PRGX Global, Hudson Technologies, XO Group and Intevac are the four companies currently attracting the attention of Matthew Drapkin and Eric Ward of Northern Right Capital one of the value-orientated funds featured in this month’s issue of Value Investor Insight.
As an activist fund, Northern Right Capital is always on the lookout for companies that aren’t living up to their full potential. Small-caps with inexperienced management teams, a lack of sell-side coverage and flawed corporate operating strategies are Northern’s preferred targets, although the fund also devotes around 30% of its portfolio to passive investments — traditional value style investments where Northern believes the market misunderstands the opportunity on offer. While these trades are an important part of Northern’s trading strategy, is the activist situations that make the firm stand out from the crowd.
Northern Right Capital: Finding value in small-caps
A provider of internet-focused consumer media properties, XO Group, has undertaken a huge overhaul of its operations, product offerings, and technology platforms during the past few years. Northern has already pressed the company to divest two money-losing businesses, improve shareholder disclosure and corporate governance. Also, the company has been working on modernising its media properties and laying the groundwork for future growth. These changes will ultimately result in the company’s addressable market expanding from $300 million to several billion dollars. If XO can correctly execute to capitalise on this opportunity, assuming a 10x EV/EBITDA multiple on 2017 estimates, the shares would trade closer to $26.
Hudson Technologies sells virgin gases used in commercial and residential air-conditioning systems. The company also operates in the recycling gas market where has a near 30% market share.
According to Northern, Hudson is set to benefit from the government-mandated phase-out of the virgin form of the primary gas product it sells. The phase-out of the virgin product should lead to a dramatic increase in the sale price and sales volume of its recycled alternative. Northern’s analysis shows that recycled gas volumes for the company could triple next year, which could result in overall company EBITDA of $100 million plus in 2017. The company’s current enterprise value is less than $200 million.
Global provider of audit services PRGX Global has struggled with its accounting in the past suffering from losses after an ill-conceived expansion into the healthcare space and European market. However, now the company appears to be back on track with a new management team, new products and the introduction of new technologies to reduce costs. Moreover, loss-making businesses have been sold, and the company is consolidating its position in the market offering existing customers services built around the group’s massive existing client database. Revenues are set to hit $144 million in 2017 up from $135 million. PRGX’s EBITDA margin is expected to hit 15% by 2017 as well. A multiple of seven times estimated 2017 EBITDA gives a stock price of $9 per share, up from the current share price of $5.80.
Northern has a seat on the board at Intevac and believes that on a sum-of-parts valuation the company severely undervalued. The firm expects to be cash flow positive this year the first time in years, is announcing significant business wins and has $2.10 per share in net cash. Even though Northern can’t divulge many details about the company’s operating performance due to its insider position, the fund is still adding to its position in the stock — a telling sign.