should underline the confidence NEWN management has in the future of the Company.
3) As of the June 15th reporting period, the short sale interest in NEWN dropped again by a small .77%. Nevertheless, it was the fourth straight drop and that is a comforting trend.
4) This stock continues to trade at silly levels. As of Friday's close, NEWN was trading at a TTM PE of 1.52 and a forward PE (using $1.72 EPS for 2011) of 1.37.
The PEG is .09 which is exceptionally rare. If NEWN moved to a one year PEG of just .50, the stock would be $13.
If NEWN were to trade at the PE of its' peer (HPJ***), the NEWN forward stock price(on $1.72 for 2011) would be at $9.80. And in the last quarter HPJ lost three cents per share while NEWN earned forty four cents per share which makes NEWN a much better performer than is HPJ.
If NEWN was taken private at about the same PE as HRBN, the NEWN take out price would be about $16 per share on NEWN TTM adjusted earnings and about $19 on NEWN forward earnings.
I noted above that NEWN shares will be added to the IWC fund. The average trailing PE for the stocks in that fund is 16.55 and the average price to book is 1.60. NEWN stock is selling at .35 times book value.
*** HPJ announced a stock buyback program this morning.
5) Most of us know that NEWN sells backup power packs for mobile communication devices (mobile phones, laptops, digital cameras etc.) in China, and that includes the Apple iPhones, iPads, and iPods. China Daily just reported that in the first five months of this year, mobile phone users in China increased by 51.1 million and now totals 910.1 million.
http://www.chinadaily.com.cn/bizchina/2011-06/24/content_12769889.htm
And the following article bodes well for the future growth of NEWN in China. NEWN already has China Unicom in its' customer base. Being able to sell backup power devices for Apple mobile products to China Mobile customers would be another exceptional achievement. China Mobile services 31 provinces in China and has over 600 million customers.
http://www.streetinsider.com/Corporate+News/Apple+%28AAPL%29+May+Bring+iPhone+to+Second+Chinese+Carrier+in+Fall/6601591.html?si_nl_click=2011062418-500
Just one opinion.
Jan
You are very welcome NightShift. Let's hope NEWN does well in the coming week.
Jan
A good holiday to you all.
As of the May 13th reporting period, the short interest(SI) numbers for NEWN decreased again suggesting more investors are getting more comfortable with the Company. The SI dropped by 24.6% which was the 18th best improvement of all stocks on NYSE Alternext. The SI/Free Float improved by 2.05% to 6.27% (SI is 561,486 shares and Free Float is 8,950,000 shares). That improvement is the 5th best on NYSE Alternext.
The March quarter numbers were good and were given a nice boost by the Kim Fai contribution. Kim Fai revenue increased to $5.5 million versus Q4 revenue of $3.1 million. The Anytone Q1 revenue was $12.6 million versus $9.2 million in Q4, for a quarterly sequential gain of 37%. The sale of 799,600 backup power units in this one quarter tells us Anytone is clearly in the China ballgame for backup power supplies. Market share for Anytone should accelerate as the 30 franchised stores come on board, the online store starts up in July, the distributor outlet count increases, and the China Unicom connection produces expanding sales. The $.44 adjusted EPS was 19% better than Q1 of 2010, and more meaningfully, was 26% higher than the immediate previous quarter which was Q4 of 2010. That kind of sequential performance is heartwarming. That $.44 is also a great start to the management projection of $1.69 to $1.75 for this year.
We should learn more about the new senior management stock purchase program in the week ahead. For now, we know that the William Bailey stock purchase of 1,075,000 shares is about three times the amount of the management purchase package. Mr. Bailey certainly seems comfortable with, and appears to have high hopes for, New Energy Systems. He may feel, as some of us feel, that NEWN stock price is now governed by an unjustified fear based on the concept that all Chinese RTOs are frauds and doomed to failure, which is just not so. Greed and fear often rule market levels and stock prices. Just as investors can get hurt from untempered greed, so can fortunes be built by recognizing irrational fear. NEWN is in a kind of reverse bubble mode. When a stock or market is in a bubble state and about to burst, investors believe nothing can go wrong only to find out that just about everything goes wrong. With NEWN, investors seem to believe that everything about Chinese RTOs is wrong and therefore NEWN must be an unsafe stock. But NEWN's history proves otherwise. And that is why, with some patience, NEWN will be a wealth builder. It is not often that one can buy a stock at $3.27 per share when its' fundamental value is three to four times that $3.27. NEWN's growth pattern and profitability level are impressive. Management has gone beyond the call of duty to provide transparency. It is unfortunate that this Company had to spend so much time dealing with so many irrelevant inquiries instead of just running the Company for the mutual benefit of us all.
I sense that NEWN is slowly emerging from this "RTO/fraud" syndrome, and will distance itself from other Chinese companies that deceived their investors. Consider these points:
1) Management is buying the stock with their own money and for their private ownership.
2) The William Bailey purchase, though only a single person purchase, is noteworthy in dollars spent.
3) Institutions are building positions in NEWN, at least in the number of new and add-on positions, even though large amounts of capital have not yet been committed in any single institutional purchase. As of the reporting period ending March 31, 18 institutions owned NEWN stock, and in that period, 9 of those institutions bought stock for the first time.
4) Short Interest holdings are dropping, as discussed earlier.
5) NEWN's Reverse Merger occurred many years ago. There is no legal action filed against NEWN and NEWN has quelled the few hit pieces aimed toward it. The Company has built itself into a $100 million operation and is highly profitable. It has over $10 million in cash and cash equivalents, no long term debt, and two backup lines of credit. It is certainly in the right place with the right product in this information age. China is the country with the most mobile phones on the planet. Managements' continued commitment to transparency will not go unnoticed as it continues to improve its' operations (such as hiring an English speaking CFO and upgrading its' auditors) while maintaining a high level of growth.
6) A target price of $12 per share (which is 270% above the current stock price), is not that difficult to justify. NEWN has a trailing PE of 2.11 (on adjusted trailing earnings) and a price to book of .49. The 2010 to 2011 PEG at .11 is one of the lowest in the investment world. Those numbers provide a very high reward to risk ratio**. Rodman & Renshaw has a price target of $12 and the closest peer company (that I can find), HPJ, is selling at a trailing PE of 6.53, which is in itself, a low PE (NEWN has traded at 9x PE). Nevertheless, when applying that 6.53 to the projected $1.75 EPS this year for NEWN, we arrive at a target price of $11.43 per share, which is pretty close to $12. As the irrational fear of the "RTO/Fraud" syndrome diminishes in general, the kind of numbers discussed here will hasten the appreciation of companies like NEWN.
7) And finally, never forget that old but proven saying; buy low (when others fear to buy) and sell high (when all are buying ).
The last several months have been a trying and tedious time for NEWN. This Company does not deserve the blood on its' street. NEWN's performance will cleanse that blood, and the crowds will come.
** On the Ameritrade stock screener, NEWN is part of the "Electronics Instr. & Controls" sector. There are 256 companies in this sector. I asked the screener to find those companies that had a price to book of less than .5 and a TTM PE of between 2 and 3. Of the 256 companies, the screener came up with one name and that was New Energy Systems Group.
As always, just one opinion.
Jan
Hi All.
There sure was a lot of fuss made yesterday over a simple SEC S-3 filing but it made for a great buying occasion. An S-3 doesn't mean that NEWN will go out and sell more stock tomorrow morning or anytime soon. They may sell none at all. They have three years under the S-3 to decide that. By using the shelf registration, NEWN can fulfill the registration procedures beforehand and then come to the market quickly at a later date , if they choose to do so, by filing an updating supplement. The filing did surprise some folks given that NEWN recently said they didn't need any new capital for operations or internal expansion (and they don't). NEWN also said they didn't, "exactly" ***, have in sight a target company for acquisition but added that an acquisition could be a possibility in Q3. That might suggest that they were looking at one or more companies and may have now settled on just one ("exactly" one) and thus the S-3 filing. Or maybe they still haven't identified that final target but still want to prepare for that possible Q3 acquisition. Remember that Q3 is just a few weeks away (we are in Q2) so an S-3 filing now is appropriate timing especially if Q3 is the target period for a new acquisition.
I was taken aback by the reaction of so many posters to the news of this S-3 filing. The filing does NOT mean NEWN has somehow lost credibility or has suddenly become a fraudulent company. The S-3 filing is not a "cash grab" or a "shelf stunt" and it does not make NEWN "illigit" as some posters on the various boards have suggested. One poster is in great fear of a possible 30% dilution in stock outstanding and seemed totally unaware that NEWN has demonstrated its' ability to create significant EPS accretion, not EPS dilution, when acquiring another company. Stock dilution is more than welcome when it creates EPS accretion and that is the case with NEWN, and is in fact one of the key drivers of the rapid NEWN growth. In the recent three acquisitions, all of which involved stock dilution, the adjusted earnings (per those diluted share numbers) increased dramatically, and that is exactly the course we want to stay on.
I don't know for sure why NEWN executed this filing. But as mentioned above, the S-3 filing may be the initial preparation for a possible acquisition - just the next step in the aggressive ramp up of this Company. NEWN does not have to sell any stock under this filing and certainly does not have to sell any shares at the current deflated stock price. The Q1 numbers and CC should be with us in less than 30 trading days and should bring many more positives which could strengthen the stock price, making any offering more palatable.
It is unfortunate that the failure of a few Chinese stocks have fostered such negativity for all U.S. listed China stocks. However, objective and practiced investors have been given NO reason to believe that NEWN has in any way compromised its position. NEWN's credibility, transparency, and performance are all intact. This Company, despite the "boogie-man" fears so many are trying to fashion, will serve us well. Recognizing corporate success, no matter what the environment, is how wealth is created.
*** The most recent conversation on the subject of an acquisition was during the CC which is a likely place for an exchange on that subject to occur. Below are the comments from the CC. I think, from these comments, we might conclude that the company is closer to an acquisition than they were able to discuss. Remember, acquisition discussions between companies must stay very private, not only to prevent the leakage of privileged information to the investment world, but also to protect the confidentiality agreements between the companies. Here are the comments from the CC:
"So for the Company would like to have some capital or cash on hand to have—to keep it growing (unintelligible) looking for the other acquisition targets."
"Through the Company strategy in 2011, we may consider about another acquisition; but currently there is no exactly target right now."
"like for example, for the acquisition maybe during Q3. The Company is doing the research, but no exactly target. But for the estimate, it probably for the Q3 will have some—may have some acquisition, but cannot guarantee, just have that intention."
As always, all of the above is just my opinion.
Jan
Hi Viking.
Thanks for your comment. And yes, NEWN, tying its back up power devices to the Apple product line is significant stuff. Here are three more recent articles regarding the strength of Apple in the world marketplace. The first story includes the paragraph:
"The founder of a prominent market research firm said Wednesday that he expects Apple to continue to post more than 50 percent sales growth over the next two years as burgeoning demand for mobile applications drives sales of Apple's mobile devices".
http://www.appleinsider.com/articles/11/03/24/firm_sees_apps_driving_50_sales_growth_for_apple_through_2012.html
And:
http://www.macrumors.com/2011/03/22/apple-officially-confirms-ipad-2-launches-in-25-countries-on-friday/
And:
C:\Users\wallyj\Documents\StreetInsider_com - Credit Suisse Makes Case That Apple (AAPL) Is the Most Valuable Company in the World.mht
The headline in the above link reads: "Credit Suisse Makes Case That Apple (AAPL) Is the Most Valuable Company in the World"
When James DePorre of Shark Investing recommended NEWN he emphasized that NEWN was a "stealth play on Apple". To whatever extent that may turn out to be true, being a stealth play on Apple, which is now the largest technology company in the world, is a nice place to be.
The previous owners of Anytone, New Power, and Kim Fai Solar must believe that New Energy is putting together an attractive entity. All three took a big piece of their buyout payments in NEWN stock. The total cost of those three acquisitions was $72.4 million and the sellers took a combined 64% of their compensation in NEWN common stock. The biggest of the three sellers, Anytone, took 70% in stock. That seems like a pretty strong vote of confidence in the future of NEWN.
Jan
ciciagt,
Nice post and thanks for your kind words.
I especially like your second paragraph that reiterates the words of Benjamin Wey:
"Be wary of less professional advice from amateur or anonymous sources that often have untold self-interest behind some seemingly legitimate arguments. There are often stock short sellers behind many "sudden discoveries of fraud" at a legitimate publicly traded China based company. Avoiding fraud involves much more than comparing apples to oranges".
It is truly sad that some posters are so willing to call others liars and frauds when no available evidence supports those awful claims. Whatever happened to the concepts of honor, integrity and fair play? These people do not care who they hurt whether it be corporate managers or investors. They are willing to sell their souls to accrue their next dollar. Yes, there are some dishonest managers out there in the corporate world. But we still cannot yell fire in the absence of fire and we ought not to be able to yell fraud in the absence of fraud.
Again, thanks for your post and a good day to you.
Jan
Thanks ChaTea.
Jan
Hi Realfast.
Yes, I am familiar with the Rodman & Renshaw $1.57 for 2011. But I have to believe that adding just $0.17 to EPS for 2011 over 2010 is way too conservative. At least I hope so.
Jan
Hi all.
A few weeks ago a poster asked if I could suggest any reason why NEWN dropped in price over the last few months. I'll try to answer that question and then expand my comments to provide a summary update of NEWN, as I see it now.
The price decline had little to do with NEWN itself and had more to do with the negative press in relation to reverse mergers and the continual flow of "hit pieces" against other U.S. listed China companies. And the suggestion that a company is fraudulent because its' SAIC, SAT, and SEC filings don't match is silly. The SAIC, SAT, and SEC filings by Chinese companies all have different filing requirements and often will not match any more than a SEC and IRS filing will match here in the U.S., for U.S. companies. My federal tax return will not come close to matching my state return, but that does not make me a liar and certainly not a fraud. And there is no evidence out there that NEWN management is conducting itself in any manner other then credible. Here is one detailed description of SAIC, SAT, and SEC and the functions of each as they apply to China companies. The following link has been posted before, but for those of you who have not previously seen it, it will point out that these filings serve different purposes and are not required to match or expected to match.
http://www.prnewswire.com/news-releases/benjamin-wey---a-china-experts-views-on-understanding-saic-and-sec-filing-discrepancies-for-us-listed-china-based-companies-103869893.html
Let's look at RTO'S (Reverse Take Over's).
The negative talk about reverse mergers has caused some concern. NEWN has not escaped that pressure. Yes, a reverse merger is a fairly quick and inexpensive way (versus an IPO) to achieve a U.S. listing. And yes, some RTO companies will fail. Most will not. RTO's often begin life with a relatively small asset base and with a less experienced management team than that found at companies that come to market via an IPO. But that doesn't mean the RTO company can't grow into a successful and respected entity. Most RTO companies will survive nicely. However, some writers will highlight the troubled RTO's, and try to apply that same level of criticism to all RTO's while completely ignoring the success stories delivered by many RTO's. This ridiculous crusade against RTO's as a group, will pass. Those who recognize an exceptional U.S. listed China stock when they see one, RTO or not, will be well rewarded. NEWN could be one of those wealth creators.
Regarding "hit pieces", in 2010 there were some fifty negative articles on about twenty five Chinese companies and another twenty or so negative pieces so far in 2011 on about nine Chinese firms. Many of these pieces had little merit even though the current attack on some may prove to have some substance. But none of the hit pieces had any direct connection to NEWN. Nevertheless, the short sellers who published most of these articles intended to spread fear and did so effectively against many U.S. listed Chinese stocks (by association) including NEWN. And when the short sale position in NEWN increased for the 1/14/2011 reporting period, that further scared many NEWN watchers. That fear was understandable, since for that reporting period NEWN registered the second largest percent INCREASE in short interest on the NYSE Alternext (American Stock Exchange). Apparently, some concluded that NEWN would be the next target for the short sale crowd. However when the 1/31/2011 short interest numbers came out, it became clear that NEWN was not going to be a target of the short sellers. The 1/31/2011 report showed that for that fifteen day period, NEWN registered the ninth largest percent DECREASE in short sales and the fourth largest DECREASE in shares sold short as a percentage of float. The February 15th figures showed another 3.25% drop in NEWN short interest and the February 28th short interest numbers showed a further 11.8% decline. And for that February 28th period, NEWN made the list as one of the 50 largest short interest percent DECREASES on NYSE Alternext. The short sellers and their "hit pieces" appear to have no interest in NEWN. Let's hope they are smart enough to keep it that way.
Then there are some of the more general concerns about Chinese stocks which will always be with us but should not be condemnation factors. One such concern is the use by small cap Chinese companies of lesser known auditing firms. That is sometimes true even though we are now seeing that even the more notable audit firms do not always guarantee a clean bill of health. In any event, it is not that difficult to change auditors should a company choose to do so. Then there is the realization that the Chinese government (communist country) wields a lot of unrestricted power over Chinese companies. Again, it is true that the government can shut down a Chinese operation in a hurry, but that same government will help get a new factory built in a matter months - something we cannot do in the U.S. Additionally we don't see many dividends from the smaller U.S. listed Chinese stocks and those stocks tend to have a smaller following of U.S. analysts. Further, we can't get much help from U.S. courts when something goes really wrong at a company operating in China.
We should be aware of these things, and they can cause PE ratios to be lower for small cap U.S. listed China stocks than PE ratios of comparable American stocks. But remember, China has the world's biggest population and is on track to become the largest economy. It already is the fastest growing economy. The China government is committed to industrial growth like few other national governments. Investing in China and in the right companies will have its rewards. A lower PE ratio for NEWN now will allow us to buy the stock at a cheap price relative to EPS and will not prevent NEWN from continuing its' exceptional growth followed by an equally exceptional growth in the stock price. And as NEWN delivers this growth and enough investors take notice, we could get a PE expansion even though we don't have to have that expansion. Over the last 20 weeks, the average trailing PE for NEWN has been about 5x. If NEWN continues at that PE, the stock price with $1.40 earnings for 2010 will be $7.00 or 30% above the current $5.40 price. If in 2011, NEWN earns a $2.00***, the stock price goes to $10.00, and that is 85% over the $5.40 price. Those are nice gains and they do not include any PE expansion. Remember, in April of 2010, NEWN was selling at a 9x trailing PE. If the current PE expands to just 7x, those stock prices would expand to $9.80($1.4 x 7) and $14.00($2.00 x 7) respectively, and the percent gains would move to 81% and 159% respectively (over the $5.40).
*** In a previous post I made the case for $2.00 EPS in 2011 and I still believe that is doable even though the Company may not guide to that $2.00 level. I would also note here that some folks believe a stock buyback program should be considered by the Company. That could be helpful if that is what they decide to do. But the NEWN momentous growth pattern is a result of their accretive acquisitions of Anytone, New Power, and Kim Fai Solar. Their cash may be better spent on helping to put together a couple more of those types of acquisitions.
There may be a couple of other reasons for a lagging stock performance and these are more directly associated with NEWN itself. First, I believe the penetration of Anytone product into the U.S. will be a slow and a difficult endeavor, and NEWN may have been too optimistic in thinking that U.S. infiltration could be swift. Finding a U.S. distributor who will sell foreign product and take full managerial responsibility for such a marketing program is not always easy and can be costly, especially when the product manufacturer is in distant China. We, as investors, should focus on China sales where NEWN is fully entrenched and we should not build up hope for a flood of U.S. sales. In the January 27th NEWN news release, management talked about Anytone product sales expansion IN CHINA, and said nothing about U.S. penetration. The slowdown in U.S. sales expectations may have been disappointing to some, but if NEWN ramps up sales to the people in its' own backyard (the biggest and fastest growing backyard in all the world) all will be well. U.S. sales volume may materialize, but it will take time and the U.S. sales volume may never be a large percentage of total sales volume, especially if NEWN sales volume in China proceeds as rapidly as anticipated.
Secondly, we have not seen any revenue or earnings numbers from NEWN for some time (Q3 reporting was on November 16th of 2010) and we will still have to wait until March 28th before we see Q4 numbers and the 10K for the FY. Full year numbers just take longer to put together and get audit review. While quarters Q1, Q2, and Q3 may take six to seven weeks to report, Q4 and full year can take twice as long, causing some impatient investors to assume something is wrong, when nothing is wrong. Year end reporting is just typically slower.
So what are the good things we see looking forward.
1) We would hope to soon learn more about the actual sales ramp up rate, in China, of the MeePower line of power sources for Apple mobile devices. These Anytone remote power units also interface with most major brands of mobile devices including Motorola and RIM (maker of BlackBerry). The MeePower power devices have been certified to meet Apple performance standards and that is no small item. From the January 18th earnings release from Apple, in the fourth quarter alone, Apple sold 16.24 million iPhones, 4.13 million computers (desktop & laptop), 19.5 million iPods, and 7.3 million iPads. Any meaningful penetration by NEWN into this market with backup power units for these Apple devices, could mean big bucks. In Q4, Apple generated $26.7 Billion in revenue and realized $6 Billion in net income. NEWN is already selling these new power backup units in China to provincial and nationwide electronic stores with one of its' major customers being China Unicom. The retail outlets of China Unicom sell more than $300 million in Telco products annually in addition to selling cell phone services to subscribers. China is the world's largest market for cell phones with over 800 million smart phone subscribers.
When we talk about the overall sales possibilities for iPhones, iPads, and iPods, we are talking about a mega-market. So I will spend a bit of time on this subject. Here are some of the APPLE comments from the AAPL conference call. As you read through these comments, remember that this is the market that NEWN is stepping into with its' Anytone products. The following are all quotes except as noted, and these quotes come from the AAPL CC.
a)" The performance of our business was extremely strong, as we sold more Macs, iPhones and iPads than in any previous quarter in Apple's history."
b)" The sales value of iPhones alone was over $10.1 billion, which yields an ASP of about $625. At the end of the December quarter, we had iPhone distributions through 185 carriers in 90 countries. We continue to experience very strong year-over-year growth in all of our segments, with sales in the Asia-Pacific region and Japan both more than doubling year-over-year.
Enterprise customers continue to embrace iPhone, with 88 of the Fortune 100 companies and almost 60% of the Financial Times Europe 100 companies now testing or deploying iPhones. Strong employee demand in custom app development are fueling deployment within the corporate sector.
We continue to have a sizable backlog, and believe we could have sold even more iPhones if we had been able to supply them. And we're thrilled to begin working with Verizon next month to offer iPhone 4 to its more than 93 million customers, as well as to new customers who want iPhone 4 on Verizon."
c)" We continue to have a sizable backlog, and believe we could have sold even more iPhones if we had been able to supply them. And we're thrilled to begin working with Verizon next month to offer iPhone 4 to its more than 93 million customers, as well as to new customers who want iPhone 4 on Verizon."
d)" Turning to iPad. We continue to be thrilled with its momentum and customer interest. We sold 7.3 million iPads, a sequential increase of over 3 million, with distribution in 46 countries by the end of the December quarter. We continue to see great enthusiasm for iPads from consumer, business and education customers. Employee demand for iPad in the corporate environment remains strong, and the response to the product continues to be significant.
Enterprise CIOs are adding iPad to their approved device list at an amazing rate. Today, over 80% of the Fortune 100 are already deploying or piloting iPad, up from 65% in the September quarter. Some recent examples include JPMorgan Chase, Cardinal Health, Wells Fargo, Archer Daniels Midland, Sears Holdings and DuPont."
e) Talking about Apple's 323 worldwide retail stores: "Additionally, our four stores in China were, on average, our highest traffic and our highest revenue stores in the world."
f)" On iPad, we increased dramatically last quarter. We sold 7.3 million the previous quarter, we were in the low 4s as you know. That did get us into supply-balance and also allowed us to expand to 46 countries, or to a total of 46 by the end of the quarter, which added 20 during the quarter. And we're confident enough to add another 15 countries during the month of January that will take us over 60. And so we feel very, very good about the progress that we've made here. Relative to iPhone 4, I also feel very, very good that what we've been able to do. However, it's not enough. We do still have a significant backlog. We are working around-the-clock to build more. I feel great that the demand is so high, but at this point, I'm not going to predict when supply and demand will meet. We believe the reaction and results from the Verizon customers will be huge, and so I don't want to give a prediction right now when the supply and demand will crawl."
g)" First of all, let me say that of the BRIC countries, Brazil, Russia, India, China, we, several years ago, identified China as our top priority, and we put enormous energy into China. And the results of that has been absolutely staggering. To give you some numbers there and some specifics, we look at Greater China as a region. And Greater China, just for clarity, is mainland China, Hong Kong and Taiwan. The revenue from Greater China for Apple for last quarter was $2.6 billion, which was up 4x from the prior year quarter. And to further, just an exclamation point by that, we did a little over $3 billion for the entire year, fiscal year 2010."
h)" The handset market is well over 1 billion units a year, and the Smartphone market is growing faster than a weed. And so there's enormous opportunity here, and we have incredible momentum in that space. iPad just got started, it's a new category. We sold almost 15 million through the first three quarters, and we believe the market is huge. IDC, I saw this morning, is predicting it to quadruple in two years."
i)" -- the demand for iPhone has just been incredible. We could not make enough in the quarter, and we would've loved to have ended with more channel inventory than we did."
j)" But the bulk of your question doesn't need specific numbers. To make a point, if you look at our Asia-Pacific business, the revenue growth was 175% or so. And so this is incredible. And the size of business in Asia that we've now built is massive. To do $2.6 billion in China in three months, where just two years ago, we did less than $1 billion in the whole year, is phenomenal, or actually for the year before. And so I think we are -- it's clear that we're introducing a lot of people to Apple who previously had not been introduced to the company, and I think that helps across the product line."
2) Q4 and full year earnings will be out next week. If NEWN reports only its' conservative 2010 projection of $95 million in revenue and $18 million in net income, those two numbers will represent gains of 260% and 183% respectively over 2009. That will make good reading. Further, if the 2010 revenue comes in at $95 million, the revenue figures for the last four years will be $2.7 million, $19.2 million, $26.4 million, and $95 million, and that kind of growth performance is nothing less than outstanding. And we are just now beginning to deliver backup power devices to the huge Apple product line. And speaking of the Apple product line, here is a morning story from a NEWN competitor. I post it here because I especially like the following words from the article:
"I think a lot of investors may be overlooking Apple's iPhone growth prospects in India, China and elsewhere," Rohde said. "The smartphone market is poised to explode in developing markets, and Apple is sure to sell millions of handsets as these populous nations catch up to the smartphone technology enjoyed here in the U.S.
"There are going to be a lot of people around the world looking for a device like the Volt that can charge their iPhones anywhere the sun is shining," he said.
http://www.bradenton.com/2011/03/21/3049444/apples-iphone-sales-figures-energize.html
3) About forty five days or less after Q4 is reported, Q1 revenue and earnings should be out (last year Q1 was reported on May 15th) and could set the tone for all of 2011. In other words, we should get a double dose of the revenue and earnings growth pace, all in a relatively short period of time (like 30 trading days).
4) The Company will soon provide 2011 revenue and earnings guidance. Last year they provided that guidance on January 6th (for 2010), but we really can't tell when we will see that guidance this year. It should come anytime between now and March 31st, or if not available by late March, that guidance should be ready by Q1 reporting, which would be about mid May. None of those dates are too far away. The guidance for 2011 could make some interesting reading for the following reasons:
a) The high growth rates of Anytone (charging devices) and New Power (Lithium-ion battery cells), and the components/finished batteries division should continue. In Q3, even though the "battery shell and cover" revenue was down 12% versus Q2 (sequentially), the "battery segment" (excluding Anytone and New Power) revenue was up 56%; Anytone revenue was up 12%; and New Power revenue was up 12%. And again, those growth rates are for just the latest reported quarter (Q3 versus Q2).
b) The acquisition of Kim Fai Solar is expected to add $24 million to revenue and $5 million to adjusted net in 2011. That $5 million addition to adjusted net income will add $.34 per share in 2011 (on 14.5 million F/D shares) which would bring 2011 EPS to at least $1.74 ($1.40 + $.34) without a single penny in growth in 2011 from the rest of the Company. Further, the $1.40 projection for 2010 is probably too low as the Company just reminded us that " Adjusted net income guidance of $18 million is conservative".
c) The ramp up at Anytone of MeePower power devices, in support of Apple products and other mobile devices, is just beginning.
Other points of interest:
Institutional Holdings of NEWN are on a positive track. For the 12/31/2010 quarter, nine institutions took initial positions in NEWN and one increased its' position by 38,713 shares. One institution reduced its' position by 51 shares and one sold out its' 15,001 share position. The number of new shares bought totaled 310,693 shares including the nine new positions. It is not a huge start but it is a good indication that the institutions are beginning to see what we see in NEWN. It is a positive beginning.
NEWN has plenty of excess manufacturing capacity (New Power now utilizing only 70% of manufacturing capacity). So we need not concern ourselves about share dilution due to an equity financing for more manufacturing space.
I have removed ABAT as a peer to NEWN since more than 50% of ABAT revenue now comes from battery powered vehicles, a business NEWN is not in. That leaves HPJ as the primary peer company. HPJ is selling at a trailing PE of 6.43. As NEWN migrates to that same PE, the NEWN stock price would move to $9.00 (6.43 x $1.40) per share or 67% above the current $5.40 price. Remember that the $1.40 is the minimum expectation for the already completed FY2010. FY 2011 EPS is expected to be much better thus driving the stock price higher.
At a $5.40 stock price, NEWN is selling at its' last reported book value of $5.40. That alone makes it notable. Additionally, using the current stock price of $5.40 and the adjusted earnings of 2009 and the 2010 estimate of $1.40, the PEG ratio calculates to .11. We won't find very many companies with a growth story like that of NEWN coupled with a PEG as attractive as .11. To illustrate my point, the PEG ratio of the overall market, per First Call, is .67. If NEWN went to a PEG of just .50, the stock price would go to $25 per share. If New Energy was a U.S. company, the $25 with the associated 17.8 PE ($25/1.40) would be achievable. But as a U.S. listed Chinese company we must, for now, look for about half that $25, or about $12 per share (PE of 8.5) which is still a 122% gain over the current price. Said another way, all this negative talk about the downfall of all Chinese small cap stocks has created a stock buying opportunity for successful and credible companies like NEWN.
In conclusion, yes, we will have to contend with the suggestion that all RTO's are hopeless cases. It is , however, a suggestion without merit. Even though some "hit pieces" occasionally do expose actual corporate problems (right now there are five companies with stock trading suspensions), most do not. So we will continue to see more deliberately misleading "hit pieces" until a successful law suit, or something like that, puts an end to this kind of nonsense. These "hit pieces", though not directed at NEWN, will do NEWN no good. We will also have to deal with the fighting in the Middle East and, of course, the tragedy in Japan.
On the other hand, investors seem to be focusing on improvements in world economic conditions and NEWN remains one of the best growth stories out there. The Company has aggressive management that has to date performed exceptionally well. Its' record of "earnings accretive" acquisitions is exemplary. It is in the right place, China, with an exciting lineup of information age products. Its' success as a lithium ion battery producer and its' title of an Apple authorized manufacturer of power accessories for Apple products, establishes its' credibility as an advanced technology firm. The NEWN research team keeps new products coming. At CeBIT, Anytone launched new mobile digital products and introduced new solar mobile power products. But the bottom line is always the performance of the income statement and the balance sheet. If NEWN meets its' guidance for 2010, revenue for 2008, 2009, and 2010 will be $19.7 million, 26.4 million and $95 million respectively. Net income will be $4.5 million, $6.4 million and $18 million. We don't have any balance sheet numbers yet for end of 2010, but if we look at balance sheet growth from year end 2008 to end of Q3 2010, we see assets going from $16.9 million to $80.1 million, equity from $10.6 million to $64.0 million, cash & cash equivalents from $7 million to $8.9 million (even after big cash payments for acquisitions), and book value from $1.95 to $5.40. Long term debt remained at $0.00. That kind of financial performance is extremely attractive. And looking forward, 2011 looks exceedingly promising.
The road that NEWN is now traversing can be bumpy as we have seen. But even though this road is long, it will take this Company where it wants to go. It will do so better than most other companies are able. As investors, we accompany NEWN on its' journey. Our level of participation will determine the degree to which we enjoy the trip. It could be fun.
We still win at this investing game by buying low (when most others fear to do so) and selling high (when others are coming late to the game). Warren Buffett outlined this strategy with these words:
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful".
At this juncture, the following could also very well apply:
"The way to make money is to buy when blood is running in the streets".
John D. Rockefeller
As always, all of the above is just one opinion. Good luck to all.
Jan 814
Viking,
Your numbers look good and I'll take them any time. Nice job. Let's hope we can get a PE expansion as we progress through 2011. Companies with constant growth, with leading edge technology, and in an exciting industry, can build a following. This Company could very well step out from the crowd.
Jan
Hi all.
The news out of NEWN this morning was great stuff. But the part of the release that said "we believe the revised guidance is conservative", may be very correct. For the first three quarters of this year, NEWN reported adjusted EPS of $.37 for Q1, $.35 for Q2, and $.41 for Q3. That means if the year comes in at the projected $1.40, Q4 will be $.27 which will be the lowest EPS quarter of 2010. That may be why there was some mid-day selling today. There could, of course, be some extraordinary operating costs associated with the new acquisition (Kim Fai) and the entry into new sales locations (like the U.S.), which might affect the Q4 numbers on a non-recurring basis. But I kind of doubt it because at the recent N.Y. presentations, NEWN said that Q4 would be similar to Q3 and that means $.41 per share, not $.27.
Even with the new projected numbers as given today, all is well compared with 2009. The adjusted EPS of $1.40 for 2010 will be 57% higher than the 2009 adjusted EPS. The adjusted net income in dollars of $18 million will be 70% higher than 2009. The $95 million in revenue will be 270% above that of 2009. Those kinds of gains will not go unnoticed.
But, again, Q4 may very well come in much higher than $.27 in the absence of any special operating charges. Here is why. First, despite the Company saying they have approximately 14.5 million fully diluted shares outstanding (which is true), I calculate that the Q4 F/D weighted average shares outstanding will be about 13.68 million (versus 12.62 million in Q3 and about 14.58 million in all of next year). In Q3, adjusted net, in dollars, increased by 15.9% over Q2. If net increases by just 12% in Q4 over Q3 (which should be easy), adjusted Q4 net will be $5.76 million (Q3's $5.142 plus 12%), and Q4 adjusted EPS will be $.42 per share ($5.76 million /13.68 million shares). That will bring 2010 total EPS to $1.55 per share, and that would certainly make the $1.40 conservative. And remember, I used just a 12% Q over Q growth (not the 15.9% growth sequential growth of the previous Q), and I did not include any revenue from Kim Fai despite my factoring in the weighted average shares of Kim Fai from November 10th to the end of Q4.
For 2011, I did a similar exercise using revenue growth (instead of adjusted earnings growth). I started with a 2010 revenue of $100 million; added an annual revenue growth of 25%** for 2011 (without Kim Fai); added the projected $24 million for Kim Fai; which gave me a total 2011 revenue of $149 million. If we then apply an adjusted net margin of 19.5%, adjusted net calculates to $29.1 million. (I used a 19.5% net margin because 2010 Q1 net margin was 21.07%, Q2 was 18.95%, and Q3 was 19.5%). The adjusted EPS comes out to $2.00 per share on 14.58 million shares.
** 25% revenue growth may be much too low for all of 2011 because the actual revenue growth in this last Q3 was more than 12% over Q2, and a quarterly 12% growth equates to an annual 57% growth. And who knows how fast the new MeePower product line will grow in 2011.
This Company has some unique qualities in addition to its' exciting growth rate. It plans to launch 1 to 2 new products every month. It has no need to raise capital in the equity markets. Product sale for Apple Mobile Devices could start this month. NEWN sells product in 30 China provinces with the market for mobile power growing at greater than a 20% annual rate in China. The Company has strong engineering and product development groups with over 50 patents. In addition to power devices, NEWN also makes Li-ion batteries in a country with a Li-ion battery market of $6.8 billion and in a world with a global market of $27 billion. And now NEWN is taking a significant step, with Kim Fai, into solar-powered battery chargers.
With today's closing price of $7.65, and using the low ball $1.40 EPS estimate for this year, the NEWN PEG for 2009 to 2010 is .15, which means this Company is seriously undervalued relative to its' growth rate. There are very few companies out there that can lay claim to a .15 PEG.
The two peer companies I compare to NEWN are HPJ and ABAT. All three have similar businesses and are similar in asset size. Last quarters' revenue for the three companies ranged from $25.9 million to $27.8 million. All three are U.S. listed and they are consistently profitable. As of last Friday, the average trailing PE of HPJ and ABAT was 7.44. NEWN was 5.64. If we apply that 7.44 to the twelve month NEWN trailing earnings we get a $10.27 stock price for NEWN, or 34% higher than it is now. If we apply that 7.44 PE to the $2.00 EPS estimate of 2011 (and we are just about in 2011) we get a stock price target of $14.88. If we get a PE expansion during 2011 to 12x, then the target price goes to $24 per share or 214% above the current price. Is a 12x PE a reasonable expectation? The China Analyst web page tabulates data for 120 Chinese companies and 64 of them have TTM PE ratios of over 12. None of the 120 have a PEG of .15 or lower.
Yes, we could use some analyst coverage, more shows and presentations, and more detail on the U.S. product distribution program. All that will come in time, and when coupled with the dynamic growth rate, should move the PE ratio, and the stock price, to those higher levels.
NEWN is a good place to be.
As always, all of the above is just one opinion, and I hope I got all those numbers right.
Jan
Realfast95:
I received your private message and I thank you.
Jan
Realfast95,
I wonder if you could do something for me since you post over on the IHub "China Growth Stocks" board, and I do not. I am looking for a good source of analyst ratings and comments on all stocks, and that source can be either a free internet service or a pay internet service. I saw on the "China Growth Stocks" board where Rames recently posted a series on analyst comments on stock TSL. Those analyst comments were nice summaries of the current ratings and estimates for TSL. Perhaps you could send a private message to Rames and ask him what source he used for those analyst summaries, and then reply back to me on this board. Would appreciate your help.
Thanks.
Jan