A Great Opportunity

Jewett-Cameron (JCTCF) is involved in the business of industrial wood distribution products (Greenwood), pet and fencing (JCC) and seed processing (JCSC, which was shut down recently).  Jewett-Cameron has been a successful growing company in the early 2000s but lately it has been well under the radar and for valid reasons. The company the last 2 years have seen depressed prices on their stock due to Covid 19 and its effects on the business. JCTCF has been struggling with decreasing margins due to increase in costs from supply chain disruptions the past years and therefore the company is carrying inventory at a high cost which is hurting margins as they are selling off their higher cost inventory. As said by management, in Q4 they will likely be done with selling their high cost inventory and margins should be seen improving over the next quarters. 

JCSC was also a drag on JCTCF’s profitability as they were recording loss after loss and making a negative impact on the bottom line of the company. JCSC has recently been shut down due to equipment coming to the end of its useful life and management thought that replacing the equipment will be a low return on their investment as JCSC is a drag for the company. The management is focused on selling remaining inventory at JCSC around $600-800k so  an increase in cash flows could be expected from this liquidation and an increase in profits should be seen over the next few quarters once the operations are completely shut down.“Nearly half of the seed inventory held at the time of the closure announcement has already been sold, as well as some of the equipment, which has exceeded management’s expectations. The end of operations and full closure of the facility is expected to be completed by the end of calendar 2023. 

Also, JCSC has some valuable assets, they own a 105,000 sq ft building in Hillsboro, Oregon. “JCSC owns 11.7 acres of land and 105,000 square feet of buildings in Hillsboro, Oregon. The ultimate disposition of these assets has not been determined and will be evaluated by the Board.” They state they own 11.7 acres of land AND 105,000 sq ft building in Hillsboro, Oregon. However, when we go to the asset section of JCSC, it only states a value of around $740,000. So I believe the building is close to being fully depreciated as the company was acquired back in 2000 for $1.5m. And from research on the properties near Hillsboro, Oregon, we have 2 buildings listed, one building is listed for $989,000 with 7,500 sq ft and the other building is listed for $1.1m at 6,600 sq ft. Now, JCSC building is 15x the size of that and with an avg price of $80 per sq ft, the building is valued at $8.4m. I don’t know how they value the buildings up there but I’m certain that with a conservative price per sq ft of $80, the building is understated in the company’s balance sheet and a sale of it would be huge for the company’s cash position. I do think $80 per sq ft is too low because the other two buildings I mentioned were selling the building at an avg price per sq ft of $137-$150. 

“Management believes there is significant value in the Company’s real estate, as the 2018 Market Value Tax Opinion from Washington County (excluding the Manning property) was $6,804,940 compared to the book value as of May 31, 2019 of $2,520,366.” This was a statement from management in the 10-Q from 2019 on its property book value. 

The company has a lot of tailwinds coming in Q4. JCTCF signed a new sales agreement with a major lumber retailer that will increase revenues and will also provide the company with a more predictable stream. However, this agreement does require the company to have a higher inventory level on their fencing products, so therefore the inventory levels will be higher compared to historical levels, good news as they earn an increase in revenue. They also signed a new exclusive distribution agreement with the SECOS Group in Australia for the distribution of MYECOWORLD products in the US. In Q3 they did a soft rollout, but in Q4 they are making the full product rollout into retail channels and with the agreement comes a minimum sales requirement to maintain exclusivity and that number is $2.8m by March 31, 2024. That should add to sales in the near future.

I expect cash flows to come back to the positive side the next few years now that inflation related costs have come down and higher cost inventory will have gotten rid of in Q4, JCSC will have been shut down so no longer a drag in the company’s profitability, increase in sales due to new sales agreement and distribution agreement and inventory coming back to normalized levels. Capital expenditures are basically non existent so free cash flow will likely equal to operating cash flow and minimal SBC. So owners earnings can be calculated as FCF. Over the past 10 years the company has generated an average FCF of $360k. Now if we limit it to pre 2020, we have avg fcf of $2.1m and the reason why we limit it to pre 2020 is because increasing costs really made an impact in the operations of JCTCF as they had to increase their inventory significantly which was a drag to cash flows and I believe that those years should be excluded because those years are not indicative of future results as they are already past that. However, earnings over the past 10 years are an average of $2.4m.

Lastly, in the near future they should receive a sum of cash from pending legal victory. In 2021 they were being sued by a former distributor for the company and JCTCF was able to win the battle and now are seeking cash from damages and I expect it to be around the $400k area as their SG&A had an increase of around $400k in their income statement due to legal fees so that is my estimate of what they are receiving. I might be way off but that’s something that will add to cash no matter the amount.

However this investment does not come without risk. One of the downsides is their customer concentration. The top 10 customers were responsible for 84% of sales in 2022. So a loss of one of those customers could have a huge blow on the financial conditions of the company. However, that is nothing that they can’t handle because they have been operating with this concentration forever and have dealt in the early 2000s with a loss of a customer that accounted for 30% of its revenues. They were able to offset revenue loss to only 19%.

They also have no product differentiation that sets them apart from competition besides their patented products. They are working into putting another patent in to keep the product well protected.

I believe this company has a sizable discrepancy between value and price. The company has understated assets and strong earnings power, even more now that tailwinds are ahead and no longer headwinds. They are able to generate positive FCF, and have bought back shares in the past so it is a possibility that they resume the buy back program they had. Management is not value destructive as they have shown to shut down operations when they have to and not bleed cash consistently.

*Not Investment Advice*