Oh boy! I was a little bit excited about buying Reitmans for the first stock in the Uproar Fund a few weeks back, but now I’m really excited about this second position for the fund, mostly because I think it’s a no brainer. It’s called MRRM Inc., which stands for the Mont Royal Milling and Manufacturing Company. The company produces rice products and rice flour, selling finished products to other food producers and grocery stores, either under the Dainty or the store’s private labels. MRRM also has a great lakes shipping company called Robert Redford (no, not that Robert Redford), which does about 5% of the business that the rice company does.
You guys all know me by now. MRRM is a beaten up company. Here’s a 5-year chart, courtesy of the Google.
Immediately, you’ll notice a couple of problems. Particularly:
- This stock has a market cap of $8.87 million. I could probably raise $8.87 million by canvassing the readers of this blog. I’m apparently serious about investing in small caps.
- It’s extremely illiquid. It commonly goes days without anybody buying a share. Limit orders, people.
Let those be problems for other people. I love that this company is so small that nobody notices it.
Let’s look at the balance sheet first, because it’s a little bit sexy. Remember, this stock has a market cap of just under $9 million.
Current assets are $36.33 million, including $3.66 million in marketable securities the company purchased because it had a mountain of cash and decided it was going to buy a bunch of stocks and bonds. It has been known to periodically pay out some of this out as dividends, most recently an 80 cent special dividend in 2012. There’s $1.44 per share in value right there.
The company has liabilities of $18.68 million, including debt of $3.5 million. Debt has gone up a lot over the last year because the company invested more than a million dollars to bring certain outsourced tasks in house. It also has a lot invested in inventory and is waiting on more accounts receivable than usual.
This puts the company’s book value at $17.65 million, or about two times the current price. MRRM is trading at about half its book value.
From 2009 to 2012, the company recorded net profits of 60 cents, 70 cents, 24 cents, and 32 cents per share. 2013 was less than impressive, as the company recorded a loss of 7 cents per share. 2013 results were down because the company imports rice from the United States, meaning the weaker dollar hurt its input costs. It also had to deal with much higher rice prices from the U.S. because 2013’s crop was the worst in years. It wasn’t able to pass those higher prices to customers.
But these are temporary events. The Canadian dollar has stabilized at right around 90 cents U.S. The company just needs for the dollar to be stable to avoid the hit, since it enters into supply contracts months before it actually takes delivery of product. And U.S. rice producers have expanded their acreage significantly because last year’s bad crop sent prices so high. If the crop turns out well, that’ll push prices down. That will get costs back in line so MRRM can return to profitability.
But wait. There’s more. Here’s where this investment gets extra sweet.
I bought 1,000 shares in the middle of April for $3.15 each. I wasn’t paying attention and could have gotten more at $3.00, but that’s okay. So MRRM is only 3.15% of the Uproar Fund, at least for now. I’d buy more in a heartbeat for $3.15, and I’m thinking of even averaging up on this one even though I never do that. Why? Two little sentences in the company’s latest quarterly results.
In this context [of challenging results], the Company’s board of directors has set up a Strategic Review Committee. The principal duty of the committee is to oversee a strategic review of the Company’s business conducted by outside advisers.
Let me translate that for those of you who don’t speak corporate B.S.
The company is for sale.
The stock immediately moved 15% on the announcement last week, albeit on volume of about 1000 shares. The company makes a good acquisition target, for a few reasons. A suitor is looking at a company that’s trading at half book value, and is sitting on $1.44 worth of easily valued financial assets. Strip those out and the company is trading at $2 per share. A suitor could come in, pay $5 for the whole thing, pocket $1.44 in easy money, and get the rest of the company under its value.
There’s a decent brand there, which has some goodwill even though there’s none on the balance sheet. Dainty rice also makes generic rice brands for some of Canada’s biggest grocers, and is the only supplier of rice flour in the country. These are moats, and they’re pretty solid moats.
Oh, and the company’s rice mill is so close to the new bridge crossing the Detroit river in Windsor that it needed to invest $2.9 million into air purification improvements so the dust from construction wouldn’t spoil the finished product. The feds have already reimbursed the company $1.6 million of costs, and MRRM is going after the Government of Ontario for the rest. That $1.3 million is a nice bonus for investors if they can get it, but let’s not count on it. Let’s focus on the terrific location of the rice plant. That’s a huge bonus for a buyer.
I have a target price of $7 on the stock, but I’m not even sure it’ll get there. The company’s controlling family owns 60% of all outstanding shares. This could represent a roadblock, but the fact is the company wouldn’t be for sale without the controller’s approval. Minority shareholders have put pressure on the company to sell, and it appears to be listening.
I’ve scheduled this post for Tuesday so I’ll have Monday to buy more shares. I’ll update you guys if I do. I think even if you can get in for anything less than $4, then you should. This company is what contrarian investors dream of.