Parthenon LLC Calls on Jewett-Cameron to Consider Strategic Alternatives
They believe the Board should actively seek options to enhance shareholder value.
The stock's performance has been underwhelming.
Profitability has seen a significant decline over the last three years.
Insiders own less than 1% of the total shares.
No insider has bought any shares in the past decade, indicating a clear lack of confidence in the company.
Dear Board Members,
Parthenon LLC, one of the largest shareholders of Jewett-Cameron Trading Company Ltd. (NASDAQ: JCTCF), holds approximately 6.2% of the beneficial ownership. Since our investment began in 2011, we have been patient and supportive. However, we have repeatedly voiced our growing concerns about the current CEO and Board Chairman over the last two years, only to have our warnings largely ignored.
This letter serves to express our serious concerns regarding Jewett-Cameron's business operations, stock performance, and its long-term sustainability as an independent public entity. The near-total absence of ownership among board members and management creates a troubling disconnect between insiders and outside shareholders. Despite previous failures, management continues to pursue ineffective strategies and has not provided a clear plan to tackle current challenges. We believe management is unaware of the urgent need to protect shareholder value before it diminishes further.
A brief look at the stock and business performance highlights the severity of the issues at hand. Over the past five years, Jewett-Cameron’s stock has fallen by 46.3%, while the Russell 2000 Index has risen by 62.4% in the same period. Looking back over the last decade, Jewett-Cameron’s total return is at a negative 11.4%, in stark contrast to the Russell 2000, which has grown by 118.8%. This decline in stock value has mirrored a significant downturn in business performance as well. From FY 2012 to 2021, Jewett-Cameron typically generated around $4 million in EBITDA annually, with a low of $3 million in FY 2019. However, in FY 2022, EBITDA dropped to $2.4 million and further declined to just under $1 million in FY 2023, with the first nine months of the current fiscal year showing approximately negative $1.2 million in EBITDA. Projections suggest only slight profitability, if any, for the fiscal year ending in 2024, with FY 2025 potentially being even worse based on recent management insights.
Jewett-Cameron is grappling with several significant challenges that must be addressed to restore profitability. These include reliance on a concentrated supply chain vulnerable to geopolitical risks, rising procurement costs, limited pricing power with key customers, and increased competition across essential product lines. Over the past decade, there have been few successful product line extensions, resulting in minimal positive impact on profitability. The weight of these issues is likely to be overwhelming for a small independent company with limited resources.
Concerns about Jewett-Cameron’s future as an independent entity have also been reflected in the credit market. Recent difficulties in securing necessary credit highlight the urgency of the situation. Although a new lending agreement was secured this past spring after being dropped by their previous lender, the terms are harsh, pricing interest at the prime rate plus an alarming 4.75%, leading to a costly 13.25% rate that jeopardizes pre-tax profits.
Insider ownership is limited to just 32,518 shares, which represents only 0.93% of the company, amounting to a mere $141,453 at a recent closing market price. This raises serious questions about the commitment level of insiders, most of whom acquired their shares through grants and options. Alarmingly, there have been no stock purchases by board members or senior executives in the last decade. This reality is telling and suggests a troubling lack of confidence in the prospects of the company they oversee.
Furthermore, we were deeply disappointed by the board's attempt to solidify their positions through a staggered board strategy proposed earlier this year, which was ultimately rejected by shareholders in a clear grassroots vote against the initiative.
We believe that Jewett-Cameron’s sophisticated product offerings in pet containment, fencing, and wood panel solutions, along with its real estate assets, could potentially yield a market value that surpasses current public estimates, especially under management with the right resources and expertise. The cost-saving synergies available in a more robust operational environment could be substantial. It is crucial for the board to consider, with the assistance of an external advisor, whether merging with a larger entity might be the best path forward for Jewett-Cameron and its shareholders. We are genuinely concerned that this may be the only viable long-term solution for Jewett-Cameron.
We strongly urge the board to take its fiduciary responsibility to all shareholders seriously.
Sincerely,
Thomas A. Corea
Chief Executive Officer
Parthenon LLC
Frequently Asked Questions
What is the main focus of Parthenon LLC's letter?
The letter outlines concerns about Jewett-Cameron's performance and urges the board to explore strategic alternatives to enhance shareholder value.
What has been the stock performance of Jewett-Cameron?
Jewett-Cameron stock has declined by 46.3% over the past five years, in contrast to significant gains in the Russell 2000 Index.
What issues are affecting Jewett-Cameron's profitability?
Challenges include supply chain vulnerabilities, rising costs, competitive pressures, and insufficient product development, all impacting profitability.
What is the insider ownership situation at Jewett-Cameron?
Insider ownership is minimal, with insiders holding only 0.93% of the company, raising concerns about their commitment to the company.
What does Parthenon LLC suggest for Jewett-Cameron's future?
Parthenon LLC recommends that Jewett-Cameron explore potential mergers with larger companies to maximize its product value and overall potential.
