Velan Inc T.VLN

Potential Growth Story?

[Deepvalue1981]

New european nuclear faicilities would be very possitive news for Velan.

https://www.bloomberg.com/news/articles/2021-10-04/nuclear-gains-ground-in-plans-to-phase-out-gas-use-in-europe

[knicksman]

Finally got that $10 million EBITDA quarter... Great buying opportunity.  Trades at Oil and gas is coming back Trades well below book value Surely opportunities to continue to improve operations and balance sheet. 

[screamer99]

I was very impressed by their top and bottom line. My caution continues to be the asbestos claims.  In Q1-21, they settled 63 claims for $4.2m which is an average of $67k per claim which is more than double the average of $30k per claim in each of the 4 quarters in 2020. In Q2-21, you'll have to piece some info together, but in the MD&A, they say they resolved/settled 116 claims

[knicksman]

Some very interesting post from smart people (usually a good sign).  From a valuation standpoint, you can't penalize VLN twice for the asbestos claims.  Either you gross up debt by $100 million and gross up EBITDA to US$50 million (on a run-rate basis) or do not gross up debt and assume EBITDA is run-rating at US$40 million.  At either rate, VLN is trading at 4x EV/EBITDA

[screamer99]

The way that I was looking at it was that there is an unrecorded liability (the audited statements is another matter that I haven't raised here, but with years of claims, a good handle on how many are settled vs. dismissed and what the likely cost of settling a claim is, I don't see how there isn't a provision for future claims - hence my comment on an unrecoded liability). Because

[Deepvalue1981]

"If management recorded an expense of say, $30k for each claim they expect to settle based on known claims when they were received (rather than recording the expense when settled), then I would agree a deduct to EV isn't appropriate because the cost would be contained in EBITDA (and EBITDA would be signifcantly lower)." I'm not sure quite what you mean here? I agree that we

[screamer99]

An analogy is warranty provisions.  When companies sell a product that has a warranty attached, they also record an estimate for future warranty costs in the current period because this cost is attached to the sale of the product (an historical event). A possible, more direct, example is the recording of invoices.  I see the received claim like an invoice which should be recorded when

[Deepvalue1981]

Thanks for your contribution on this. It's certainly made me dig much deeper into this issue. Ya the warranty analogy is a good one I think and as investors it's an adjustment we need to make, but whether or not this needs to be acknowleged on the financial statements is a different matter. I would contest that a very large percentage of the costs that they are incuring are legal. 

[knicksman]

This board is getting smarter and smarter! Here is what I understand. And these are some of the reason why I believe the shares are undervalued. 1) The elevated legal/claims costs in Q1 was primarily due to the change of legal firms. I also understand, that a decent amount of the cost associated with the legal/claims settlements are legal costs. I would estimate annual costs of about $10 million

[knicksman]

Sloppy seller weighing on the share price...despite the obviously improving fundamentals.  Too bad. 

[bucheroncapital]

No early this month around $ 8,00 the sellers gave us a gift even now @ $ 8,75$ it's trading at 14.5X actual and a lot cheaper based on future earning.  Patience will pay off

[knicksman]

Completely agree. Company just released the best quarter in years -- it should be at a 52 week high. There are so many ways to surface value here. The balance sheet could be optimized much further. I think we should see upside to at least 1x book value...and then beyond if they can remove the overhang related to the legal claims. 

[undervalue]

I was speaking to a Vln supplier. I need to do further work, but he mused that with fugitive methane emissions getting increased scrutiny, rather than repair,  clients are starting to cut out the worn valves and replace with new to ensure zero leakage.  There might be a new order flow coming from esg demands.   The legal claims are a headache for the share price. But, replacing

[Deepvalue1981]

Interesting.  Thanks for sharing and the earnings release seems to back this up with the increased MRO sales.  It will be interesting to see if they can drive revenues back to a ~$500M run rate while maintaining gm's.  The aesbestos thing is certainly a drag on earnings and thus the share price, but if they can do that it would likely become less of an issue in the eyes of