MTI Wireless Edge

MTI Wireless Edge (company website) is a company based in Israel and listed on the London AIM market (ticker: MWE.L). MTI Wireless develops and manufactures antennas and antenna systems for commercial and military applications. The business was doing well in 2006 and 2007 and net income was around $4 million at the time. Revenue and profits have slipped since the financial crisis and the company was roughly breaking even in 2011 and 2012.

The company uses the U.S. Dollar as its functional currency, so keep that in mind if you’re interested in reading their financial reports.

I know very little about MTI Wireless’ business and their prospects. The reason I’m interested in the company is that it is trading at a large discount to its net current asset value.

The company has 51,571,990 outstanding shares and the latest trade was at a price of 6.75p, giving MTI Wireless a market cap of £3.48 million or $5.63 million at the current exchange rate.

On June 30, 2013 the company had cash and investments of $7.0 million and total current assets of $15.0 million against just $4.9 million in total liabilities. Net current asset value is $10.1 million, which means MTI Wireless is trading at 0.56x NCAV.

An important reason for the cheapness of MTI Wireless, besides the recent poor profits, is probably the ownership structure of the company. The major shareholder of the company is MTI Computers, which itself is a listed company in Israel. MTI Computers currently owns 52.4% of the outstanding shares. This company has a number of subsidiaries which are active in the Radio frequency (RF) and microwave field. MTI Computers has been losing money consistently over the last 5 years and book value has been cut in half since 2008. I don’t know any further details, because the annual reports are in Hebrew.

In December 2010 MTI Wireless Edge purchased a building from MTI Computers for $5.2 million. MTI Wireless was using roughly 75% of the building. The remaining 25% is now rented by MTI Computers. If the price paid was fair and real estate prices are comparable, then there is substantial value in the real estate as well.

Two directors of MTI Wireless own 25% of a company called Mokirei Aya Ltd, which controls about 40% of the shares of MTI Computers. A transaction like the one described above is also a related party transaction, given the ownership structure of MTI Wireless.

This is my main concern with MTI Wireless: will the excess cash of MTI Wireless be used to keep the losing divisions of MTI Computers afloat?

On September 12, 2013 the company called an extraordinary general meeting (EGM) for the purpose of approving a guaranty agreement between the MTI Wireless and MTI Computers. MTI Computers has made an agreement with a bank to loan $1 million. Now MTI Computers has asked MTI Wireless to provide a guarantee for this loan. The EGM was held today.

MTI Wireless gets a 2.5 percent yearly compensation for providing the guaranty. Also, MTI Computers will use any dividends it receives as a shareholder of MTI Wireless to repay the loan:

“MTI Computers undertakes to apply any dividend that it may receive from the Company in order to reduce the outstanding amount of the Loan Amount prior to the use of any such dividend sum (or part thereof) for any other purpose.
[…]
Since listing on AIM the Company has pursued a progressive dividend policy and has paid out $3.8m in dividends. Subject to the availability of sufficient funds and the working capital needs of the Company from time to time, the board intends to continue to pay dividends in line with the Company’s existing dividend policy and, as mentioned above, MTI Computers has undertaken to use the proceeds from the receipt of future dividends to repay the bank loan which will reduce the outstanding amount of the Loan Amount prior to the use of any such dividend sum (or part thereof) for any other purpose. The Board anticipates that this will have the effect of reducing any inherent risk to the Company in giving the Guaranty.”

I think this is not a good deal for MTI Wireless shareholders. Why should a MTI Wireless shareholder approve of a deal like this? It doesn’t sound attractive to me to become some sort of a piggy bank for other troubled divisions of MTI Computers.

These are the voting requirements for this agreement:

“Under Israeli companies law (the “Companies Law”) the approval of the Guaranty Agreement requires a resolution to be passed by a special majority vote in favour of it. Under the Companies Law, a resolution concerning an exceptional transaction of a public company with its “controlling shareholder” or with another person in whom the controlling shareholder has a personal interest requires the approval of the company’s audit & remuneration committee, its board of directors and its shareholders in general meeting provided that, in the case of the latter approval, either of the following conditions is satisfied:

(a) the majority of votes in favour includes more than 50% of the shares shareholders who have no “personal interest” in the approval of the resolution and who vote on the resolution; or

(b) the total number of shares of shareholders who have no “personal interest” and who vote against the resolution does not exceed 2 per cent. of the issued share capital of the Company.”

Then on October 8 an interesting amendment was made to the guaranty agreement:

“The Guaranty Agreement now provides that, in the event that the Company receives written notification from the MTI Computers and/or the bank lending the funds to MTI Computers (the “Lender”) that the loan is to be repaid pursuant to the terms of the loan agreement (and the Lender intends to use the Guaranty Agreement), the Company will call a meeting of its directors in order to declare on a dividend to shareholders of the Company in an amount that will enable MTI Computers to discharge the then outstanding balance of the loan without the Lender using the Guaranty. For the avoidance of doubt, any director appointed to the board of directors of the Company on behalf of MTI Computers, will be not be entitled to participate and vote on any such resolution.”

(Emphasis mine)

I think this amendment makes sense as it protects the minority shareholders of MTI Wireless. In the event that MTI Computers needs the money for repaying the loan, just pay out a special dividend to all the shareholders from the excess cash that MTI Wireless is holding.

Perhaps some of the larger shareholders contacted the company an expressed their concerns and maybe this was the reason for the amendment?

I think MTI Wireless is likely to pay out more dividends in the future, because MTI Computers needs the cash. One complication is that there are some rules about the distribution of dividends that might restrict the payouts:

“Dividends and distribution:
17.6.1 The Companies Law provides that distributions may be paid out of a company’s profits, provided that there is no reasonable concern that the distribution will prevent the company from meeting its existing and foreseeable obligations as they become due. “Profits” for this purpose is defined as the greater of a company’s surplus balance and surplus that accumulated for the two previous years.
17.6.2 If a company does not have sufficient profits, then permission to effect a distribution can be granted by order of an Israeli court. Prior to granting such an order, the company is required to give notice of the proposed distribution to its creditors, who are entitled to file objections with the court. In any event, a distribution is permitted only if there is no reasonable concern that the distribution will prevent the company from satisfying its existing and foreseeable obligations as they become due.”

(Source: AIM admission document of MTI Wireless. Emphasis mine.)

The company has hardly made money in the last few years and retained earnings on June 30, 2013 were $2.06 million. If I am understanding this passage correctly, it means the company is restricted to paying out $2.06 million in dividends currently. If MTI Wireless wants to distribute more it will need to generate some decent earnings again or get court approval to distribute more cash. It seems the company has much more excess cash available currently than $2.06 million, so I think the company would have a good chance of receiving court approval.

Perhaps a better solution would be for MTI Computers to find a buyer for its stake in MTI Wireless or perhaps a buyer can be found for the entirety of MTI Wireless. Maybe that’s just wishful thinking on my part though.

The amendment of October 8 did make me feel a little more comfortable about this company and I have recently bought a small position, but MTI Wireless is not a high conviction stock for me. Still, there is a large discount to NCAV and a good chance that the company will distribute at least some of its excess cash in the future. These dividends could help reduce the discount.

Disclosure: long MTI Wireless Edge