Thursday, February 18, 2016

MICT making moves

Often times I'll buy shares in a stock fairly quickly after finding it if it sounds good and fits my style. After reading further and maybe talking to management, etc I'll buy more and write a blog post to capture my research.  Usually there's a theme or overall story with each company and that's the way I like it. To me the best things are simple so I'm always happy to be able to chop down an investment to a single point.  Complication is cluttered and leaves room for error.

What does this have to do with MICT?  Well I bought shares a few months ago and was doing my further research last month. I read a bit more with the intention of finishing (it's never really done but can be done enough for now) and writing a blog post. Problem is no single clear theme jumped out at me so I put it to the side and moved onto another stock. Then today MICT came out with a PR about buying another company... So now it's time to follow through with my blog post.
Let me apologize in advance because I haven't put in the time on this stock that I normally do but I'm itching to write a post and with the PR today I just want to get this out.  

Microtec Enertec Technologies (MICT) is an Israeli company listed on the Nasdaq.  Operations are world wide but largely in the U.S. and Israel.  MICT is a holding company with two subsidiaries: 100% of Enertec and 63% of Micronet.  Micronet is listed on the Tel Aviv Stock Exchange where they do post reports but unfortunately they are written in Hebrew which doesn't do me much good.   Micronet has a U.S. division in Utah.  From the 10k:
Micronet is a publicly traded company on the Tel Aviv Stock Exchange and operates in the growing commercial Mobile Resource Management (“MRM”) market. Micronet through both its Israeli and U.S. operational offices designs, develops, manufactures and sells rugged mobile computing devices that provide fleet operators and field workforces with computing solutions in challenging work environments. Micronet’s vehicle cabin installed and portable tablets increase workforce productivity and enhance corporate efficiency by offering computing power and communication capabilities that provide fleet operators with visibility into vehicle location, fuel usage, speed and mileage. Micronet’s customers consist primarily of application service providers (“ASPs”), and solution providers specializing in the MRM market.

Enertec operates in the Defense and Aerospace markets and designs, develops, manufactures and supplies various customized military computer-based systems, simulators, automatic test equipment and electronic instruments. Enertec’s solutions and systems are designed according to major aerospace integrators’ requirements and are integrated by them into critical systems such as command and control, missile fire control, maintenance of military aircraft and missiles for use by the Israeli Air Force and Navy and by foreign defense entities
Enertec generates revenue mostly through funded development, which involves the development of a small number of products, systems or solutions for evaluation. Thereafter, we anticipate moving to the production phase and generating revenue through direct sales from the mass production of its developed product. Enertec generates additional revenue from the customization and upgrades to its products. 
  • BV $2.95 per share
  • Recent share price around $2
  • Cash + securities $1.80
  • ST debt $1.85
  • LT debt $0.46
  • Clean share structure with only common
  • 5.9M shares outstanding
  • Market cap around $12M
  • 46% owned by board
  • 44% owned by CEO
  • no earnings
What I like about MICT:
First is the chart.  I love buying near all time lows:

Second it's cheap and fits my style.  Clean share structure, small share count, heavy inside ownership.  

Management is not afraid to make a deal.  In 2012 they started buying up shares of Micronet.  In 2013 they started a JV to sell in India.  In 2014 they bought up Beijer's US vehicle and MRM operations for $7M.  Then today they announced the acquisition of Novatel Wireless's telematics division for $24M.  They sure do know how to write a PR, it notes the transaction is accretive, will double their revenue, and will "transform" them into a "major supplier".  It seems like a good complimentary business to own so I'm all for it.  Price doesn't sound bad either at 1x sales and 6x EBITDA.  Half the price will be due at closing with a quarter due on the one and two year anniversaries.

And the thing that got me to make my initial purchase: the PR they put out with the 10Q in Nov 2015.  Quite simply one of the most positive sounding press releases I've read from a company currently earning nothing.  They certainly do not lack in confidence.  Some excerpts:
During the third quarter we began to see marketplace momentum from our new All-In-One wireless platforms for the MRM sector. 
our new, U.S.-based sales team has generated tremendous interest in our full connectivity product line and we’re encouraged by significant increases to our order pipeline.
We saw a meaningful increase in our backlog during the quarter which sets us up for a particularly strong fourth quarter and 2016.
MRM backlog grew considerably throughout the third quarter as customers embraced our new product line, and we anticipate 60 plus percent revenue growth over the third quarter and improved gross margin performance in the fourth quarter as orders are shipped.
Our order pipeline for the All-In-One solution is strong and we expect to benefit further from the Federal Motor Carrier Safety Administration’s (FMCSA) publication of the Electronic Logging Device (ELD) mandate  as the trucking industry prepares for compliance, given that our product captures the required logging data.  With the momentum in our business, favorable macro trends, and focus on driving margin improvement, we anticipate strong revenue growth and net profitability in 2016 and coming years 
We have been strategically focused on diversifying our customer base by growing our presence in the MRM segment and are confident that our U.S. presence and enhanced product offering position us well to drive growth in this market 

What I don't like:
Lots of debt.  This is not normally my thing but here I am.  Debt is fine as long as it manageable so the question is will they get back to earning money to pay it all off.

No earnings.   The company is certainly trying and it sounds like they are moving in the right direction but for now it's a money losing operation.

They fired their CFO in Dec.  This could be a good thing but I don't know.  I should really talk to management before forming an opinion.

They don't disclose complete backlog.  The 10Q shows nothing while the 10K shows only Enertec.  Micronet's might be disclosed in Hebrew on TASE but that does me no good.  I would love to plot historic backlog vs revenue to see how well they correlate since the Nov PR mentions a "meaningful increase."

The future:
One good opportunity for MICT is the recent FMCSA mandate that "requires interstate commercial truck and bus companies to use Electronic Logging Devices (ELDs) in their vehicles to record their compliance with the safety rules that govern the number of hours a driver can work. Implementation of rule compliance will begin immediately, and full enforcement of the regulations will commence in 2017.  With full implementation of the rules, industry analysts anticipate that the number of ELD-equipped trucks on the road will increase from 1 million today to approximately 2.7 million in 2017."

Based on their history I would not be surprised to see further company purchases but I hope they wait a while to pay down some debt

Conclusion and valuation:
I don't know what to say about valuation other than I think MICT has an opportunity to get profitable and grow.  They are invested and active, let's see if they can execute


disclosure: long MICT

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