Chartwell Technology Inc. (TSX:CWH)

Chartwell Technology "develops, markets, licenses, implements and supports gaming applications and entertainment content for the internet and remote platforms. Chartwell’s JAVA and Flash based software products and games are designed for deployment in gaming, entertainment and promotional applications."

Balance Sheet: Current assets after deducting ALL liabilities listed on the balance sheet are $1.19 per share. Most recent share price was $1.15. So the company trades at a slight discount to it's "net-net" value (net of current and non-current liabilities). The current assets are primarily cash. The company has $19.5 million in cash, or $1.06 per share. There is no debt (although there is $234K obligation under capital lease. Relative to the cash balance this is insignificant). Using Graham's liquidation value formula (as discussed here), the liquidating value for Chartwell is $1.13 per share. Liabilities per share are 7 cents. So our balance sheet multiple is (1.15 price per share + .07 liabilities per share)/(liquidating value of $1.13) = 1.22/1.13 = 1.08. There are certainly a lot of very liquid assets backing the current share price and this provides a significant level of safety to the share value. Cash burn is a potential concern, with the company cashflow negative the past 3 quarters. Longer term, operating cashflow has been postive, if somewhat volatile.

Cashflow: over the past 5 years (20 quarters), Chartwell has generated an average of $1.93 million in CFBIT (Cashflow before Interest and taxes) per year. The enterprise value is about $2 million (that's the market cap less net cash). So our cashflow multiple is 2/1.93 = 1.04. This is a very low multiple. Bear in mind that earnings have only been about breakeven during this time. The company has substantial non-cash charges in the form of amortization, depreciation and write-offs and this accounts for the majority of the difference.

Cash usage: The company generated $9.7 million in cash flow from operations before interest and taxes, plus $2.9 million in interest income and a net $7.6 million from share proceeds (primarily from an $11 million private placement back in December 2004, net of share re-purchases over the 5 years). This cash was used to pay taxes ($2.5 million), repay debt ($1.1 million) and make acquisitions ($4.6 million). The difference of around $11.8 million remains as cash on the balance sheet. No dividend has ever been paid and there has not been significant share buyback activity except to offset option activity. Overall the cash usage is neutral. Chartwell has not returned cash to shareholders as yet but at the same time they do not seem to be squandering it either. The 2005 Micropower acquisition resulted in an $870K impairment charge in fiscal 2007.

The industry is highly competitive and subject to substantial legal and regulatory risk. So be forewarned. Still, at the current price, Chartwell deserves a close look by the serious value investor.

Disclosure: I own shares in Chartwell Technology