From: editor@smallcapinvestor.com (SmallCap Investor News)
December 22, 1997
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The SmallCap Investor
Stock of the Month
January 1998
Tech Electro Industries, Inc.
Nasdaq: TELE, TELEW
Baby Berkshire In The Making?
Berkshire Hathaway and its founder/president, Warren Buffett, have
grown
famous for their strict adherence to the fundamental principles of
value
investing. An individual investor following the company since its
inception
would be extremely wealthy today. But Berkshire shares consistently
trade
for over $40,000 per share - far out of reach for investors seeking
low-priced bargain stocks.
Tech Electro Industries offers investors a near-ground floor
opportunity to
join a kind of small-cap holding company - a baby Berkshire, if you
will -
for about $3.50 a share.
In February 1997, a group of investors took control of TELE with the
purpose of using the company as an acquisition vehicle. The investor
group
bought 1.1 million common shares and 1 million stock options
exercisable at
$2.10 each for total consideration of $1.87 million.
The company's new management - Chairman of the Board and
President William
Kim Wah Tan, Vice President Kim Yeow Tan, and Vice President
and Corporate
Secretary Sadasuke Gomi - have since attracted two top-flight
personnel
additions: Steven Scott as an executive vice president and John Rosati
as a
consultant.
Scott is primarily responsible for acquisitions and strategic planning.
He
was formerly senior vice president at Dean Witter Reynolds in Beverly
Hills
and has helped raise a total of over $1 billion dollars in his career.
Rosati is responsible for researching potential business opportunities
in
the high-technology and communications industries. A recognized
leader in
the development of advanced technology initiatives for a wide
spectrum of
applications, he boasts 25 years of international and domestic
operating
experience in technology products, development, marketing, sales and
distribution. He also chairs the Physics Advisory Council and
Cognitive
Science Advisory Council at UCLA.
This strong leadership group has earnestly launched the company's
stated
mission: make intelligent acquisitions and that will boost growth
without
dilution. The company has indicated that it will not consider using
stock
for acquisitions until TELE is trading at a minimum of $15 per share.
Therefore, TELE's current plan is to finance acquisitions with debt
and pay
the target company in cash. The target companies are profitable
enough that
TELE can pay the interest on the debt used to buy them and still have
plenty of profits left over to fall to the bottom line and boost TELE's
earnings per share. And because shares outstanding will not grow with
each
acquisition, significantly large increases in earnings per share are
possible.
Seeking acquisitions which will enhance shareholder value, TELE is
pursuing
two key strategies:
(1) The company will buy businesses for five times EBITDA
(earnings before
interest, taxes, depreciation and amortization) or less. Essentially,
TELE
seeks to purchase earnings at a low price.
(2) The company will buy assets below fair market value. This would
include
buying companies that have hidden assets - assets which are carried
on the
books at much less than fair value. This often includes land carried on
the
books at its purchase price, although its fair market value is
significantly higher.
On December 19, TELE announced that it is acquiring 63% of Long
Island
based U.S. Computer Group Inc. for $1 million in cash and a $1.5
million
loan. The company's services include system maintenance for Digital,
IBM
Midrange, Sun and leading brand PCs, new and used equipment
sales, network
integration and design services, and support services such as disaster
recovery and business relocation. U.S. Computer Group, which has
placed on
the INC. 500 list of the nation's fastest-growing privately held
companies
for five consecutive years, has annual revenues in excess $25 million
and
is profitable. According to TELE, the liquidation value of this
company is
$5 million and the acquisition will immediately add approximately $1
per
share in shareholder equity.
From our discussions with management, we feel that this acquisition
will
add $0.25 or more per share to TELE's consolidated earnings in
1998.
Management is committed to boosting the company's growth, and
this is just
the first of many steps which have been quietly worked on for the
past nine
months.
TELE has also previously announced that it is interested in acquiring
Black-eyed Pea USA Inc., a restaurant chain owned by DenAmerica
Corp.
(Amex: DEN). According to press releases, WAM Acquisitions LLC
offered to
purchase Black-eyed Pea for about $69 million in cash. WAM
Acquisitions was
then to sell Black-eyed Pea to TELE. But DenAmerica, which itself
acquired
Black-eyed Pea in 1996 for about $65 million, rejected the offer from
WAM.
However, discussions with TELE management lead us to believe that
talks
with DenAmerica to buy Black-eyed Pea are still occurring and that
the
acquisition may well come to fruition. If so, it would add well over
$100
million in revenues and over $15 million in EBITDA to TELE. After
accounting for interest payments on the debt needed to finance the
acquisition, enough profit could fall to the bottom line to increase
annual
earnings per share by $1 or more.
TELE is also working on various other acquisitions which could add
significantly to earnings per share, but no specific information has
been
released by the company thus far.
Besides the companies that TELE plans to acquire, it also has an
existing
business which imports, distributes and sells electronic components
used in
the manufacture and assembly of high-technology products such as
computers,
oil field equipment, medical instrumentation, and uninterruptable
power
supply systems. The company is an authorized distributor for two
product
groupings of Panasonic, USA and Varta USA. Additionally, the
company offers
lighting products and batteries and battery products.
According to management, revenue growth for TELE's existing
business could
be as much as 100% in 1998, which would result in over $14 million
in
revenues. Management also indicated that this business would be
profitable
in 1998.
Based on TELE's existing business and the acquisitions mentioned
above, the
company could generate 1998 earnings per share of well over $1.
Based on
this figure, a stock price of $10 or more would be justified - more
than
triple its current price of $3. But if TELE is successful in its
acquisition strategy, the stock has the potential to go much higher than
$10.
An investment in TELE is speculative and should only be made by
investors
who can afford to take significant risks. TELE has completed only
one
acquisition to date (under current management), and there is no
guarantee
that the company will be successful in making future acquisitions. If
successful, however, the rewards to shareholders could be enormous.
TELE also has warrants outstanding trading under the symbol
TELEW. The
warrants provide more leverage than the common stock, but that also
makes
them riskier. The exercise price for the warrants is $3.30, which buys
1.06
shares of TELE common stock. The warrants can be redeemed by
the company
upon 30 days' written notice, if the average closing bid price of TELE
exceeds approximately $5.10 per share for any 30 consecutive trading
days
prior to the notice of redemption. We expect that the company will
call its
warrants for redemption as soon as it is able.
So is Tech Electro really a baby Berkshire in the making? A bit of a
stretch, perhaps. But the two firms' commitment to fundamental
principles
of value investing are remarkably similar. We like Tech Electro
management's vision and its achievements to date, and view the
company as
an attractive speculative investment for risk-tolerant investors.
-The SmallCap Investor
Company Name: Tech Electro Industries
Nasdaq Symbols: TELE, TELEW
Stock price on date of report: $3.375 bid, $3.50 ask
52 Week Range: low $1.375, high $3.50
Common Shares Outstanding: 3,446,875
Common & Equivalents: 7,905,000
Float (common): 900,000
Market Capitalization: $11,633,203
Insider Ownership: 52.43% (as of 6/24/97)
(This report was written by The SmallCap Investor and has not been
paid for
or approved by Tech Electro. Earnings and price estimates were
derived from
our own analysis and were not provided by Tech Electro.)
For more information on Tech Electro, please contact Steven Scott,
executive vice president of the company at (800) 895-5551.
Current stock price, graph, and news:
quote.yahoo.com
Copyright 1997 Axxess, Inc. All rights reserved.
This report does not represent an offer to buy or sell securities and is
provided for informational purposes only. The information in this
report
was obtained from sources believed to be reliable, however, Axxess,
Inc.
cannot guarantee its accuracy. This report is not intended to be a
complete
description of Tech Electro. Readers are advised to consult with their
own
independent tax, business and financial advisors with respect to any
investment, including any contemplated investment in the company
featured
in this report. All information contained in this report should be
independently verified with the featured company and by an
independent
financial analyst. You should independently investigate and fully
understand all risks before investing. Employees of Axxess, Inc. may,
from
time to time, buy or sell securities mentioned in The SmallCap
Investor.
However, it is the policy of Axxess, Inc. that employees are restricted
from trading in The SmallCap Investor Stock of the Month during the
period
beginning two weeks prior to publication and ending one month after
publication. |
