CITY.PK

**bdcmm** Thu Feb 09, 2006 11:53 am

CITY.PK
Blast,

I found this private prison management stock (CITY.PK) very interesting at current price of $1.80:

1. P/B about 0.75 (true book value could be higher as it has depreciated real estate on the book)
2. P/S a bit more than 0.2
3. big insider holding (CEO/founder reportedly holds about 52%), past insider buying price exceeds $2
4. good current asset, great cash flow, 9 months earning per share in 2005 already 0.25 (P/E = 6, Price/Cash flow < 3 by rough estimate)
5. Two good hedge funds have accumulated shares at around $2 in 2005 (one 8%, one 5%)

Compared with peers such as CRN (insider buying on this company too), CITY.PK is traded at the discount of 60~70%. So my estimate of its fair value is almost 3 times of its current market cap. Its share price could double or triple from here in a couple of years.

Drawbacks:
1. trade on pink sheets
2. CEO controls the company with over 50% stake.
3. Not sure how clean is the book (the cash flow in past few years does indicate good earning power of this company)
4. very small float

Any insights on this industry and stock?

**blast_investor** Thu Feb 09, 2006 7:49 pm

Hi bdcmm:

This stock CITY.PK would be too risky for my taste. The main risk in this stock is high leverage at $24 million debt, and only 6 million market cap.

This company can only make 1 to 2 million earning per year to pay down debt, PE looks attractive. But such high leverage and microcap would not be very attractive. Usually a small cap would trade at discount already, but this is microcap, tinycap, and would be discounted more.

**bdcmm** Thu Feb 09, 2006 8:41 pm

Thanks for your opinion Blast. However, the collateral of the debt is mainly real estate asset I believe. For example, if a person pays down 10% to purchase a house, and he has very stable income (at least for a few years) to pay monthly mortgage, which is like what CITY.PK is doing. I don't think this as a high leverage, as it holds appreciated real estate over the years. After a few years, it can always sell the real estate to pay down the debt, with profit.

I think the private prison management is a stable business, as the government pays for the management and the society always needs such facilities no matter the government is republican or democratic. Also, population is growing in America, so is the crime unfortunately. If you look at the earning history of the company, it is very stable.

My 2 cents.

**blast_investor** Thu Feb 09, 2006 9:36 pm

I would agree that prison business is stable business. The government is unlikely to stop or change the current business set up.

On the other hand, I am not sure the real estate part argument. I would expect the prison real estate is in very poor location. Hey, it is prison, not a mansion. Is it possible to sell the real estate of prison and pay down debt easily?

If the value of real estate is the income from the prison business operations. If the owner can only sell prison business plus real estate to another investor, then it can get 10x income under debt free enterprise level, which would not add too much upside to current stock price.

bdcmm wrote:
I think the private prison management is a stable business, as the government pays for the management and the society always needs such facilities no matter the government is republican or democratic.
My 2 cents.