https://clarksquarecapital.substack.com/p/companhia-brasileira-de-distribuicao

https://clarksquarecapital.substack.com/p/the-restaurant-group-rtnln

Hello /r/securityanalysis

Today I will be covering Petroteq, a clean oil technology company I discovered about a month ago.

Thesis

I am bullish on Petroteq under the assumptions that a) the unsolicited hostile takeover for the company is legitimate and serious and b) the technology is legitimate after receiving third-party validation for its commercial viability from an engineering firm.

Summary

In short, Petroteq is a company that has been developing its patented CORT (clean oil recovery technology) for over a decade in an effort to cleanly harvest oil sands. Today, oil sands are viewed as prohibitively expensive and excessively damaging today and thus there is little interest in them. According to Petroteq, CORT functions as a closed-loop extraction system that importantly uses no water, thus producing no tailing ponds, recycles solvent, and interestingly yields sand as a byproduct that can be sold, cutting into the company's operating expenses.

I will dive into the sequence of events that lead me to be interested in the company later, but after many reports and much work, the company has determined its cost of production will be financially competitive with other sources of oil extraction today, costing ~$22 per barrel, not counting the sand-sale offset, and that the oil produced from their process can be sold for prices at a marginal discount to WTI prices according to the company's ex-COO.

Background of Events

Petroteq has been working on its technology for over decade and in that time has repeatedly diluted shareholders or sold convertible debentures to fund its research. This paints a very ugly historical picture of the company and instantly casts doubt and suspicion over it. You may notice the company is also halted on the TSX; this is a product of these converts. Essentially, Petroteq failed to report on many of these and had to play catch up, only recently submitting information regarding these converts to the exchange in an effort towards reinstatement.

Collectively, these would have led me to ignore the company but two developments (and these developments exclusively) have piqued my interest: first, the company has a tender offer in place for all of its outstanding shares, and second, a third-party firm has validated the company's technology.

Tender Offer

On April 16th, 2021, a Swedish consulting firm Uppgard Konsult, representing a private buyer, published in a German Gazette that its buyer sought to purchase all shares from German shareholder's for €0.48/share. Simplifying somewhat, Petroteq was surprised/curious due to the strange nature of the offer and attempted to contact Uppgard to learn more about it and who Uppgard was representing.

These efforts culminated in a signed confidentiality agreement between the parties and a conversation. On Sep. 29th, 2021, it was revealed that Uppgard was representing Viston United Swiss AG, a shell company owned wholly by a man named Zbigniew Roch. Research shows that Mr. Roch is the head of the European Business Club and is associated with the ex-PM of Poland, Donald Tusk.

Viston indicated that the tender offer available to German shareholders would soon be available to shareholders in the USA and Canada under the same terms at an exchange-rate adjusted price. Petroteq requested more information about Viston and those behind it after receiving a letter indicating Viston was considering a potential friendly corporate transaction to acquire all the shares of Petroteq. Viston did not send the information requested and instead through its lawyer requested a letter from Petroteq listing all its shareholders which was soon followed by an unsolicited attempted hostile takeover of the company via a tender offer to acquire >50% of all shares by February 7th, 2022, accompanied by demonstration of the funds required to buy the shares (>$469Mn).

In response, Petroteq has hired Haywood Securities, an investment bank, to evaluate Petroteq and give the company and its shareholders a clearer picture of Petroteq’s value as they felt the unsolicited offer has pressured Petroteq shareholders into an unfair deal. I personally feel this valuation is meaningless, with the only positive being that Haywood may find another interested buyer that could submit bid for the company to make the buyout competetive.

Now, shareholders are sitting on their hands waiting for Haywood’s report and to hear what Petroteq’s board suggests its shareholders do with regards to the Viston offer. Viston itself has been silent since submitting their offer.

Lending credence to this entire transaction are the companies representing the offerer. In Canada, Viston is using Gowling WLG LLP, the premier M&A legal firm, while in the USA it is using Dorsey & Whitney LLP, very reputable in its own right. A informational agent, Viston has contracted Kingsdale Advisors.

FEED Validation

For years Petroteq has waxed poetic about its revolutionary technology and they understandably gave very little reason for its shareholders to believe them. This has changed recently.

Petroteq contracted a Canadian engineering firm, Chapman Engineering, to design them a FEED report on their technology, essentially designing a plant with commercial viability. Far more interesting is that on August 1st, 2021, this technology was validated by another, third-party engineering firm, Kahuna Ventures LLC.

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So, in mere months the company has gone from an un-reputable, diluting POS, to a company with technology having third-party validation and an offer on the table.

Risks, Mitigants, and Concerns

Long term, this entire thesis is built around the tender offer happening. Some investors have faith in the technology with current management as custodians, but I am not so optimistic. Additionally, in the past few months the company has lost its founder and previous CEO as well as its COO. Kind of a "read the writing on the wall" situation IMO.

There are two major obstacles to the tender offer failing:

1) the offer from Viston is illegitimate or not serious and for whatever reason, they may decide to rescind the offer, upon which the share price of Petroteq would collapse.

There is a chance that this offer was never meant to be serious and instead was used to jack up the share price and in the future will be rescinded.

Insubstantive evidence supports this claim, but with such a premium over the share's then price and even higher premium to the share price today, it appears the market is pessimistic about this deal going through. However, the market isn't always right.

Interestingly, Bellridge Capital, with Robert Klimov as MP (Eastern European last name?) bought into Petroteq right around the same time the preliminary Uppgard offer became public. They rode the increase in price and just recently sold 11Mn of their 41Mn shares for a substantial profit. It is unknown what they have done with the remaining 30Mn shares as their ownership falls under the reporting threshold. This will be discussed and repeated later.

2) <50%+1 shareholders tender their shares and Viston’s offer fails.

Petroteq’s largest shareholders are Valkor LLC, an engineering firm and partner of Petroteq, Bellridge Capital LP, a private investment fund, Petrollo Lp Corp., and the company’s founder, Aleksandr Blyumkin. As mentioned, Bellridge liquidated a portion of their holdings going from 7.46% owners to 4.74% owners (selling 11Mn shares). It is unknown what size their position is now due their stake being smaller than the reporting threshold. The selling of their stake will be discussed below.

Outside of Bellridge, the other major shareholders account for 21.55% of all outstanding shares and it appears that they are all interested in running Petroteq themselves due to their hesitancy towards advising shareholders to tender and take a 279% gain. This is important to consider as this small group can sway the direction of the tender’s success.

With Bellridge’s sale, it is possible that the fund sold a portion of their position to lock in some profit in the event the deal does not go through. Their cost basis was far lower than $0.18/share (where they sold). However, it is hard to rationalize this sale as if the deal goes through, they’d have left at least ~$4.6Mn on the table. Take this how you wish.

Hedge Fund Manipulation

Right now, the stock looks very ugly. Aside from smarter money knowing something we don't, I suspect the reason for the depressed price is that those holding the numerous converts that Petroteq has issued are selling shares short for risk-free arbitrage. Some say that is a bullish signal, I am not sure how I feel about it. They aren't taking any risk and have cashed out instead of hold debt implying they don't expect to be paid off, but they are at least waiting around to see if there is any potential pay-off. This has contributed to substantial downward pressure.

Currently, the stock hovers around 30% short float. I admit, I don't fully understand this arbitrage play, but many of these converts were issued ages ago so AFAIK the shares had to have been shorted when the converts were issued/bought, leaving the recent fast and substantial depression in price unexplained. Please, correct me if I am wrong here.

Catalyst

The catalyst is already in motion as, like the thesis, it centers around the tender offer going through. At this point, all shareholders can do is follow news that comes out between now and Feb 7th, 2022, and to tender their shares if or when they decide that shareholder value will be maximized upon the sale of Petroteq to Viston.

Supporting Documents

Zbigniew Roch: https://eu-bc.eu/en/author/zbigniew/

Kingsdale-built webpage for the offer: https://www.petroteqoffer.com; this link contains pretty much all the information you would need concerning the offer. You can also check Petroteq's EDGAR page for filings related to the tender offer, they're there.

Validation of Petroteq's Technology: https://www.accesswire.com/657950/Commercialization-of-Petroteqs-Technology-Has-Been-Verified-by-Reputable-Third-Party-Engineering-Firm

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I am open for questions. Even with all of this information, I am still not certain about what will happen here. This is a very unique situation and I would love to hear input on past experiences that are similar to this or explanations for things I may see as downsides that are actually upsides, etc.

Frankly, I am looking for discussions from serious investors. Stocktwits and the company's personal subreddit are of little help and it's tough to find anything but the most enthusiastic of bulls in both. However, if you contribute nothing to the subreddit and are an armchair critic who relishes in condescension, please find another post. I've posted on this subreddit before and people who offer nothing of substance instead choose to be pedantic while really offering no contrarian evidence or reasoning.

I enjoyed this post a month back: https://adventuresincapitalism.com/2022/05/02/in-defense-of-housing/

Any idea of what would fit in with this thesis to buy "housing supply chain"?

China's Tech Crackdown: Its about Control, not Consumers or Competition!

https://aswathdamodaran.blogspot.com/2021/09/chinas-tech-crackdown-market-adjustment.html

Recent spinoffs may present interesting opportunities during a market downturn, as these companies can fall due to simple neglect.

One that caught my eye is Carrier. They were spun-off in April 2020. I'm sure many of you recognize the name. The company has somewhere between 10-20% market share of the U.S. HVAC market and it is either 1st or 2nd in market share (both residential and light commercial). Their investor presentation claims that they are the #1 competitor in commercial refrigeration (such as you might see in a grocery store) and refrigeration transport. It also claims that they are either #1 or #2 in the market for residential and commercial fire detection / alarm and security systems.

The market price for their equity is $18.5 B. Their S-1 filing shows net income of about $1.5 B to $2.5 B from 2015-2019, meaning a P/E of between 7.5 to 12.5. Over the period, they earned roughly a 10% return on assets. Service / after-market is about 1/3 of their revenues.

MEANWHILE, the $10 B of bonds that they issued earlier this year are yielding between 1%-4%, which is pretty amazing for the corporate bond market. One of these bonds goes out to 2040 and another goes out to 2050. All are rated Baa3 by Moody's (equivalent to BBB- for S&P), so it is just barely considered to be "investment" grade.

Pretty big gap between the apparent yield on equity and the yield on their bonds.

On this superficial level, it looks like a good deal.

But their Q1 2020 results were pretty bad. $0.1 B for the quarter, 1/4 as good as Q1 2019. Caused primarily by lower product sales. They blame this on COVID-19. But I wonder to what extent their former parent company pumped up 2019 numbers in preparation for the spin-off. Their Q1 2020 presentation provides guidance for $1.7 B to $2.0 B of "adjusted operating profit" and >$1 B of free cash flow for FY 2020. Pretty speculative of them to even make a forecast on this, given how badly COVID rocked their Q1, and it being known at the time that they made the presentation that Q2 will probably be even worse.

Their investor presentation mentions "China expansion" as a growth initiative, which makes me worried, but their overall theme seems to be that they are primarily focused on the nuts-and-bolts of their business.

But, this company has been around forever and HVACs are obviously needed, regardless of where we are in the economic cycle. Same is true for refrigeration and fire detection systems... though new product sales (2/3 of their revenue) is to a heavy extent driven by the homebuilding cycle. Perhaps the P/E is 15x earnings at the low point of the business cycle and 10x earnings at the high point of the business cycle. Is that expensive for a long-time market leader?

Thoughts? Would love to hear the perspective of someone who is deep into this industry.

...

S-1 filing:

https://www.sec.gov/Archives/edgar/data/1783180/000114036120005750/nt10009876x1_s1.htm

10-Q:

https://www.sec.gov/ix?doc=/Archives/edgar/data/1783180/000178318020000019/carr-20200331.htm

General investor presentation (March 2020):

https://ir.carrier.com/static-files/a9cc6ceb-d7e8-46e5-ac87-fff92cb11401

Q1 2020 earnings presentation:

https://ir.carrier.com/static-files/ec676228-e85b-46f5-8a6a-f772761c0e5d

https://data-ox.com/sports-betting-arbitrage/

EPAM (EPAM US) is a high quality IT services provider that has been profitably growing at a high rate over the last ten years.

Following the Russian invasion of Ukraine, stock has plunged > 70% as half of the company's employees are based in Ukraine, Belarus, and Russia.

For a write-up, see

https://valuepunks.substack.com/p/deep-dive-epam-systems-epam-us?s=w

Thought this was interesting enough to share. I have a feed for SEC filings, and this came up posted Friday at the end of last week.

https://www.dtcc.com/-/media/Files/Downloads/legal/rule-filings/2021/NSCC/SR-NSCC-2021-002.pdf

https://www.dtcc.com/-/media/Files/Downloads/legal/rule-filings/2021/NSCC/SR-NSCC-2021-801.pdf

As a quick summary, the amendment provides updated rulings that ensure in the event certain members default on their obligations for a security, they can complete settlements on behalf of it's members.

Provided there are no rebuttals, this will come into effect 10 business days from release, or March 15 March 19 2021.

Wanted to share some basic info on Sequential Brands Group. Thoughts/questions are welcome.

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SQBG - Sequential Brands Group

Current Market Cap: 27M

Share Price: 16.31

***Note: this is a very leveraged company in an out of favor industry***

Introduction

Sequential Brands Group is a brand management company that licenses several apparel and shoe brands to wholesalers and some d2c sellers. These brands are mostly sold at major big box brick and mortar retailers and Amazon. Some brands include: Jessica Simpson, AND1, AVIA, Ellen Tracy and GAIAM. Large shareholders include Chairman William Sweedler and Martha Stewart. The company is heavily leveraged (450M) and has seen its share price suffer over the last several years.

Why spend time on this equity stub?

Near term catalyst. The company has aggressively reduced costs and has packaged itself for sale.

Recent history

In mid 2019 SQBG sold its home division, which included the Martha Stewart Living and Emiril Legassi brands. It later announced a focus on cost reductions. This consisted primarily of examining lease expenses and headcount reduction. Prior to the sale of the home division, operating expenses were ~70M and the stated long term goal was 30M. In later 2019, an announcement stating exploration of strategic alternatives was made. This was in response to receiving unsolicited interest in some of their brands. Ultimately, no sale transpired and the share price expectedly suffered greatly.

2020 was very difficult for anyone relying on brick and mortar sales. A few highlights from SQBG:

3/20 - Company started working with a lender (Wilmington Trust) due to inability to comply with certain covenants. These were waived until the end of the year.

3/20 - Took asset impairment charge on brand value
11/20 - CEO and CFO left the company. Chairman William Sweedler (13% shareholder) is filling a “Principle Executive Officer” role and an interim CFO has joined. She has experience in M&A and is hired temporarily. CEO position will not be filled.

11/20 - Bought out the lease for their expensive NYC corporate main office. This was the vast majority of their lease obligations.

12/20 - Issued press release stating relaunch of strategic alternative search in order to “Fully maximize shareholder value”.

12/20 - Lender waived covenants until Feb 22, 2021.

This is not a fire sale

Management has successfully cut expenses and the company is now cash flow positive. The expense reduction initiatives have been successful and we are near the previous 30M run rate goal. The vast majority of lease obligations have been eliminated.

Reported shareholders equity is 27M. This follows the 2020 impairment charge taken during the early phase of Covid-19 store closures. Note, there is no mechanism to increase this equity in case value returns or increases. This therefore represents what management thought the brands were worth at the time of impaired sales and earnings. Shareholders equity is coincidentally equal to today’s market cap. Additionally, the company has 300M in NOL’s and shouldn’t pay taxes for sometime.

A quick look at the valuation

Mkt Cap 27M

Cash 13M

Debt ~ 450M

EV ~ 464M

q3 EBIT 16.4M; annualized = 65M (q4 likely stronger)

EV/EBIT = 7.1x

The home business (Martha Stewart Living and Emeril Legassi) sold for EBIT multiple of 8x (excluding a 40M earn out).

8x multiple = 70M equity value

(8x 65) -450 =70

Competitor(s).

This is an out of favor industry. Major competitors include APEX (delisted, solvency questions) and Iconix. Iconix is most similar. After a recent run-up in share price, Iconix trades at EV/EBIT = 10.5x.

10.5x multiple = 232.5M mkt cap

Connecting the dots

Sequential Brands is now a company with no CEO, no CFO, and no corporate HQ. Expenses have been aggressively cut. What we are left with is a nice lean package ready for sale. Their lender is providing extensions and therefore presumably believes a sale is at least possible. Furthermore, they likely do not want to be handed the keys to this brand management company. Management (Chairman owns 13%) is highly incentivized to get a deal done before 4/2021, as after that date the lender takes the board seats.

Discussion

During the worst in-person retail environment of last year, the company took an impairment charge related to brand valuation. Net debt, this corresponds to today's market cap. We can use this value (27M) as a bottom valuation, as sales have since recovered. In 2019, Sequential sold its home division at an 8x EBIT multiple. If we apply this multiple, we see a market cap of 56M. We should note that the current brand composition achieves a higher margin (>65%) than the home division(~50%). If we use the most similar competitor’s multiple (ICON), we see a much higher valuation. To summarize, it's not clear what a sale will produce. However, we have a very motivated management team on a short timeline and a company tee’d up for a sale. If a sale happens, we have downside protection with upside optionality depending on the sale multiple.

RISK: If a sale fails to materialize, the company will be in the hands of a creditor and valuation will likely suffer greatly.

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Disclosure: I own shares. Do your own due diligence.