Monday, August 21, 2017

Looking at Some Micro Caps and Oddballs

Annual report season is over, and after reviewing 100+ micro caps and Oddball-type companies, there was not much that was cheap. Small banks are trading at ridiculous premiums (~1.2-1.5x) to book value.

If I started a hedge fund that was going to short T-bills and buy 10 year bonds with max leverage, would you be willing to invest a dollar and only have 66 cents of your capital working for you? That's what you're doing if you're buying (at >1x BV) one of the crappy small banks that's a levered bond fund in drag.

However, there were a handful of things that I wanted to sleuth more, three of which are mentioned below. Hardly anyone comes to CBS anymore (since the world is post-investing and there's nothing to talk about), but for those loyal old readers on RSS and such we can ponder whether these might be interesting.

SouthFirst Bancshares, Inc. (SZBI)

  • One of the smallest banks out there. They have $7.8 million in stockholder's equity, but a lot of that is expensive preferred stock. (Rate is 9%, don't know why they haven't refinanced.) The common equity is $4.9 million. Market cap is only $3.5 million with the stock at $5.00. (P/B is 71%.)
  • Officers and directors only own 5% per the proxy. For some reason, the CEO only owns 100 shares. Two other people are listed as owning 10.1% and 24.4% for a total of 35.5%. Based on the language of the proxy and by Googling them, I read them as being bank investors, not affiliated with the company. If so, they might rationally support a sale. It's not clear who else owns - possibly some retired execs?
  • The bank had been under OCC consent order and FRB agreements [pdf], but those were terminated last year. There are $1.7 million of net foreclosed assets. These need to be worth their carrying values or the book value starts to melt and the P/B discount evaporates.
  • The bank is not overcapitalized, so a buyback would not be a play here. Rather, a sale is more rational since this bank is probably too small to be economic. Interestingly, "effective as of January 25, 2017, SF entered into an Executive Change in Control Agreement" with execs which provide that the CEO will receive a severance of $225k and three other execs will receive 100% of their base pay if the bank is sold and they are fired.
  • Basically, it's interesting that they just adopted this bonus agreement, the stock trades at $5 and the book value (common) per share is $7.  
Hanover Foods Corp. (HNFSA)
  • Nate has written about this four times, and so have others (1,2,3,4,CoBF, etc). The company has been in business in PA for a long time selling frozen and canned vegetables. 
  • It's profitable and a net current asset play, one of the only ones out there anymore. They have a complicated share structure but the market cap implied by the nonvoting A share price seems to be ~$70 million. There is $223 million in common shareholder equity and $115 million in net current assets (P/B 31% and P/NCAs 61%).
  • Net income to common over past four years averaged $8.2 million a year, for a P/E of 8.5. Meanwhile, the FCF averaged $7.3 million. So, the return on equity is quite low (sub 4%) but the earnings yield seems respectable. Also, of course, if just the current assets were worth their carrying values than theoretically the company could liquidate and shares would be worth 64% more plus whatever the PP&E is worth. (They carry over $100 million of inventory, but that's only about ~90 days.)
  • Everyone who has looked at this comes away with the opinion that management is the reason it's cheap. They are dark and it's tough to get information out of them as a shareholder. And, unfortunately, they've been sued before (huge 2nd generation family feud) and the current management won.
  • Nobody on the outside knows who owns it. I have not seen a proxy statement or notice of annual meeting. (I wonder if they even hold one?) 
Community Savings Bancorp Inc (CCSB)
  • Small bank in SE Ohio near the WV border. This one demutualized and went public last year. The IPO price that they chose was just below 60% of book value. 
  • They have published neither a 2016 annual report nor Q2 2017 financials. As of Mar 31, 2017, the book value per share (adjusted for a planned withdrawal from a DB plan) was $17.63 per share, which would make the current ask price 78% of book value.
  • The adjusted book value is less than $8 million and total assets are $55 million. This is another bank that is sub-scale and in fact they are losing a little bit of money. A sale would be good but my understanding is that (as a demutualizeation) they will have to wait until their three year anniversary to sell, which would be Jan 2020.
  • If they earn nothing on equity between now and then (2.5 years) and sell for 1.0x BV, then the IRR on buying now would be 10.5%. Not bad!
Currently noodling on and sleuthing these and some others. Do your own homework.


Stephen said...
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Anonymous said...

"Hardly anyone comes to CBS anymore" and hardly anyone updates it regularly. The Law of Blogging states that audience size is directly proportional to quantity and frequency of published output.

You've sold us short on your many book reviews you've read but not consummated, no doubt!

ADL said...

For its (relative) liquidity and modestly improving profile, I like ASRV at around 85% of tangible book (under 75% of book). It's moderately profitable, pays a small dividend, has been buying back a few shares. 1st Summit, in their market, is higher-margin and trades at a "normal" premium to book; ASRV would be low-hanging fruit for an empire builder.

CP said...

I'm thinking the best of these three is Hanover. No longer interested in the two banks.

CP said...

Double Bottomline Corp. ("DB") and Evan M. Stone have reached a definitive agreement with Community Savings Bancorp, Inc. (OTC: CCSB), and its wholly-owned subsidiary, Community Savings, a federal savings and loan association, to acquire Community Savings Bancorp, Inc. ("CCSB"), the registered savings and loan holding company for Community Savings.

The aggregate merger consideration for the transaction is $9.5 million, subject to adjustment as provided in the definitive agreement. CCSB currently estimates that, without any adjustments, this will result in approximately $22.76 per share to the current holders of CCSB common stock. However, the estimated per share consideration may be subject to significant adjustment based on a variety of factors, including, but not limited to, transaction costs and whether the organization obtains CDFI status, as defined below. As a result, CCSB shareholders should not assume they will receive $22.76 per share upon closing of the transaction.

Community Savings operates a full service location in Caldwell, Ohio. As of March 31, 2021, CCSB reported $59.58 million in total assets and total equity capital of $7.79 million. The proposed transaction will merge CCSB into a wholly-owned subsidiary of DB, with CCSB surviving the merger. Upon consummation of the proposed transaction, DB will own 100% of the outstanding shares of CCSB and its banking subsidiary, Community Savings.