Purchase of Multi-Chem

Following from my penchant of hunting for unknown gem companies. I have chanced upon a company called Multi-Chem and had bought its stock today.

Business Profile

Contrary to its name, the company is not involved in the chemicals industry and is distributing IT security solutions products such as RSA and trend micro and training people on them. While it has a small business in mechanical drilling, this contributes to only 1% of its revenue; hence it should be focused as an IT and network solutions provider.

Being in the IT security solutions company, the company has very little CAPEX. Furthermore due to the trend of working from home, the company has seen a growth in its business. The market capitalization of the company is $124.3 million based on its closing share price today

Growth in Cash Flow

In page 6 of its latest financial results ending in 2020, the company experienced a growth in operating cashflow generated by 60% from $20 million to $32 million. Multi-chem's business in the IT security solutions has grown from $127 million in 2009 to $453 million in 2020.

With a small annual CAPEX outlay due to its model, the company generated approximately $28 million in free cashflow before working capital changes for FY20. This means its current business has the potential to yield a free cashflow yield of 22.5% based on current market cap.

With the gradual return to physical working at the office, I do not forsee that Multi-Chem will continue to grow its business but hover at around an operating free cash generation capability of $20 million. This itself is still a good free cash yield of 16%.

Strong Balance Sheet

In 2020, the company has paid off almost all of its bank borrowings (decrease from $25 million to $4.7 million debt). Its current cash reserves is $67.6 mil, and therefore has a net cash of $62.9 million which forms 50% of its market cap.

Possible Privatization Candidate

The controlling shareholders who is the CEO, owns 68% of the business. With its large cash reserves and a business capable of generating $20 million a year, it is possible a buyout may occur for the remaining 32% stake. 

Assuming a free cashflow yield of 10% and $20 million generated in free cash annually, the company can be valued at $200 million or about $2.22 per share. If investors are gung ho and think that Multi-Chem's strong growth in FY20 can be maintained due to the digital workplace trend; at FY20's free cash flow of $28 million, the business is worth $280 million or about $3.10 per share. With little debts on its balance sheet, the free cash generated by Multi-Chem's business can be sued for dividends. Hence free cash equals to potential dividends.

Multi-Chem's FY 20EPS is 19 cents, and is now trading at low P/E ratio of 7.2x.