|Shares Out. (in M):||12||P/E||0.0x||0.0x|
|Market Cap (in $M):||80||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||64||EBIT||0||0|
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Penford Corporation (NasdaqGM: PENX)
Penford is an under-the-radar, dramatically mispriced micro-cap company with a very near-term catalyst for revaluation and that is presently trading at only 1/3 to 1/2 of its private market value. PENX is ignored, misunderstood and undervalued because (i) with an $80mm adjusted market cap it is too small for most investors to dig in; (ii) its complex capital structure, including an expensive, debt-like preferred issue owned by a Zell fund, has depressed reported earnings and is confusing to many investors; (iii) its high-volume, low margin industrial/ethanol business masks the company’s hidden gem – its highly profitable, fast-growing food ingredient business; and (iv) its run-rate revenues and profitability are substantially higher than LTM metrics. Key tenets of the investment thesis are as follows:
Company Overview: A very good overview presentation can be found here: http://www.penx.com/pdfs/investor-presentations/Jefferies_&_Company_2012_Clean_Technology_Conference.pdf
PENX engages in the development, manufacture, and marketing of specialty natural-based ingredient systems for food and industrial ingredient applications primarily in the United States. It develops and manufactures ingredients with starch as a base. The starch products are manufactured primarily from corn and potatoes, and are used as binders and coatings in paper and food production, as well as an ingredient in fuel. The company’s Industrial Ingredients segment provides specialty starches to the paper and packaging industries in ethylated, oxidized, and cationic forms. Its ethylated and oxidized starches are used in coatings and as binders, providing printability to fine white, magazine, and catalog paper; and cationic and other liquid starches are used in the paper forming process in paper production, providing the bonding of paper fibers and other ingredients. This segment also produces and sells fuel grade ethanol. The company’s Food Ingredients segment offers specialty starches and dextrins to the food manufacturing and food service industries. Its specialty starches are used in coatings for various products, such as French fries sold in restaurants, as well as used as moisture binders in a range of foods, including canned products, sauces, whole and processed meats, dry powdered mixes, and other food and bakery products. PENX sells its products through a direct sales force, as well as through distributor agreements to manufacturers and processors. The company was founded in 1894 and is headquartered in Centennial, Colorado.
Capital Structure and Segment Data:
|Diluted Shares Outstanding||12.3||Assumes Pref B fully converted (adds 1.0mm shares)|
|Market Cap||$ 80.1|
|Revolver||16.1||Matures April 2015, $60mm max availability, $75mm with consent|
|Series A Preferred||46.4||Includes unamortized discount and accrued dividends|
|Other LT Debt||1.6||Iowa Dept of Economic Devt flood assistance loan, partially forgivable|
|Total Enterprise Value||$ 143.9|
|Book Value||$ 85.0|
|Tangible Book Value||76.8|
|Diluted Shares Outstanding||12.3|
|Price/Tangible Book Value||1.04x|
|TEV/LTM Consolidated EBITDA||7.13x|
|TEV/LTM Food ONLY EBITDA||6.76x|
|TEV/Run-Rate Cons. EBITDA||4.56x|
|TEV/Run-Rate Food EBITDA||5.54x|
|Net Sales||$ 184.0||$ 233.2||$ 53.9||$ 64.8||$ 244.1||$ 259.2|
|Net Sales||$ 70.3||$ 82.2||$ 18.3||$ 25.9||$ 89.8||$ 103.6|
|Net Sales||$ 254.3||$ 315.4||$ 72.2||$ 90.7||$ 333.9||$ 362.8|
Valuation Data Tables: The following tables illustrate potential valuation of PENX based on assigned valuation multiples for the Food Ingredients business (ranging from 7.0x-10.0x) and the Industrial business (ranging from 3.0x-6.0x). The first table applies these multiples to LTM reported data, while the second table applies the same multiples to the Run-Rate EBITDA, which we believe to be fair given the growth trajectory of the businesses and the lack of meaningful seasonality.
|PENX Valuation - LTM Data|
|Food Valuation (x EBITDA)|
|Industrial||3.0x||$ 8.55||$ 10.28||$ 12.00||$ 13.73|
|Valuation||4.0x||$ 9.09||$ 10.82||$ 12.55||$ 14.27|
|(x EBITDA)||5.0x||$ 9.64||$ 11.36||$ 13.09||$ 14.82|
|6.0x||$ 10.18||$ 11.91||$ 13.63||$ 15.36|
|PENX Valuation - Run-Rate Data|
|Food Valuation (x EBITDA)|
|Industrial||3.0x||$ 12.90||$ 15.00||$ 17.11||$ 19.22|
|Valuation||4.0x||$ 14.00||$ 16.11||$ 18.22||$ 20.33|
|(x EBITDA)||5.0x||$ 15.10||$ 17.21||$ 19.32||$ 21.43|
|6.0x||$ 16.20||$ 18.31||$ 20.42||$ 22.53|
Preferred Stock: On April 7, 2010, the Company issued $40 million of Series A 15% cumulative non-voting, non-convertible preferred stock (“Series A Preferred Stock”) and 100,000 shares of Series B voting convertible preferred stock (“Series B Preferred Stock”) in a private placement to Zell Credit Opportunities Master Fund, L.P., an investment fund managed by Equity Group Investments, a private investment firm (the “Investor”). The Company has 1,000,000 shares of authorized preferred stock, $1.00 par value, of which 200,000 shares are issued and outstanding at November 30, 2011 in two series.
The Company recorded the Series A Preferred Stock and the Series B Preferred Stock at their relative fair values at the time of issuance. The Series A Preferred Stock of $32.3 million was recorded as a long-term liability due to its mandatory redemption feature and the Series B Preferred Stock of $7.7 million was recorded as equity. The discount on the Series A Preferred Stock is being amortized into income using the effective interest method over the contractual life of seven years. At November 30, 2011, the carrying value of the Series A Preferred Stock liability of $40.3 million includes $6.3 million of accrued dividends, and $1.7 million of discount accretion for the period from the date of issuance to November 30, 2011. The accrued dividends represent the 9% dividends that may be paid currently or accrued at the option of the Company. Dividends on the Series A Preferred Stock and the discount accretion are recorded as interest expense in the Condensed Consolidated Statements of Operations.
The holders of the Series A Preferred Stock are entitled to cash dividends of 6% on the sum of the outstanding Series A Preferred Stock plus accrued and unpaid dividends. In addition, dividends equal to 9% of the outstanding Series A Preferred Stock may accrue or be paid currently at the discretion of the Company. Dividends are payable quarterly.
The Series A Preferred Stock is mandatorily redeemable on April 7, 2017 at a per share redemption price equal to the original issue price of $400 per share plus any accrued and unpaid dividends. At any time on or after April 7, 2012, the Company may redeem, in whole or in part, the shares of the Series A Preferred Stock at a per share redemption price of the original issue price plus any accrued and unpaid dividends.
The Company may not declare or pay any dividends on its common stock or incur new indebtedness that exceeds a specified ratio without first obtaining approval from the holders of a majority of the Series A Preferred Stock.
Disclaimer: The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.
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