Why buy WestBond Industries (WBE)?
On a regular basis, I screen the losers list on CEO.ca. A few weeks ago, I came across WestBond Industries. On that date, WestBond shares dropped more than 10%. I navigated to the Stockhouse website and noticed the market valuation was ± $26,000,000. Then I saw the February 25, 2021, headline: for the third quarter ending December 31, 2020, WestBond realizes profit of $1,850,241. The previous quarter, WestBond made $538,291 in profits. Add these two quarterly profits and multiply by 2 and the potential annual profits are $4,700,000. Divide the annual profits by the market valuation and you get a ratio of 18% ($4,700,000 / $26,000,000), that is cheap. Why is it cheap? How has the Covid-19 crisis affected WestBond business?
WestBond's business profile
WestBond sells disposal paper products. WestBond product lines include clinical products such as examination table paper, sheets, pillowcases and gowns sold to health professionals. The personal hygiene product line consists of hand towels and bathroom tissue in jumbo roll format as well as conventional formats. Another product line is patient wipes and underlays for long-term care facilities sold to nursing homes. WestBond is expanding into a fourth product line, non-wipe air-laid table top products, which include high quality air laid paper napkins (restaurants and hospitality). WestBond claims to be the only Canadian manufacturer of airlaid parent rolls. Exciting stuff!!
https://westbond.ca/products/
WestBond manufacturing plant is located close to Vancouver, BC and sells directly to small distributors in Canada and western USA. As a supplier of clinical and personal hygiene products, WestBond was considered an essential service and has remained operational. In late August 2020, WestBond's began distributing disinfectant wipes sold under the brand name Viroban Plus. The Viroban Plus wipes can be found at Staples, Rona (Loews), Walmart, Cardinal Health and many others.
ANALYSIS
WestBond fiscal year ends on March 31, therefore revenues for the fiscal year ending March 2020 were somewhat affected by the Covid-19 crisis. The annual revenue growth rate between 2014 and 2019 were compared. For that period, WestBond grew its revenue on an annual basis by 11.5% not bad for what many would consider a boring industry. Net cash flows from operating activities grew by 25.7%. Impressive. The number of shares outstanding increased from 33,265,800 (2014) to 35,515,580 (2020). Almost no dilution, WOW!!
How has the share price done over this period? The share price at the end of each fiscal year was compared. On March 31, 2014, the share price was $0.10. On March 31, 2018, the share price was $0.10. On March 31, 2019, the share price was $0.16. At the end of March 2020 (beginning of Covid-19), the share price was $0.18. On March 31, 2021, the share price was $0.86. If in 2014, a very patient investor had purchased a million shares at 10 cents ($100,000), at the end of March 2021, that investment would be worth $860,000.
The market ignored WestBond financial performance throughout the 2010 decade. Enter Covid-19 and wet disinfectant wipes.
On May 19, 2020, the share price was $0.23. On May 26, 2020, WestBond announced it had been awarded a Drug Identification Number by Health Canada to produce wet disinfectant wipes. On the same press release, WestBond announced that it had suspended the quarterly dividend. Good news, bad news, but the market did not react. The following day, the share price closed at $0.23.
As some investors realized that wet wipes could be a bonus, share price began creeping upwards. On November 25, 2020, the price reached $0.57. At the end of the day, WestBond published positive quarterly results ($538,291 in profits) and the following day, the share price closed at $0.87.
On February 25, 2021, WestBond published third-quarter results ($1,850,241 in profits) and the share price reached an all-time high of $1.16. The share price has since retreated to the low $0.70-$0.80 range.
Normalized revenues
| | Normalized revenues |
| | for a 12-month period |
| Personal hygiene | $3,200,000 |
| Clinical | $2,000,000 |
| Wipes 2020-08-21 | $11,000,000 |
| Non-wipe air laid | $4,000,000 |
| Other | $45,000 |
| Total (rounded) | $20,245,000 |
Margins and operating cash flows
For the quarter ending December 31, 2020, WestBond net cash flows from operating activities / revenue yielded a 28.8% margin ($1,776,292 / $6,157,646), probably boosted by a onetime government contract. For the quarter ending in September, 2020 the margin was 20.9% ($1,133,120 / $5,412,664) For the quarter ending in June, 2020 the margin was 13.3% ($435,145 / $3,268,300).
Using a margin of 15%, net cash from operating activities would be ±$3,000,000 (15% X $20,245,000).
Using a margin of 18%, net cash from operating activities would be ±$3,650,000 (18% X $20,245,000).
Using a margin of 20%, net cash from operating activities would be ±$4,000,000 (20% X $20,245,000).
Dividend policy
WestBond instituted a dividend policy in 2018 and distributed 0.01 per share or $338,000 per year. The dividend represented about 25% of net cash flows from operating activities. The dividend payments were stopped after the February 2020 payment. A year later, WestBond reinstituted a dividend policy, but this time the annual dividend payment is 8 cents per share or $2,841,000 in annual distribution. In March 2021, WestBond paid $710,316 in dividend. During the third quarter ending December 2020, WestBond generated $1,776,292 in net cash flows from operating activities. The coverage ratio is 40% ($710,316 / $1,776,292). Operating cash flows were boosted by a onetime contract. The fourth quarter results are due in June and should shed some light on the dividend coverage ratio.
Using a rule of three and a coverage ratio of 40% would suggest operating cash flows would be $7,105,000.
| $710,316 | $1,776,292 |
| $2,841,264 | $7,105,168 |
Using a coverage ratio of 60% would suggest operating cash flows would be $4,740,000.
In February 2021, when the WestBond Board of Directors decided to reinstitute a dividend, it would be irrational for the Board not to have considered whether or not WestBond could generate enough cash flows to cover future dividend payments, equipment purchases, interest payments and other expenses. Board members collectively own 33.7% of all shares, and have an interest in maintaining and collecting the dividend.
WestBond intends to spend around $500,000 on equipment over the next 12 months. If the dividend payments and the equipment purchase are all paid from operating activities, than operating cash flows for the next twelve months will be at least $3,341,000 ($2,841,000 + $500,000). It would be unwise for WestBond to finance dividend payments by increasing the debt or issuing shares.
All things considered, if the dividend payments are secured, then WestBond annual net cash flows from operating activities will likely be higher than $3,341,000.
Conclusion
For fiscal year ending in March 2022, operating cash flows will likely range in the $3,400,000 to $4,000,000 range.
With net cash flows from operating activities of at least $3,341,000 combined with a market cap of ±$26,000,000, plus an ±11% dividend should offer decent downside protection and good potential upside. As the economic activity of the health care, restaurant and the hospitality sectors return to a normal beat, WestBond future growth prospects looks promising. In the coming months, the share price is likely to move towards $1.00. At $1.00, the dividend will be 8%, still a very good dividend.
Board members
Westbond is managed like a private company. Third quarter press release was seven lines. Westbond did not issue a press release when it contributed to the Canadian government wet wipes stock pile. Investors should be aware that THE ACTION on the share price will happen four times a year, in between periods will be quiet.
The Board members and a private investor own 51.9% of the company.
The CEO, Gennaro Magistrale owns 22.9% of the company. He has been involved with the company since 1989.
Mario Grech, a private investor since 2014 owns 18.2% of the company.
The CFO, Owen Granger owns 8.6% of the company. He has been involved with the company since 1989.
Three other directors own 2.3% of the company. The three other directors joined the company in 1996, 2003 and 2013.