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| To: statesidereport who wrote (443) | 5/18/2015 5:44:27 PM | | From: diddlysquatz | 7 Recommendations Read Replies (4) of 1388 | | |
I had an interest in LRL so not only have I done a considerable amount of dd but I met with management as well as visited the facilities in Abbotsford, BC. On the surface LRL does appear to be an interesting investment opportunity.
There are a lot of differences however between LRL and IBH that you've neglected to mention and that I believe help to explain the difference in valuations. About the only similarities is that they use wood as their raw materials.
The main market for IBH's products is a subset of the housing industry, commercial and multi dwelling unit construction. What is driving the use of IBH's products is the regulatory mandating of fire separation in construction. This is causing a growth rate considerably higher then the overall growth in the housing sector and you may also notice that while single family home construction continues to grow it is growing at a slower pace then multi dwelling unit construction especially in the more populated urban areas. The bulk of LRL's housing construction products, it's floor joist webbing is much more applicable in the single family home construction and the decision to purchase this product is in the hands of the contractor who likely looks at cost to determine if they will use the product rather then by-law requirements. As for LRL's now key product, their access mats this applies more to the oil and gas and heavy industrial markets and will be susceptible to the swings in those sectors.
There is also a considerable difference in the financials of the two companies. IBH's balance sheet is considerably stronger with positive working capital of US$755,000 and shareholder equity of US$3.489 million where as LRL has a working capital deficit of $890,000 and negative shareholder equity of $508,000. While LRL's balance sheet has improved over the last few quarters any downturn in it's business would likely put it in a very vulnerable position especially considering that they owe approximately $220,000 to Canada Revenue Agency for what looks to be payroll deduction, or income tax arrears and penalties.
As for the recent strength in revenues for LRL i've learned that the bulk of the strength came from their recent agreement with Hampton for their access mats and it can be attributed to inventory loading to stock the product. I suspect that Q2 should be considerably slower than Q1 now that Hampton has built it's initial inventory. I'm not aware of what kind of seasonality there might be to this business. As for the access mats and the deal with Hampton when I asked about the length of the contract I was made aware that there is only a verbal agreement to supply product. Hampton can cancel their ordering at any time. In my opinion this increases the risk going forward especially since their financials are fragile. Also keep in mind that this is a service agreement. Luxor gets paid approximately $50 per mat that they make. Notice in the financials the break out of service revenue (70%) and sale of goods (30%). There is no proprietary product or process involved. Almost anyone can provide the same service if they had the financial means and desire and Hampton has secured two other operations to produce these mats in other parts of the province. As more evidence that this is a low hurdle type of business most of the employees are paid a starting wage of $12/hour which tells me there is no great skill required to build the product.
IBH has ownership of patented intellectual property. This has been further monetized with a licensing/royalty agreement with Kronospan and possibly with LP in the near future. IBH continues to leverage its IP by working with LP to create new products. This has value that the market must evaluate.
As for your question regarding why IBH had a slower April 2015 then 2014 this could be due in part to the lumpiness and or timing of the ordering process. March 2015 product volume actually increased 5% while revenues were lower. However the drop in revenue had more to do with the drop in substrate prices (OSB) to near record lows as the increase of OSB supplies effects the supply/demand equation. It is a little to early to determine if there is a multi dwelling unit construction slowdown, my research tells me it should continue strong. If you want to follow someone with a very good read on the sector I suggest Calculated Risk calculatedriskblog.com
One other thing I will leave you with. The drought on the west coast of North America will bring with it a heightened concern for wild fires. The damage that is likely this year may dwarf anything we've seen in years and the likely response will be further fire safety building regulations that should benefit products like those produced by IBH.
I'll continue to watch LRL and may buy some if the risk/reward improves a bit more. |
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