I have been looking at SMIT since the company announced its rights offering in early November. I recently bought a position in the company and think it is extremely cheap. I think the downside is protected by the real estate and upside is quiet large with the equity stake of new management and funds.
SMIT is a company that has 3 core business segments: SBS dynamic balancing (grinding controls), Acuity Laser Measurement, and Xact Tank Monitoring. Until recently, the company used to be run by founder who didn’t really care about the marketing or running the company from a business perspective. In 2016, we had a management change. The new CEO has a business background and has brought a much better approach to running the company.
The company owns 40,000 sq ft building in Oregon. The new CEO tried to sell the part of the building (about 10K sq ft) for around $2.3M in 2016. The sale didn’t happen (we don’t know why) but the company is now looking to rent 7.7k sq ft. Once leased it could bring in around $1M in cash flow. For a company w/ around $6M market cap that is great annual cash flow, plus that would put the entire value of the real estate to be more than market cap.
Out of the 3 business segments the 2 interesting ones are Xact and SBS.
Xact creates satellite based monitors that measures the tank fill level and communicates that information via a 1-way device. The monitors are mostly used for Propane tanks but do work w/ diesel and other tanks. The monitors are easily attached to the tank and can be done by anyone in 15 min. The monitors work in extreme locations/weather. These monitors provide recurring revenue and save the customer money in transportation costs (no need to go fill tank when it is not close to empty). The Xact business does around $2M in annual revenues, very high gross margins, recurring revenue, and growing at 40% rate.
The company is working on a new version of the monitor. This will be a lot smaller and a two-way communication device. Also, most of the competition works on cellular networks and some of the large carriers are phasing out 2G and 3G networks which forces companies to switch devices. So the satellite based product is an easier sell and this creates an opportunity for Xact to get customers from competition.
The other business segment is SBS. SBS is a grinding balancing system that is used mostly in semiconductors. The demand for manufacturing is requiring smaller and smaller chips. This leads to better surface finishes. SMIT offers a product that automates the manufacturing process, where as competition requires human operator. This is a huge advantage and the prior mgmt team didn’t capitalize on.
The SBS segment does around $10-12M in rev and is a nice 50% gross margin business.
So you have Xact business that does around $2M in rev, very high margins, growing at 40%. The SBS business does around $10-12M in rev and around 50% in gross margins. And then you have real estate that is likely worth $6M+. For a company that is trading at around $6M market cap (w/ no debt).
Also you look at insider buys and you see a huge interest from funds (Gabelli, Monongahela, and Teton recent buyers) and the CEO also buying in public market.
Overall this is an extremely cheap company trading at less than liquidation value with some valuable business segments and a management team that is focused on growing and investing (rights offering) in the business.
Hidden Asset play