All of a sudden there are questions about Alaris Royalty Corp.'s future, forcing management to do all it can to convince shareholders its recent hiccups are anomalies, not harbingers of doom.
Much like a private equity fund, Alaris buys stakes in a number of small companies. The majority of royalties earned from these investments are paid out to public shareholders in the form of dividends.
Although Alaris has mostly been on a tear since the 2008 financial crisis, management got into hot water late in 2013 when one of their portfolio companies, SHS Group, which sold home-installed products for Sears Home Services, went under.
Compounding the woes, another portfolio company, Labstat International, which offers tobacco toxicology testing services, ran into problems when the U.S. delayed enactment of the Food and Drug Administration's tobacco regulation, which would boost demand for Labstat's services. Because less revenue is now expected in 2014, Labstat lowered its cash flow estimates, cutting into the royalty Alaris would receive.
There are also questions around a third portfolio company, SCR Mines Technology, which is directly tied to the troubled mining sector.
Given all these problems, investors have started to bail on Alaris's stock, sending the shares plummeting 15 per cent in two months. Now management is fighting back.
When the company announced the restructuring of its Labstat investment this week, chief executive officer Steve King also wrote a note to shareholders, stressing that he believes Alaris's dividend is safe because their investment portfolio is diversified.
He also did not shy away from the recent problems, opting to spin them in as positive a light as possible. "We certainly learned many valuable lessons in 2013 and we have become a better company for it," he wrote.
While it could take time for investors to take him at his word, analysts are already stressing that Alaris's outlook isn't as grim as it may seem.
While the SHS investment is universally regarded as a mistake, the company comprised only 3 per cent of Alaris's assets. As for Labstat, RBC Dominion Securities analyst Anthony Jin believes the company will ultimately generate substantial profits come once the U.S. legislation is approved. "Our checks indicate this is a case of revenue deferral, with potential tailwinds that could position Labstat as one of Alaris's better overall investments," he wrote.
Meanwhile, Alaris's remaining portfolio companies are in good shape. "The bulk of [Alaris's] partnerships are outperforming" noted National Bank Financial analyst Trevor Johnson, who added that these investments are expected to deliver strong royalties to Alaris this year. As of now, Labstat is the only problem, and Mr. Johnson said management has already articulated a recovery plan.
But investors must remember there is always a chance things don't go as planned. In a scenario where either Labstat or SCR Mines fizzles out, RBC's Mr. Jin noted that "the impact to investor sentiment would be much more devastating to the share price," yet he believes Alaris would still be able to protect its all-important dividend.