Monday, May 20, 2019

POLXF: A Business for Free

Polydex Pharmaceuticals, Ltd (POLXF) is a simple story.  They own their building worth ~$3M.  They have $1.6M in cash and a BV of $5.7M, yet the market cap is ~$3M.  This is one of many stocks I wish I owned more of.

You could shut down operations, sell everything, and turn a profit.  On top of that we have a business that did $4.9M in revenue last year with net income of $230k.

When you see a stock like this it's a dying business, or at least the public thinks it's dying.  Why else would it be priced less than hard tangible BV like that.  CVV is priced similarly.  You have to decide for yourself what may happen in the future.

The numbers:

  • $4.9M rev in 2019 vs 5.3M in 2018
  • net income $231k vs 448k
    • comprehensive income $-50k vs $721k after currency adjustment
  • BV $5.7M flat
  • cash + investments $1.6M vs $1.3M
  • 900k shares preferred 
  • 3.4M shares common
We can go back a little further with some numbers from the latest annual:

And look at revenue since they sold their subsidiary Vet Labs in 2004.  Doesn't look dying to me:

POLXF is on the edge of darkness like many of my stocks.  They de-registered from the SEC in 2010.  I don't know if they kept filing reports anywhere.  Their website shows reports starting in 2014 and then in 2016 they started filing again with otcmarkets.  Coming back to filing on otcmarkets is what originally caught my attention.

It's not the most exciting business.  Mostly the company makes one bulk chemical Dextran.  The do some R&D on future products.  From the most recent annual:
Polydex Pharmaceuticals Limited (the “Company”) is engaged in the development, manufacture and marketing of biotechnology-based products for the human pharmaceutical market, and also manufactures bulk pharmaceutical intermediates for the worldwide veterinary pharmaceutical industry. The Company focuses on the manufacture and sale of Dextran and derivative products, including Iron Dextran and Dextran Sulphate, and other specialty chemicals.
Before moving on I have to mention their preferred.  It's for voting only.  It pays no dividend and is not convertible into common.  It carries 2 votes per share and that's it.  I don't know how to value that other than go with the buyout value of $15k noted in the 1997 10-k.

Often times I invest in situations rather than businesses.  When I look at this situation what I see is potential.  Here we have three things: a steady business, a solid balance sheet, and real estate.
  • The business has been doing about $5M in revenue for the past 15 years.  Some years they are profitable and some not.  Profits have been as high as $0.38 and the stock followed.  
  • The balance sheet shows $1.6M in cash vs only $1.3M total liabilities.  BV is $5.7M.  
  • They bought their building in Toronto in the mid-90's for $425k CDN.  The company tells me it was appraised at $2.2M in 2010 and $2.8M in 2015.  
The stock has been $0.80-$1.00 for 8 months now.  What do you think the real estate is worth?  If it's $3M that's $0.89 per share and the business costs nothing.

You might think to yourself what good is the real estate since the company needs it to operate.  It's not  that simple.  Real estate can be put to use whether the business is separated from it or not.

HYDI recently sold their building for $0.67 per share when the stock was at $1 and announced a move to another state.  They are using the money to fund growth and entry to new markets.

PRAC sold their building and leased it right back then paid out a $0.38 per share dividend with the stock around $0.50.

BDR also did a sale/leaseback and is using the money to stay alive.

DEWY's mention of selling off their excess real estate, along with improved rev/earnings, has doubled the stock in the past 6 months.  

The point is not what will happen, but what optionality we have.  POLXF has been around a long time and the stock has been much higher than it is now.  Look at these long range charts.

The company is steady and has plenty of assets on the back burner if need be.  I don't see them going out of business and if they stick around another 10 or 20 years I'd wager there's a time when the stock is materially higher than it is now.

disclosure: long POLXF


  1. Nice write up Dan, I’ll add a few things.

    1. POLXF has a history of great Free Cash Flow Generation (I’m using EBIT + D&A – Capex), over the past 6 years they have averaged $570k, a couple more years of this and their whole market cap will be in cash.

    2. CEO’s most recent commentary “The order book remains strong leading into the new year with increased orders from existing customers” . In speaking to him recently I think they are due for a few good quarters now that machines are fixed. I estimate $0.05 a quarter for an annual run rate of $0.20… 10x that add back cash stock should be $1.80 at least.

    3. They should be getting a $250k payment form Sparhawk within the next year or two and once this new 20% Dextran product with Sparhawk is approved by the FDA and sales in the U.S. will be much stronger.

    4. They are working on new applications of Dextran for use in water and mining, if these take off, revenue could see a substantial boost.

    Aside from the cash and Real Estate the business and earnings are going to rebound and look good after 2 years of declines… the last time that happened the stock went from the $0.70 range to a high of $2.82

    1. Thanks. This just makes me wish I owned more. I don't have spare cash right now and got sick of waiting so I wrote it up.

    2. Its great that you have more good ideas than cash. I unfortunately have more cash than stock since my HEMA limit orders in low $8’s and high $7’s were not hit December (excuse me while a throw up! lol)

      The thing people don’t realize is that Polydex actually has a decent business. A recent combination of Exchange Rates, factory problems and some fire-sale pricing buy a European company trying to further penetrate the U.S. market has caused a slump in earnings. All of this is fixed now and the company is running a full 7 day schedule to get out current orders out the door and keep up with new demand. Not bad for like you said “a business for free”!

      Plus you have the swine flu epidemic in China (Iron Dextran is injected into new born pigs) so they are seeing an uptick in business as China imports pork. I believe Polydex is the only North American producer of high quality Dextran, with FDA approvals, valuable Drug Master Files and Fortune 500 drug companies as their clients. Its mind boggling that the business itself is valued at nothing!

      As a long time micro and nano cap investor, I guess I shouldn’t be surprised, its the old saying "if a tree falls in the forest…! Your blog helps keep me sane as it shows that eventually things work if you are right!

  2. Nice write up
    Someone took it seriously and jumed the stock in 37% (with 7000$).
    Nice idea that can give back nice in the next 10 years

  3. I think that's a good stock pick. Amazingly, it seems that this blog can indeed increase the price of these stocks. (However, this may not be so sustainable in the short term).

  4. Interesting stock, great writeup as always, thank you Dan! And thanks King for the additional background info!

    Dan, a quick question if I may:

    > They bought their building in Toronto in the mid-90's for $425k CDN. The company tells me it was appraised at $2.2M in 2010 and $2.8M in 2015.

    Just to be sure, we're talking 2.2/2.8M *US* dollars here right?

    1. Yes the appraisals are in US dollars. At least I think they are. Here are the direct quotes from their investor relations.

      "The most recent appraisals are as follows;
      Capital Valuations appraised the property at $2.2 million in 2010.
      Kalex Valuations came in at $2.8 million on 2015.

      The most recent tax statement assesses the property at $2.4 million"

      "the building in Toronto was purchased in 1993 for the sum of $425,000 CDN."

    2. Ok great, thanks again!

    3. I think the property is undervalued, but keep in mind they invested in the building over the years, so it's no longer on the books for $425,000; it's on the books for the 425 plus the investments they've made minus any depreciation

  5. Fundmentals look good and cheap:
    MC of 3.7 Mio., P/E 13 (ttm), P/FCF 6.7, P/S 0.7, P/Book 0.66.
    The p/e is not so low. Further, in the last 10 years the stock did go as low as 10 cents.

  6. "Coming back to filing on otcmarkets is what originally caught my attention."

    How do you monitor for companies coming back to filing on otcmarkets?

    1. I don't have an automatic alert or anything. You can see status changes on otcmarkets here:

      I think I first heard about POLXF from geoinvesting years ago. And then a couple people had mentioned it to me as one I might like. All I meant is when I first looked it over the thing that most interested me was the fact they had just come back to filing. I'm always looking for change. When I hear about a company I look at the numbers, the chart, and the situation.

  7. Any thoughts on yesterday's earnings report from POLXF?

    1. not really. I like the improved margins. Hopefully keeps moving in the right direction

    2. think the numbers were great, $0.06 is a $0.24 run rate for $1 stock... a stock that has about $1.30 per share in cash and real estate... its mind boggling that its only trading at $1.09! I think there are a couple things going on here... 1) there is a large seller who wants out, every time the stock starts to get some momentum the large seller comes in with 20k-30k shares and knocks it down. Only when this seller is cleared out will the stock gain any traction. I can't imagine he/she has much more to sell but who knows!

      2) POLXF's results have been very inconsistent. Margins are all over the place, execution has been spotty and all the break downs and stuff makes people think management doesn't have a handle on the business so we will need to see a few good quarters for people to believe thing have improved.

      I don't think they will do $0.24, this year... probably more like $0.18 since this first quarter included a large higher margin order that they usually get only once a year. But again, put up a few $0.04 quarters, clear out the seller, the stock should be $1.50.

  8. this study shows that it was quite easy to beat S&P500. the return of the smallest 20 stocks in the S&P1500 was 33% p.a. Minimum market cap was 17 Mio. So it was also possible to beat the market with a bit larger stocks which are listed on the stock exchange. However, an Investor should be prepared that this is a volatile strategy. E.g. the smallest stocks strongly underperformed the largest stocks for the period 1981-1999 (see page 11). 19y of underperformance could be a Long time.

  9. I am wondering how you handle the risk of a delisting for a micro stock. E.g. a stock is delisted if it trades for some time below 1 usd or below a certain market cap. The price of a stock, that is delisted, often goes down by 50% or even more. So it is a bigger risk if you invest in listed micro stocks. Or do you just not hold listed stocks?

    I noted also there is a exchange called "value exchange". Currently I hold one stock which was downgraded on this "exchange" and my broker (IB) does not support trading anymore. Do you know what this is? So it seems that there is also a downgrade risk on OTC?

    1. I hold listed and not listed stocks. Yes sometimes they delist and drop which can be an opportunity. It's one piece of the pie. Sometimes they delist and don't drop. DYSL is one I own now that's delisting.

      I've never heard of the "value exchange". I know of the grey market which is the skull and cross bones on otcmarkets. IOMT or SIMA for example. In these stocks there is no electronic quote so anyplace you look online there's no bid/ask. You'd have to call in.

      There's always some risk. Any company listed anywhere could disappear and never talk again

    2. It happened to me once. I had shares in SteadyMed Pharma, it was taken over byUnited Therapeutics
      It took until April 2019 to get the cash and until that time my shares were on "value" and dead money.

  10. Hey Dan. Thanks for sharing another great find with a great write up! I was just looking through their latest annual report and was confused about their note 7: "related party transaction." Note 7[i] describes amounts due from shareholder of 21,000 but the note below describes that as only the interest bearing part not including a non interest bearing amount of 250,000. 243,263 shares a collateral for this loan. The management discussion and analysis further complicates these loans by not discussing the 21,000 at all but instead describing an amount due as 285,081 with interest of prime+1.5%. Then there is a large provision described against collection of this loan and accrued interest. The management discussion also discusses the 250,000 non interest bearing loan as having no repayment terms. What do you make of all these confusing loans to late former director Thomas Usher? Should a shareholder ever expect repayment or should the collateral shares be considered as good as repurchased shares? Thanks in advance for your thoughts.

    1. Yeah you see stuff like this sometimes with these little companies. I've seen it both ways. Major shareholder lends to the company because that's the easiest thing to do and then major shareholder lets them forgo interest for years. Or in this case it seems the company lent money to the shareholder with no interest. I haven't looked into these deeply. Since it's been so long I don't know what will happen. Eventually I'd bet the shares get retired but that's just my guess

  11. Hi, Polydex sounds very interesting. But I look at the website and all their annual reports are unaudited. does that concern you?

    1. No. They’re probably just trying to save money

  12. potentially very exciting news today:

  13. I spoke to the CEO... Dextran replaces Chlorine, it costs about the same for power plants so no benefit there but is as effective and much better for the Environment and a new alternative if we have another Chlorine shortage. Apparently it works for all types of power plants, nuclear, coal etc.
    With $2mln in net cash and debt free real estate of at least $3.5mln combined with a profitable cash generating business with high barriers to entry the current #3.5mln mkt cap is a steal! Especially when Sparhawk gets approval to sell 20% Dextran (hopefully within the next few months)and POLXF gets the other $250k payment and is now selling both 10% and 20% Dextran earnings will be even better.

    1. thanks that is very interesting. cheap for sure and likely a waiting game until the income statement shows some change

  14. Merger at $2.017 yay!

  15. Great news! Still a 15% spread to the merger price. Any thoughts on whether it is a good play at this level?

    1. I bought more to play the spread. The 14% was way too high.

    2. Yes I bought some more yesterday right after I saw the announcement as well