Here is what Canaccord Capital had to say in this morning's Daily Letter ... starting to make some sense to me now:
Aimglobal Technologies Inc. (AGT : TSE : C$15.25 / AMEX : US$10.125)
Jeff Rath, CFA (604) 643-7323
Recommendation: STRONG BUY
12-month target price: $30.00
52-week price range: $28.35-5.00
Shares O/S: basic 14.40M
fully diluted 16.50M
Float: 11.0M
Major shareholders: Mgmt. & directors, 30%
Weekly trading volume: 229,500 shares
Working capital $49M
Book value/share: $6.25/share
Dividend/Yield Nil
Market capitalization: $251M (f.d.)
Sector: Industrial Technology
Web site address: www.aimtronics.com
What Happened? Why Did Shares in AGT Drop $5.00/share?
The quarterly financial results released August 15 were AGT's Q4/00
three months ending Mar 31/00). Leading up to this release,
management had been actively visiting investors and discussing future
financial expectations. While opinions vary, many investors (including
ourselves) were left with the belief that AGT would likely report EPS
net of write downs from discontinued operations) of approximately
0.20/share for the quarter. When the company effectively reported a
loss $(0.02/share), we believe many investors felt betrayed and sold
the stock, believing that they had been mislead.
Our post-conference call discussion with management led us to believe
these results (while below expectations) are in many respects better
than most investors first understood and, more importantly, suggest
that AGT is still on-track to report solid and growing profitability
in its f2001 and 2002. To summarize, we believe that the broader
market, in its haste to penalize management, has misunderstood these
recent results, which present investors with a good buying opportunity.
We believe much of the company's EPS miss [$(0.02) actual loss versus
expectations of a $0.20 gain] can be directly attributed to
non-recurring items and/or investments designed to support future
profitability.
AGT - Adjusted EPS
Actual EPS (excluding write downs) $(241,515) or $(0.02/share)
Adjustments:
Note 1: Non-recurring inventory write-downs/provisions imbedded in
COGS $1,300,000 or $0.11/share
Note 2: Enterprise Resource Planning implementation charges (ongoing
for the next 3-4 quarters) $350,000 or $0.03/share
Note 3: Non-recurring charges related to consolidation down to one
employee health benefits carrier (consolidated from five separate
carriers) $300,000 or $0.03/share
Note 4: catch-up accrual of Capital and BC large corporation tax
previously not accrued) $350,000 or $0.03/share
Net Effect of Adjustments:
Revised EBITDA $3,340,000 or $0.29/share
Revised EPS $2,060 or $0.18/share
Note 1: These non-recurring inventory write downs/provisions involve
either stale inventory related to the now divested Aim Safe Air
division (for which AGT was the EMS provider) or provisions
accounting safe guards) that are considered one-time in nature. While
future inventory write-downs cannot be completely ruled-out,
additional provisions such as the ones recognized within the quarter
are not expected to re-occur. This write-down effectively reduced
reported gross margins from 14.5% to 11.8%.
Note 2: The value-add that the EMS industry provides its customers
relies heavily on economies of scale. AGT announced in mid-2000 that
it was implementing a new Enterprise Resource Planning (ERP) solution,
designed to maximize supply change management efficiencies and,
eventually, set the stage for a just-in-time inventory management
system. We believe this represent a long-term investment that should
produce excellent longer term returns for shareholders. While ERP
related expenses are expected to continue for at least the next 3-4
quarters, we believe investors should exclude them from operations.
Note 3: AGT also consolidated its employee health care provider during
Q4. This resulted in one-time break-up/administration fees of
approximately $300,000, which are not expected to recur. As human
resources is extremely important to a successfully run EMS company,
employee satisfaction is considered extremely important.
Note 4: Previously, AGT's auditors had not accrued Capital and BC
Large Corporation taxes properly. As a result, the year-end audit
resulted in a doubling or catch-up of one-time related taxes of
350,000. Proper accruals are now in place.
Management confirmed that all future quarterly financial results will
now be complied and reviewed by its auditors prior to release, to
avoid any negative perception and reduce any year-end restatements. As
the company has in fact already finished its Q1/01 (Jun 30/00)
results, management expects to report these on August 28.
Recommendation
The last 24 hours has been extremely confusing for investors. We
believe the recent share sell-off has served to support unfounded
rumours regarding the failures of AGT's management, causing many
investors to sell shares without first truly understanding the actual
results. However, true or not, we believe significant damage has been
done to the reputation of management and investors should expect the
road back to be slow and now supported by strong operational results.
We have now revised our financial projections (details are provided on
the following pages.) Essentially, with a view toward increased
conservatism, we have increased gross revenues and pulled back our
gross margin assumptions.
We continue to recommend shares in AGT as a STRONG BUY and maintain
our 12-month target of $30.00 based on 20.0 times f2002 EPS or (30.0
times normalized 2002 EPS). |
