Monday, June 18, 2012

Wood Composite Technologies Inc: The Last Cigar-Butt Company?

When Warren buffett started his partnership, he used to for cigar-butt companies. By that meaning, as Benjamin Graham tried to find before him, firms that were not very popular but still had one last puff of earnings or value to give to shareholders and that offered themselves at a valuation attractive enough to make them seem almost free.

It seems it is still possible to find companies with such caracteristics. Just looking at the latest quarterly filing will make you wonder why there are not more people jumping at this company.

According to Reuters, Wood Composite Technologies Inc. develops, manufactures and sells composite decking products. The Company’s products include decking boards and a variety of decking trims and fascia suitable for residential and commercial decking and dock purposes, which were manufactured on site in Nisku, Alberta. The Company markets these products throughout Canada and the United States to retail consumers and building contractors through various building supply dealers and wholesalers. It distributes the product in Canada under the brand name of Millennium Decking Inc., its wholly owned subsidiary while Millennium Decking (USA) Inc. acts as its marketing entity in the United States.

The first point of interest here is that the company is trading under cash on hand per share. Indeed as of the last quarterly filing dated may 24th 2012 of the company has 3.7 Millions CAD in cash on hand.

Another interesting fact here is that the company also has 17 millions CAD of carried forward unused losses that are set to expire in the next five years. This is very attractive for a company willing to by them for that pursposes only, without even considering the current cash hoard. At the minimum 15% marginal tax rate available for Canadian corporations, this represents about CAD 2.6 Million in cumulative potential savings from the point of view of a company willing the bid on the company.

With 74,205,825 shares outstanding, we can establish two different values for the firm. One that just considers a liquidation and distribution of the company's cash in the form of a liquidating dividend. This would value the company at 0.048$ per share. Another way to value the company would take the perspective of an acquirer looking for a way to save on taxes in the future. From such a perspective, the company would be worth at most 0.083$ per share.

As of June 15th 2012, the shares traded at an ask price of 0.03$ per share. An investor positioning himself today has the potential to realize a profit ranging 60% in the case of a liquidation to 177% in the case of an acquisition, which will certainly materialize over the next year. With most investments providing meaningless risk-free returns, it will be beneficial for current and potential shareholders to press the company to realize the full value of the company on the August 7th Shareholders meeting as it has completely stopped it's operating activities with the recent sale of it's Nisku plant.

Disclosure: The Author is Long WCT.V