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The Alternative Activist

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

This article originally appeared on the Alternative Activist blog in February. You can follow the Alternative Activist on Twitter.

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

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.