Friday, March 13, 2015

STT Enviro

For a company with a net cash position, STT Enviro (STT) may be the most volatile stock I've seen. But that price volatility is a good thing, as it allows investors opportunities to buy this company at a discount to intrinsic value.

STT provides chemical remediation services along with tank structures to the currently-hated resource industry. The company is cheap on a trailing earnings basis: STT has a P/E of 7 using its price at yesterday's low, and a P/E of 10 using its price at yesterday's high. I told you it was volatile!

But that's not where the stock's attractiveness ends. The company had revenue of $22.3 million last year, with a beginning-of-year backlog of $13.9 million. The backlog at the start of this year, however, ballooned to $28.2 million, as management noted that "Our bolted tanks become a “must consider” alternative in the oil sands given current low oil prices because of our 25% to 30% cost advantage over field-welded alternatives". As a result, "[t]his sets up the Company for a very strong revenue expectation for 2015 relative to any previous year, although our gross margins will see some pressure due to the competitive nature of our current bids."

It's also worth noting that while the company has most of its costs in Canada, about a quarter of the company's revenues come from outside, mostly the US. The huge currency swing that has taken place over the last quarter(s) should serve to benefit the company even more.

Because of the backlog growth it looks like the company wanted more capital to be able to fund its working capital. It recently issued shares at the same price as yesterday's low ($0.25/share) to firm up its balance sheet. Considering the company is in a net cash position, I was surprised they felt it was smarter to issue shares at such a low P/E rather than borrow money. The company did recently pay back what appears to have been some psychologically harmful long-term debt, however, and so my guess is that management just didn't want to go that route again. The company's investor relations department assured me that no self-dealing was involved, but I'm not sure what that's worth.

Disclosure: Author has a long position in shares of STT Enviro


Anonymous said...

Negative OCF and FCF though...

Saj Karsan said...

Hi Anon,

For 2014, your are right. But often when a company is growing it needs working capital to be financed. In 2013 the company did not grow, and showed $4 million+ in OCF and FCF of $2.5 million. Its market cap a year ago was like $7 million!