Wednesday, February 01, 2006
Valuation estimate of ETLT
The first 9 months of 2005 had ETLT earning $3 million. It's likely for them to earn another million in Q4 for a total of $4 million. But more importantly, their current legacy business (i.e. not including E-Sea and not including the returns on their future $37 million new venture) is likely to earn around $4 million per year, with that number likely increasing each year at some reasonable rate.
E-Sea's earnings for 2004 were $649K. Their earnings for the first 6 months of 2005 included $1,445,783 of "other income". This would be a real headscratcher until you get to the cash flow statement. First of all, the cash flow statement shows a net loss of $227,275 and not a net income of $1.87 million! Second, the cash flow from financing activities shows $1,445,783 of capital contributed, which exactly matches the "other income" line in the income statement. In other words, they treated a capital contribution as income!
Let's back that out, since it's not income. Now the net income is $422,200. In the equity statement, they distributed $649,475 (i.e. the earnings from 2004), presumably to the shareholders as a dividend. If we subtract this from the net income of the first six months of 2005, we end up with a "net loss" of $227,275, which just happens to be the exact amount of the net loss they claimed on their cash flow statement.
WARNING: E-Sea can't "account" their way out of a paper bag with a sharp knife!
Putting on my smoking jacket and deftly lighting my pipe, pausing by the clock on the fireplace mantle for dramatic effect... Here's the real story of E-Sea in the first half of 2005. They started the year with $1.1 million in cash. They then proceeded to earn $384K of cash (plus $38K added to AR) in the first half, which compares quite favorably to 2004's full year earnings of $649K (being a non-seasonal business). They distributed the $649K of cash to shareholders and took in $1.4 million of contributed cash. $578K went to prepayments and deposits, $506K went to a construction project, $361K went to acquire investment assets, $61K went to additional inventories. If you back out the $231K of depreciation, you're left with roughly the $925K they ended up with on the night of June 30.
So their real net income for the first 6 months of 2005 is around $422K. But revenues and incomes have been rising at a fast pace. I'm hoping all this investing activity they're doing is going to pay off. I'm setting my estimate of their annual earnings to $1 million.
E-Sea's new business model that I mentioned here and here will have something like 5 of these stations set up. In thinking about this more, I'm wondering if assuming $2.5 million in revenues is too much? It could be that the rate slows down after the initial few months. They claim that these stations run "at very little cost" (their current business has net margin of 45%) so perhaps it's safe to assume they'll add $1 million of net income total per year (I've gone back through their statements and it seems fairly clear that this is all sustainable annual revenue).
Finally, there's the anticipated return on the $37 million new investment. According to the news item IX on their website, the net return will be $2 million per year, reaching maturity by year 5 and ROI in year 7 (do they mean reaching $2 million/year by year 7?) The income will be tax free. This is actually less than a 5.4% return. I'm not sure if they're counting the interest in the loans (see below). This seems like a fairly low return.
2/3 of the investment ($24.7 million) will be cash on hand. The rest ($12.3 million) will be in loans (half from Chinese banks after phase 1 is completed with 2,000 dairy cattle produced). The US dollars needed will be not more than $2.5 million.
So if we take these numbers and add them up, we get 4+1+1+2 or $8 million per year. With 40 million shares total (note that there's no dilution from the $37 million investment), we get 20 cents per share of net income. If we slap a P/E of 15 onto that, we get $3.00 per share while the shares are trading at 55 cents.