5 Microcaps in 5 Minutes (#2)

Quick overview of 5 interesting Microcaps I came across.

Disclaimer: This is not investment advice and meant for entertainment purposes only, I do hold a position in one of the discussed companies and may initiate further positions in the future. The mentioned names are highly illiquid, please use a Limit-order when buying.

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After receiving positive feedback for the first issue of “5 Microcaps in 5 Minutes”, I continue with this format and bring to you the second issue of “5 Microcaps in 5 Minutes”. Remember that this is a very brief overview on those names, so use this only as an inspiration to do your own research. Let’s go…

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1. ARK Restaurants - ARKR 0.00%↑

Market Cap: $63m
MC/FCF: around 5x FCF

What they do: Ark Restaurants owns several independent restaurants. They grow by acquiring restaurants and usually try to buy the land as well.

What sparked my interest: It looks cheap on a FCF to Market Cap basis, further the market probably doesn‘t appreciate the fact that they own so much land and buildings. On top of that, there is obviously the hope, that they will get the casino license in New Jersey. If that happens, this part alone would be worth more than the entire current market cap. The CEO is confident it could happen within the next 2-3 years.

My take on it: First, it was great fun researching this company. The earnings call transcripts are informative, and the CEO provides great insides in a very entertaining way. At the end, I decided to pass on this company for now. Apart from the casino license, I saw no catalyst that would justify owning a business, in what seems to be, a very tough industry.

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2. PharmChem - $PCHM

Market Cap: $14m
MC/FCF: around 10x FCF

What they do: Their main product “PharmCheck” uses sweat to detect illegal drugs.

What sparked my interest: Tice Brown and Tim Eriksen took over the company at the end of 2021, later Harris Perlman joined the board as well. So we not only have three highly respected microcap investors on the board, what is even more remarkable, is that none of them earns a salary, the only way for them to make money is if the stock price goes up. In addition to that, it is a pretty good business, it is very capital light and the industry seems to have high barriers to entry (products need to be approved by the FDA).

My take on it: I, and also the new management, probably thought that they would be able to increase Free Cashflow and grow the business faster. But it turned out that a) sales in 2020 and 2021 have been elevated by covid, and b) generating new clients takes longer and is harder than expected. These miscalculations lead to the fact that the share buy back at $4,59 was destroying shareholder value, rather than increasing it. However, I still remain long and optimistic about the future of PharmChem.

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3. Turbon AG - $TUR.DE

Market Cap: €14m
P/E: 12

What they do: Turbon printing sales printing accessories and Turbon Electric develops electronic assemblies.

What sparked my interest: In general, this is an interesting turnaround situation. Historically, it was only a company that sells printing accessories, such as toner cartridges. Now it was transformed into a holding company, owning several businesses in the printing and electric industry.

My take on it: On the first look, this company looks ridiculous cheap, annualizing the H1 results (after adjusting for the sale of their real-estate), it trades at an EV/EBIT of ca. 3-4. However, since the company owns a lot of subsidiaries only partly (50%, some even less), from the EBIT only a certain part belongs to the shareholders of Turbon. Therefore, it is not that cheap anymore, plus depending on from which subsidiaries the growth comes, there might be not that much shareholder value created.

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4. Muelhan - $M4N.DE

Market Cap: € 52m

What they do: They provide/ provided surface protection and industrial services in the oil, marine and construction industry.

What sparked my interest: This is a liquidation play. They sold most of their business for a total of €80m. After paying down the remaining debt, they should have around €2,7 per share in net cash (current share price: €2,68). The remaining operation will probably be sold soon as well. They plan to pay out the cash via dividends to shareholders.

My take on it: In my opinion, the upside comes from the sale of the remaining company. Given the fact, that the remaining part consists of their operation in the Middle East and wasn‘t acquired by the private equity firm which acquired the other operation, I doubt that it would be very valuable. Surely a situation, where the downside is protected, but I don’t see an upside, either.

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5. AmeraMex International - $AMMX

Market Cap: $5,36m
P/E ‘22: 3,4

What they do: Sell, lease, and rent new and refurbished heavy equipment.

What sparked my interest: It looks very cheap on 2022 earnings, furthermore it grew revenues by 100% from 2021 to 2022.

My take on it: To be honest, I have no idea where this enormous growth came from and whether it is sustainable. For me, it looks like peak of the cycle earnings, but I could be wrong. If you have any opinion on the company, feel free to reach out to me.

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That’s a wrap for the second issue of “5 Microcaps in 5 Minutes.” Feel free to leave a comment with your opinion on this episode, I would also love to hear your opinion about one of these names.