Union Dental: The Best Deal on the Board at Two Cents?

A conversation with an interested investor a few days ago led me to a pretty interesting question: could Union Dental Holdings Inc. (OTCBB: UDHI) really be one of, if not the most, undervalued companies on the board priced around $.02?

While I have no claim to an elite methodology for scouring the OTC Bulletin Board for every company at two pennies, nor the time to conduct and report on a complete evaluation, what I can do is go with what I know, which when it comes to the bulletin board, happens to be more than many.

While we found a plethora of organizations around $.02, some with real revenues, and a boatload of others characterized as what we like to call “story” companies – UDHI is one of the few, if any, we found that has a perfect combination of: significant historical revenue growth, a proven business plan that is being executed to a T, and a management team that has made the acquisitions and relationships necessary to not only tell the story, but live it.
So here's the quick and dirty on the huge upside here:

1. Current Operations Are Facilitating Steady Growth

UDHI reported revenues of nearly $745K for Q2 ’07 in their hot off the press 10-QSB filing – marking both a 4th consecutive quarter of growth and an increase of more than 43% over the corresponding period during last year.

In addition, Union Dental continues to expand its dental network and generate increasing sales. This advancement facilitated an improved net loss per share figure from (.02) in Q2 ’06 to $0.00 in ’07.

2. Management Buying Shares like Wildfire

President/CEO Dr. George D. Green has literally put his money where his mouth is, building a nearly 30,000,000 share, or 50% ownership position in Union Dental Corp.

3. Big Move Should Facilitate Near-Term and 5yr. Growth of 400% and 2400% Respectively

UDHI just announced plans to execute a $10 million acquisition of the grand daddy of all dental practices, check out past blogs for more info. The move will essentially make Union Dental cash flow positive and grow revenues from roughly $2M to $10M with five year revenue potential of nearly $50M.

4. Enormous Upside Potential

To totally comprehend the size of UDHI’s legitimately addressable target market, in the U.S. alone, we think it may be helpful to take a look at the sheer size of some of the company’s labor union clients:

Communications Workers of America (CWA) - (700,000 members)
International Brotherhood of Electrical Workers - (IBEW) – (750,000 members)
United Association of Plumbers and Pipe Fitters (UA) – (300,000 members)
Association of Flight Attendants - Communications Workers of America (AFA-CWA) – (55,000 members)

Bellflower (’06 adjusted EBITDA of $521,000) aside, if the company is able to double its local union client base with the Communications Workers of America (CWA) over the next few years, bringing adoption rates to approximately 20%. CWA contracts alone would provide access to a market opportunity in excess of $1 billion. Since union workers typically receive only $1,500 in annual allowable dental expenditures - a 30% discount, which UDHI can provide for dental prosthetics discount pretty essentially brings any worker in one of UDHI's coverage areas through the door. How’s that for potential?

XKEM vs. UDHI

For the sake of today’s discussion, let’s take a look at Xechem International, Inc. (OTC BB: XKEM - News). Since I’ve conducted a great deal of due diligence on the company in the past, am fairly well acclimated with their business plan and historical performance, and shares trade at around $.02, what the heck. For the record, XKEM has built a massive following of investors and traded on volume of 4,337,142 on 8/13.

How about this for a sexy story? XKEM is strictly focused on commercializing NICOSAN™, a drug for the prophylactic management of Sickle Cell Disease (SCD). The disease is most prominent in Nigeria (home of more than 4 million SCD sufferers) and therefore XKEM has a deal with the Nigerian government that has helped secure funding for an initial production facility.

The Bottom Line:

XKEM is selling limited quantities of the drug from its state-of-the-art R&D scale facility and has not logged more than $202,000 in revenues over the past three years. The company also had a net income applicable to common shares of ($3.2M) as of the last quarterly filing.

While XKEM has recently received the funding required to by the company’s account “purchase the U.S. manufactured pre-fabricated corporate offices, warehouse, plant equipment and machinery needed by Xechem Nigeria to establish a state-of-the-art facility in the outskirts of Abuja, Nigeria, which is slated for completion during the fourth quarter of this year.” - the only problem is that this means more debt and more potential dilution AND many more facilities like this will be needed to achieve even 25% penetration of Nigeria’s SCD sufferers.

While I like XKEM as a long-term investment, in my opinion it still remains a “story” company. If I’m looking for some returns in the near-term versus the next 5-10 years, I’m buying UDHI. Furthermore, a quick peek at shares out pushes the weight even more of UDHI’s favor (60.8M vs. 1.64B)

The Wrap-UP

Quite similar to the way us humans must first crawl before we walk, and walk before we run – many micro-cap ventures need to gain their footing and build up some steam before achieving their true potential. Although both UDHI and XKEM appear to be doing so, Union Dental is creating real value by the day. Check back on the Blog for more comparisons in the coming weeks. Got a comp that you’d like to see our opinion on? Feel free to email us with any requests.

Labels: Union Dental Holdings Inc.