Privet Fund – Norsat (TSX:NII) – Activist Investing


Privet Fund looks to continue its impressive record with micro cap activist investments and appears to have uncovered another gem. 

February 11, 2015

Norsat Snapshot

Privet Fund is a growing activist fund that has compiled a very impressive record mostly by showing some love to the widely ignored micro-caps, with an average target market cap of $73 million.  Norsat is no exception, with a market cap of $29 million. Of Privet’s 11 targets, 7 have been technology plays (including Norsat) and 4 of its top 5 performers are tech companies such as PFSweb and RELM Wireless. The activist wages proxies battles and mostly pushes for changes to the board and/or board representation as well as operational changes and full company sales.

As micro-caps can be considerably riskier, it appears the activist finds a margin of safety in clean balance sheets with net cash positions, free-cash-flow positive (or near break-even) and beaten down valuations, which brings us to Norsat…

  1. I dig Norsat’s clean balance sheet, minimal debt and low capex investments
  2. Its gross margins are decent for a comms equipment provider, though it admirably manages its opex for strong net income margins.  Also like the positive free-cash-flow margins as well as the respectable return on invested capital.
  3. Valuation metrics are beaten down.  Look at that P/E ratio of 5.7x!
  4. Though this is only Privet’s 5th largest investment made, given the smaller market cap of NII, Privet owns 15.0% of the shares outstanding.
  5. Technology-focused activist targets, and more specifically the comms equipment subset of tech, are acquired at a higher rate than the rest of the field (38% vs. the 27% for the whole activist database).

NII looks like a promising value play with an activist that has a very impressive track record. I invested.

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