Vitreous Glass Inc. (VCI.V)

Vitreous Glass Inc. (VCI.V) is meant for small accounts due to its small market capitalization (less than $25 million) and low trading volume. VCI is a reasonably-priced micro-cap Canadian stock with the potential for upside if the Alberta housing market recovers. The recovery in the Alberta housing market is dependent on numerous factors including higher prices for oil and natural gas plus the resolution of complications for transporting energy out of Alberta via pipelines or other methods. Despite its small market cap, VCI may be a reasonable investment in order to take advantage of any recovery in the global and Canadian energy markets that gives reasonable downside protection given its current valuation plus some upside without investing in oil and gas plays directly.

Description

Vitreous operates a waste glass processing plant in Airdrie, Alberta. The plant gathers post-consumer waste glass from Alberta and elsewhere, crushes it, removes contaminants, and sells the final product to three manufacturers of fiberglass building insulation for use as a raw material in their production facilities in Alberta.

All production from the Company’s Alberta glass plant is sold to two large customers and one smaller one in the fiberglass manufacturing industry in Alberta, which is heavily dependent on housing starts in Western Canada and the Northwest United States.

On the supply side the Company generally must accept glass as it becomes available from one major supplier, and two other suppliers of modest scale, all three of which involve a different cost, including hauling.

Regional Monopoly

VCI’s business model is relatively simple. The company first purchases glass from the Alberta Liquor Deposit (ALD), with whom they have an exclusive agreement to buy the waste glass. VCI must accept the glass from ALD. VCI also purchases smaller quantities of waste glass from BC and Saskatchewan. There are currently no other significant uses for waste glass.

Once the glass is collected from its suppliers, VCI’s plant processes the glass and sells it to three manufacturers (Johns Manville/Schuller International and Owens-Corning Fibreglass are the two largest purchasers). These manufacturers in turn use the glass to produce fiberglass building insulation.

Please note that the cost of transporting waste glass is high, making long-haul transportation costly. The cost of transportation is estimated to be roughly 3x the cost of raw materials. This has led to little or no competition from out-of-province waste glass processors. This has allowed VCI to pass on any increase in raw material prices including shipping costs to their customers.

Fibreglass production can use either sand or glass. The melting point of sand is higher than that of glass requiring higher amounts of energy and thus cost. Both sand and glass are heavy to transport.

Management

The CEO, Patrick Cashion, has been a board member since 1992, and has been the CEO since October 2011. Since Cashion took the reins as CEO, revenues have grown from $7 million in 2011 to $8.6 million in 2018 (CAGR of 2.98% over 7 years), while fixed costs have remained relatively stable. Furthermore, Cashion’s compensation plan aligns his interests with those of VCI shareholders – his base salary is only $86,400, whereas his bonus is 20% of operating cash flows. Investors may take issue with the percentage bonus amount of 20%, however it is hard to argue with the simplicity and direct relationship to VCI shareholders. Cashion’s compensation structure means that he is incentivized to maximize operating cash flow, which benefits shareholders.

In addition, VCI has significant insider ownership. Management and insiders currently own 43.2% of the shares outstanding. Cashion himself owns 24.2% of the company and his wife owns 13.4%, which demonstrates the confidence and knowledge that Cashion as well as management and insiders have in the business. The CEO’s wife is on the board which is not ideal corporate governance.

Growth

Fibreglass is a mature slow-growth industry. Over the past six years, VCI has grown revenues at 3.25% per year. If there is a significant recovery in the Alberta housing market due to a recovery in the energy market and resolution of Canadian energy transportation issues, revenue growth could accelerate somewhat which could have an impact on earnings. 

Valuation

Over the past 3 years, VCI has traded at an average trailing price to earnings (P/E) ratio of just under 12x. Using the projections below, VCI is trading at 11.3x 2020 earnings assuming similar average revenue growth as in the past of 2.98% per annum and similar gross margins. Even if there was no growth over the next 2 years, VCI trades at just over 11x trailing twelve month earnings.

Dividend Policy

Vitreous Glass has a dividend policy that Warren Buffett would endorse. The company determines quarterly, based on operating results, the amount that it will pay out as a quarterly dividend. In 2018, the company paid out $0.36 in dividends (almost identical to operating cash flow) representing a dividend yield of approximately 10%. This dividend has been relatively consistent over the last number of years. Given the company’s dividend policy, an investor is dependent on management to run the business rather than running the business and allocating capital.

Summary

Trading at a 9.5% 2020 forward earnings yield and with net cash on the balance sheet (the company operates with no debt. However, cash net of all liabilities is $0.08/share), Vitreous Glass is an attractive microcap investment opportunity.

Catalysts

-          Recovery in the Alberta economy and housing market

Risks

-          Downturn in the Alberta economy

-          Technological innovation resulting in cheaper transportation costs from out-of-province glass suppliers

-          New uses for waste glass

-          A serious issue with its sole operating facility in Alberta

-          Customer concentration