Wednesday, June 14, 2017

Aggressive Change at DPW

Digital Power Corporation (DPW) is a $4M market cap electronic power supply company under new ownership as of 8 months ago. The ship has turned towards explosive change with a $50M contract and one acquisition already. At the current price you get the old business on the cheap with everything new for free.

DPW is another in my line of companies with a flat, low margin old side paired to an exciting new high potential side. Same as HEMA was, same as GIGA is, as well as SOFT.  One thing that sets DPW apart is new majority ownership aggressively pursuing growth.

added June 14, 2017
Zacks put out a nice report in May with valuation of $1.20.

The core business is power system solutions. From the latest 10k:
We provide the highest density, highest efficiency and high-grade flexibility power supply products and systems. We provide full custom, standard and modify-standard product solutions and value-added services to diverse industries and markets including military-aerospace, medical and industrial- telecommunication.  We believe that our solutions leverage a combination of low leakage power emissions, very high power density with superior power efficiency, flexible design leveraging customize firmware and short time to market.

High potential comes from new management.  
(From latest 10k) Our strategy to increase revenues through acquisitions was developed after a review of our current business. While we continue to maintain our core business of power system solutions for the military-aerospace, medical and industrial-telecommunication industries, we have determined that significant organic growth in these industries will be challenging due to our limited releases of new products offerings, insufficient sales and marketing force as a result of deferring research and development of new products because of limited working capital, and lack of financial size in industries traditionally dominated by more large, well established and capitalized power system solution companies.

Therefore, we believe that the best strategy for us and our shareholders is to invest our core business to support releases of advanced new power technologies and to expand our customer base and market share in our major serving markets.

(From 5/5/17 8k) As previously disclosed, for the remainder of 2017, the Company is pursuing an increase in revenues by seeking to attract new customers and implementing an aggressive acquisition strategy to build upon its anticipated organic growth. This anticipated revenue increase reflects management’s and the Board’s commitment to an aggressive growth strategy through acquistions adopted pending the change in control completed in September 2016. In implementing this strategy, the Company has hired a number of additional personnel and consultants to assist in identifying, analyzing, negotiating and acquiring potential companies. The Company will need to raise a substantial amount of capital for acquisitions and to support its infrastructure.

Core Business
As of the latest 10k we have the following numbers:
  • 7.7M shares common in 2016 vs 6.8M in 2015
  • No preferred
  • BV $0.47 per share in 2016 vs $0.51
  • Rev $0.99 per share vs $1.15
  • EPS $-0.16 flat

The core business is fine.  Power supplies for the “military-aerospace, medical and industrial- telecommunication” industries are not the worst place to be. It's stable and far from dying. Based on those numbers I'd value the business around $0.75 per share.

New Management
In Sept 2016 the husband and wife team of Kristine and Milton "Todd" Ault took over.  Philou ventures (owned by Kristine Ault) bought Telkoor's 40% stake in the company for $1.5M = $0.55 per share.  Along with the purchase the entire board was replaced other than the CEO, Amos Kohn, who remains.  Milton Ault is now the Chairman of the Board while Kristine is a Director.

The company changed direction immediately.   Core business stays while they aggressively move beyond.  Philou is providing funds while the company seems set to go on an acquisition spree.  They've already invested in one company (Avalanche (AVLP)) and completed one acquisition (Microphase).  They also received a $50M purchase order from MTIX.  

Before going any further we have to bring up the Ault network of inter-company dealings.  I am not sure what to make of all this but in the end I don't really care.  DPW has been cheap for years and now has a catalyst so let's see what happens.  I imagine the Ault's are lining their own pockets with financing terms and salaries.  As long as revenue goes up the stock will follow (pending dilution...).  

AVLP and MTIX
These two are one and the same as far as DPW is concerned and the only question is will the $50M purchase order be executed.  If so then this $4M market cap company is super cheap.  In Mar 2017 DPW received a "$50 million purchase order to manufacture, install and service fabric treatment machines that utilize MTIX’s proprietary Multiplexed Laser Surface Enhancement (MLSE™) system.  The purchase order calls for a number of fabric treatment machines to be assembled over a three year period. The first two machines are to be installed by the end of December 31, 2017 with the number of machines to be assembled increasing each year and due by the end of August for each calendar year 2018 and 2019."  MTIX believes they have a revolutionary textile machine of some sort.  

This deal is certainly something to be scrutinized due to the ownership structure.  On the negative side the latest 10k notes "No assurance can be given that MTIX will order $50 million in fabric machines which are the subject of the purchase order."  The most recent numbers from MTIX's UK filings in May 2015 show a BV of only $125k.  AVLP has a market cap less than $1M and bought MTIX for only $10M.  But the PO announcement was a real press release and since then the company has said they are moving forward.  In May they said they are "executing this year the first part of the 3-year $50M order from MTIX".  In June DPW discussed the MTIX technology and again mentioned the $50M order then added "DPW has been awarded first right of refusal to finance manufacturing of the MLSE equipment beyond the first purchase order."

Will the $50M come?  I don't know.  I think the order will be executed.  It may move slower or total less than expected, but they are moving forward.

Microphase
This is a stock swap and ends with DPW owning 50.7% of Microphase.  Microphase had revenue of 6.6M in 2016 vs $7.6M for DPW.  Microphase sounds like a similar company to the DPW core business.  They make electronic Rf devices for the defense and aerospace markets.  

The Future
It always comes back to the future.  DPW has given us the following estimate.  Missing from this is share count and earnings.  I imagine this is consolidated as well.  

There's also the question of listing.  Currently DPW is fully SEC reporting and listed on NYSE.  In May 2017 the NYSE gave a warning they will be delisted if they can't get $6M in shareholder equity.  Philou has pledged to provide funding to keep the listing and they are.  They have been buying preferred stock from DPW so the company will stay on NYSE while shareholders will be diluted.  So it goes.

Chart
No stock discussion is complete without a chart.  As you can see we are at a long term low support area.  Good place to buy

Conclusion:
The numbers get confusing due to dilution and consolidating subsidiaries so I will not try to get exact.  The chart shows we are at a long term low support area.  New ownership bought in at $0.55 per share.  The stock is currently at $0.45.  The legacy business is worth more than that so we get the new ownership upside for free.  

On top of legacy we have the $50M purchase order, Microphase acquisition, and the AVLP/MTIX investment.  Management is actively looking for further acquisitions and I'll be surprised if we go through this calendar year without more deals.  Management estimates revenue being a double next year and up 10x in 5 years.  I bet we get some stock spikes to sell into as press releases come out and increased revenue is reported.  

Positives are high upside and active, new ownership.  Rather than wait for growth they are investing heavily and pushing forward.  

On the risk side we have dilution and paying too much for acquisitions.  Dilution started with the new ownership and will probably not stop as we move down this path.  We might see a reverse split.  


-- Dan
disclosure: long DPW

5 comments:

  1. Added a link to the Zacks report from May 2017. http://s1.q4cdn.com/460208960/files/News/2017/May-5-2017_DPW_Thompson.pdf
    http://scr.zacks.com/News/Press-Releases/Press-Release-Details/2017/DPW-New-Ownership-Charts-a-Growth-Path-for-Digital-Power/default.aspx

    Forgot that when I first published.

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  2. lots of money will be needed to finance the leasing of these MTIX machines, they may get it, but it's not a done deal, also DPW said they want to raise $5-$10 million in equity, still it is interesting

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  3. Any idea how today's default on a small Convertible Note falls into all of this? (see yesterday's 13D

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    1. I wonder why they let it default. Probably managing cash I guess. It's only for $125k so I imagine they'll pay it and that's that. But who knows

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