Analysis
1. Current market price around $5. Real book value is (32.5m-1.6m-0.5m-1.6m-0.3m) /14.8 = $1.93. Almost all in cash which is good.
2. Last years report earning is 61 cents pre share. Some adjustment:
Add currency lose 1.4m*69% = 1m.
Add stock buy back plan cost 0.2m. (BTW: it didn't happen, but the cost is there. This year end, they again passed 5% buy back plan. I think they will do it this time since the stock price is cheap now.)
Minus tax benefice 1.8m+0.8m=2.6m.
So roughly should deduct 1.4m from their reported income. Which reduce earning around 10 cents pre share. Actual earning will be 51 cents pre share.
3. This year's estimated earning pre share will be around 50 cents too.
4. Compensation and related benefits cost:
2005 2006 2007
8.1m 9.0m 10.9m(estimated)
This increased a lot and took too much of their revenue. This might caused by their acquire of Nandra Group in Sept. 2006. You can see their first 3 quarters of 2006 this number is roughly 2.1m each quarter. Started in 4th quarter of 2006, This number is around 2.7m. That's why 2006 increase 0.8m from 2005. 2007 increased 2.8m from 2005.
5. The admin expense will increase 0.8m in 2007 compared to 2006.
6. Because of 4 and 5, although their revenue in 2007 will increase more than 5m than 2006. Their income stay the same.
7. They issued quite a lot options(1.8m shares outstanding at 2006 year end. That is 13% of their total stock). The good news is at Sept. 30, 2007. There is only 0.6m outstanding with average price 4.39. (1.2m forfeited or expired). Thanks for the low stock price I think.
8. Their growth is depending on their new clearing service. I don't understand it very well. Just assume it doesn't decrease their revenue.
9. All above is not really bothering me. Only one thing left, which is also the most important, their revenue is largely depending on the number of trading orders they exercised. Obviously, they will do better in a bull market year since there will be more trading than bad year's. So I should estimate a average trading volume for them. However, from 2002 to 2007, they experienced a quite good growth. I don't know whether this is got by more new customers or just by increased volume from existing customer, or even both. So it is hard to estimate a average volume for them.
Conclusion:
If I take .50 cents as their average earning. At $4.50, I will buy it. However, due to the reason above, I can't do it before I figure out how bull market year and bear market year will affect their business. So this is not really a conclusion :)
Update:
Mar. 30, 2008
2007 Q4 Data
1. Recent market price around $4.5. Real book value (34.6m-1.0m-0.3m-1.6m-0.2m)/15.0 = $2.10. Almost all in cash.
2. 2007 net income 0.48 pre share.
3. Compensation and related benefits cost in 2007 is 10.8m.
4. The admin expense increased 0.95m in 2007 compared to 2006.
5. Revenue of Q4 2007 revenue decreased by 1.2m compared to Q4 2006. Revenue in 2007 increased by 3.3m compared to 2006.
6. Telecom and data fee in Q4 2007 increased by 0.1m. In 2007 increased by 1.0m.
Analysis:
1. In Q4 2007, its revenue decreased by 12% compared to Q4 2006. Which is obviously caused by current market downward. So the market condition did affect their revenue.
2. Cost of exchange, clearing and brokerage fee as percentage of revenue in Q4 2007 is 25% compared to 34% in Q4 2006. This is quite strange since Q4 2007 revenue actually decreased. In 2007 this number is 27.6% compared to 31% in 2006. This might be related to their new clearing service which could reduce cost. Any way, this is a very good sign.
3. The telecom and data cost now is around 6m pre year. This fee are pretty fixed and will not change when revenue grows or drop.
4. They added three new lines: (1) Full Service Self Clearing. (2) DeepBook(TM) for Options Traders. (3)BestX(TM) smart order routing and algorithmic trading. The first one is to attract new customers ans they said it did, the second and third are technique improvements.
5. In Jan. 2008, the company create an new RIN(Renewable Identification Number) online exchange market. The RIN is a credit which is attached to each gallon of renewable fuel produced in US like gas produced from corn or soy bean. Any gasoline sold in US if it doesn't use some percentage of renewable fuel(7.76% in 2008), it must attach the same among of RIN. The exchange charge 5% of each transaction from both seller and buyer. Assume the price for each gallon is 0.05. By 2022 this total market could be 36Bx0.05 = 1.8B. The RIN market itself is very interesting as well. However, this new line will not increase their income notably at least in this year since its trading volume is very low.
6. At previous analysis, I thought the market situation will affect their revenue. It is actually not too hard to check it out by simply go to yahoo finance and check S&P 500 and Nasdaq index volume history. I found out that for the past 5 years, Nasdaq volume stay as pretty as the same as 2B daily while S&P 500 volume doubled from 2B to close to 4B daily. So their revenue growth did somehow come from good market conditions in recent years.
7. However, although from last quarter to now the volume decreased by some, but I found historically the trading volume is not related to market conditions that much. They just keep increasing. Which means the current volume is most likely will keep fluctuating towards upwards than downwards. Which means their revenue will not suffer that much from current market conditions.
Conclusion:
Although the question in previous analysis is answered, however, the socket does not fit my value investment rules. 1. The book value is not close to price. 2. Two of Recent five years income are negative. I probably should create rules for this kind of stock as well.
(Mar. 11, 2009: It is bad to create new rules because it breaks THE RULES.)
Update:
May. 12, 2008
Some analysis on Q1 2008 data:
1. Recent market price around $4.6. Real book value (35.9m-1.0m-0.4m-1.6m-0.2m)/14.9m = $2.19. Almost all in cash.
2. Q1 Earning 0.07 pre share. 0.11 pre share last year.
3. Compensation and related benefits cost 2.8m. Pretty the same as last year.
4. Admin expense: 1.1m. Pretty the same last year same quarter.
5. Transaction revenue decreased by 1.3m while exchange, clearing and brokerage fees saved 0.9m compared to last year.
6. Hired 7 new sales person in Q1.
Analysis:
1. Cost of exchange, clearing and brokerage fee as percentage of revenue for this quarter is 24% compare to 29% last year. The same thing as I noticed in previous quarter. They seems manage to decreased their cost of exchange fees. When their revenue getting better, this will save them quite a lot.
2. Compensation 2.8m. It has 100 employees. Aver $112,000/year for each person. They hired 7 new people in Q1. It is good this number hasn't increased.
3. Their revenue decreased compare to last year. Close to 2006 to 2005 level. But I didn't found volume of Nasdaq or S&P 500 decreased this year. I found this is really the most important thing about their business.
Aug. 15, 2008
Q2 2008 data:
1. Recent market price around $3.88. Real book value (35.5m-1.0m-0.5-1.6m-0.2m)/14.9m = $2.16. Cash 24.3m
2. Q2 Earning -0.03 pre share compare to 0.11 pre share last year.
3. Compensation 2.95m.
4. Admin expense 1.4m.
5. Revenue declined 19% from 11.1m to 9.0m compare to same quarter last year.
6. Lost $800,000 on a trading error. Will be write off at Q3 2008 which will be 0.03 pre share.
Analysis:
1. One big customer of floor brokerage cease trading this quarter count for 1.0m in revenue decrease.
Nov. 24, 2008
Q3 2008 data:
Bought some at $2.05. Recent price around $2.10.
1. Book value around $2.14. Cash 18.5m. Cash $1.24 pre share.
2. Q3 earning 0.0 pre share excluding 0.8m trading error.
3. Compensation 3.16m.
4. Admin expense 1.25m.
5. Revenue increased by 14%, however, gross margin is down.
6. Released a news after Q3 data that in Oct. it get extra 0.8m on options trading and good sales revenue at that month. Will be reflected in Q4 data.
Mar. 10, 2009
Q4 2008 data
Current price $1.87
1. Hired new CEO and president.
Q4 2008 data
Current price $1.87
1. Hired new CEO and president.
2. Restructuring charge $1.1m (paid to former CEO). Unusual gain on foreign exchange 0.8m reported on Nov. 2008
3. The actual earning of Q4 is -0.7m before tax. 0 after tax.
4. Revenue $7.6m($12.2m including pass through ) compare to 6.9(9.0 including pass through) same quarter last year.
5. Cost of revenue ( 0.8(5.4)+2.1) = 2.9m compare to (0.1(2.2)+1.5)=1.6m. Gross profit $4.7m compare to $5.3m last year.
6. Admin $1.5m compare to $1.3m same quarter last year.7. Compensation $3.6m. Over $1.0m above previous year. May related to hire new CEO and president. It is pretty unacceptable given their current income level. I should be alerted when their Q2 compensation increased to 3.0m and Q3 increased to 3.2m.
Other thoughts:
1. Although we should not take one quarter of data as big deal. The new management team might need more time to get things better. But until now they show an very weak management. The market is bad now but they have not intention to cut cost and there is no sigh their cost will be reduced instead of keep increasing.
2. I brook two rules to buy this stock: "Two of Recent five years income are negative." & "They never paid any dividend". Obviously breaking rules is bad.
According to above, It is a mistake to buy this stock. Fortunately I bought it below book value and they have a lot of cash. Hopefully I can sell it without big lose.
Feb. 23, 2011
Recent price: $0.50
A company called Frontline Technologies Corp. will merge with the company. BLZ will pay FrontLine $1m in cash and issue 7,881,826 new shares to Frontline. Exchange for around $2.75m in working capital and $4m annual sales, $0.2m annual income. Existing BLZ business will be closed and proceed will be distributed to existing share holders only.
1.Current share outstanding: 14.638m, New shares after merge: 22.52m. With a new working capital around $2.75m and $0.2m annual income, it worths at least $0.10c or more. Actually Frontline must expect it should worth ($2.75m-$1)/7.882m = $0.22 per share to make a even.
2. Based Q3 2010 data, BLZ has $13.5m in equity.( $12m in working capital. $1.25m in capital assets. $14.5m in cash. $3m in liability). Minus $1m cash will be paid to Frontline. It is $12.5m on paper for distribution at Q3 2010.
3. Four big share holders is now on board. Total 5.3m shares, 36%.
After 2 quarters of lost, if some how the $12.5m eventually can be liquidated over $6m. Then there are some profit there.
Mar. 03, 2011
Bought more at $0.39
The asset must be liquidated for $4.25m and after merge stock price must be $0.10 for me to make an even.
Mar. 14, 2011
Got the agreement of Frontline deal and agreement of ref customers to EBS.
1. Frontline current working capital is likely to close to $0(range from -$300k to $300k). Which means the $2.75m will be deducted from BLZ current cash. This amount will be increased or reduced by the final number of Frontline's current working capital.
2. The refer of customer to EBS will be started before Apr. 1st, 2011. Within one year, the operation will be transferred to EBS gradually and EBS will pay BLZ for the operation cost during the period.
3. The deal with Frontline seems was directed by Cameron MacDonald, the biggest share holder of BLZ (2.1m shares). He is the CEO of Goodwood fund. It is value fund which returned quite good since inception(1996). He is also CEO of Westaim corp(TSE:WED) which Goodwood holds 20% shares of it. The Westaim is very similar to BLZ in nature.
1.BLZ will give up $3.75m(0.26 per share)cash in this deal. Assuming the deal is fair, then it is reasonable to think the new company will worth $0.26 per share. Otherwise, BLZ could just distribute the cash to share holder in stead of going though this whole merger process.
2. In total, BLZ will pay $1m + $2.75m*35% in exchange for 65% of the equity of Frontline. If the deal is fair based on numbers, Frontline could have ($1m+$2.75*35%)/65% = $3m in equity before merger. However, I don't expect that they would have that amount of long term assets. It it is more reasonable to range from $1 to $2m, then future book value will be around ($2.75+$1)/22.52=$0.17 to ($2.75+$2)/22.52 = $0.21.
3. The existing long term asset of BLZ is $1.3m, plus 150k tax credit. The U.S subsidiary are very likely be liquidated while the Canadian office remains unknown. Let's assume this could be added $0.05 to distribution and future stock value in total.
4. The referral of customers to EBS might return quite a bit for BLZ, also it will happen before Apr. 1st, which is much earlier than expected. let's take Saj's assumption the is will nets out the cost of closing cost to zero.
5. The total amount of working capital available for distribution at Sept. 2010 will be ($12-$1-$2.75)= $8.25m. Assuming it had lost 4m in past 2 quarters, now it has $4.25 in cash for distribution which is $0.29 per share.
1+3+5=$0.26+$0.05+$0.29=$0.60 per share. The price I bought $0.39 is a 35% discount. Ideally it should be no more than $0.36 which is 40% discount.
Comments:
I had made a mistake again in this stock which is too rush to buy. The two reports was released just 2 days after I bought the stock. Should have been more patient and wait its release.
Luckily the price I bought wasn't that bad. For Saj's opinion, he is right on the $2.75m working capital while missed the value of the new shares and the long term assets. Personally I trust Cameron MacDonald wouldn't let us down. Will continue to hold it.
http://www.barelkarsan.com/2011/03/belzberg-uncertain-payout.html
Mar. 22. 2011
Q4 2010 release and Annual Information Circular.
(1)At Dec. 2010, BLZ had working capital $10.3m. $Assets around 1.1m.
(2)I was wrong thought this is a reverse merger. Actually BLZ will have some operation with new company. The new company had a $6.6m pro forma revenue in first 3Q of 2010.
(4)Frontline currently has 34 employees.
(5)Astaraki the owner of Frontline declared bankruptcy at 2003. It said was caused of his parents debt.
(6)The distribution will be decided only after one year of deal close.
(7)The current CEO will leave with $300k compensation.
Recalculation:
1. BLZ will give up around $3.55m. $1m to Astaraki and leave $2.55 to new company. Around $0.24 per share.
2. After merge. It will have around $2.8m in equity and working capital around $2.35m.
3. Some of the $1.1m asset from BLZ will be liquidated and some will go to Frontline. Assume half will go to Frontline, half will be liquidated.
4. Available fund for distribution at Dec. 2010 was $10.3-$3.55+$0.5=$7.25m. Assuming $2m more loses. Now it has $5.25 for distribution which is $0.35 per share.
Around $0.60 in value. Not much change from previous calculation.
Thoughts
1. Frontline currently only have $300k in equity. It is much less than I thought. It means BLZ have trade around $1.8m just for $300k*65%=$200k in return. They might just liked the new business.
2. The new business will have $8m to $9m in revenue which should be able to support an $0.20 to $0.30 in share price. However, it must be remain profitable to get that.
3. Bad part is now I feel the distribute is very uncertain. Because these guys seems care more about the new company than the U.S liquidation. Plus the new CEO will get nothing from the distribution, he would care nothing about this matter.
Disclosure: Author has a long position in BLZ
