Jewett-Cameron Trading – Parthenon LLC Delivers Open Letter to the Jewett Cameron Board of Directors

Parthenon LLC, one of the largest shareholders in Jewett Cameron Trading Company (6.2%), expresses strong concerns about the company's current situation in an open letter to the board. They point out that the company's stock performance has been very poor, with a negative return of 46.3% over the past five years, compared to a 62.4% increase in the Russell 2000 Index during the same period. Additionally, the company's profitability has significantly declined, with EBITDA dropping from approximately $4m annually to -$1.2m in the most recent fiscal year.

Parthenon also highlights that insiders, who own less than 1% of the shares, have not purchased any stock in ten years, which they interpret as a clear sign of a lack of confidence in the company. They also bring attention to serious challenges such as supply chain concentration, limited pricing power, and increasing competition, which lead them to doubt the company's long-term viability as an independent entity.

Therefore, Parthenon urges the board to immediately explore strategic alternatives to maximize shareholder value, including a potential sale of the company to a larger player with better resources.

The full letter can be read here.

Our estimate is that the "sum-of-the-parts" valuation could be between $7-$10 per share, where we believe the excess property currently being prepared for sale could be worth $5m, and the property housing the HQ and warehouse could also be worth approximately $5m. The Industrial Wood Products segment ($2.6m, about 5% of total revenue) has historically been marginally loss-making. Perhaps this business should be shut down, handed over to existing segment management, or sold for a small amount. We do not assign any particular value to this segment.

The Pet, Fencing & Other segment (JCC) accounts for approximately 95% of the group's revenue, corresponding to $49.2m, with Fencing accounting for about 70%, Pet 25%, and Other 5%. Currently, the segment is temporarily loss-making, but in the event of a sale, JCTCF's board would likely refer to historical profitability. If such a "prospectus" were to assume that JCC returns to an EBT margin of 6% (slightly below the historical average), this would yield an EBT of $3.0m and an EAT of $2.4m (equivalent to an EPS of $0.69). Since we have already separated the property value, we should deduct, say, $0.5m from EBT (rental cost), resulting in an EAT of $1.9m or EPS of $0.54. At a P/E of 10 (based on the above forecast), the segment would then be worth $19m or $5.40 per share. This figure can be compared to the net working capital (for the entire group) of $20.1m ($5.74 per share), of which the inventory is $13m.

In addition to this, there is some optionality (which we do not include in our calculation) that JCTCF could potentially free up some working capital before a sale, perhaps up to $2 per share, without affecting the sale price (which could potentially be based on an earnings multiple). This optionality is based on the fact that net working capital currently exceeds historical levels relative to revenue.

If we add the net cash of $1.1m ($0.31) to the above valuation approach, we get a total value of $30.1m ($8.60). Of course, it's always a guessing game with multiples and property valuations, so it might be more reasonable to assume that the SOTP estimate could be somewhere between $25m and $35m, which corresponds to a per-share range of $7 to $10 and 50% to 115% above the current price.

(Disclaimer: at the time of publication, the writer owns shares in the mentioned company)