Cleland's Latest Letter
Posted before trading began. But still something to chew on. G7
I am still waiting to do a detailed review of Vendtek after it resumes trading (which is still
expected to be any day now)
In the meantime, I draw your attention to a research report on Vendtek written by Glenn Jamieson
of Macquarie Capital on March 1, 2010, after the financial results were released. Although he
understandably reduced his target from where it had been prior to the trading halt, he still pegged
his 12-month target at $1.10, and published an EPS estimate of .04/share for FY2010 (which
ends October 31, 2010). His conclusion was as follows: “We expect the stock to trade down
significantly when the halt is lifted due to pent up selling, but from that point, we think the stock
will do well, which is why we rate it ‘Outperform’. We think Vendtek is a solid business that will
successfully emerge from a difficult period and capitalize on the opportunities ahead.”
I also encourage you to review the section on Vendtek from my letter dated December 10, 2008. I
still stand behind everything I wrote in that letter:
www.northernriversfunds.com/assets/downloads/Cleland_November_2008.pdf
Two facts about 2009 that I will highlight:
1) “As at October 31, 2009, the company’s cash balance was $2.676million, compared with
$2.103million on October 31, 2008.” This is very impressive, in light of the approximately
$1.2million in one-time restatement costs they incurred during fiscal2009. Simplistically,
they generated almost $1.8million in cash during fiscal 2009—of which$1.2million was
consumed by one-time legal and accounting costs. Anyway, the bottom-line is that the
business model is proving itself as a free-cash-flow-generation machine,and they will not have
to raise money after they resume trading.
2) They signed licenses in 5 new countries, three of which were under their “software as a
service” model, whereby they can domicile the servers and software to support the offerings in
those countries in Canada (meaning the margins for their “software as a service” clients are
very high).
Yes, 2009 was a bit of a “lost year” for Vendtek, but they did grow their top line and free cash
flow—in contrast to so many other companies—during the worst economic and financial crisis of
the last 50 years. That in itself is impressive.
Last but not least, Vendtek has added a number of extremely impressive individuals to their Board
of Directors, including Gordon Glenn, the former Chairman and CEO of SXC Health Solutions
(formerly known as Systems Xcellence). (Given my history with SXC, it is not difficult to deduce
how it is that Gordon came to join the Vendtek Board…) I will review all of the Board additions
in detail in a future letter.
In the next letter, I look forward to explaining why I think Vendtek is likely to give us strong
returns in 2010 and beyond. In the meantime, I thank you again for your patience and trust. I am
doing everything I can to continue earning it.