The Low Down on Leading Brands Inc.

Just some very quick back-of-napkin style notes on a micro-cap (Leading Brands Inc.) with a potential catalyst for value realization.

Leading Brands Inc. (Nasdaq: LBIX)

Cash: $692.2K

AR: $322.7K (discounted by 30%)

Inv: $474.8K (discounted by 50%)

Total current assets: $1.48 Mil.

Total liabilities: $1.63 Mil. (accounts payable/accrued liabilities, 
co. is completely debt free).
PP&E: $8.27 Mil. ($16.27 Mil. of plant and buildings at cost, not including 
$433K of land). 

Book value: $11.68 Mil.

Market cap: $5.5 Mil. (Nov. 22, 2016) 

- Net income consistently under-reported due to aggressive depreciation charges 
on PP&E. 

- Number of shares outstanding lower year over year due to company buyback. 

- Cash flow from operating activities $345K for first six months of FY 2016. 

- Bob Gaglardi (Chairman Northland Properties Corp. and one of wealthiest people 
in Canada) on co. board of directors. Also largest owner with approx. 
14.66% of outstanding shares as of last management information circular - 
May 11, 2016. 

- Co. announced that it has entered into a binding agreement to sell its 50,000 
sq. ft. (10 mil. case per annum capacity) Edmonton bottling plant land and 
building on Oct. 31st. The transaction is for all cash on closing and is 
scheduled to complete on February 1, 2017. No other terms were disclosed. 

- Loopnet comps as of Nov. 2016 show a 6,780 sq. ft. Edmonton warehouse for sale 
for approx. $2.55 Mil. and another industrial warehouse of 15,400 sq. ft. 
available for $3.9 Mil. 

If one multiplies these, median price for a 50,000 sq. ft. industrial facility 
in city of Edmonton should fall between $11-13 Mil. (or around the co.'s current 
book value).

I would estimate a 30% probability of the property transaction falling through 
with a 25% downside in the market price of the shares if this does occur. On the 
other hand, as my notes show if it is successful the upside could be as high 
as 80-90% with a 70% of the aforementioned transaction going through and this 
value being realized in the next quarter.

6 thoughts on “The Low Down on Leading Brands Inc.

      • Thanks for replying. I’m sorry to say, though, that I didn’t get your answer. Perhaps my question was sloppily written, so I’ll try it this way: I’m assuming that the transaction only includes the real estate (and maybe also the machinery), so that the net proceeds for Leading Brands will be whatever they’ll get from the buyer ($11-13m in your estimation), minus taxes on the sale, minus severance and other termination costs. Do you have any idea of how big the last two might be?

        I’m pretty sure this is a good investment idea, but just how good might depend on that info.


      • No severance or termination costs since they own the facility outright.Taxes will likely amount to about 27% of the corporate capital gain on sale (we do not know the size of this gain unfortunately to precisely calculate) But few things in investing are precise after all.

  1. How about the employees? They had 73 as of the last annual report – perhaps the majority of those worked at the bottling plant and will have to be paid severance? That could amount to quite a bit.
    But I agree with you, even without the precise calculation this seems likely to be a good investment. Thanks for having written about it.
    I was able to only buy a few shares some days ago, and hope my total buy order will eventually get filled.
    Thanks again.

  2. I spoke with the listing broker. Typical industrial buildings go for $120 per square foot in this section of Edmonton. That’s $6M, if they weren’t in a hurry to sell. $5M ($100 per square foot) seems a decent gross estimate to start with. Hoping they post earning before the start of trading tomorrow.

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