Friday, January 05, 2007
Conforce International (CFRI)
The big question is whether I can determine if this company is worth significantly more than $60 million. They have 120 million shares selling for around 50 cents. I obviously like what I see so far and it's time to dive into it some more.
Starting with the annual report for the period ending 3/31/2006:
This is all unaudited
This is for their existing business: revenue increased by 2.7 times from the prior year to $1.6 million. Gross margin was 56% vs 78% in the prior year. The SG&A is mostly wages and facility rent and cost of subcontractors. Depreciation is very low. 13% operating margin. 10% net margin.
Looking at the balance sheet, it's not particularly strong. Cash in the prior year has shifted into AR. Shareholders funded most of the company's debt. Less than 1/4 equity.
Operating cash flow combined with capex looks ok for a development stage company. They've got the accounts moved around from the usual US GAAP locations. AR ate a lot of cash. So did buying fixed assets.
There's an entry on the balance sheet of $103K for "adjustment for shareholder position". What the hell is that? Maybe related to the 50% of CCTI they don't own (see below)?
The equity statement is a bit difficult to decypher. They ended March 31, 2004 with 120,001,000 shares, with ($65,228) in retained deficit and a total deficit of ($71,967).
They had net income during the next year of $134,691 minus ($17,972) in taxes.
They did a recapitalization, adding 1,000 shares and then removing 1,000 shares, with no net effect. Why?
The rest of the equity statement makes sense, however.
The capital assets consist of a truck, $100K of equipment (probably including a lot of trade show stuff), and a container. The truck is depreciated 30% per year. The other stuff 20%.
May 25, 2005 they did a reverse merger, acquiring Conforce Container Corporation ("CCC") for 120 million shares (only 1,000 shares were outstanding beforehand). Share counts have been retroactively stated. They acquired 50% of Conforce 1 Container Terminals ("CCTI") for a symbolic amount of one hundred dollars. They still own only 50% based on Note 2.
CCTI provides handling, storage, and transport of containers with an 11 acre terminal in Missassauga. Management worked for an operated Toronto Reefer Container and AB Container Sales (very small business).
CFRI is working on developing EKO-FLOR for containers which will reduce operating costs, "first revenues expected in April of 2006".
No related party issues.
Q2 results for the period ending Sept 30, 2006:
Revenues up 27% to $524K. Gross margins of 60%.
R&D, wages, subcontractor expense, and commissions are way up (not surprising).
But they still made an operating profit of $43K and a net profit of $34K.
Cash is up somewhat.
AR is unchanged.
They still have that odd "Adjustment for Shareholder Position" asset which is now $137K.
They are recording cash flow as cumulative, not just during the period since fiscal year end, which makes it confusing.
Shareholders added more to the loan. No terms, no interest.
They're squeaking by with the cash.
No change in the equity statement.
Added slightly to the capital equipment ($751 added to the truck capitalization, I hope they aren't capitalizing oil changes and repairs).
Dec 19, 2006 Investor Update (they don't provide any convenient link):
It begins with a CEO letter. The goal for 2006 was to start work in a 3-phase testing process, which they've completed in November. Also, the terminal operations had double-digit growth.
Phase 1 testing based on industry standards completed May 25, 2006.
Phase 2 testing completed Oct 24, 2006.
Nov 10, 2006: Joseph DeRose (from Ciba Geigy) appointed VP of Product Development.
Nov 29, 2006: EKO-FLOR passed the final phase of testing and was officially certified by the American Bureau of Shipping for use in containers worldwide. Apparently, they also have a group of people working in China, which I assume is the subcontractor expenses.
Dec 5-7, 2006: EKO-FLOR launched at the Annual Intermodal Conference in Hamburg, Germany. The organizers specifically pointed out EKO-FLOR:
Of the many new products and services showcased at Intermodal 2006, there were a few particularly outstanding launches. After 32 years of specialising in the repair and sale of containers, Conforce International announced it was also to become a supplier of container products. The Canadian company launched a revolutionary new container flooring system, EKO-FLOR, designed to replace the traditional wood floor in shipping containers. Certified by the American Bureau of Shipping just two weeks ago, EKO-FLOR attracted a great deal of interest from Intermodal visitors.After the launch in Hamburg, Conforce became an Associate Member of the Container Owners Association (COA) which promotes common standards for the industry. Conforce will participate in workshops and spearhead issues and studies in the industry related to container flooring [and I'm guessing those studies will suprisingly favor composite based flooring instead of wood floors].
Members of COA include COSCO, GE SeaCo, Hanjin, Hapag Lloyd, Hyundai, Maersk, and ZIM. GE has been working on smart container technology.
Schedule for 2007:
January: announce plans for a new listing for CFRI stock, announce appointment of a new VP of operations.
February: Shareholder update regarding EKO-FLOR roll-out, terminal operations core expansion announcement, and issue revenue and earnings projections for 2007 and 2008. Also media features and interviews.
March: Investor conference with Q&A.
Ok, so what sort of confidence do I have that this is a much bigger than $60 million business?
Container fittings and floors news
Container linings news
Container misc industry news
Container world in a box article
This looks like a worse solution
Interesting writeup of the business
Container packing issues from Hapag Lloyd.
Conforce fact sheet This has a lot of useful stuff in it, including some mention of one of the articles I found in the "Container fittings and floors news" link above (Mar 2003, Floors - going nowhere slowly):
The search for environmentally-friendly alternatives to Apitong plywood for container floors is ongoing, but progress to date has been negligible. Any company or entrepreneur who can come up with an environmentally friendly product that can match Apitong plywood in terms of technical performance and be produced in large volumes at a comparable price could make a killing in the container flooring market....
They also note that there's no product like it on the market.
There are about 140 million containers and trailers worldwide, with annual production at about 15% or 21 million. Conforce's goal is to replace about 6% of all new containers and trailers with EKO-FLOR within the first three years after launch. That would be 1.26 million floors per year. If they reach that goal and have a net profit of merely $4 per floor, the company would be worth its current market cap. If they reach a net profit of say $20 per floor, it would be worth about 5 times what it's selling for today.
Based on what I've read, it seems like the EKO-FLOR price is probably higher than apitong plywood, but the quality of the plywood is going downhill, it's getting more and more difficult to get it, and I'll bet the margins of the suppliers are probably dropping. The major industry players would prefer not to be tearing down rare forests because it's just a matter of time before some ECO groups focus on them and cause a lot of trouble. Not to mention the headaches of unreliable apitong quality, price fluctuations, and uncertainty of the future. The big thing for me is the direction of long term trends. Global trade is going to increase in the long term. Ecological issues have constantly been increasing in importance. And there are clear indications that supply is at best unreliable.
Conforce has been pushing the importance of odor, contamination issues, and so forth. If you use a container for shipping nasty chemicals, if you want to ship food later on, you need to sand the floor, you need to keep track of what's been in the container. And then there's the liability issue if for some reason you make a mistake.
It's worth reading the various trade journal articles (they cost like $40 for each issue of the magazine).
I'm thinking it's worth a moderate investment. I spent three days buying shares. I'd buy a small amount and the ask would go up. I'd chase it up and it would go higher. I'd stop and it would come back down. Lots of games being played on this one. I found that the ask would always come back down after waiting a while.
UPDATE 1/11/07: "it's from an investment firm's financial analyst's analysis of CFRI's currrent state of the balance sheet" Yeah, the firm is Me, Myself, and I Capital Partners from Can I Quit My Day Job Yet.
I'm in this and I'm staying long !!!!
good news CFRI first sale of trial containers...see the news on the website...this is what people have been waiting for.