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Gold/Mining/Energy : YBM Magnex Intl Sees Revenue Growth 30-35%/Yr In MagnetOp -- Ignore unavailable to you. Want to Upgrade?

To: robert west who wrote (115)	5/18/1998 10:23:00 PM
From: burne	Respond to of 314

Jacob's just checking with his analyst at Nesbitt for an update on this little b-j. Then he'll have something encouraging to say. YBM Magnex International Inc - Nesbitt Burns says buy YBM Magnex International Inc YBM Shares issued 44222901 1998-04-02 close $17.6 Thursday Apr 2 1998 Peter Sklar says why EVENT: A publication named "Canada Stockwatch" has recently published two articles on YBM, which we believe portrayed the company in a negative context. One article, dated March 9 (see Stockwatch dated March 11, 1998), claims that YBM had not accurately portrayed its historic sales to North America. The other article, which we believe was dated March 13, (see Stockwatch dated March 17, 1998) claims that two of YBM's directors have been involved in stock promotions, which it asserts in one case involved false claims. IMPACT: Creation of a buying opportunity. We believe that these articles have caused the recent weakness in YBM's stock price. Since March 9, when YBM had its high close of $19.90, the stock declined to current levels. During this time, the TSE has risen by about 4%. We believe that the fundamental prospects for the company are intact and that the recent weakness presents a buying opportunity. BACKGROUND AND ANALYSIS: As for the March 9 article, YBM had previously disclosed in a press release dated Oct. 22, 1997 (see Stockwatch dated Oct. 23, 1997) that it was restating the segmented sales disclosure contained in its 1996 financial statements. This restatement arose as a result of an audit completed by Deloitte & Touche in connection with YBM's November 1997 equity offering. YBM sells its products largely through distributors, and YBM had reported its segmented sales on the basis of the geographic location of those distributors. In its audit procedures, Deloitte & Touche looked through the distributors to the end-users, and YBM restated its segmented sales on that basis. The effect was that a significant portion of the Western European and North American sales were reclassified as Russian sales. While the reclassification of sales to Russia increases the risk of the company, we do not believe that this is currently a negative for the stock. As we indicated above, details of the restatement were disclosed by YBM in October, and we believe this issue has, for the most part, long been discounted into the stock. In addition, YBM's acquisitions of the magnetic operations of Crucible and Phillips had increased the company's exposure to Western Europe and the United States. The March 13 article alleges that two directors have been involved in stock promotions (unrelated to YBM), which it asserts in one case involved false claims. We do not know if these allegations are true or not, but the allegations are "new news" to the stock. Even if the allegations prove to be largely true, this would not change our view on YBM's stock. The company essentially became public towards the end of 1995 when it acquired, through a reverse takeover, a shell company that was trading on the Alberta Stock Exchange and then subsequently issued shares. We believe that at that time, YBM management was not sophisticated with respect to public equity markets, and pursued this course to take the company public and accepted these two directors on the basis of advice provided by its financial advisers. We believe that the issue of having two directors who have drawn criticism is a reflection of typical "growing pains" which small companies that experience rapid growth often encounter. We believe that YBM management recognizes the significance of this issue and is taking steps to improve the board, and the public perception of the board. The two directors who are the subject of these allegations are not involved in the management of the company, and we believe that their role is largely limited to attending board meetings. We understand that at the upcoming annual general meeting of shareholders, YBM intends to add two additional directors to the board, both of whom are expected to be individuals who would be highly unlikely to attract any further public criticism towards YBM's board of directors. VALUATION AND CONCLUSION: YBM is trading at a significantly low multiple relative to its growth rate. The company has grown its arnings per share by 45% and 42% in each of 1996 and 1997, espectively. We are looking for 19% and 24% EPS growth in each of 1998 and 1999, respectively. The slower growth rate in 1998 is due to the dilution of an equity issue completed towards the end of 1997. In the near term, we are forecasting first quarter 1998 operating earnings of 17 cents per share versus first quarter 1997 earnings of 13 cents per share, an increase of 31%. Based on our earnings estimates, the stock is currently trading at about 13x our 1999 EPS estimate, which will be the forward estimate one year from now. Given YBM's growth rate, we believe that the stock should trade at a much higher multiple. Our one-year target price of $24 is about 18x our 1999 earnings estimate. (c) Copyright 1998 Canjex Publishing Ltd. canada-stockwatch.com