Monday, May 28, 2007

JER Envirotech

Sometimes I refer to certain small-cap stocks as "lottery tickets"...speculative, but with huge potential. I started following JER Envirotech (JER.V) three years ago. The missteps and management faux pas that have occured over that time period weave a tale of woe that has resulted in the stock selling at about the same price now as it was back then. That's the bad news.

The good news is that the company still has extremely viable products and they have completely overturned the management team and brought in industry professionals who are businessmen (as opposed to inventors and entrepreneurs). Despite the 3-years walk across a bed of nails/coals (take your pick), I think that the wheels are finally on the rails and things are coming together in the way that is required for the company to get traction, which is why I mention it now.

Thumbnail of the company:

- Wood-plastic composite products, using polypropylene and organic fibers such as sawdust, rice husk, palm fiber, etc.
- Technology was developed in conjunction with the Natural Resources Council of Canada. Canadian gov't owns the patents, company has an exclusive license to use them. This should discourage infringement by larger players.
- One product line consists of pellets that can be used as input to injection-molding applications (coat hangers, car parts, and on and on and on).
- The other product line is 4' x 8' sheets. This is the only company that can extrude WPC panels of that size. Also can produce variable thicknesses, depending on the application. Plywood is no good in tropical (think Asian) markets, due to insect infestation and rot. This stuff does not rot, but has performance characteristics that meet or exceed plywood. Due to deforestation in Asia, there ain't a lot of plywood there anyway. Cement panelboard is used in many applications where JER would compete. WPC panel board is cost-competitive to cement panels and has superior performance characteristics.
- The company has recently replaced the entire management team, but if you read through the bios of who they have brought in, it is clear that they are now building the RIGHT team to take this company to the next level. Earlier team were nice guys...but not businessmen. They just closed a non-brokered private placement to raise $2.6MM and are doing a brokered PP to raise another $5MM. This will give them the runway they need to execute their plan.

The stock is not likely to do anything for some time, certainly at least until they get the larger PP done. But NOW is the time to start doing DD on it if this is the kind of story that interests you. I bought into the company through a PP, before the company was public. The PPs they are doing now are at the same price level where I bought...three years ago. That stinks, but at least they are now headed in the right direction.

So...what is the potential? They are running trials with several companies that are testing the pellets and the panels for various applications (clothes hangars, car parts, building material, deck underlayment for yachts, for example). We need to see these trials turn into customer adoptions and then the revenue will start to ramp steeply. The company has production facilities that are operational in Delta, BC and Malaysia, with plants under construction in the Philippines and in planning in India.

During a conference call with the (new) CEO a couple of months ago, he said that he thinks that they can go from $3MM in revenue in 2007 (projected) to $30MM in 2008. If they can achieve a 10-fold increase in revenues within the next year and a half, then I think the stock will reflect it. Longer term, they are thinking much bigger numbers than that.

I bought the company because it was the most boring thing I could find. I was tired of companys with "exciting" products that were actually solutions in search of a problem. To me, this seemed like a no-brainer and it still does. Contrary to some popular opinion though, products do not sell themselves. It takes a village...ooops, no it takes the right management team to make it happen. I think the right team is now in place, but the market needs to see proof that they can execute their beautiful vision. This creates a window of opportunity for those who are seeking diamonds in the rough.

It's not without risk, but given the developments over the last few months, I feel that a large amount of risk has been mitigated and the markets for their products have not disappeared. All they need to do now is execute, execute, execute.


TheSlowLane said...

I spoke to Investor Relations last week and got the following update:

- Two more personnel announcements are coming this week, including a COO (Peter Baran). All the new hires have come because of Ed Trueman, the new CEO.
- Ed Trueman’s compensation package is done.
- Ed thinks that JER will be a $100MM company in four years.
- Panel board lines are functional. They are getting $10-$40K procurement orders and shipping about $400K/month into the US.
- Pellet lines are a full go. They believe that they can max out both lines within six months. JER can run the business profitably on just those two lines.
- They’ve closed the first $2.6MM PP (non-brokered, oversubscribed by $500K). First closing for the $5.1MM brokered PP will be on Friday and Mark wants to close the rest within two weeks.
- Only top management position that needs to be filled is a CFO. Meanwhile, Ed has been cutting overhead. He is moving all operations in Delta into one building and will be subleasing the other building.
- JER has the potential to return 10X over five year investment.
- Companies testing product in trial period are in final phases.
- JER had record revenue in April and May.
- Trial orders received from potential customers in Korea and Latvia ($25-50K).
- JJ Barker – Home Depot, bathroom fixtures?
- AMF Bowling Alleys – underlayment, about $5MM in product.

Hans-Jörn said...

wow, this is very interesting. Interesting on how you keep your eyes on such a project and do so much homework about the company. It only makes sense if you have your own money in the game.

I found your post on this company because I was looking at their now toy application with Sprig Toys which has had a huge impact in the toy industry. JER Envirotech's website must have accidently expired (oops, is that not a big faux pas?) so your post was the next best.

I really need to keep watching what you do, as I am starting to get my toes wet with my own little company that I started and am trying to bring to the next level). My plan for myself was to learn the ropes of running a business so that I can eventually get into investing, taking the experience from running a company to know what to look for in companies that I'd like to invest in.

It all might sound a little bit fuzzy, but I'm working hard on getting my head out of the clouds :-)

Cheers, Hans