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Here's why Canaf @ .10$ is undervalued

posted on Apr 14, 11 12:35PM

Canaf (CAF.v) Financial analysis

• Q1= +140k
• Q2= +454k (operated near full capacity)
• Q3= +285k
• Q4= -327k ( but includes a -408k write down of the Sierra Leone property )
Total = +552k or + .012$/share

Q1 = made 30k before income tax but 78k of income tax payments, thus -48k net

In Q1, there was a 13k foreign exchange loss, and a number of one-costs which are not expected to repeat (some legal fees and maintenance costs for example).

The company continues to trade at about .4x price/sales. If we discount the write off of the Sierra Leone property in Q4, Canaf currently trades at roughly 5x price to earnings. These metrics are clearly undervalued from an accounting point of view, based on current market multiples. Several picks with these kinds of metrics have undergone a natural stock price correction, as visibility increased and management speaks to the crowd.

Maximizing the Quantum facility:

• Quantum has 2 kilns
• The company basically runs the equivalent of 1 kiln at full capacity due to the severe electricity penalty cost should they go over their quota.
• Due to increasing demand from their customers, Quantum is looking to increase the overall capacity by operating one of the kiln with a different power source (natural gas), thus bypassing the electricity penalty from Eskom
• Operating one of the kilns with natural gas would not only increase capacity/sales, it offers significant operating cost reduction and improves margins
• Once completed, the company will contemplate eventually powering both kilns with natural gas to reduce costs even further for both kilns

The Uganda litigation settlement:

• Canaf can obtain up to 10M$ in settlement, representing up to .22$/share for shareholders
• The balance sheet already shows positive working capital
• There is 727k owed to the CEO and a small 160k debenture to clear; the lawsuit settlement will eliminate both, providing further enhancement of company’s balance sheet
• Conversion of the kilns to natural gas is not a very costly overhaul; it can easily be done with current operating cash flows. However, any litigation settlement can only speed up the conversion
• Any meaningful amount received could be used to buyback shares on the open market, reduce the float, and improve earnings per share going forward
• Or the company could use some the proceeds to improve visibility (ie hiring an investor relation firm) which could have a positive impact for current shareholders
• If a large settlement is obtained, the company could envisage new projects, and if these do not seem adequate, the company could very well turn around and give current shareholders a special dividend

Quantum has been profitable for the past 6 years, providing a solid base for this public entity. The rejuvenated order book from BHP Billiton and Arcelor Mittal are encouraging; shareholders of Canaf have lots to gain with very little down side at this point. Good luck to all.

The above is simply my personal understanding and not to be construed as investment advice. I’m not a broker, promoter, director, manager or employee of the aforementioned company, just a shareholder. Some typos could have occurred, do your own due diligence.

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