Imperial Ginseng: A Tiny Microcap With Not-So-Tiny Upside Potential

Your author used to be a big microcap guy, buying up tiny little companies trading at half book value or 4x earnings or other similar valuations that would make many large cap investors salivate.

And then I stopped. The smallest I go is in the $250-$500 million range. And even then, those are exceptions to the norm. Most of the stocks I own have $1B+ market caps.

The reason for stopping was actually pretty simple. These companies were often controlled by families or other large shareholders who simply weren’t very interested in maximizing shareholder value. They’d run the place, collect a very nice salary for doing so, and not put much effort into anything.

Microcap investors know these kinds of situations well. They often turn themselves around over time, but it takes a great deal of patience as well as some sort of external factor, the infamous catalyst. These days, that catalyst is often microcap investors getting together on the internet and raising hell until they force a change. That’s always quite interesting, but it’s not for me. I much prefer to buy and hold what I think are high-quality companies and let compounding do its thing.

Or, as Charlie Munger puts it:

“The first rule of compounding is don’t interrupt it unnecessarily.”

However, even after saying all that, every now and then I come across an interesting microcap stock idea, one that entices me to take a closer look. Let’s do exactly that right now with Imperial Ginseng (TSXV:IGP), a liquidation play with some serious upside potential.

The skinny

Imperial is in the ginseng business. They grow the product and then process it in their wholly-owned processing plant. It rents land in Southern Ontario to grow the product, which can take as long as five years to grow. The finished product is then primarily exported to China, although some has traditionally been used in North America as well.

In 2020, Imperial announced it would no longer be planting crops for a number of reasons. COVID was a big one, of course. So was crummy ginseng prices, which were steadily marching down at the time. (They haven’t recovered, by the way). And the company was worried about worsening relations between Canada and China. It still had some biological inventory in the ground but once that was sold it would cease operations.

It has since sold or written off most of that inventory, with just a little left to get rid of. This is the last step before liquidating, which management predicts will happen sometime around June, 2023.

The financials

Management, as you can expect, isn’t really talking about how much investors can expect during this liquidation process. So allow me to make some estimates.

The logical first step is to start consulting the balance sheet. There’s $13.9 million in assets compared to $1.2 million in liabilities. At this point, the majority of liabilities is a payout to management in exchange for leaving when the company liquidates. That is currently listed on the balance sheet as a liability of approximately $800k. This will ultimately end up costing $2.2M.

If we add an additional $1.4M to liabilities, we get a current book value of $11.4M. There are some stock options outstanding. Once they are all exercised we get an approximate final share tally of 7.65M shares.

There is also $3.6M worth of property, plant, and equipment assets on the balance sheet, which is mostly the value of the company’s ginseng processing plant and farming equipment. These assets are likely worth more than what they’re carried on the balance sheet for, but admittedly I don’t have any realistic estimates. So we’ll be conservative and say they’re worth exactly $3.6M.

Based on the current book value and the fully diluted share count, we have a stock that will liquidate at approximately $1.50 per share minus any losses accumulated over the next year. Since the majority of expenses is payouts to management and we’ve already accounted for that, I feel pretty safe in the final amount settling out close to the $1.50 per share number.

As I write this, Imperial Ginseng trades at $0.85 per share. This implies upside of approximately 75% in approximately a year.

Some caveats

The first caveat is IGP’s size. It has a market cap of $6.2M today. Daily volume is basically non-existent. Good luck building up a position worth more than a few thousand dollars. It’s a good TFSA investment.

Secondly, there’s still the possibility that management will decide to get into some other business and throw the liquidation plan out the window. The filings are filled with mentions of “getting out of the ginseng business” and less about liquidating. I’ve seen enough of these situations to at least mention the risk, although I wouldn’t worry about it too much.

And this analyst is the first to admit I’ve only spent a couple hours with the filings. I could have missed something that negates this whole analysis. It *seems* pretty simple though.

The bottom line

I will not be buying shares of Imperial Ginseng. Sure, the upside is there. But I’d rather put my cash into buy and hold stocks I can tuck away for a long time.

But I’ll also admit these types of situations are interesting, especially for smaller investors looking for an edge. This is a name that should likely work out pretty well even if my assumptions are a little aggressive.

I also tried to keep things conservative. I think the upside will end up being somewhere in the 80-100% range. Not bad in for a year.

And if you’re looking for a blast from the past, Imperial’s website is pretty fun.

Author has no position and will not be buying