RESEARCH REPORT: THE COMPELLING CASE FOR PURCHASING SHARES OF ATNY
I've been accumulating shares of ATNY since early last week. To date I have taken on a medium sized position to start and plan on making it a large sized position in the weeks to come. The reasoning behind investment in the name is compelling when taking into account all the factors. There is a value angle, an activist angle and most importantly, as you will learn, there is a knowledgeable team guiding the company forward in an effort to maximize shareholder value.
ABOUT ATNY
API Technologies Corp. designs, develops, and manufactures electronic systems, subsystems, RF/microwave, secure systems, and information assurance products and solutions for defense, aerospace, and commercial applications.
The US, Canadian and United Kingdom Governments’ Departments of Defense (directly and through subcontractors) accounts for approximately 50%, 2% and 5% of the Company’s revenues for the three months ended February 29, 2012 (72%, 4% and 7% for the three months ended February 28, 2011), respectively.
In the most recent quarter ended February 29th, 2012:
- Revenue of $70.7 million for the quarter ended February 29, 2012, up from $24.6 million in the quarter ended February 28, 2011
- Operating income of $4.3 million compared to an operating loss of $7.2 million in the comparable quarter of 2011
- Adjusted EBITDA of $10.8 million (15.3% margin) for the quarter ended February 29, 2012, versus zero in the prior-year period and $11.4 million (15.2% margin) for the quarter ended November 30, 2011
- Implemented $23.8 million of annualized net cost reductions during the last 12 months
GROWTH THROUGH ACQUISITION
Thus far you can see that we have a defense electronics manufacturer that seems to be cutting costs and increasing the top/bottom line numbers over the recent past. The story goes far beyond these simple facts, however.
ATNY has been achieving growth through acquisition. Since 2011 the company has merged with or purchased five separate companies. As a result, they have become a prime mid-level player in their space, setting them up as a target for acquisition by a top-tier name over the next 12-24 months.
On January 9th, 2011 the company completed a complicated merger with SenDEC via Vintage Capital Management. That merger effectively resurrected the company through a doubling of revenues, allowing ATNY to pay down debt, reestablishing a Nasdaq listing (traded on bulletin boards prior) and implanting the head of Vintage Capital as CEO of ATNY.
THE ROLE OF VINTAGE CAPITAL MANAGEMENT AND BRIAN KAHN
Vintage Capital Management, as described by their website is a value-oriented, operations-driven private equity investor specializing in the defense, manufacturing and consumer sectors. What Vintage Capital Management does basically is to take large stakes in defense related companies that they believe to be undervalued. They then proceed to create the perfect mix of target related catnip, in the form of any combination of enhancements that allow for the company they are involved with to be eventually acquired at a hefty premium. That is Vintage Capital Management's modus operandi. They seem to be good at it too.
Vintage Capital is led by Brian Kahn. Mr. Kahn began his career in 1993 in Equity Research at Fidelity Investments, where he was primarily responsible for analysis and selection of equity investments for various portfolios with assets in excess of $400 billion. He served as Chairman of White Electronic Designs Corp. from June 2009 to April 2010 and also as its Director from February 2009 to April 2010. He serves as a Director of Spectrum Control, Inc. He served as Director of Integral Systems, Inc. from October 2010 to July 27, 2011. In 1997, Mr. Kahn was selected as one of the “Most Knowledgeable Buy-side Analysts” in an annual Reuters survey of S&P 500 companies. He is a holder of the Chartered Financial Analyst designation. Mr. Kahn graduated cum laude and holds a Bachelor of Arts degree in Economics from Harvard University in 1996.
Here are some past examples of Vintage Capital and Mr. Kahn's work that leave little doubt of what the goal is with ATNY:
WEDC - After acquiring a significant stake in WEDC, Brian Kahn became Chairman of the Board of WEDC. In August of 2009 Vintage Capital (through an affiliate investment arm it looks like) took a 16% stake in WEDC through a cash tender offer http://www.istockanalyst.com/article/viewiStockNews/articleid/3420857.
Throughout 2009 and early 2010 shares of WEDC were purchased in the $4 range http://www.gurufocus.com/InsiderBuy.php?insider=KAHN+BRIAN+RANDALL
March of 2010 WEDC was acquired by Microsemi (MSCC) at a 75% premium to Vintage Capital's purchase price. Not coincidentally, the Senior VP of MSCC now serves as President of ATNY.
ISYS - During 2010 http://www.rocketfinancial.com/Holdings.aspx?fID=128562Vintage Capital began acquiring a substantial stake in ISYS.
Subsequently two members of Vintage Capital landed on the board of directors http://www.ft.com/intl/cms/s/2/ff3e162e-f812-11df-8d91-00144feab49a.html#axzz1sh4IhsHu of ISYS to explore a possible sale of the company.
May of 2011, ISYS was acquired at a near 100% premium to prices paid by Vintage http://boston.citybizlist.com/7/2011/5/25/Vintage-Capital-Owns-9.8-of-Recently-Acquired-Integral-Systems--cbl.aspx
HRLY - In August of 2006 Brian Kahn made an aggressive move to acquire HRLY through a company named Veritek http://13dtracker.blogspot.com/2006/08/veritek-confirms-offer-for-herley-hrly.html In 2011 HRLY was eventually purchased by Kratos Defense and Security http://www.herley.com/index.cfm?act=displaynews&prs=416 What is interesting is just a few months later Kratos also purchased ISYS, a company that Mr. Kahn sat at the Board of Directors and had a significant stake that was acquired in 2010.
This from an SEC filing: Over the course of 2010, both before and after his appointment as a director of Integral Systems, Mr. Kahn corresponded with Kratos' Chief Executive Officer, Eric DeMarco, on general matters in the defense industry. On February 7, 2011, Mr. Kahn called Mr. DeMarco to congratulate him on Kratos' purchase of Herley Industries, Inc. Mr. DeMarco responded by email, stating that he was unable to speak with Mr. Kahn until the Herley transaction closed.
These examples are meant to convey the philosophy of Vintage, which seems to be utilizing relationships and knowledge in a niche industry to garner maximum value for assets they can influence through various means.
Mr. Kahn seems to be in overdrive with the recent acquisitions that have taken place over the past 16 months with ATNY. There is definitely a value creation process that is ongoing at the company through acquisitions and cutting costs. Given the history, scope of experience, as well as relationships within the industry among current management, an eventual acquisition at a substantially higher per share price is an inevitable conclusion.
MORE POWER PLAYERS
Let's look at some of the other players involved:
Senator Investment Group - Controlling shareholder. ATNY recently borrowed $16 million from Senator through an issuance of convertible debt.
Doug Silverman is an expert in event driven investing. In 2008, he established Senator Investment Group in New York with Alexander Klabin, an expert in private investments, value investing, distressed debt and special situations. Before founding Senator Investment, Silverman and Klabin worked at York Capital Management. Senator Investment Group has around $3 billion in assets under management.
Holds 10% of outstanding shares purchased at higher prices to recent close.
Wynnefield Capital, Inc. (WCI) is a value investor, specializing in U.S. small cap situations that have a company or industry specific catalyst(s). Surfacing of these catalysts unlocks existing, but previously unrecognized value for shareholders.
Holds 5% of shares outstanding purchased at higher prices than recent close.
J. Kyle Bass HAYMAN CAPITAL MANAGEMENT an American hedge fund manager, is the Founder of Hayman Capital. He received extensive coverage in the financial press for profiting $590 million by short selling the sub-prime mortgage bond market (via CDO's), before that market crashed.
Holds 4% of shares outstanding purchased at higher prices than recent close.
INSIDER BUYING
It should also be noted that insiders have been especially aggressive in purchasing shares of ATNY
http://www.secform4.com/insider-trading/1081078.htm
Note that a reverse split took place. Therefore, the price information you see for the insider buys has been modified. A majority of the buys you see there have taken place at higher prices than current per share price.
A part of the insider trades listed above was executives taking part in a private placement of shares
http://apitech.com/news/api-technologies-completes-debt-and-equity-financing
http://www.faqs.org/sec-filings/110321/API-Nanotronics-Corp_8-K/
Both of the private placements had investors buying at prices that represent a 50% premium (6-6.50 per share) to Friday's close. This is an indicator of where investors believe a compelling valuation for the company lies.
CEO INCENTIVES
ATNY also has a highly incentivized CEO at the helm. This according to a recent SEC filing:
Mr. Lazar became our President and Chief Operating Officer effective March 1, 2011. Under his letter agreement with the Company, he is entitled to a base salary of $500,000 and an annual cash incentive payable for the achievement of performance goals to be established by the Compensation Committee. His target for the incentive payment is 70% of his base salary, with a maximum target opportunity of 100%. Mr. Lazar also was granted 300,000 shares of stock as a signing bonus. For his performance during the transition period, in lieu of a cash bonus, the Compensation Committee granted Mr. Lazar 100,000 RSUs that vest over a 3 year period. Mr. Lazar’s employment is at-will, and either party may terminate the employment at any time, and the Company is entitled to modify his job title, salary and benefits. Mr. Lazar has no agreements for severance or change in control payments.
VALUATION
On a pure valuation basis, the company trades at 9 times F13 EBIDTA and less than 1 times F13 sales. Industry average is roughly 15 times earnings putting fair value for the company at $6.75 or 66% higher than Friday's close based on forward projections.
The valuation for ATNY is not the primary driver here, however. The key catalyst comes in the form of a group of investors who are driving the company towards an eventual sale to a top-level defense electronics manufacturer. That sale, if and when it comes, should be at a valuation that eclipses fair value by a significant margin. 8-9 per share is not be out of the question over the next 6-12 months.
SUMMARY
My investment in ATNY at these levels is as close to a no-brainer as it gets. These types of opportunities come along once in awhile. What I mean by these types of opportunities is a company that is obviously backstopped by a knowledgeable group of investors who are creating incentives for larger companies to come and gobble up this current project. Furthermore, should a buyout of ATNY be delayed for a significant period of time, the company has the leadership, product line and industry presence to function well on its own. It is certainly trading at an under-appreciated price per share given all the circumstances.
RISKS
The risks to the company come in the form of governmental risk as governments make up the majority of their revenues. The ability to service their substantial debt load will become a concern should the economy take a step backwards. Execution risk in the form of successfully integrating all the pieces of the acquisition pie they have accumulated over the past 16 months is another potential stumbling block.
TECHNICAL ANALYSIS
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