NAPEC Inc: 30%-40% Upside In Potential Turnaround

Repost from Seeking Alpha

By Brian Langis

Summary

  • NAPEC is undervalued on many different valuation metrics compared to its peers.
  • NAPEC’s latest changes (board & management + strategic plan) is overshadowed by NAPEC’s lackluster past.
  • The CDPQ recently raise their participation in NPC to become the 2nd largest shareholder. That’s a vote of confidence. The FTQ is the number one shareholder.
  • NPC turned down multiple takeover offers in past as high as $1.95 per share. That was a terrible decision but it tells you the business is worth something.
  • The new CEO is competent and serious about turning the business around. Regaining shareholder confidence is the key.

TSX: NPC

Nasdaq:OTC:CVTPF

CVTech Group officially became NAPEC Inc. in September 2014. Throughout the article, NAPEC Inc. can also be referred to as NPC, CVTech Group, or the Corporation and its subsidiaries.

NAPEC Inc. is primarily traded on the Toronto Stock Exchange under the sticker NPC.

Note: Dollar amounts are in Canadian $ unless mentioned otherwise. USD-CAD 1.2617 Price of 1 USD in CAD as of March 10, 2015.

Investment Thesis

The following opportunity is a beaten-down stock that has been disappointing shareholders for many years. NAPEC Inc. (NPC, CVTPF) is a company with a market cap of ~$76 million that operates in energy sector. NPC provides maintenance and construction services for electricity transmission and distribution networks in Quebec, Ontario and the eastern U.S. Below is a chart of the stock performance of NAPEC Inc. since inception. This valuation research article explains why NAPEC trades at a significant discount to its intrinsic value because its past failures are overshadowing the current changes and progress. NPC prospects will be worthy once short-term problems disappear.

                                   NAPEC Inc. +6.19% since inception vs S&P TSX +62.79%. Apr 29, 2005 – March 5, 2015

That’s certainly not an impressive chart so why is NPC’s stock performance so depressing and why is this an opportunity?

First how did we get here? NPC’s stock performance has been a wreck because of two nasty proxy wars, two failed acquisitions within 6-months, mismanagement of the company as a whole, the mismanagement of multiple takeover offers, the lack of transparency, overhead overspending, the resignation of the Chairman and the CEO, and negative publicity. As a result of this mess NPC ended in a bad light with the financial community and shareholder confidence in the company has plummeted with its share price.

Why is this an opportunity?

Since the ship was sinking for a while, major changes were required. A new competent CEO, Pierre Gauthier, took the wheel in August 2014. Mr. Gauthier has recently presented its 2015-2017 strategic plans which calls for sales to double to $600 million and to restore EBITDA margins to its historical level of 7-8%. Basically Mr. Gauthier is doing the work that was supposed to be done five years ago. On the cost side, overhead cost has ballooned under the previous CEO and he’s cutting unnecessary spending. He’s also focused on developing synergies between operating units which are highlighted in the strategic plan. On the revenue side, LTM revenues are at an all-time high and NAPEC just recently awarded some of its biggest contracts in its history. Those massive contracts are not on the current financial statements and Q4-2014 results are expected on March 26, 2015. There also have been some management and board changes. In the last year there’s been new key personal running the operating units since there’s been a new chairman as of January 28, 2015. The new board and CEO is committed to fiscal discipline necessary to right-size NAPEC and put the company in a position to grow.

On the macro side, North American transmission and distribution infrastructure has been under-invested and is aging. In the U.S. alone there’s ~$20 billion spent on both the distribution and the transmission electricity grid each year. Quebec and Ontario are also growing their investment in the distribution and transmission lines. Even though NAPEC is only located in the North-East, it’s due to benefit from the large electricity infrastructure investment.

Regarding valuation, on an EV/EBITDA, price to book, and price to sales basis NAPEC trades at a significant discount compared to its peers. One can argue that it’s warranted considering its lack of results in the past. But the market has overreacted and is too pessimistic. For example, NPC trades 0.92x book value vs your 1.81x book value for your comparable and the Corporation has modestly increased its book value over the years. I’m not suggesting NPC should trade at the same valuation than its peers but it doesn’t deserve to be in the garbage bin either. I believe the market’s reaction is a little too extreme.

According to my valuation which you will find in greater detail below, I believe the valuation range of the price per share of NAPEC is between $1.40 and $1.50 a share, this implies an upside of 32% to a 41.5% on the $1.05 closing price of March 3rd, 2015. In the short-term I believe those numbers are reasonable. In the long-run, if NAPEC actually improves and achieves half its goal (450m in revenues), the upside is even higher.

The catalysts that will fuel the stock higher are a combination of; higher sales, higher EBITDA margins, a takeover offer, acquisitions, take private offer, the lower Canadian dollar, growing investments in the electricity distribution and transmission grid. A little under the radar news is the Caisse de Dépôt et Placement du Québec (CDPQ) has recently increased their position in NAPEC to become the 2nd largest shareholder after the Fonds de solidarité FTQ. A CDPQ investment in an unloved company is definitely a vote of confidence. This means they did their due diligence and the CDPQ is an excellent long-term investor to have.

NPC presents an interesting investing opportunity with minimal downside. Everything negative about the NPC is all-ready baked in the stock price, so any positive surprise will be greatly welcomed by the market and might just be enough to shift the momentum.

Here are some basic stats on NAPEC Inc.:

Background on NAPEC Inc.

For the full article, click here.

 

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