The Deep Value Week – 2024/44

The Deep value Week is created in the spirit of Shelby Cullom Davis who wrote a market letter (on insurance) that “no one read”, and when questioned on the why of still writing it, answered that they wrote it for themselves, as a form of self-reflection on their activities – helping them refine their thoughts, test their theories and maintain discipline.

Companies mentioned:

·         Alico (ALCO)

·         Coffee Holding (JVA)

·         Key Tronic (KTCC)

·         Orbit Garant Drilling (OGD)

·         Reko International Group (REKO)

·         Tandy Leather Factory (TLF)

·         Unifi (UFI)

·         Advent-Awi Holdings (AWI)

ALICO – NEW ANALYSIS. Alico Inc. (ALCO) (P/TB 0.75x) is an agricultural company and the largest publicly traded citrus grower in Florida, with 48,000 acres of farmland. The company faces challenges with declining citrus production but is working to increase revenues through a new agreement with Tropicana and by gradually converting parts of its land for residential development. This week, Macrotips Trading published a new analysis of the company - Hurricane Milton's Potential Impact And Earnings Preview.

In recent weeks, several new analyses of the company have been published, and the stock is down 16% YTD. The company has been valued below 0.80x TB during only 9% of trading days since the summer of 2012 (the extent of available data), and from these valuation levels, the 1-year forward return has been positive 9 out of 10 times.

COFFEE HOLDING – NOT FULL SUPPORT AT ANNUAL MEETING. Coffee Holding Co., Inc. (JVA) (P/TB 0.70x) manufactures, roasts, packages, markets, and distributes coffee products, including green coffee beans, branded and private-label products, to customers in the U.S., Canada, and internationally. The company held its annual meeting on October 31, 2024, where – at least in our experience – the opposition to the re-election of board members was unusually high. Andrew Gordon received 2,336,020 (84%) votes in favor and 451,403 (16%) votes against. Barry Knepper received 2,162,298 (78%) votes in favor and 624,523 (22%) votes against. Given the company's small shareholder base, it is actually surprising that as many as approximately half of the votes were represented at the meeting.

Over the past two years, JVA has been involved in a planned acquisition of Delta Corp Holdings Limited. On September 30, 2022, the company announced a definitive merger and share exchange agreement with Delta Corp Holdings Limited. However, after nearly two years of attempts to complete the merger, and after the shareholder vote in April 2024 failed to approve the merger, Coffee Holding's board decided to terminate the merger agreement and continue as an independent company.

In March, Stock Pursuit published an analysis of the company – Coffee Holding JVA Less Than Half of NTAV. Since then, the stock has increased by 91%.

KEY TRONIC – ELECTION SPECULATIONS & A CONTINUED WEAK PESO. Key Tronic Corp. (KTCC) (P/TB 0.52x) is specializing in contract manufacturing services, including design engineering, electronics, plastics, metals, and full product assembly, serving clients globally. The company released its annual report and reported a strong start to the fiscal year 2024 with revenue growth of 11% in the first half, primarily driven by increased production at their U.S. and Vietnamese facilities. However, margins and profitability were impacted by higher labor costs, unfavorable exchange rates in Mexico, and higher interest rates. In the second half, operations were significantly disrupted due to extreme weather conditions and a cyberattack, leading to lost revenues exceeding $20m. Measures were taken to save $10m annually, and the company remains optimistic about efficiency and upcoming margin improvements. Production in Mexico is expected to recover due to recently secured contracts, and the Vietnam facility is an essential part of future plans. The company looks forward to fiscal year 2025 with a strong pipeline of new business opportunities and benefits from a weakening Mexican peso.

On X it has been discussed how KTCC is a potential Trump winner driven by, in that outcome, likely increased onshoring.

ORBIT GARANT DRILLING – LAUNCHES REPURCHASE PROGRAM FOR THE FIRST TIME. Orbit Garant Drilling Inc. (OGD) (P/TB 0.48x), one of Canada’s largest drilling service companies within the mining industry, announced that the Toronto Stock Exchange (TSX) has approved the company’s intention to implement a share repurchase program (NCIB program). The company plans to repurchase up to 1,868,637 common shares, representing approximately 5% of the outstanding shares, over a 12-month period starting from October 31, 2024, and ending on October 30, 2025.

The purchases will be conducted on the open market through TSX and/or alternative Canadian trading platforms at the prevailing market price. The daily purchase volume is limited to 3,532 shares, which is 25% of the average daily trading volume over the past six months, excluding block trades. All repurchased shares will be canceled. The program includes an automatic purchase plan to facilitate share purchases even during blackout periods due to regulatory or internal restrictions.

As far as we can find, this is the first time OGD has initiated a repurchase program, and the fact that this is being done despite negative TTM figures and a net gearing of 56% can likely be seen as a sign of strength from the board.

REKO INTERNATIONAL GROUP – TWO NEW BOARD MEMBERS. Reko International Group Inc. (REKO) (P/TB 0.48x) provides precision machining, tooling, and automation solutions, primarily serving the automotive, industrial, and consumer industries. The company has announced that two new board members have been appointed, effective immediately – Diana Colella and Peng-Sang Cau. Diana Colella is currently Executive Vice President of Entertainment & Media Solutions at Autodesk, Inc. and has experience in financial analysis, sales, operations, product development, strategy, as well as mergers and acquisitions.

Peng-Sang Cau, former CEO of Transformix Engineering Inc., has experience in leadership, marketing, sales, and innovation within the automation industry. She led Transformix through the sale of its intellectual property to ATS Corporation and served as VP of Emerging Markets at ATS until 2023. The new board members will stand for election at Reko’s annual meeting on December 5, 2024.

It is noteworthy that both have M&A experience.

TANDY LEATHER FACTORY – A “BACK OF THE ENVELOPE” AT X. Tandy Leather Factory (TLF) (P/TB 0.61x) is a retailer and wholesaler specializing in leather and leathercraft supplies, providing products and tools for various leatherworking projects to customers across the U.S. and internationally. Art of stock picking shared during the week a “back of the envelope” of TLF on X.

UNIFI – LANGONE FACILITATES FINANCING & 1Q24/25. Unifi, Inc. (UFI) (P/TB 0.44x) manufactures and sells recycled and synthetic fibers, specializing in innovative and sustainable textile solutions for customers in the apparel, automotive, and home furnishings industries globally. The company entered into a credit agreement of $25m on October 25, 2024, where both the company and its subsidiary Unifi Manufacturing, Inc. act as borrowers. The facility has a maturity date of October 28, 2027, or earlier if the company's current credit agreement from 2022 is terminated or refinanced. The credit facility is secured with assets from Kenneth G. Langone (#301 on the Forbest list), who also serves on Unifi's board. He has waived compensation for this guarantee to maintain his independent position on the board. The interest rate on utilized funds is Daily Simple SOFR plus 0.90%.

For 1Q24/25, revenue amounted to $147.4m, an increase of 6% compared to $138.8m for the same period last year. The increase was primarily due to higher sales volumes. Gross profit was $9.5m, compared to a gross loss of $0.6m last year. The gross margin was 6.4%. Adjusted EBITDA was $3.3m, an improvement from -$4.8m last year. Net income was -$7.6m, an improvement from a loss of $13.3m the previous year. For the full year 2024/25, revenue growth of 10% compared to 2024 is expected, along with improved gross profit, gross margin, and adjusted EBITDA. Capital expenditures of approximately $12m are planned, compared to D&A of about $28m.

ADVENT-AWI HOLDINGS – NEW ANALYSIS. Kreuzmann’s Ideas posted a new analysis of this old-timer net-net – Advent-Awi Holdings – Is this Net-Net paying special dividends worth it?

To conclude, a very good quote – unfortunately of unknown origin – that aptly describes Deep Value:

The writer may own shares of the companies mentioned. This communication is for informational purposes only.