LVT, the turnaround.
Today I want to review some of my reasons for picking LVT (1.46) as my earnings turnaround pick stock for year 2007. A company whose fundamentals were previously poor but now getting better can be a timely investment choice, and so here are my conclusion with LVT. You can see LVT's excellent web site at the following URL link: www.lv-technology.com for a better understanding in what it does.
This company sells and installs a proprietary process to cement manufacturers which reduces considerably energy consumed in the making of cement. Energy is by far the largest cost in the manufacturing of cement. The company claims and this has been confirmed that the pay-back period on the total cost of installation of LVT's equipment to the customer is at most 1-2 years and 
often less then one year! The company is highly export oriented with as I recall over 95% of sales coming from outside Thailand. The increasing Baht/vs Dollar rate has a negligible effect on LVT as the payback period is so attractive.
The real key issue with this company is how effectively they can secure & market new contracts and then install the equipment. LVT is a beneficiary of higher global energy prices for obvious reasons. LVT has about 100 employees and is essentially a service company as it manufactures none of its equipment. Many of the employees are expat engineers and/or previous white color workers from Siam Cement. Over the past couple of years many improvement have been made in the overall organizational effectiveness of LVT and more could/should/will be implemented. There is still much room for improvement in the overall efficiency of LVT.
To restate on May 10 '07, I posted the following in our member lounge:
After some poor quarters the bad news is over and this company should have a good earnings turnaround this year! LVT made wrote some poor contracts and so wrote off some of these off last year (from Middle Eastern countries). But this is the old story. My take on LVT is that the 1 Q. will show a turnaround and the company should have a nice earnings recovery this year and beyond. I like the story and consider it my best turnaround story. I rate it buy now, as noted in the latest member article.
LVT shares back then where trading around 1.40 and moved up to 1.59 for a brief moment only so to correct back to current levels, at which point I rate it a turnaround buy for medium term investment. Here are my reasons why:
And on May 15th '07, I further posted this to our member lounge:
LVT just reported a turnaround quarter of 20.6 mill or EPS 0.10, for Q1 '07. This vs. a loss for the year before of -0.28 Baht per share. For all of 2006 LVT earned 0.05 per share, so the latest quarter confirms the turnaround is in place! If LVT can keep up this momentum and earn say 0.35 EPS this year, the stock is trading at cheap p/e of 4.28. I plan to write more on this company as the year progresses and keep rating it a "buy now". I have not yet been able to find the change in revenues for the last quarter but I am confident good things are now happening this year and beyond, with LVT. Many bad debts and poor old contracts have been eliminated. "This year should be a good one for LVT shareholders", according to one reliable source.
There was an accounting change in order to conform to Accounting Standard TAS 44 & 45, applying retrospective adjustments. "The Company's Financial Statements for the period ending 31st March 2007 show a net profit of Baht 10.4 Million which as a result of the change in the accounting policy differ from the net profit of Baht 20.7 Million reported in the Consolidated Financial Statements for the same period.
This difference is due to that the Company's Financial Statements do not include any share of profits from investments in subsidiary and in associate companies in accordance with the adopted accounting method." From LVT's Mgt. analysis as reported late on May 15 '07. IF stock gaps open today, of course I would turn more cautious in the short term
The change in the accounting (which has happened with many listed companies this last quarter) has not in any way affected the bottom line results. The first Q. earnings have essentially come from royalties which is an irregular income. On May 21 L.V. Technology Public Company Limited has been awarded a new project in Malaysia for clinker production upgradation by Negeri Sembilan Cement Industries Sdn Bhd. The contract has been signed on March 21, 2007. The Letter of Credit was opened by the client on May 7, 2007. The details of the Contract are as follow: 1. Name of Project : NSCI 2. Client name : Negeri Sembilan Cement Industries Sdn Bhd Lot 3323, Mukim Kepis, Kuala Jelai, 72100 Bahau, Negeri Sembilan, Malaysia. 3. Contract value : USD 3,788,000. Completion date is expected by September of '07, as was reported to the SET on that day.
In fact as has been confirmed there are a number of contracts in the pipeline for LVT this year and I expect the earnings to date for the first 2 Q's of 2007 to approach or even slightly exceed 40 million Baht.
LVT is so on a clear earnings turnaround this year with all of the bad past now written-off and one expects they have learned from their previous nightmare.
As stated the past losses stemmed from a poorly written and then executed single large contract abroad which ended up in large losses for LVT. But this is the old now past story and it has been written off. It allows the company to carry forward losses and so near term tax liability is minimal. Yet, the consolidated income statement shows a positive retained earnings number so allowing the company to declare a dividend for this year (payable next April/May) which LVT indicated it wants to do.
The first quarter '07 already has seen a turnaround in earnings -and after visiting with its Managing Director last week, I came away convinced that calendar year 2007 should see net profit soar between 60 to 100 million Baht. If you divide this by the 210 mill shares outstanding, this comes to 0.28 to 0.47 Baht range per share. Hence the current p/e is in a range of 3.1 to 5.2 or rather undemanding!
However 105 million warrants are outstanding convertable at one share per warrant, at 1.25 Baht. Additionally there is 10.5 million ESOP shares issued for employees. Hence the total future shares outstanding (fully diluted) is 210 + 105 + 10.5 or 325.5 million shares. So on a fully dilluted basis the EPS comes to a range for year 2007 of 0.185 to 0.308 or a fully diluted p/e range of 7.9 to 4.7. Again assuming what earnings one projects for this year.
However the warrants are not likely to be converted this year and when they do LVT company will be injected with a hefty 131.25 million Baht of new equity capital. LVT could easily use this money to buy back shares on the open market as it as of now has no expansion plans. They are focusing on their core business, a smart strategy.
I believe to assume a fully share diluted view on LVT is a bit conservative as this tabulation ignores the fact that the warrants are not likely to be converted anytime soon and if/as they are, new equity capital flows into LVT's treasury, since the warrants are not convertable for free, as noted. LVT's warrants expire in February of 2009.
The current managing director is an accountant by training with considerable Thailand experience. A tall charismatic man whom also happens to own over 8 million shares of LVT purchased around an average price of 2 Baht. As of April '07, he is the single largest NVDR holder with some 53% of the then issued NVDR shares. (NVDR shares are issued to foreign to Thailand shareholders and have all but voting rights). The MD was brought on to help strengthen the finances/accounting and steer LVT through this turnaround. He fully admits that his is a temporary position, as ideally the long term direction and guidance should come from a professional within the cement industry, which he is not.
LVT has a very profitable and high octane Indian subsidiary which is very well managed and shows substantial momentum and promise. The Indian contribution alone could show a 50 million Baht profit for LVT this year. Major other contracts have been signed in places like Algeria, Peru, Iran, Malaysia and more. LVT is very careful with delivery and payment and protects itself with bank guarantees letters of credit.
Here is my take and my own opinion: The MD is an accountant by profession and now steering this company through an impressive earnings turnaround. Surely he will get due credit for this. His offical estimate of 60 mill Baht this year is by design too conservative. His projection of "Provision for Project liability and doubtful debt etc..of 40 million Baht is just too conservative in my own view. The traditional & established business reality so often is to project too low and then exceed projections; thereby later gaining much credibility by bankers, shareholders and others. This so often fits with the image nurturing such estimeed professionals seek. Its understandable but for us investors it can be misleading to the reality.
I think LVT's MD current projections are likely too low, and while there are always risks, there are also potential positive surprises as well that the company will get more orders then anticipated later during the year. If the second quarter shows similar earnings to the first, as I think it might, LVT is well on its way to earn 80 mill. rather then 60 mill this year. My own reaction (confirmed by a consultant of the company) is that LVT will earn more like 80 mill. Baht net after profit or even more, then the 59.7 mill as the official projection given. (see below).
If I use 80 mill and divide by 225 mill shares outstanding for this year, it comes to an EPS of 0.35 and so a year 2007 p/e of 4.17. If next year I assume the company can earn 100 mill. and then assume 300 million shares outstanding (some warrants no doubt will have been converted) I come to EPS of 0.33 or still a p/e of less then 4.5!
The company has stated it will pay a dividend of some 40% of profits and so I think a 0.10 to 0.12 Baht dividend is achievable, the yield could so be 6.8-8% on the current stock price. A p/e of less then 5, a probable yield at or above 7% and with no long term debt on the books -and with this company now on the mend are the core ingredients which make me bullish on LVT stock at current levels. My "Buy now" view is maintained and after this company visit so re-enforced.
Here are the MD's current projections for year 2007:
I advocate diversifying a stock portfolio and always here express my own opinions and of course could be wrong. Because LVT is a turnaround story it is not a strict value stock but it got my attention.
Best Regards to all Members,
Paul A. Renaud.
June 15 '07.
