May 2008 Analyst Interview with: Paul J. Resnik, CFA, Dutton Associates, covering Sofame Technologies Inc. (SDW-TSXV)- featuring: their unique, high-efficiency direct-contact heat recovery and hot water heating systems. |
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With Everyone Talking About The Need To
Reduce Nitrogen Oxide Pollution, Greenhouse Gases And Energy Use, Sofame
Has A ‘Now’ Solution With Their Direct Contact Heat Recovery And Hot Water
Heating Systems For Large Industrial Facilities
CEOCFO: Mr. Resnik, what impressed you when you first looked at Sofame? Mr. Resnik: “It begins and almost ends with the product. It is a rather simple concept but it is so right for the current needs and the challenges we face both in energy and global warming. I took a look at the product and what it accomplished and felt that you don’t need an engineering background to understand the potential for their systems.”
CEOCFO: What does Sofame do? Mr. Resnik: “What Sofame does is manufacture energy saving commercial and industrial, heat recovery equipment. Anybody who has a private home with a furnace knows that there is a flue pipe that takes hot flue gas out of the house up into the sky. Heat is energy and what is the benefit of this energy; it gets lost, it goes up into the air along with whatever pollutants it carries. Sofame has a better use for that energy.”
CEOCFO: Who is using their products and services now? Mr. Resnik: “Their clientele would be large industrial and commercial establishments and that would include hospitals, airports, industrial facilities, certainly anybody who uses a lot of water for instance a company that involved dying materials. They have an impressive collection of installations. That is another thing that impressed me about Sofame, they are not talking about, ‘Does this work?’ The Sofame product systems are used in substantial facilities; for instance in the Trudeau International Airport, the University of Toronto, the Edmonton Airport, Jewish General Hospital; mostly in Canada. Therefore, we are looking at large industrial facilities, hospitals and airports, where there is a lot of need for heating, and where they are wasting a lot of energy.”
CEOCFO: What has Sofame’s CEO, John Gocek brought to the table and how has he changed the direction for Sofame? Mr. Resnik: “You asked what attracted me to Sofame and I said, ‘the product’. The product has so many good uses, it is so appropriate for the times. What has held Sofame back for so long is that, while it has the product, it really has been hampered by inadequate operational, financial and sales management. When you have good people with a great idea, you say, ‘Why isn’t this everywhere?’ I think it needed a professional manager. John Gocek, Sofame’s CEO, cannot do it alone, he is committed to bringing in sales management, to bringing in a new CFO, bulking up the operational management, and he is making this happen. He didn’t create the product, but with his leadership with a strong business approach this product can get more widely used and become a really big growth story.”
CEOCFO: How is Sofame planning to grow? Mr. Resnik: “One issue is that they have to improve their marketing and in that respect they are identifying very strong marketing partners in the US and overseas. Again, this has been mostly a Canadian business. They are focused on marketing arrangements with well-established regional sales representatives in the US and have established relationships in Ohio, Minnesota, North Carolina, and Pennsylvania. They have an impressive agreement with a firm called Soffimat through Europe, the Middle East and North Africa which should further extend their markets.”
Mr. Resnik: “We keep looking around and feel that the biggest competition for Sofame is the power of inertia. The people who put boiler systems into large facilities have been doing the same thing for a long time. There used to be a saying that nobody ever got fired hiring IBM for your IT needs; well that is always a problem when trying to get people to try something new and I think this has been and will continue to be the biggest issue for Sofame, which is going into an area where things have been done the same way for so long. Sofame can save costs on energy, can reduce pollution, can put in a system that involves minimal maintenance and you are going to get your money back in maybe one-and-a-half to three years through efficiency. It is a powerful story. But then you say why won’t everybody do this? Again the real issue is corporate inertia.”
CEOCFO: They are making inroads into the US, there is an agreement covering Ohio and Kentucky, tell us about that. Mr. Resnik: “People just don’t just put in a boiler system, you just don’t purchase a Sofame product, it is part of a larger engineering contract. It is important for people who are in the heating and air conditioning general contracting area to get involved, to get in the door. They have the engineers, the marketers who have the relationships, who are known in the area, who can provide Sofame as part of single-source solutions for the purchasing companies. These are sales operations that are well-established. They add their credibility to the Sofame product; even though it has been used in major facilities it is still not well known.”
CEOCFO: What is the financial outlook for Sofame?
Mr. Resnik:
“The company is making the move out of the area of loss operations towards
profitability. Over the next couple of quarters, I think we are going to be
talking about the company becoming cash flow positive and really not too far
beyond that we believe we will see the company actually turn into a
profitable operation. The key there is the level of sales, which could move
up quite rapidly and it shouldn’t be too long. I expect to see quarterly
profit before the end of the current fiscal year.” CEOCFO: Are there any challenges to look out for? Mr. Resnik: “Right now here is a company with a patented very well-protected product, on the other hand technology always changes and it is conceivable that there could be a technological change out there. It is important that the company continue to have access to capital during this transition time. They have been able to raise funds recently. Actually, in a kind of perverse situation, the funding progress they have made has recently hurt their stock performance. Sofame was able to sell convertible shares last fall and, since the company is doing so well, was able to force conversion into common shares recently. However, all these new shareholders with a nice profit in the current market environment turned out to be a source of stock for sale and I think it has masked the operational progress that Sofame is accomplishing. Therefore, we have a supply of stock for sale right now. I view this as an opportunity for people with a little longer term outlook, but not that much longer-term, to get the stock at an attractive level.”
CEOCFO: What is your rating on stock today and projection? Mr. Resnik: “A strong speculative buy. I think that because of the background and because we are still talking about a company that is not profitable, speculative is the appropriate rating; but it is a strong buy. I have a twelve-month price target of $0.75 a share, which is almost a triple from the current level, which is based on going out to the June 2009 quarter and annualizing those earnings and putting a thirty multiple on them, but quite frankly earnings projections are going to be very difficult to be exact on. The estimate could be high, but given the potential for the size of this market it could also turn out to be low as new orders come in. I feel comfortable with the $0.75 price target but I also think that if I understand the story correctly, this $0.75 would turn out to be a stopping place on the way to higher levels.”
CEOCFO: What should people remember most about Sofame?
Mr. Resnik:
“We talk about the energy crisis and so many people come up with exciting
grand, new technologies that will someday address these problems. However,
with Sofame we are not talking about a company with technology that will
someday address a problem, we are talking about a company that has a
solution right now that can substantially improve efficiencies in hot water
heating systems today and can substantially reduce pollution. We haven’t
even gone into the details, not only do you reduce pollution by using less
energy but there are aspects of the Sofame system that particularly reduce
the nitrogen oxide pollution. This is a ‘now’ solution to these problems,
not just a ‘this is an exciting technology that in five years will be
wonderful.’ This is a true solution that we can utilize now to reduce
creation of greenhouse gases and reduce energy use. It is a very exciting
story and I really believe that now that the company is putting together the
operational, financial and sales management it has always needed. We are
going to be hearing a lot more about Sofame in the very near future.” |
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“This is a ‘now’ solution to these problems, not just a ‘this is an exciting technology that in five years will be wonderful.’ This is a true solution that we can utilize now to reduce creation of greenhouse gases and reduce energy use. It is a very exciting story and I really believe that now that the company is putting together the operational, financial and sales management it has always needed. We are going to be hearing a lot more about Sofame in the very near future.” - Paul J. Resnik, CFA, Dutton Associates |
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