Monday, January 6, 2020

STRI Isn't Done Yet

Almost 3 years ago I wrote up STRI with the stock was at $0.18 and a market cap of $3.5M.  It was a net-net with about $15M in cash.  The stock doubled in two years then dropped all the way to $0.07 before recovering to the low teens.  Latest closing price is $0.12.

The story now is much the same.  We have a small company struggling to stay alive and I'm still waiting for the turnaround.  I read every filing with excitement.  "Maybe today is the day" I tell myself.  They closed operations in China.  They are leaving India.  The Malaysian facility was sold.  They started into a new business in Europe while cutting costs to keep the lights on.

I stick around for the potential amongst the carnage.  Three weeks ago they announced the sale of their old Malaysian facility was completed for over twice the market cap.  A $5M per quarter contract was announced which would be a 300% increase!

Below are numbers and the chart over the past 3 years:




The table shows you all the negativity and risk you need to hear.  Cash has been cut by 2/3rds.  They took on debt.  Book value is down 60%.  Their main business was solar panel encapsulants and it has not gone well.  This has been an operational falling knife and it might continue all the way to zero.

But then again STRI has a lot of what I look for.  The stock price is low and at the bottom of the chart.  Share structure is clean with only common.  They are trying for a turnaround and you know I'm a sucker for turnarounds.  They have $4.9M in cash, double the market cap.  A few weeks ago they announced the Malaysian facility sold for a net for $5.3M which will make it $10.2M total cash.  

A few years ago the company saw the dark future and made a change.  From the 2017 CEO's letter, "We are very pleased to report that in September 2017, our board of directors approved a significant investment in our Spanish entity, STR España, S.A. (“STRE”), to enter the large and growing high-end food packaging business."  This sort of thing is what I look for.  Pulling out of a weak business while moving into something with potential.  Change is here and change is what I want.  Give me potential, not stagnation.  The company is trying to get away from death, though recent numbers show they are swimming upstream.

Several years ago their solar operations were in China.  Losses forced their hand so they shifted to India which suffered a similar fate.  They have collected from their India partner and sold the Malaysian operation.

This is what survival looks like.  Cut off the dead branches and plant new saplings.  Put that cash to work.

Long term the stock will be a big winner if the food packaging business is a home run.  Some commentary from the most recent CEO letter (I recommend you read the whole letter):
we have made a major investment in the food packaging business at STR Spain. More specifically, we have invested approximately €5 million in new equipment and facilities upgrades to allow us to participate in the high-barrier, multi-layer film market for food packaging.

We made this investment believing that (i) solar encapsulant manufacturing will continue to decline in Europe, (ii) our facilities, systems, supplier relationships and know-how are very well suited for plastics manufacturing, (iii) the high-barrier films market in Europe will continue to grow for the foreseeable future, (iv) demand for our products will support our installed capacity and, (v) the return on investment will be strongest at the high-tech end of the product spectrum where we have chosen to enter.

BRC certification requires clean manufacturing practices, special provisions and procedures for avoiding contamination, proactive pest control, certain material handling requirements and other measures important to ensure food-safe production. We have been operating our facility in what we believe to be BRC-compliant mode since 1Q19. Our goal is to clear this important BRC certification hurdle by year-end by having an audit as soon as practicable after we have been able to develop sufficient production records.
I don't know anything about the food packaging business.  I can only trust they know what they're doing and think about the possibilities.  It won't take much to move this stock with only a $2.4M market cap.  Imagine what happens if their BRC certification comes through and they start getting orders.  Anything has got to be better than what they've been doing and the stock will respond.

The main reason I'm excited about STRI right now though is the $5M per quarter solar encapsulant contract they announced in Aug 2019 and commented on in the CEO letter.
Based upon current pricing, which is subject to adjustment, the Company anticipates that the minimum revenue it will receive under the Supply Agreement, if the Purchaser purchases its minimum requirements under this contract, will be approximately $5.0 million per quarter.

The term of the Supply Agreement is for a period of three years from commercial commencement of the new production capacity

The term of the Supply Agreement renews annually for additional one-year periods unless cancelled by either Party

We anticipate that such capacity will be operational during the first half of 2020, that the material will pass their requirements and that production-scale sales will commence under the supply agreement (the “Agreement”) mid-year 2020
STR will now be in a long-term supply relationship with the opportunity to grow our solar encapsulant business with recurring revenue and profitable sales over the three-year supply agreement period and potentially beyond
Man that sounds good!  STRI is a company with latest quarterly revenue of $1.2M and TTM sales of $6.8M.  Here comes a $20M per year contract.  They estimate it'll cost $3M to get the line running and we don't know what margins will be, but they're going to report some insane revenue growth when this kicks in.  That press release alone could cause a big stock spike.  What if they actually turn a profit?

In situations like this I think about how could I lose and how I could win.  Same reason I look at a chart and buy when it's at the bottom, I want more room to go up than down.  With STRI I see a few ways it could win big and they have the pieces in place to at least give it a shot.  What more can you ask for.

I bet the stock would've already taken off if they reported some good food packaging contracts.  Maybe one of these days...


--Dan
disclosure: long STRI

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