Description

Disclosure: Very small market cap ($7.7m CAD), small float (insiders hold approximately 51% of the company), average daily volume 100k shares, suited mostly for PA and small funds.

All amounts in CAD

Summary:

We think Gemini (GKX.V) offers an asymmetric risk/reward given its recent turnaround, exceptional working capital management, new motivated management team, debt free balance sheet and extremely low price (Market cap close to half 2016 OCF). Currently $0.1 per share, the company has a market cap of $7.7m CAD (2016 CF from operations of $12.6m).

Gemini Corporation was founded in 1982. It is headquartered in Calgary Alberta and operates in the cyclical and out of fashion oil industry. Gemini’s ticker is GKX.V and trades on the TSX Venture Exchange

Gemini’s services mostly consist of building and maintaining energy and industrial facilities. The Company’s principal target markets are oil and gas, heavy oil, oil sands, midstream and pipeline facilities, hydrocarbon processing, power and other industrials.

The Company services its clients by delivering a single or multiple projects throughout the full life cycle of their assets  - from asset acquisition, environmental and regulatory support, engineering, fabrication, construction, maintenance, turnarounds, decommissioning, reclamation and remediation.

An example of a project is:  Gemini was chosen to execute the expansion of a client of its storage capabilities; the project involved the mechanical construction to connect an incoming pipeline to an existing tank farm and underground cavern.

The Company operates in Western Canada and is headquartered in Calgary with offices in Ponoka, Fort Saskatchewan and Fort St. John. Services and products were delivered through three business groups - Field Solutions (90% of revenues), Engineered Solutions (5% of revenues) and Environmental Solutions (5% of revenues). In 2017, Field Solutions and Engineered Solutions were combined into Integrated Project Delivery (“IPD”).

Gemini as with other contractors engages in a bidding process to win projects. We have interviewed management to better understand the dynamics of the process. Traditionally quality has been paramount in assigning work; with known contractors having an advantage due to a successful track record. This somewhat mitigated price pressure and led to a steady stream of projects for the company; however, with the extended downturn in the oil industry, projects have increasingly been most recently, assigned based on the lowest price irrespective of quality.

Gemini, being a small company, had been operating by bidding projects of relatively small and medium size; however, management got greedy in 2014 and pursued the biggest project in the Company’s history (the amount was never made public), a rail loading facility. The company did not have the experience to manage a working capital to finance cost overruns. Adding fuel to the fire, Gemini also entered into some non-intelligent acquisitions which proved costly for shareholders.

The company recorded a $17m loss in 2015 despite record revenues of $166 and the stock price decreased around 90% from its peak.


2015 and early 2016 were very challenging for the Company. Gemini had to borrow $10.3m against the bank operating line and the Company was technically in breach of two of its financial covenants - tangible net worth and cash flow coverage ratio. Yet, the bank provided a tolerance letter for both covenant breaches at December 31, 2016.

In 2016 management was replaced and a new CEO and CFO were brought in (explanation further below) and some members were also replaced at board level.

Despite generating net losses in 2016 of $5.6m (mostly to non-cash items), the Company generated $12.6m of operating cash flow, which was used to repay in full the bank operating line and decrease its payables by $8m. The business ended 2016 with a net cash position of $1.6m (currently $1.8m).

The new management team was quick in recognizing the difference between the value of the Company and the price the market assigns to it. Consequently, they have been active acquiring shares in the open market.

Gemini has an extremely low requirement of CAPEX. CAPEX is only dependant on projects (the more projects the more CAPEX), and, as per our discussion with management, CAPEX consist of a very small IT expense. So in an environment of low activity Gemini will not be affected by forced capital investments.

Currently Gemini is trading almost at half the operating cash flow generated in 2016 which clearly was a very challenging year for the oil industry. Management has highlighted that the Company has already been bidding projects outside the oil sector. Gemini managed to clean its balance sheet and operates with zero debt. We think the market fails to recognize the changes Gemini has performed and it is pricing it for failure.  With an increase of activity in the oil sector and a management focused on securing margins Gemini could be a multi-bagger from these depressed levels.

Gemini is closely controlled but its controlling shareholder and management are focused to increase shareholder value

There are 76.82 million shares outstanding and approximately four million of options and unit plans. The Company just granted one million options to senior management at a strike price of $0.105 which are valid for four years. Gemini also granted to certain officers and directors 990,000 performance and restricted shares.

Coril Holdings is the majority shareholder owning 47% of the Company. Coril Holdings has a 119 year history in family business and is currently owned by Ron Mannix (third generation).  Fredrick Mannix and Ron Mannix divested of most of the Group’s energy assets in 1997. Ron then established Coril holdings. The brothers’ net worth is reported to be approximately $3.8 billion.

Given the decisions to change management, it seems Coril possibly was not in full agreement to accept the rail loading project back in 2014. Coril and the board ensured Gemini needed a total re-shape of the management team. The new management on board is focused on winning backlog without sacrificing margins and, leaving the ego aside, not going for big projects where they clearly have no advantage. With their decisions, Coril demonstrates its long term view and commitment in making sure Gemini does what they know best, which is projects of medium and small size.

New Management:

After the departure of the old management team, Peter Sametz was appointed as CEO in March 2016. It is important to highlight that Mr Sametz was the CEO and co-founder of Alberta and Power corp. Mr Sametz was a member of the Gemini board and agreed to leave his own company and be the leader of Gemini’s turnaround. He has been emphatic in highlighting that priority number one is to increase backlog without sacrificing margins.

Mr Sametz has started an aggressive cost cutting program with substantial savings already, administrative expenses in 2016 decreased by $2.6 million, a reduction of 16.0% compared to the prior year.

Chris Podolsky joined Gemini in July 2016 as the new CFO; and he and the CEO have acquired more than 500k shares in the open market since December 2016, the latest purchase was at $0.11 in June 2017. Mr Podolsky along with the VP of HR is under an ownership plan which has enabled them to acquire more than 500k shares as well.

We have had discussions with management and found them to be transparent and disciplined, they are realistic about the current difficult environment, where clients will want to secure low prices until there is a pickup on their own business, which of course depends on oil prices in a larger extent. They rejected a project that would have had good optics from a revenue basis but would have been detrimental to margins.

We are further encouraged that management clearly recognize that the company is undervalued and have individually acquired shares in the open market as stated above.

Clean Balance sheet - Good Liquidity / Available Credit Line / Financials

Subsequent to the 2016 year-end, the Company accepted the terms of a new senior credit facility with another lender, providing for a $14.0 million senior secured revolving credit facility plus an accordion feature for an additional $4.0 million as needed, for a two year committed term.

This facility will provide working capital financing as workload activity increases when projected in the second half of 2017.

As per the Q1 2017 release, the Company ended with $1.8m in cash and no debt. Of course, given the low activity of Q1 and possibly Q2, the Company is likely to use its unused credit facility for working capital purposes.

Gemini Annual Report

Gemini Annual Report

As shown above, Gemini’s cash flows were dramatically affected in 2015 due to the rail loading project. 2016, being a slow year, still enabled them to generate $12.6m in OCF and reduce debt. The difference between cash flow and net income (loss) is mostly attributed to improvements in working capital and to the following non-cash items:

• A $3.3 million non-cash impairment charge was recorded during the year, taking into account the challenging business environment and reduced work levels primarily in the Environmental Solutions group

• Gemini assessed current office space requirements and recorded a non-cash onerous lease provision of $2.1 million in 2016 as a result of excess and unused space.

Gemini Annual Report

Gemini Annual Report


During projects Gemini increases its visibility to costs as the project approaches the end. Projects normally begin in the first months of the year and are finished in the winter, which explains that margins begin small or negative and substantially increase close to year end (assuming no overruns). Gemini has shown a substantial improvement in working capital and gross margins, which ended in Q4 2016 at 35% from 7% in Q1 (20% for the full year).  Although, Gemini in Q1 2017 had a negative gross loss of $500k from $6.7m of revenues, this loss is not abnormal given the low recognition of revenues in Q1, and should be offset in the following quarters (mostly Q3 and Q4).

For 2017, the Company announced a backlog of $40m in March and just recently announced winning $15m of new business for 2017 completion. Management was a bit overenthusiastic in March when it announced sales were expected to be higher than 2016 levels. However, they rephrased that in the release of Q1 earnings saying that sales will be slightly lower than 2016. The majority of its revenues and the improvement of margins are expected to be visible in Q3 and Q4.

Valuation and Conclusion

The company is trading at half 2016 operating cash flows. While cash flows are totally dependent on projects, the improvement has been done mostly due to an outstanding working capital management. Given that Gemini has a very low CAPEX requirement; any extra project should substantially improve the prospects of the business.

A Company with no debt, a new motivated management team with skin in the game and a long term shareholder base, should not trade at half its operating cash flow.

We believe given the small size, low float and unsexy nature of having to bid for projects, the market has been slow to recognize the transition and upside potential that Gemini has.

We think if the company is able to generate projects around $85m or higher per year and margins of around (13 -20%) , the stock should trade at least at 2 to 3 times 2016 operating cash flow and still be cheap; making it a potential multibagger two years from now. The asymmetry on the risk/reward makes this investment very appealing in our view.

Risks:

• Investing in a cyclical industry such as the oil and gas ultimately requires timing. If the oil industry remains depressed for longer, Gemini will have trouble finding new projects and we have no ability to know when the oil industry will start to pick up.

• Gemini’s clients can continue disregarding quality for price, meaning Gemini can win projects but not profitable; management is clear not to pursue that path.

• Low liquidity.

• Market indifference to Gemini can persist for months/years

Catalyst

• More projects assigned to Gemini

• Gemini gaining some visibility by the market
• Coril possibly taking the company private