No representation is made that the objectives or goals of any investment or ..... problematic exposures by commuting the
Philip C. Ordway
Principal & Portfolio Manager Anabatic Fund, LP 312-416-4225
[email protected]
Opportunities in Financial Guaranty 71 South Wacker Drive Suite 3495 Chicago, IL 60606
February 11, 2014
Anabatic Fund, L.P.
Disclaimer This presentation has been prepared solely for informational purposes. This is not an offering or the solicitation of an offer to purchase an interest in any fund, and it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security. Nothing herein should be construed as investment advice, an opinion regarding the appropriateness or suitability of any investment, on an investment recommendation. No representation is made that the objectives or goals of any investment or strategy will be met or that an investment or strategy will be profitable or will not incur losses. Past performance is no guarantee of future results. Reliable methods were used to obtain information for this presentation but the information herein cannot be guaranteed for accuracy or reliability; the information in this presentation may be out of date or inaccurate. The information contained in this summary is without permission.
and may not be distributed
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Anabatic Fund, L.P.
Table of Contents I. Overview and Investment Process
II. Review of 2013 Small Caps Conference
III. Financial Guaranty
IV. Contact Information
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Anabatic Fund, L.P.
I. Overview and Investment Process
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Anabatic Fund, L.P.
Investment Process
Value-Oriented Investment Approach Determine what an informed, rational, long-term investor would pay – and then pay a lot less
Valuation of an Enterprise
Evaluate businesses, not just securities
Assess the business- and product-level economics, incremental returns on capital, and competitive advantage
Understand and value the entire business, and then target specific parts of the capital structure based on where the value of the enterprise is most likely to be realized
Understand the Price and Identify a Catalyst
Margin of Safety
Rely on a fundamental research process designed to ensure a built-in margin of safety in every valuation Apply experience in volatile markets and in distressed investments to identify long and short ideas and their potential risks
Market Price as a Source of Opportunity
Ask why a security is mispriced and what will drive a change in valuation
Use market prices and volatility to take advantage of opportunities
Identify events that may be a catalyst for change
Maintain deliberate investment process and checklist to proactively identify potential mistakes
Estimate intrinsic value using a range of probabilistic outcomes
Avoid false precision and overconfidence, key dangers in the valuation process
Allocate capital at prices such that a mistake or market volatility is not expected to result in a large permanent loss of capital
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Anabatic Fund, L.P.
Investment Process
Investment Philosophy Anabatic’s investment philosophy is drawn from, and Anabatic’s investment portfolio is managed against the backdrop of, well-established value investing tenets
A “margin of safety” is paramount – successful investments require investing at a price that absorbs volatility and errors to minimize the risk of a significant impairment to capital
Markets are highly competitive and often efficient, but investors occasionally act irrationally and thereby create opportunities; as such, value investors with a disciplined, rational and patient process can have a distinct advantage over time
Value investing works because it requires the time, patience and discipline that many investors lack – in other words, value investing works over time because it doesn’t work all the time
Valuation produces a range of estimates in seeking to minimize common valuation mistakes such as overconfidence and false precision
Good opportunities are rare and deserve meaningful capital – avoid diluting returns by over-diversifying, but employ an appropriate level of diversification over time to better protect capital
Preserve the flexibility to be opportunistic – invest in equity and in credit, take long and short positions, and hold cash when appropriate
Seek to act rationally in the face of near-term and be prepared to tolerate short-term volatility and underperformance in order to pursue expected long-term results
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Anabatic Fund, L.P.
Overview
Key Strengths
Value Orientation
Discipline
Patience
Fundamental value approach: Anabatic’s investment process utilizes fundamental analysis to evaluate businesses and invest when securities are believed to offer a significant margin between price and expected value
Focus on under-followed companies and special situations: Anabatic’s portfolio focuses on companies that attract relatively little attention from the market and on special situations that may be complex or subject to non-economic buying/selling pressure
Fund size: Capacity is carefully monitored to preserve an opportunistic approach as the ability to allocate to smaller companies and under-followed situations is a key advantage
Experience: Over the course of his career, including his over 6 years with CFIP, Mr. Ordway has analyzed and invested across the entire capital structure, long and short, in smaller companies, and in distressed credit situations, through a variety of market conditions
Concentration: Anabatic’s portfolio is expected to be concentrated, generally with 8-12 investments comprising at least two-thirds of capital
Long-term approach: Anabatic seeks to maintain a patient, long-term oriented investment process, particularly in the face of near-term market uncertainty and volatility; accordingly, Anabatic targets equally patient, like-minded investors
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Anabatic Fund, L.P.
Investment Process
Investment Strategies Anabatic’s investment program includes investment ideas that can generally be characterized into the following strategies, investment types and expected time horizon/position sizing Strategy
Description
Types of Investments
Time Horizon and Position Sizing
Special Situations
Value driven by an event within a given timeframe
Spin-offs, restructurings, liquidations, distressed securities, and post-emergence securities
• Expected time horizon of 1 year • 5-10 positions generally sized 3-10% each
Balance Sheet Bargains
Asset value at a discount
Ignored and/or complex business selling below the estimated realizable value of their net assets
• Expected time horizon of 1 to 2 years • 5-10 positions generally sized 3-10% each
Long-Term Value
Earnings power at a discount
Great businesses valued at attractive prices (usually due to company- or industry-specific problems creating excessive pessimism)
• Expected time horizon of 2 to 3+ years • 3-7 positions generally sized 3-10% each
Directional Shorts
Stand-alone short positions expected to generate alpha
Event/catalyst-driven businesses with excessive valuations, accounting concerns, weak management, problematic industries, insufficient returns on capital and/or negative cash flows
• Expected time horizon of 6 months to 1 year • 3-15 positions generally sized 12% each
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Anabatic Fund, L.P.
Investment Process
Finding Opportunities Looking for value in securities and information that others may have missed Smaller, over-looked companies and special situations often provide the best opportunities
Anabatic’s investment universe includes smaller, under-followed companies and special situations: spin-offs, carveouts, liquidations, recapitalizations, regulatory events, and distressed companies
As institutional capital concentrates in large funds, focusing on smaller companies is a key advantage
Forced or indiscriminate selling creates opportunities
Looking for trouble: value can often be found in securities that other investors are selling due to liquidity or regulatory constraints, distress, bankruptcy, ratings downgrades, and out-of-favor sectors
Reviewing as many spinoffs, bankruptcies and corporate events as possible creates a deep pool of potential investments and potentially useful business knowledge
A fundamental research process often leads to investment ideas
The development of deep industry- and company-specific knowledge can generate attractive investments
Heavy emphasis placed on evaluating original source documents such as annual reports, 10-Qs, proxies, registration statements, press releases, disclosure statements, etc.
Monitoring secondary sources (periodicals, trade journals, books, newsletters), screens/databases, and in-person research with managers, customers, and suppliers can also lead to new ideas
Maintaining an active “watch list” of previously valued companies
Reading, reading, and more reading
Email me for a copy of my reading list or to join my “good reading” distribution 9
Anabatic Fund, L.P.
Investment Process
Fundamental Business Analysis Deep fundamental research is crucial in valuing companies, and the process aims to understand the key risk factors in each investment as well as the reasons that the perceived valuation gap will close
The fundamental research process, which is designed to thoroughly analyze and understand each business and security under consideration, generally incorporates: – Close reading of original-source documents: annual reports, 10Qs, proxy statements, call transcripts, and press releases
– Evaluation of competitive position and industry dynamics, including the history and evolution of the firms – Financial analysis: margins, ratios, and trends – Assessment of customers, competitors, suppliers, employees, and managers – Consideration of a future outcome in which the business has deteriorated and what went wrong – Evaluation of the business performance over time and in varying business conditions – Judgment of future capital investment opportunities for the business and management’s capital allocation priorities – Determination of management’s honesty, ability, and incentives
Use fundamental analysis to estimate “fair value,” a range in which the business would be appropriately priced
Always invert and ask what could go wrong with a business and how capital could be impaired
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Anabatic Fund, L.P.
II. Review of 2013 Small Caps Conference
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Anabatic Fund, L.P.
Review of 2013 Small Caps Conference – EGL “EGL faces significant revenue pressure, but it also has considerable flexibility, very high returns on capital, and an attractive market price”
Update: Despite ongoing dysfunction in Washington and related top line pressure, Engility has performed well; business model remains attractive, valuation less so; jury still out on recent acquisition of DRCO
Performance: +109.5%
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Anabatic Fund, L.P.
Review of 2013 Small Caps Conference – XLS “The spinoff has largely played out…XLS will sink or swim on its valuation, economic prospects, and capital allocation…valuation provides some cushion”
Update: XLS is now pursuing a spinoff of its own! ITT really is the gift that keeps on giving…
Performance: +80.1% (including dividends)
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Review of 2013 – KTOS “Reasonable valuation with attractive option on growth and M&A…Attractive business profile, proven management team but M&A may be the only event to unlock value”
Update: 2Q/3Q13 auditor switch and CAO resignation are red flags; growing, but valuation likely full above $7.00
Performance: +65.4%
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III. Financial Guaranty
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Anabatic Fund, L.P.
Financial Guarantors Before and During the Crisis Financial Guarantors such as MBIA, Ambac, Assured, SCA, Syncora, FGIC, XL Capital and ACA were at the epicenter of the Financial Crisis, and many did not survive
Bond insurance is not a great business: The industry’s history is littered with poor/irrational underwriting; selling a put – especially an underpriced put – is a dangerous thing
Leverage + Innovation + Correlation = Failure: Multiple layers of leverage, new and untested structures, and faulty assumptions about correlations lead to a massive, industry-wide failure
From munis to CDOs: More than 50% of muni issuers from 1995 to 2009 used bond insurance – it was good, steady, high-margin business, but it was slow growing and unsexy – so the insurers strayed into structure finance; by the end of 2006, the industry insured more than $1.3 trillion of munis and more than $800 billion structured finance*
Principal and interest when due: Bond insurance augments a security’s credit quality by guaranteeing any shortfall in the payment of interest or principal by the issuer…but the payments are not accelerated The long-dated nature of FG obligations is their only saving grace – it gives them a lot of time to fix problems and earn their way out of a hole via investment income and new premiums In bankruptcy, bond insurance must pay the difference between par (or the notional value) and the recovery on the security; recovery rates on muni issues have historically been very high, and even most structured issues had significant recoveries (and litigation victories) *Both figures are net par outstanding
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Financial Guarantors Before and During the Crisis
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Financial Guarantors Today Back from the brink, but still facing many challenges
Statutory overhauls and bankruptcy: Most if not all bond insurers have been transformed in the past several years, either voluntarily or involuntarily
Penetration rates in munis: Before 2008 ~50% of muni issues were wrapped vs. ~4% today; will demand for insurance ever recover? With lower FG ratings, only a few triple-BBB and single-A issuers have any reason to use bond insurance
Runoff, low rates and refinancings: 2004 and 2005 were big years for muni issues, most of which had NC-10 protection and are now maturing or refinancing; similarly, structure exposure is rolling off; if nothing else, a huge release of capital
Capital up, returns down: A 15-20% ROE historically is more likely going to be ~10% going forward
New entrants: Berkshire Hathaway dipped a toe in the market in 2008/09 but pulled back fairly quickly
Excess capital: The entire industry is over-capitalized: more business is running off – which releases capital – than can be replaced; harmful for pricing but favorable for good capital allocators
Effective structures: Only now paying claims on 2005-08 RMBS/CDOs still outstanding, with limited exceptions, significantly mitigated by legal rights and collateral leading to massive recoveries on prior and future paid losses
Commutations: FGs have neutralized problematic exposures by commuting them at a discount in advance of maturity; can also buy their own wrapped securities at a discount (becoming both the bondholder and the insurer, adding to negotiating leverage)
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Financial Guarantors Today The good, the bad and the ugly
Everybody hurts: AGO is likely the only listed insurer with an attractive, viable model in current conditions
Distressed debt: Truly distressed opportunities are few and far between, but the opco surplus notes of some monolines – which are essentially the equity of the operating subs – may deserve some consideration
Residual values: Uncertainty abounds, but by valuing the residual of the consolidated entities it can be argued that there is little risk and considerable upside
It is worth emphasizing that it is truly residual value we are estimating, as there are massive obligations ahead of the debt and the equity – future value that goes to public securities deserves a healthy discount rate and a wide margin for error
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Anabatic Fund, L.P.
How to Value a Bond Insurer Safety first – adequate capital is paramount; consider the balance sheet and burn-down value
Statutory capital and reserves: Policyholders and debtholders clearly come first, and there must be a large capital cushion
Rates and spreads: The prevalence of bond insurance is driven by ratings and capital arbitrage, of course, but bond insurers are affected by rates and spreads just like any other insurance company
Capital allocation: The decision to pursue buybacks vs. dividends vs. acquisitions will drive a large portion of future returns
Metrics: Book value, operating book value*, adjusted book value† are far more important than earnings
Management and underwriting: A history of judicious underwriting and decision making is crucial
† Operating book value is book value after removing the effect of VIE consolidation, fair value gains and losses not related to credit impairments, and fair value gains and losses in the investment book, all after tax * Adjusted book value is operating equity (excluding mark-to-market and fair value gains and losses) plus the embedded value of the insured book (unearned premiums less losses, after tax)
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Anabatic Fund, L.P.
Risks Insurance is always risky, and financial guaranty entails special risks
Municipal exposure: Default rates have historically been low, mitigated by high recoveries, and typically concentrated in multifamily housing, land-based developments, and healthcare…but as Stockton, Jefferson County, Harrisburg, Detroit and Puerto Rico are currently proving, the problems in large/GO issues are real and spreading*
Structured exposure: Marks and reserves are generally adequate against what’s left, and the worst of the worst has mostly been defaulted/paid away by now, but another leg down in the economy or housing market will hurt
Regulatory action: Bond insurers are regulated closely by the state insurance commissioners where they are domiciled, and the regulators have wide discretion to make decisions that affect everything from pricing to capital allocation to solvency
Complexity and disclosure: Depending on the company, it can be difficult to parse the financial statements of the various entities to evaluate the true economics; for example, AGO has exemplary disclosure, but AMBC’s disclosure post-emergence is only slowly improving
* Ironically, the problems in muniland may actually be helping to revive the prospects of the insurers still able to write new insurance: as even publications like BusinessWeek have begun to notice, in times of turmoil a wrap from a solvent insurer still adds value, and as muni investors notice the 10- and 20- and 30point spreads between wrapped and unwrapped bonds, demand for wraps on new issues may pick up; see: http://www.businessweek.com/news/2014-0207/puerto-rico-turmoil-supports-assured-guaranty-corporate-finance#p2
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Anabatic Fund, L.P.
Ratings A flawed but prevalent system
Still a necessary evil: Most deals still require a rating despite the rating agencies’ massive failures over time
Changing landscape: Moody’s has a decidedly unconstructive view of the industry and has pulled back from all ratings; S&P often providing the only useable ratings; Fitch is the red-headed stepchild of the industry; A.M. Best and Kroll making some attempt to take market share
Both insured securities and insurers themselves hurting: Bond insurers’ own ratings have been hit hard by the agencies, reducing the capital charge benefits for the insurance buyers
Factors considered in rating bond insurers*: Capital adequacy, profitability, liquidity, franchise, insured portfolio and investment portfolio
Ratings often don’t reflect reality: Rating decisions can often be too far behind – or otherwise too far disconnected from – reality to be useful; see the 2013 downgrade of AGO for a good example
* A.M. Best has a fairly good synopsis of its process:
http://www3.ambest.com/ambv/ratingmethodology/OpenPDF.aspx?rc=203404
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Puerto Rico An uncertain road with no great options – needs to restructure, but how and when?
An intractable fiscal problem: Puerto Rico has been in recession since 2006 – eight straight years of economic contraction – and it faces a chronic budget deficit, a 15% unemployment rate and 42% participation rate, a massive pension problem, tax collection shortfalls, human capital migration, a shrinking population, and an ongoing need for capital markets access
Overleveraged: Debt totals $70 billion…comparable to NY and CA but with a fraction of the population or economy; normalized leverage implies approximately $25bn of debt (or 36 cents) needs to be written off
No clear path: Puerto Rico is constitutionally prohibited from default and as a U.S. Territory is not eligible for Chapter 9*
Government efforts: PR’s government is doing what it can: spending and deficits are way down and revenues are up, with a goal to balance the budget by next year…but it is likely on a treadmill as the underlying economy stagnates
Massive U.S. bond fund exposure: Morningstar says that more than 70% of all U.S. muni bond funds hold Puerto Rican debt
GOs, COFINAs, others: Puerto Rican debt is triple tax exempt and comes in several flavors, notably General Obligation bonds, COFINAs (the Spanish acronym for the sales tax revenues that back the bonds), and others secured by sewer/water/power
Washington unlikely to help: For many reasons, Washington is very unlikely to help or “bail out” Puerto Rico, although it is theoretically possible if the situation escalates * As Governor Garcia Padilla says, “We couldn’t default even if we wanted. Our constitution is clear and it says we must honor our debts first.” He later added, “We will do everything, and I repeat, everything that is necessary to for Puerto Rico to honor all its commitments. These are not just constitutional obligations but also moral obligations.” But Puerto Rico will obviously still default if it has no liquidity to service its
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Anabatic Fund, L.P.
Puerto Rico A huge mess, but Financial Guarantors’ obligations are manageable
Downgrade to junk: Puerto Rico’s debt was cut on 2/4/14 from BBB- to BB+ (Watch Negative) by S&P on 2/4/14
The downgrade will result in a ~$1bn hit to PR’s liquidity, but the market had certainly been pricing in a downgrade and bonds were flat to up slightly on the news; PR had $2.3bn of liquidity at 9/30/13 and could last into 2Q14, but it is in talks to bring a significant bond deal this month; a backup plan has been speculated to be a $2bn private financing in the 10% context;
The downgrade with bring a higher capital charge for bond insurers, but not a material hit to capital, reserves or liquidity; even S&P itself says that AGO and MBI have more than adequate capital† (no comment on unrated Ambac)
Investor communication: PR is making an effort to communicate with investors and another presentation is scheduled for 2/12/14 – see: http://www.gdb-pur.com/investors_resources/presentations.html
Insured exposure: headline number of $15.7bn is large, but the PV of payment obligations is far lower and can be Insured Net Par Oustanding Total oustandinding* $71,894,613,561 managed AGM $5,329,485,000 Total avg. coupon $2,998,337,439 COFINA GO GDB PREPA Highways Pub. Bldgs. PRASA Employees Retirement Infra. Fin. Auth. Pub. Fin. Co. Others
$16,615,405,729 $11,063,986,656 $9,431,517,000 $8,482,675,000 $5,580,384,078 $4,355,784,782 $3,734,860,000 $2,770,480,049 $2,976,765,000 $2,079,228,084 $4,803,527,183
National $4,147,850,764 Ambac $2,940,115,381 FGIC $2,649,099,197 AGC $512,200,000 XLCA $375,710,000 CIFG $259,185,000 FSA $29,900,000 * As of 2Q13, including FV of CABs Sources: Bloomberg, Moody's, JP Morgan † http://www.mbia.com/investor/ratings/01_29_2014_BondInsurersCapitalAdequacyPuertoRico.pdf
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Anabatic Fund, L.P.
Ambac (AMBC) Post-emergence equity loaded with uncertainty and recent volatility
AMBC: Ambac Financial Group (AFG, or HoldCo) owns Ambac Assurance Corp (AAC, or OpCo)
Bankruptcy: In 2010 the regulator in Wisconsin seized AAC and established a Segregated Account to hold $35 billion of structured finance products (read: toxic waste) with the rest of AAC (the General Account) hold everything else; Holdco filed bankruptcy shortly thereafter
Segregated Account: the SA exists to effect an orderly runoff of claims, settling them with 25% cash and 75% Surplus Notes (accruing at 5.1%, due 2020); AAC has also commuted most of its structured exposure for cash and Surplus Notes; at 9/30/13, the SA had $6.57bn of claims paying resources and $443mn of surplus (against a regulatory minimum surplus of $100mn)
Emergence: AMBC reorganized and emerged in May 2013 with 45 million shares and 5.05 million warrants struck at $16.67 exp. 2023 (all converted claims from old AFGI bonds); $350mn of junior surplus notes in SA; $1.2bn of surplus notes and $660mn of pfd at AAC; $501mn of policyholder surplus and $1.1bn of qualified statutory capital; and $7.1bn of claims paying resources
NOLs: AAC has $4bn of NOLs and AFG has $1.2bn; emergence budget calls for $100mn of payments from AAC to AFG for use of NOLs in coming years; currently Ambac is not writing new business and has no earnings to offset the NOLs but is exploring the purchase of an operating business
Uncertainty, but favorable odds: Pegging a valuation with any specificity or certainty is extremely difficult, but the current price comes with favorable odds
Investor communication and management incentives: Both were notably lacking until recently – the company finally filed a proxy in November, along with its first-ever conference call, and it will host an investor day this spring
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Ambac (AMBC) Simplified Org Chart
Both AAC and the Segregated account have numerous entities beneath them Ambac Financial Group, Inc. ("Ambac," "AFG," or "AMBC") Delaware ticker: AMBC; $1.0bn mkt. cap
Ambac Assurance Corp ("AAC") Wisconsin Surplus Notes: $1.2bn Auction Mkt. Pfds: $660mn
Ambac Assurance Corp. Segrated Account -- in Rehabilitation Wisconsin Surplus Notes: $50mn Junior Surplus Notes: $350mn
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Ambac (AMBC) $2.5bn of Puerto Rico exposure looks manageable*
Extremely long dated: nearly a third of the total is related to zero-coupon COFINAs – due in 2047 and 2054 – that have dedicated revenue pools sufficient for S&P to exclude them from the credit downgrade
Relatively little exposure to GOs: Most of Ambac’s insured bonds are backed by dedicated revenues, providing debt service and potentially higher recoveries
Capital cushion is adequate: If Puerto Rico defaults and/or restructures its debts to a sustainable level, Ambac likely faces $200-$500mn of PV payment obligations Transaction
Gross Par*
Maturity
DSCR**
Sales Tax Revenue Bonds (COFINA) 1
$808.5
2054
3.0x
2
$759.8
2045
1.4x - 2.7x
3
$573.9
2044
2.8x
$137.1 $191.2 $59.0 $2,529.5
2031 2035 2023
1.4x n/a n/a
Hwy./Transp. Auth. Revenue Bonds
Infrastructre Fin. Auth. -- "Rum Tax" 4
Conv. Ctr. Auth. -- "Hotel Tax" PR Pub. Bldg. Auth. (GO g'teed) PR Commonwealth GO's
* As of 9/30/13: http://www.ambac.com/authenticate.asp?file=Single_Risk_Exposures_by_CUSIP.xlsx ** Per GDB a/o FYE 2012 1
Backed by first 2.75% of collection on sales tax (current rate 7%); segregated from Gen Fund; exempt from claw-back
2
Backed by tolls, gas tax, license fees; required debt service reserve; toll revenues exempt from claw-back
3
Backed by federal excise tax on rum
4
Backedy by hotel taxes; segregated monthly
* See full schedule (http://www.ambac.com/authenticate.asp?file=Invest_Sched.xlsx ) and slides (http://ir.ambac.com/events.cfm# )
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Ambac (AMBC) How management chooses to unlock value will be crucial
Several roads to value: Management has been quiet and cagey so far, but there are multiple influences on value
Litigation recoveries, putbacks – Ambac has six ongoing Rep & Warranty lawsuits pending, and recoveries equal to or in excess of what Ambac has booked are likely given precedent in similar/identical lawsuits already settled (AGO and MBI’s settlements with Flagstar and BAC are instructive); some upside in additional fraud claims Profitable runoff – Reserves of nearly $6bn against RMBS are potentially overstated, and if so they will be gradually released; substantial surplus at AAC
Buybacks – Ambac can buy back its own wrapped bonds at a discount, which has proved attractive so far – as of 9/30/13, Ambac had repurchased $1,441mn of par value for $947mn (66 cents) that is now carried at $1,228 (85 cents) NOLs – Ambac is considering the purchase of an operating business in a “related field” that could use NOLs; Ambac could also try to restart Everspan, a dormant shell; ultimate value of NOLs to AFG could range from zero to several hundred million
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Anabatic Fund, L.P.
Ambac (AMBC) Risks are considerable
Segregated Account losses: Any uptick in losses and/or severity would obviously diminish value available to AFG; Supplemental Payments approved by Rehabilitator are a good sign*
Recoveries and litigation: Claims being pursued against third party originators are uncertain
NOL monetization: AFG could let the NOLs lapse or pursue a dumb acquisition in hopes of monetizing them
Management: Senior leadership has been largely silent until recently; the long-awaited proxy didn’t shed as much light as hoped
Municipal exposure: $128bn of par muni exposure, most of which is rock solid but significant chunks of which ($170mn Detroit, $2.5bn Puerto Rico) is distressed or stressed
Student loan exposure: $5.7bn of par exposure, with several hundred million of additional reserves possible
Investment book: Like any insurance company Ambac has to invest its premiums, a task made more difficult by current rates
Warrants: At current levels, the equity appears a better bet than the warrants, but both are worth watching
Time is not on Ambac’s side: As a pile of assets without an ongoing business (for now), the present value of the residual will be sharply affected by delays in litigations/settlements, regulatory approvals, etc. * http://www.ambac.com/Supplemental_Payments.asp
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Ambac (AMBC) May 2013 emergence followed by massive Puerto Rico-induced selloff in 3Q13
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Ambac (AMBCW) Warrants add leverage but not much else
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Assured Guaranty (AGO) The best business and portfolio in the industry is overcapitalized
AGO: Assured Guaranty Ltd (NYSE: AGO, AGL or Holdco) owns various opcos
Last man standing: Assured was the only bond insurer to maintain its IG rating (double-A at S&P, single-A at Moody’s) thanks to fairly judicious operations and the support of Wilbur Ross, who still owns ~14.8mn shares (~8%)
AGL: $450-500mn of capital adequacy cushion, per S&P report citing “very strong capital” even in light of troubled munis; Puerto Rico downgrade to junk will tie up $65mn of capital, per S&P
NewCo: Established Municipal Assurance Corp and currently has 41 state licenses to write muni wraps
Pricing discipline: Choosing to maintain pricing at the expense of volume
New domicile: AGO chose to become a U.K. tax resident in 2013, with no change to rates but now subject to U.K. tax withholdings of 0-5% compared to 30% previously, making it more “able to more efficiently manage capital within the Assured Guaranty Group”; Holdco remains in Bermuda and is NYSE-listed
Potential for large return of capital: Regulatory limit on upstreaming capital from OpCo to Holdco – generally prohibited above 10% of surplus – only a temporary roadblock
On 2/5/14 AGO increased its dividend by 10%, the third straight year with an increase; AGO now yields approximately 2% New $400mn buyback authorization in Nov. ’13 after repurchasing 12.5mn shares (>6% of total) at average $21.12/share from March to November 2013
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Assured Guaranty (AGO) Subsidiaries are substantially overcapitalized, and AGO shareholders should eventually benefit
Dividend restrictions: AGO’s entities have significant excess capital but also faces limitations on how it can operate
AG Re has $600mn of excess and surplus but dividends are capped at $321mn; AG Re also has $255mn of unencumbered assets; Assured Guaranty Corp. and Assured Guaranty Municipal Corp. have $49mn and $78mn, respectively, available for distribution
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Anabatic Fund, L.P.
Assured Guaranty (AGO) Many drivers of value, with a large return of capital fairly likely
Rapid paydown: AGO’s books will release very significant amounts of capital in the coming 1-3 years
Book value: AGO’s book value (both the GAAP, operating and adjusted varieties) should slowly accrete over time
New issuance: MAC, launched in July 2013, starting to gain traction
Litigation AGO’s lawsuits against Deutsche Bank and Credit Suisse are promising
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Assured Guaranty (AGO) Volatility is no stranger here either
Patience required: Economic value is far more stable and is generally increasing; headlines will likely continue to fuel volatility
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MBIA (MBI) MBIA somehow avoided bankruptcy, but it’s still overleveraged
MBI: MBIA Inc. (MBI, or HoldCo) owns MBIA Insurance Corp (Opco), which was subject to a controversial NY state insurance commissioner ruling and is effectively dead, and National Public Finance Guarantee Corp (“National”)
National: Currently single-A and seeking upgrade to double-A so as to resume writing muni insurance – it has been dormant for five years – with its $350-$400mn of capital cushion
HoldCo is overleveraged: Liquidity is OK, but $2,200mn of Holdco debt will get paid down with cash flow; management targeting a 40% reduction over 4-5 years
Surplus notes: Sub debt of OpCo; very volatile, for good reason; OpCo cash flow will be used to delever, limiting any cash/capital flexibility
Commutations: Opco still has $837mn of triple-B or worse CMBS net exposure, some or all of which could be commuted
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Anabatic Fund, L.P.
Other Resources Insurance is a unique industry, and bond insurance especially so
SEC and statutory filings: There is no substitute for original-source filings, and if you can’t understand the language, concepts and numbers, it’s not worth even considering an investment
BTIG Bond Insurance Panel: A good discussion of the sector featuring senior management from AGO and MBI*
“Financial Guarantors and the 2007-2009 credit crisis”: A working paper by Bergstresser, Cohen and Shenai †
NAIC: National Assoc. of Insurance Commissioners (http://www.naic.org/) – understanding the regulators is crucial
AFGI: Assoc. of Financial Guaranty Insurers (http://www.afgi.org/)
* Email me for a copy if you can’t find it † http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1571627
37
Anabatic Fund, L.P.
Appendix
Contact Information
Philip C. Ordway Principal & Portfolio Manager Anabatic Fund, LP 71 South Wacker Drive, Suite 3495 Chicago, Illinois 60606 T: (312) 416-4225 E:
[email protected]
38
SMALL-CAP INVESTING SUMMIT 2014 FEBRARY 12, 2014
Bob Robotti President & CEO
Disclaimer The Firm is not providing investment advice through this material. This presentation is provided for informational purpose only as an illustration of the firm’s investment philosophy and shall not be considered investment advice or a recommendation or solicitation to buy or sell any securities discussed herein. As of the date of this presentation the firm continues to own the securities discussed herein. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Robotti & Company Advisors, LLC or its affiliates may engage in securities transactions that are inconsistent with this communication and may have long or short positions in such securities. The information and any opinions contained herein are as of the date of this material, and the firm does not undertake any obligation to update them. Information contained in this presentation has been obtained from sources which we believe to be reliable, but we do not make any representation as to its accuracy or its completeness and it should not be relied on as such. This material does not take into account individual client circumstances, objectives, or needs and is not intended as a recommendation to any person who is not a client of the firm. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. Robotti & Company Advisors, LLC does not provide tax advice. Investors should seek tax advice based on their particular circumstances from an independent tax advisor. In reaching a determination as to the appropriateness of any proposed transaction or strategy, clients should undertake a thorough independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their particular circumstances and make their own independent decisions. 2
About Robotti & Company • Established in 1983 by Robert Robotti. • Robotti & Company Advisors manages internal and external capital in separately managed accounts and several private partnerships. • We believe that market prices of securities do not necessarily indicate their true economic worth. Guided by this philosophy, our analysts research and identify equities selling at significant discounts to their “intrinsic value.” • Our niche is small-to-mid capitalization equities of misunderstood, neglected, or out-of-favor companies around the world. 3
Behavioral Edge Forms Our Foundation Behavioral Edge We take a longer-term view and have the ability to tolerate losing money before we make it. Leads Us To
Analytical Edge
Informational Edge
Within the context of a longer-term perspective and 30+ years of experience, we have the ability to develop a different conclusion than that of the market.
Our network of industry relationships, focus on deep primary research, and experience serving on company boards, provides us with more pieces for building our information mosaic.
Our behavioral edge comes from our ability to tolerate losing money before we make it. As a result, our investment process concentrates on understanding the long-term normalized earning power of a business well before the market gains interest. 4
Select Investment Themes Z Industries facing significant near-term headwinds / “unknowns.” Individual companies that are certainly not immune to the industry-wide issues and may even have more serious complications. Large insider-ownership – managers who ‘eat their own cooking.’ The dynamics are in place for very long runways of growth. 5
LSB Industries, Inc. (NYSE: LXU) Company Background
Market Capitalization (USD mm as of 2/10/14)
•
LSB Industries was formed in 1968 and is headquartered in Oklahoma City, OK.
•
The company operates two primary segments: (1) Chemical, and (2) Climate Control.
•
The chemical business (63% of revenue) manufactures and sells nitrogen based chemicals.
•
The climate control business (35% of revenue) manufactures and sells a broad range of HVAC and is a leader in the geothermal & water source heat pump market.
Price Shares Market Cap Long-Term Debt Preferred Shares Cash LT Cash & Equiv Enterprise Value
3 Year Price Chart
$32.33 23.6 $763.0 468.4 3.0 139.7 280.0 $814.8
Valuation Summary ($ mm) Revenue ev/ revenue EBITDA ev/ebitda Diluted EPS p/e
2011 805.3 1.0x 155.5 5.2x $3.80 8.5x
2012 759.0 1.0x 116.9 7.0 $2.61 12.4x
2013E 707.0 1.0x 68.0 12.0 $0.82 39.5x
2014E 800.0 1.0x 145.0 5.6x $2.76 11.7x
Trading Summary 52 Week High / Low: Avg Daily Volume: Listing Exchange: Analyst Coverage:
$42.24 / $28.15 165,720 NYSE 4
Source: Capital IQ, Wall Street Consensus Estimates, Company Filings
6
Investment Highlights Domestic leader in two separate niche businesses Chemical segment has not demonstrated its true earning power • Several operational issues have weighed on recent earnings • Management has opportunistically grown this business
Climate control segment positioned for cyclical recovery • Weak residential and commercial real estate markets • Consistent revenue / margins even at low utilization rates in recent trough
Management team with significant ownership and a history of creating shareholder value We believe shares trade at a 50% - 100% discount to intrinsic value • Recent developments have forced management to address operational issues • Chemical segment is poised to take advantage of a long-term feedstock advantage • Climate control segment is poised to benefit from a rebound in residential and commercial construction 7
Background LSB operates two primary segments: Chemical Segment: Manufactures and sells nitrogen based chemicals to North American agricultural, mining and industrial industries. Climate Control Segment: Manufactures and sells a broad range of HVAC products to commercial, institutional, and residential new construction, renovation and replacement with a particular focus on geothermal and water source heat pumps. LSB Historical Sales Mix 100%
Chemical
Climate Control
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: LSB Q3 2013 Presentation, Company Financials
8
Chemical Segment • Manufactures and sells nitrogen based chemicals to North American agricultural, mining and industrial industries. • Leading supplier of urea ammonium nitrate (UAN) and ammonium nitrate (AN) fertilizers in key markets. • Leading merchant marketer of nitric acid in the U.S. • Nitrogen is required for most crops to grow – corn, soybeans, wheat, forage.
Source: LSB Q2 2013 Presentation
9
Chemical Markets Agriculture (46%) UAN, Ammonium Nitrate HD Prills, Anhydrous Ammonia
Industrial (34%)
Chemical Business
Nitric Acid, Mixed Acids, Concentrated Nitric Acid, Sulfuric Acid, Anhydrous Acid, Diesel Exhaust Fluid (DEF)
Uses include: High nitrogen fertilizer for corn and other crops, varied concentration based on end use
Uses include: Specialty fibers, nitrocellulose, gaskets, crop chemicals, mining products, metal treatment, nitric acid commercial blends, semi-conductor industry, air emission abatement in power plants, diesel fuel additives, and others
Mining (20%) Ammonium Nitrate (LD Prills and solutions), and Specialty E2 Ammonium Nitrate Source: Company Financial Statements
Uses Include; Specialty emulsions for mining applications, surface mining, quarries, construction
10
Domestic Capacity
11
Demand Drivers: Agriculture
Source: LSB Q2 2013 Presentation
12
Natural Gas Feedstock Advantage
13
Domestic Fertilizer Capacity Growth
14
Cost-Plus Sales Agreements
Source: LSB Q2 2013 Presentation
15
Chemical Facilities El Dorado, AK
Cherokee, AL
• 150 acre, multi-product facility located on a 1,400 acre site
• Operates a 160 acre, multi-product facility on a 1,300 acre site located on the bank of the Tennessee River in Cherokee
• Produces high density ammonium nitrate (AN) for agricultural markets and regular nitric acid, concentrated nitric acid, mixed (nitrating) acids, sulfuric acid, and ammonium nitrate solutions for industrial markets • Products are distributed by truck or rail through third-party distributors, wholesalers, and 17 company owned retailers in TX, TN, and MI
• Produces urea ammonium nitrate (UAN), urea and nitrate for agricultural markets and nitric acid, ammonium nitrate solutions, anhydrous ammonia, diesel exhaust fluid (DEF) and carbon dioxide for industrial markets • Products are distributed by truck, rail, pipeline, or barge
• Feedstock: Ammonia (delivered by pipeline)
• Feedstock: Natural gas (delivered by pipeline)
Baytown, TX
Pryor, OK
• Operates one of the newest and most technologically advanced nitric acid plants in North America located within the Bayer Material Science complex
• Operates a 47 acre, multi-product facility on a 104 acre site
• Produces regular nitric acid used for the polyurethane, nylon fiber and plastics industries.
• Produces anhydrous ammonia, urea, and urea ammonium nitrate (UAN) for agricultural markets and nitric acid, and carbon dioxide for industrial markets
• Products are distributed by truck or rail
• Products are distributed by truck or rail
• Feedstock: Anhydrous ammonia (delivered by pipeline)
• Feedstock: Natural gas (delivered by pipeline)
Source: Company Financials
16
El Dorado and Cherokee Facilities Timeline El Dorado June 2012
May 2012
•
• • •
Reactor Explosion Destroyed DSN concentrated nitric acid plant Damaged three other nitric acid plants Damaged sulfuric acid plant Damaged high density AN plant
•
High density AN plant back online with limited capacity due to feedstock shortage
December 2012
July 2012 •
•
One of the three nitric acid plants back online
•
•
Two other nitric acid plants back online Entered agreement for new 1,100 ton nitric acid plant to replace DSN concentrated nitric acid plant Sulfuric acid plant back online
August 2013 Expansion Plan Entered into agreement with SAIC to build: • A 375,000 ton/year ammonia plant • Cost: $250-300m • Completed mid 2015
November 2012
Pipe rupture caused damage to heat exchanger in ammonia plant
Expansion Plan Entered into agreement with SAIC to build: • A 360,000 ton/year nitric acid plant • A 40,000 ton/year nitric acid concentrator plant • Cost: $120m • Completed mid 2015
May 2013
Pipe Rupture •
November 2013
Restart •
Ammonia production resumed
Cherokee Source: Company Financials
17
Pryor Facility Timeline January 2010
May 2011
Initial Ammonia Production • •
Production of anhydrous ammonia commenced Production of UAN has not yet started
Unplanned Maintenance • •
A 6,500 HP compressor motor had to be repaired Nitric acid plant needed repairs February 2012
October 2010 Restart • Pryor restarts production following June shutdown
•
June 2010
June 2011
Pipe failure
Restart
A pipe failure caused a fire that damaged the primary reformer
• •
Repairs completed on the compressor Nitric plant’s maintenance delayed to July
Source: Company Financials
Improvements •
•
Ammonia plant resumed production Urea plant still under repair
•
•
Unplanned Maintenance
•
•
Increased ammonia production levels
March 2012
•
Unplanned Maintenance
Restart •
Excess heat in ammonia plant caused a shutdown During shutdown the Urea plant underwent maintenance to repair a break in the reactor
October 2013
November 2012
April 2012
Principal ammonia plant shutdown to repair compressor Replace ammonia converter
Unplanned Maintenance •
Indicated by new diagnostics equipment
December 2013 Restart • Resumed ammonia production
April 2013 Restart Ammonia converter replaced & plant back online
July 2012
January 2014 Delay •
Additional repairs required
Restart •
Urea plant completed and UAN production back online
18
Capital Expenditure Plans
“…the capital investments in the El Dorado facility, once complete, are expected to contribute approximately $90 to $100 million of incremental annual EBITDA, based on anticipated market conditions.”
Source: LSB Q3 2013 Presentation, LSB Letter to Shareholders 1/21/2014 19
Climate Control Segment • Manufactures and sells a broad range of HVAC products to commercial, institutional, and residential new construction, renovation and replacement with a particular focus on geothermal and water source heat pumps. • Leading market share in core niche products • Leader in geothermal HVAC technology. • Thousands of premier installations and over four million units installed.
Source: LSB Q3 2013 Presentation, Company Financials
20
Climate Control Segment
$350
Climate Control: Sales Mix
Sales (in millions)
$300 $250
Heat Pumps
$200
Fan Coils
$150
Other
$100 $50 $0 2003
2004
2005
2006
Source: LSB Q3 2013 Presentation, Company Financials
2007
2008
2009
2010
2011
2012
21
Climate Control Value Proposition
Source: LSB Q3 2013 Presentation, Company Financials`
22
Demand Drivers Commercial Starts
Residential Starts
*LT Mean from 1976
1600
1.20
1400
*LT Mean from 1993
0.6 0.5
1200
1.00
0.4
1000
0.80 0.60 0.40
800
0.3
600
0.2
400
0.20
200
0.00
0
2012
(billion square feet)
*LT Mean from 1959
1.40
2011
Hotel Starts
(millions)
(billion square feet)
2013
LT Mean
0.1 0 2011 2012 2013
Water Source Heat Pumps 43%
*Data Taken from USG May 22,2013 presentation, U.S. Census data, McGraw-Hill, LSB financials, and Robotti &Company estimates
LT Mean
2011 2012 2013
LT Mean
Hydronic fan coils 21% Other HVAC Products 18% GHP 18%
23
Heat Pump Market Share $800 AHRI Market Estimate $700
LSB Market Share
$600 $500 $400 49% $300
46%
$200 43%
47%
44% 44%
38%
41% 40%
45%
$100 $0
*Data Taken from LSB presentations and annual reports and AHRI historical data
24
Climate Control Orders, Sales & Backlog
Source: LSB Q3 2013 Presentation, Company Financials
25
Management • LSB was founded by current CEO and Chairman Jack Golsen in 1969. • Barry Golsen (Jack’s son) currently serves as a director (Vice Chairman), President and Chief Operating Officer. Barry joined the company in 1978. • Jack, Barry, Steven Golson (COO, Climate Control and Jack’s son) and family controlled investment vehicle SBL Corp own approximately 12.7% of LSB’s outstanding shares. • The board of directors and management team owns roughly 19% of the outstanding shares, including convertible preferred stock. Source: Capital IQ, LSB Letter to Shareholders 1/21/2014 Jack and Barry Golsen (source: www.newsok.com)
26
LSB Stock Price / Tangible Book Value LSB Industries Price Chart 1/1/2008 - Present
CAGR ~8%
$39.98 (1/1/2014)
$18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 –
Tangible Book Value Per Share
CAGR ~26%
2008
2009
Source: Capital IQ, Robotti & Company Calculations
2010
2011
2012
TTM 27
Earning Power Chemical:
Climate Control:
Source: LSB Q2 2013 Presentation, Company Financials
28
Capital Expenditure Plan
Source: LSB Q3 2013 Presentation, Company Financials
29
Recent Letters Engine Capital Open Letter to the Board of LSB
http://finance.yahoo.com/news/engine-capital-issues-open-letter-130000424.html
LSB Open Letter to Shareholders
http://www.sec.gov/Archives/edgar/data/60714/000089882214000037/lettertoshareholders.htm
30
Disclosure: Ownership Information Disclosures
LSB Industries, Inc. (NYSE: LXU)
Robert Robotti and/or members of their households have a financial interest in the following securities
Yes
Robotti & Company or its affiliates beneficially own common equity of the following securities
Yes
Robotti & Company or its affiliates beneficially own 1% or more of any class of common equity of the following securities
Yes
Robert Robotti serves as a Director or Officer or Advisory Board Member of the following securities.
No
As of the date of this presentation, Robotti & Company Advisors, LLC and/or its affiliates owns shares of LSB Industries and does not have any current intention to exit these positions. Companies have been chosen solely as a case study to illustrate the investment process and approach of Robotti & Company Advisors, LLC. This information should not be interpreted as a performance record or as an indication of future performance results. 31
6 East 43rd Street 23rd Floor New York, NY 10017
QUESTIONS Phone: (888) 762 - 6884
[email protected] www.robotti.com
Small-Cap Investing Summit 2014 ValueConferences.com February 2014
Disclaimer This document, its exhibits and attachments are for discussion purposes only and are intended to provide a general introduction to Boyles Fund I, LP and an investment idea. This is not a solicitation to invest in any investment fund, program, products or investment. Such solicitation may only be made by the appropriate offering document or disclosure statement. Only the confidential offering circular or private offering memorandum of Boyles Fund I, LP will make such an offer or solicitation. This document does not provide all information material to an investor’s decision to invest in Boyles Fund I, LP, including, but not limited to, risk factors. For more information, please refer to the company’s confidential offering circular or private offering memorandum and read it carefully before you invest. Funds managed by Boyles Asset Management own shares in the investment idea presented herein. It may in the future buy or sell shares of the investment idea and is under no obligation to update its activities. The information included in this document is believed to be accurate. However, nothing is guaranteed nor warranted. Past performance is not necessarily indicative of future results. Subscription for a shareholder interest in the fund must be made solely on the basis of the information contained in the confidential offering memorandum issued by the fund. It is recommended that any person wishing to make an investment in Boyles Fund I, LP should seek the advice of their independent taxation, legal, and other advisors regarding the suitability and consequences of an investment in the company. Neither Boyles Fund I, LP, nor any of its affiliates, employees and representatives assume any responsibility or warranty, expressed or implied, as to the omissions from this document or any other written or oral communications transmitted or made available to the recipient in the course of their evaluation of the fund. An investment in Boyles Fund I, LP involves risks and is suitable only for those persons who can bear the economic risk of the loss of their investment and who have limited need for liquidity in their investment. There can be no assurance that Boyles Fund I, LP will achieve its investment objective. An investment with Boyles Fund I, LP carries with it the inherent risks associated with investments in U.S. and foreign securities, as well as additional risks. Disclosure relating to the past performance of Boyles Fund I, LP’s management is for illustration purposes only. It should not be assumed that investors in Boyles Fund I, LP will experience returns, if any, comparable to those previously experienced by Boyles Fund I, LP’s management. The performance information provided in this brochure, if any, should not be taken as any indication of the future performance of Boyles Fund I, LP.
Presentation Outline Boyles Introduction Zicom Group Introduction and Summary Thesis Financial and Valuation Overview Giok Lak Sim and Family Company History Segments Overview Cyclical Tailwind Core Segment Notes Acquisition Philosophy Disruptive Technologies Recent Profit Warning Other Notes Risk Discussion Conclusion Appendix
Boyles Introduction Boyles Asset Management, LLC was formed in April 2013 and Boyles Fund I, LP was launched on May 10th, 2013.
BAM Managing Members are Matthew Miller and Joseph Koster. Previously, both managing members, as employees of Chanticleer Advisors, co-managed Chanticleer Investors II since its inception in 2007. Boyles Fund I was seeded with $25 mm by a sophisticated institutional investor with a multiyear commitment. Chanticleer Investors II was merged into Boyles Fund I. Current AUM is $29 mm.
Boyles Investment Philosophy Overview
Patient Long-Term Approach Concentrated Portfolio Small and Micro-Cap Focus
International Appreciation for Cash Research Oriented Methodology
Zicom Introduction – (ASX: ZGL) Zicom is a small industrial conglomerate (with a few emerging technology businesses) that is traded in Australia and headquartered in Singapore. The company is managed by an owner operator named Giok Lak Sim who owns approximately 36%.
Summary Thesis An investment in Zicom Group is a cheap opportunity to partner with a committed owner operator. Shareholders have the opportunity to benefit from a strong balance sheet, a late cycle cyclical upturn in one its primary markets (offshore marine, oil & gas) and perhaps most importantly, the company’s multi-year investments in what it labels “disruptive technologies”. We view these disruptive technologies as nearly free call options on significant new business opportunities. The shares trade at 72% of tangible book value, 3.1x EV/EBITDA (FY ‘13) and 6.3x adjusted net income (FY ‘13 of A$7.3 million). The shares yield 4.65%, which is paid out of conduit foreign income which is not subject to Australian withholding tax.
Financial and Valuation Overview Company Name:
Zicom Group Limited
Ticker:
ZGL
Country:
Australia
Share Price:
$0.215
Shares Outstanding:
214,751,830
Market Cap:
$46,171,643
Net Debt:
($6,140,000)
Minority Interest:
$910,000
Enterprise Value:
$40,941,643
Dividend Yield:
4.65%
Total Equity:
$76,345,646
P/B:
0.60 x
Tangible Equity:
$64,069,878
P/TBV:
0.72 x
Net Current Assets:
$31,692,843
P/NCA:
1.46 x
FY '13 NI:
$6,459,704
P/E:
7.15 x
6.20 x (net of cash)
FY '13 NOPAT:
$7,324,909
P/NOPAT:
6.30 x
5.47 x (net of cash)
FY '13 EBITDA:
$13,152,362
EV/EBITDA:
3.11 x
Giok Lak Sim and Family Zicom Group is a Family Business
Giok Lak Sim (67) founded the business in the late 70’s Two current sons are involved in the business Kok Hwee Sim and Kok Yew Sim (both educated in the US) We suspect Kok Hwee will take over for his father at some point Three brothers are involved in the business
Juat Koon Sim was founder of Sys-Mac, now owned by Zicom Sim Family Believes in Zicom Shares Giok Lak Sim owns 77.5 mm shares or approximately 36% of the shares Since 2007, Giok Lak Sim has frozen his base salary at S$432,000
Since 2008, Giok Lak Sim has made significant investments in shares: Purchased 10.8 mm shares for A$2.2 mm (about A$.20 per share)(including through SNS Holdings); S$2.6 mm in base compensation during period Exercised his option to acquire 4.5 mm shares in lieu of cash bonuses (entitled to up to 50%) Collectively the brothers and sons own approximately 14%
Company History 1978 – GL Sim leaves accounting profession to establish Zicom (became Zicom Holdings) 1990’s – Zicom builds stake in Zicom Australia (became Zicom Group Limited) 1996 – Zicom makes first acquisition (in Australia) 2005 – Zicom acquires Foundation Associated Engineering
2006 – Zicom Australia completes rights offering at A$.16 2006 – Zicom Australia changes name to Zicom Group Limited (ZGL) 2006 – Zicom Group acquires Zicom Holdings in merger 2006 – ZGL acquires 51% stake in Sys-Mac Automation Engineering 2007 – ZGL completes private placement at A$.38 per share 2008 – ZGL completes rights offering at A$.20 per share 2008 – ZGL acquires remaining 49% stake in Sys-Mac Automation Engineering 2010 – ZGL makes series of investments in “emerging technologies” 2013 – ZGL (Sys-Mac) partners with SPRING Singapore to develop medical IP
Segments Overview Offshore Marine, Oil & Gas Machinery
Construction Equipment
deck equipment (primarily winches in support of O&G exploration / infrastructure) fluid regulating and metering stations Offshore oil rig construction a leading indicator
Transit concrete mixers (that are affixed to concrete delivery trucks) Foundation equipment Manufacturing and rental business
Precision Engineering and Automation
Industrial and Mobile Hydraulics
Equipment used in production lines System design, contract manufacturing, precision machining Semi-conductors, biomedical products, electronic equipment, consumer electronics
Drive systems for harvesting machines (mostly in Thailand) By far smallest business
Segments Overview
Segments Overview FY '13 % of Revenue 3%
35%
29%
Offshore Marine, Oil & Gas Machinery Construction Equipment Precision Engineering & Automation
33%
Industrial & Mobile Hydraulics
Segments Overview Fiscal Year Revenue 160,000,000 140,000,000
Offshore Marine, Oil & Gas Machinery
120,000,000
Construction Equipment
100,000,000 80,000,000
Precision Engineering & Automation
60,000,000 40,000,000
Industrial & Mobile Hydraulics
20,000,000
Total Segment Revenue
0
2009
2010
2011
2012
2013
Segments Overview FY '13 % of Total Segment Operating Income 8%
21%
Offshore Marine, Oil & Gas Machinery 44%
Construction Equipment Precision Engineering & Automation
27%
Industrial & Mobile Hydraulics
Segments Overview 8 Year Average Segment Operating Margin 35.00% 30.00% 25.00% 20.00%
26.53% 20.30%
15.00%
7.78%
10.00%
5.18%
5.00%
0.00%
Offshore Marine, Oil & Gas Machinery
Construction Equipment
Precision Engineering & Automation
Industrial & Mobile Hydraulics
Segments Overview FY '13 % of Revenue 2% 3%
6%
Australia
14%
Malaysia 10%
22%
Singapore China United States Thailand
14%
29%
Bangledesh Others
Cyclical Tailwind Confirmed Orders Sequential Change Change Over Prior Year 30-Jun-07 31-Dec-07 30-Jun-08 31-Dec-08 30-Jun-09 31-Dec-09 30-Jun-10 31-Dec-10 30-Jun-11 31-Dec-11 30-Jun-12 31-Dec-12 30-Jun-13 31-Dec-13
84.5 159.0 103.4 95.7 66.8 68.9 73.0 83.2 63.0 41.6 51.5 43.2 56.0 80.6
88.17% -34.97% -7.45% -30.20% 3.14% 5.95% 13.97% -24.28% -33.97% 23.80% -16.12% 29.63% 43.93%
22.37% -39.81% -35.40% -28.00% 9.28% 20.75% -13.70% -50.00% -18.25% 3.85% 8.74% 86.57%
“Demand for offshore vessels generally precedes demand for our deck machinery by 1-2 years.” - Zicom Group
Core Segment Notes Prior peak offshore marine, oil & gas segment EBIT was A$15.5 million in 2009 versus $4.5 million in ’13.
Construction equipment has been the weakest segment as of late. I believe this segment has a fair bit of exposure to Australian construction. Australian business declined 29.3% in ’13 and revenue was down 30.8%. Precision engineering has been one area of growth over the last five years, as revenue has grown from A$8.1 mm in ’09 to $35.2 mm in ’13. The segment produced $2.2 mm in income in ’13 versus a loss in ’09. ROE has averaged 15.75% and tangible book value has compounded at 13.9% over last 5 years. Last couple years have been a bit softer as the balance sheet has become less levered, the company has invested in the disruptive businesses and its two core businesses have been softer.
Acquisition Philosophy Giok Lak Sim Acquisition Philosophy: 1) Takes the same approach as the Kennedy quote “ask not what your country can do for you, ask what you can do for your country”
If Zicom “cannot add value it becomes a one-way street and the relationship isn’t sustainable”
2) Has to be synergistic with Zicom capabilities
3) Start-up investments have to present “disruptive technologies” 4) Zicom has to have enough internal resources to finance acquisitions or fund investments up to the objectives they have set for it 5) Zicom has a general policy, though not set in stone, of not investing more than 10% of net worth in an acquisition or investment 6) Acquisitions are not just about numbers, you have to spend time studying the character of a person “people create numbers”
Disruptive Technologies Orion Systems Integration (S$3.2 mm)
Biobot Surgical (S$4.3 mm)
Solutions and equipment for flip chip microelectronic assemblies; new process Would be sold into semi-conductor manufacturers and assembly companies Driven by smaller and faster devices; potentially replacing wire bonding Been negotiating first large order ($10 mm)
Curiox Biosystems (S$5.6 mm)
iPtec (S$2.0 mm)
Wall-less plate and washing machine for use in assays (drug research / discovery process) Reduces costs in bioassays Will be sold to pharmaceutical and biotech Accepted “as breakthrough” by 10 of top 25 pharma/biotech companies in US / EU
Service company offering medical IP translation services (prototyping, design, regulatory consulting, manufacturing) SPRING Singapore grant; partnered with SingHealth Will provide potential platform for future investments in medical technologies
Surgical robot 1st targeting prostate biopsies Undergone multi-year live trials at SGH Reduces infections and improves accuracy Received regulatory approval in US, EU, Australia, Singapore, Taiwan Been negotiating international hospital partnerships
Disruptive Technologies This series of investments are clearly venture capital in nature and are focused on markets with significant barriers to entry. Valuing these investments is admittedly a near impossible task. We don’t believe we are paying for the option value of these businesses. While it has been a long time coming collectively these investments appear meaningfully closer to generating revenue. A total approximate investment of S$15 mm. If we assume a 20% return after-tax on the collective investments, the incremental NI potential is approximately A$3.5 mm.
Recent Profit Warning On January 17 Zicom Reported a Significant Profit Warning
ASX:ZGL - Share Pricing 0.33 0.31 0.29 0.27
0.25 0.23 0.21 0.19 0.17
0.15 2/5/2013 2/19/2013 3/5/2013 3/19/2013 4/2/2013 4/16/2013 4/30/2013 5/14/2013 5/28/2013 6/11/2013 6/25/2013 7/9/2013 7/23/2013 8/6/2013 8/20/2013 9/3/2013 9/17/2013 10/1/2013 10/15/2013 10/29/2013 11/12/2013 11/26/2013 12/10/2013 12/24/2013 1/7/2014 1/21/2014 2/4/2014
H1 revenue expected to be down 14.3% H1 earnings expected to be down 76.2% Cash at S$25 mm and confirmed orders S$80.6 mm Delays in disruptive technology business, slow marine and precision engineering businesses “Based on confirmed orders in hand, the slack is expected to pick up in the second half of the year and we are hopeful of maintaining profits of the full year at the same level as the previous year. Barring no unforeseen circumstances, the results could be improved." Our Take on the Profit Warning
Obviously not a great half As expected cash generation was quite strong in the half (nearly A$9 mm net cash now) Given confirmed orders for H2 and prior H2 performances, company comments that full-year earnings performance may match or exceed FY ‘13 is reasonable
Other Notes Enviable balance sheet. A$19 million in cash and A$13 million of consolidated debt. Well positioned to invest further in its businesses or make further acquisitions. Based on recent trading statement this has improved further. While traded in Australia, a relatively small portion of the business is from Australia. Dividends are paid out of foreign conduit income and are not subject to withhold. While the A$ has weakened against the US$ and could be a risk going forward, the A$ has also been weak against the S$ which provides some benefit in terms of translation. Given the increased volatility in exchange rates in ’13, the company recorded an exchange loss of A$2.7 million for the year. While the company was repurchasing shares a few years ago, the company, unfortunately, began to be frustrated that the market didn’t really respond to the repurchases and so it has failed to continue to repurchase shares at what I deem, and even management seems to deem, as attractive prices.
Risk Discussion Late cyclical pick-up in marine offshore, oil & gas orders does not materialize (or to the degree hoped). Declines in construction related activity offset potential gains in the marine offshore, oil & gas business. Exchange rate volatility continues to hamper the business. Investments in disruptive technologies do not begin to bear fruit and/or they become a further drag on profitability. Further value destroying investments are made in this area. Management knows something we don’t… insider purchases have tended to come after the announcement of earnings in two time periods each year. This year, insiders have been noticeably silent in terms of purchases after the release of full year ’13 results. The family nature of the business is or becomes an impediment to commercial success and progress. The family may not be entirely focused on shareholder value. Management transition issues arise.
Conclusion ZGL is cheap on current earnings, average earnings and book value. ZGL provides an opportunity to partner with a committed owner operator. ZGL is witnessing a late-cycle, cyclical upturn in a core businesses. ZGL’s recent investments may be positioning the company toward more high quality, high growth, less cyclical businesses. ZGL’s balance investment.
provides
significant
further
opportunities
for
Matthew Miller Managing Member (704) 370-1704
[email protected]
Joseph Koster Managing Member (704) 370-1705
[email protected]
Thank You Boyles Asset Management, LLC 550 South Tryon Street ▪ Suite 3500 ▪ Charlotte, NC 28202 www.boylesasset.com
Appendix 30-Jun-09
30-Jun-10
30-Jun-11
30-Jun-12
30-Jun-13
77,856,245
46,889,081
58,334,220
34,353,546
42,109,000
-39.77%
24.41%
-41.11%
22.58%
57.32%
43.10%
39.57%
26.46%
34.95%
46,860,029
42,858,869
55,229,048
57,389,595
39,720,000
-8.54%
28.86%
3.91%
-30.79%
34.50%
39.40%
37.46%
44.20%
32.97%
8,160,251
15,074,437
30,649,342
34,895,084
35,211,000
84.73%
103.32%
13.85%
0.91%
6.01%
13.86%
20.79%
26.88%
29.23%
2,958,593
3,966,828
3,207,445
3,188,064
3,428,000
34.08%
-19.14%
-0.60%
7.53%
3.65%
2.18%
2.46%
2.85%
Segment Revenue: Offshore Marine, Oil & Gas Machinery Growth % of Total Construction Equipment Growth % of Total Precision Engineering & Automation Growth % of Total Industrial & Mobile Hydraulics Growth % of Total Total Segment Revenue
2.18%
135,835,118 108,789,215 147,420,055 129,826,289 120,468,000
Appendix 30-Jun-09
30-Jun-10
30-Jun-11
30-Jun-12
30-Jun-13
15,448,762
9,538,410
12,023,185
1,915,511
4,540,000
-38.26%
26.05%
-84.07%
137.01%
95.95%
65.06%
55.70%
16.37%
43.89%
217,424
3,477,140
7,103,321
6,394,332
2,759,000
1499.24%
104.29%
-9.98%
-56.85%
1.35%
23.72%
32.91%
54.65%
26.67%
(483,899)
623,636
1,721,424
2,721,992
2,187,000
-228.88%
176.03%
58.12%
-19.65%
-3.01%
4.25%
7.97%
23.27%
21.14%
918,785
1,022,028
737,865
667,978
859,000
11.24%
-27.80%
-9.47%
28.60%
5.71%
6.97%
3.42%
5.71%
8.30%
16,101,072
14,661,214
21,585,795
11,699,813
10,345,000
Segment Results: Offshore Marine, Oil & Gas Machinery Growth % of Total Construction Equipment Growth % of Total Precision Engineering & Automation Growth % of Total Industrial & Mobile Hydraulics Growth % of Total Total Segment Results
Appendix 30-Jun-09
30-Jun-10
30-Jun-11
30-Jun-12
30-Jun-13
22,171,462
18,446,641
22,590,318
23,322,000
16,497,000
-31.19%
-16.80%
22.46%
3.24%
-29.26%
16.43%
17.05%
15.35%
17.85%
13.76%
28,914,823
10,377,514
16,222,323
12,753,000
11,730,000
Growth
55.72%
-64.11%
56.32%
-21.39%
-8.02%
% of Total
21.43%
9.59%
11.02%
9.76%
9.79%
Singapore
44,518,414
33,801,743
52,947,048
37,328,000
35,184,000
Growth
-12.45%
-24.07%
56.64%
-29.50%
-5.74%
33.00%
31.25%
35.97%
28.57%
29.36%
Segment Revenue: Australia Growth % of Total Malaysia
% of Total China
14,186,704
20,491,565
21,546,061
6,988,000
17,087,000
Growth
61.70%
44.44%
5.15%
-67.57%
144.52%
% of Total
10.51%
18.94%
14.64%
5.35%
14.26%
United States
10,483,968
9,834,929
14,660,344
29,101,000
25,948,000
213.93%
-6.19%
49.06%
98.50%
-10.83%
7.77%
9.09%
9.96%
22.27%
21.65%
1,788,771
2,873,892
3,056,916
6,849,000
6,944,000 1.39%
Growth % of Total Thailand Growth % of Total Bangledesh
60.66%
6.37%
124.05%
1.33%
2.66%
2.08%
5.24%
5.79%
0
106,110
8,335,636
8,088,000
2,227,000
# DIV/0!
-72.47%
Growth % of Total Others
7755.66%
-2.97%
0.00%
0.10%
5.66%
6.19%
1.86%
12,860,165
12,245,411
7,835,871
6,219,000
4,232,000
Growth
9.29%
-4.78%
-36.01%
-20.63%
-31.95%
% of Total
9.53%
11.32%
5.32%
4.76%
3.53%
Total Country Segment Revenue
134,924,307 108,177,805 147,194,517 130,648,000 119,849,000
Appendix 30-Jun-07 31-Dec-07 30-Jun-08 31-Dec-08 30-Jun-09 31-Dec-09 30-Jun-10 31-Dec-10 30-Jun-11 31-Dec-11 30-Jun-12 31-Dec-12 30-Jun-13 31-Dec-13 Confirmed Orders
84.5
159.0
103.4
95.7
66.8
68.9
73.0
83.2
63.0
41.6
51.5
43.2
56.0
Offshore Marine, Oil & Gas
61.8
106.1
94.0
90.5
56.6
58.3
59.5
59.6
37.2
21.6
23.7
18.9
37.0
Construction Equipment
12.2
39.4
6.8
1.2
5.5
4.3
5.6
4.9
6.5
5.7
5.4
13.9
12.3
Precision Engineering
4.5
11.0
2.2
3.9
4.3
6.0
7.2
18.3
19.3
14.2
22.2
10.2
6.5
Industrial and Mobile Hydraulics
6.0
2.5
0.4
0.1
0.5
0.3
0.7
0.4
0.2
0.1
0.2
0.2
0.2
Next Fiscal Year
78.0
78.6
50.1
70.0
53.0
51.5
56.0
After Fiscal Year
6.5
24.8
16.7
3.0
10.0
0.0
0.0
Current Fiscal Half Year After Current Fiscal Half Year
40.5 159.0
34.7
55.2
53.7
34.2
32.4
29.5
9.2
80.6
43.2
52.3
0
28.3
Change in Confirmed Orders (Sequentially): Confirmed Orders Offshore Marine, Oil & Gas
88.17%
-34.97%
-7.45%
-30.20%
3.14%
5.95%
13.97%
-24.28%
-33.97%
23.80%
-16.12%
29.63%
71.68%
-11.45%
-3.67%
-37.51%
3.09%
2.06%
0.17%
-37.58%
-41.94%
9.72%
-20.25%
95.77%
Construction Equipment
222.95%
-82.84%
-82.25%
358.33%
-21.82%
30.23%
-12.50%
32.65%
-12.31%
-5.26%
157.41%
-11.51%
Precision Engineering
144.44%
-80.00%
77.27%
10.26%
39.53%
20.00%
154.17%
5.46%
-26.42%
56.34%
-54.05%
-36.27%
Industrial and Mobile Hydraulics
-58.33%
-84.00%
-75.00%
400.00%
-40.00%
133.33%
-42.86%
-50.00%
-50.00%
100.00%
0.00%
0.00%
22.37%
-39.81%
-35.40%
-28.00%
9.28%
20.75%
-13.70%
-50.00%
-18.25%
3.85%
8.74%
43.93%
Change in Confirmed Orders (Prior Year): Confirmed Orders Offshore Marine, Oil & Gas
52.02%
-14.70%
-39.81%
-35.58%
5.22%
2.23%
-37.48%
-63.76%
-36.29%
-12.50%
56.12%
Construction Equipment
-44.59%
-96.95%
-18.64%
258.33%
1.82%
13.95%
16.07%
16.33%
-16.92%
143.86%
127.78%
Precision Engineering
-51.11%
-64.55%
95.45%
53.85%
67.44%
205.00%
168.06%
-22.40%
15.03%
-28.17%
-70.72%
Industrial and Mobile Hydraulics
-93.33%
-96.00%
25.00%
200.00%
40.00%
33.33%
-71.43%
-75.00%
0.00%
100.00%
0.00%
86.57%
Sears Hometown Todd Sullivan: Rand Strategic Partners Feb. 12, 2014
!1
History •
Spun from Sears Holdings in October 2012 via Rights Offering
•
Operates 1,239 locations in 50 states and Puerto Rico
•
Company owns ~15% of locations
•
ESL holds 48% of the outstanding stock
•
Has two segments, Hometown (1,101 locations) and Outlet (131 locations)
•
In August 2013 approved $25M buyback, as of 11/2/2013 $16.6M remain
•
Have repurchased 279K or 1.2% of outstanding shares (as of 11/2/2013). Remaining auth can repurchase and additional 3.4% (at today’s prices)
•
Would expect an additional authorization to replace this one
•
Currently the 4th largest appliance retailer in the US (Sears #1, Lowe’s #2 and Home Depot #3) !2
Locations
!3
Hometown •
925 Sears Hometown Stores—Primarily independently owned stores, predominantly located in smaller communities and offering appliances, lawn and garden equipment, and hardware. Most carry Kenmore, Craftsman, and DieHard, as well as a wide assortment of other national brands.
•
88 Sears Hardware Stores—Carry Craftsman brand tools and lawn and garden equipment, DieHard brand batteries & assortment of other national brands and other home improvement products along with a selection of Kenmore and other national brands of home appliances
•
95 Sears Home Appliance Showrooms—Stores that have a simple, primarily appliance showroom design that are positioned in metropolitan areas.
•
Hometown operates through 926 dealer-operated stores, 154 franchiseeoperated stores, and 28 Company-operated stores (very little difference between dealer/franchise models) !4
Outlet •
Outlet: designed to provide in-store and online access to purchase new, one-of-a-kind, out-of-carton, discontinued, obsolete, used, reconditioned, overstocked and scratched and dented products, across a broad assortment of merchandise categories, including home appliances, apparel, mattresses and lawn and garden equipment at
•
Prices are significantly lower than manufacturers’ suggested retail prices
•
Generally still covered by manufactures warranty
•
Majority are company owned (all were at one point)
•
Began to re-franchise some locations in FY’ 14 !5
Thesis •
Owning SHOS is a play on the dominant brands in their respective categories Craftsmen, Kenmore, Diehard
•
Kenmore and Craftsmen #1 home brand in US. Craftsmen has 2X share of closest competitor
•
20% of all tools sold in US are craftsmen and >100M American’s have a Kenmore appliance
•
Franchise model eliminates largest complaint about “Sears” …management’s retail execution. Lampert’s only involvement is as shareholder. Directors experience comes from from Goldman Sachs, Saks, Orbitz, Union Square Hospitality Group, People of Cosi and Sears Holdings/Sears Canada (among others)
•
It also frees those brands seemingly trapped inside Sears Holdings/Kmart locations
•
Inclusion in “Entrepreneur Magazine Top 500” list (at 141) will increase exposure and Franchisee interest
!6
Thesis •
Low initial investment ($65-$75k) makes franchise very affordable
•
Increase new home construction will increase sales of core brands (Q4 US appliance sales up 11% according to Association of Appliance Manufactures)
•
Household remodeling expected to grow double digits in 2014 (per Harvard Univ. Center for Housing)
•
Kitchen Tune-Up franchise opening within SHOS locations to provide customers additional options and increase foot traffic
•
The continued shrinkage of SHLD’s footprint offers more opportunity for SHOS to enter the then unserved areas. We are already seeing this take place and in fact SHOS has proven 40%-60% sales recapture in SHLD exited markets.
•
An 8,000 SHOS sqft location sells 40-60% same volume as 100,000 sqft Sears/ Kmart box w/o occupancy/labor costs to parent
•
Asset light model allows for continued share repurchases !7
US Demographics •
Hispanics are 17% of US and growing 15% faster than all non-Hispanic groups combined. This growth gab is widening annually
•
>1M Hispanic household formations in 2012 vs 700K decrease in non-Hispanic households
•
Median age of Hispanic pop is 27yrs, vs 37yrs for US (entering prime home buying years)
•
Hispanic households have 2X # of children vs non-Hispanic
•
Why does this matter? Sears spent $56M in ’12 on Hispanic media….and it worked
•
Sears has 26% Hispanic market share, trailing only HD (28%) in outdoor power equipment, 24% (vs HD 27%) in Hand Tools and is #1 at 36% vs HD 12% in major appliances
•
Sears success in this demographic directly translates to SHOS !8
Hispanic Market Share
!9
Sears Has By Far Highest Close Rates
!10
Operations •
SHOS receives commissions from SHLD for specified sales of merchandise made through sears.com & searsoutlet.com, the sale of extended service contracts, delivery and handling services, and relating to the use in stores of credit cards branded with the Sears name. For certain transactions SHOS pays a commission to SHLD.
•
Inventory is owned by SHOS with commissions for sales being paid to franchisees who control day to day operations of their location
•
Inventory is obtained from SHLD at cost for Sears branded items
•
Pay royalties related to sale of products branded with the KENMORE®, CRAFTSMAN®, and DIEHARD® marks
•
Pay fees for participation in Sears Holdings' SHOP YOUR WAY REWARDS® program
•
Agreements with SHLD for logistics, handling, warehouse, and transportation services, the charges for which are based on merchandise inventory units !11
Financials •
Gross Margins 24%-25%
•
SG&A 20%-22%
•
The effect of additional franchisees will be an increase in SG&A dollars (commissions paid come out of here) but costs of sales and occupancy will fall as occupancy costs are now franchisee’s, increasing gross margins
•
As of 2/2013 the company leases 94 locations from SHLD
•
Has $87M outstanding ($157M available) on a 4.25% Senior ABL (used to pay SHLD $100M dividend on separation) and $21M cash !12
FY 2013-14 Comps Skewed •
Why?
•
FY 2013 featured one off events that increased revenues while FY 2014 had some that decreased them
•
SHOS rationalized store footprint post spin in FY 2014, reducing revenues and incurring costs
•
Cost comps from the two years are irrelevant as several non recurring items due to the SHLD separation were not present in FY ‘13.
•
FY 2014-’15 will feature more accurate comps !13
Sales thru 39 weeks (In thousands, dollars)
Net Sales Appliances Lawn and Garden Tools/Paint ! !
Other Total
FY 2013
FY 2014
1,182,949 1,231,089
Diff +48,140
322,089
300,967
-21,122
159,075
149,059
-10,016
158,332
137,969
-20,363
1,822,445 1,819,084 !14
-3,360
Why The Fall? ! •
In 2012 Orchard Supply Hardware filed for Chapter 11, SHOS sold items through their locations. The buyer, Lowe’s terminated the contract upon their purchase of OSH ($1.2M rev impact)
•
FY’ 13 benefitted from tool & law/garden sales surge pre/post Super Storm Sandy
•
The “other” category declined due to the company’s decision to exit electronics sales in Hometown locations. Q4 is the last quarter in which there is significant negative revenue comp impact due to electronics !15
Costs (thru 39 week) FY ’13 vs ‘14 ! •
The spin was completed in Oct, ’12.
•
$SHOS was spun with $400M in inventory
•
As mentioned before FY ’14 featured additional costs that FY ’13 did not, thus skewing comps
•
Thru 39 weeks FY’ 14 SHOS incurred ~$15M of higher costs in SG&A for items not present or only immaterially present in FY ’13.
•
Items are higher cost resulted from additional staffing, home office rent, D&O insurance, commissions to sears.com ($1M), and other costs related to being independent
•
For Gross margin they incurred an additional $2.2M of additional occupancy costs in FY ’14
•
Additional $1.8M interest expense due to ABL taken to pay SHLD dividend posit spin in FY’14
•
Additional costs main reason EBITDA from $89M to $53M FY’13 vs FY’14.
!16
Advantages of Sears Relationship •
Commission structure on any item sold by SHOS from sears.com in essence gives SHOS “free inventory” to sell. This includes everything on sears.com
•
In addition, SHOS can sell any tool or appliance not in stock in their store but through SHLD and get credit for sale, this is more “free inventory” to sell
•
SHOS utilizes SHLD’s distribution network for appliance delivery. Again, this is essentially a “free” fleet of trucks they use on a “pay per use” basis
•
SHOS directly benefits when SHLD advertises their big three brands…”free advertising”
•
Neither SHOS franchisees nor SHOS corporate pay any royalty to SHLD for this relationship, it is a “pay per sale” model !17
Looking Forward •
SHOS currently trades at ~6X EBITDA vs 11X for HD and 9X for LOW
•
SHOS current PE 11X vs 21X for LOW and 20X for HD
•
Large gap due to Street’s misunderstanding of why SHOS EPS fell in FY’14 vs FY ’13
•
I feel FY’15 will feature improved metrics across the board and increased store count/buybacks will easily push EPS >$2 (~11%EPS growth).
•
EPS growth will cause valuation gap to close leading to substantial price gains
•
Even if valuation gap partially closed (15X PE vs 20X PE for others) that will lead to a share price >$30 ( >45% gains)
•
Substantial improvements across main metrics (revs, store count, buybacks) and simply consistent cost measures (ex. gross margins stay 24%-25% range) could lead to superior gains
!18
Looking forward •
Most of growth will come from Hometown Stores franchises. SHOS avg. ~$1.7M in rev per location (incl hardware & appliance stores)
•
Assuming flat SSS for existing locations, buyback completed in FY’ 15, no additional buybacks, and no improvement in Outlet Locations metrics, no improvement in Hometown operating metrics, no debt repayment, opening 80 hometown locations will accomplish EPS increase (6.5% unit growth)
•
Now, this is VERY conservative as actual Hometown results are superior as incl in above #’s are 183 Hardware & Appliance Showroom locations (16% of group) that produce far less than Hometown locations (SHOS does not break #’s down)
•
Simply repaying the outstanding debt will lead to ~$1.8M in annual savings or $.08/share
•
This also ignores additional cash flow provided from additional franchise sales that can be used for buybacks !19
Margin of Safety •
Aggressive buybacks lead to consistent bid in market
•
Valuation well below peers
•
Industry only now emerging from cyclically depressed conditions; will provide tailwind to business
•
Demand for franchises will continue to drive top line
•
Major restructuring post emergence now essentially complete
•
Continued shrinkage of Sears store based provides increasing opportunity for SHOS store growth !20
Can A Boring Slow Growth Biz = Large Shareholder Returns? •
Look at another large Lampert investment (Autozone AZO)
•
In FY ’03 AZO had 3219 locations doing $1.70M per location in sales
•
In FY ‘13 they had 5201 locations doing $1.75M per location
•
That is nonexistent SSS growth for a decade but share count was reduced from 96M to 36M growing EPS from $6.60 a share to over $28/share
•
AZO did not enter new businesses or “invest” its cash flow in other areas for this additional profit. They stuck to their core business.
•
How did the stock do? !21
! ! !
•
Up 494%
•
I believe this is the model SHOS will follow, a continuous opening of new locations providing additional unencumbered cash flow that will lead to a steady, “cannibalization” of its shares enabling large shareholder gains !22
•
For more on this please read “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success”
•
Can be found on Amazon.
!23
ValueConferences Small-Cap Investing Summit 2014
Two favourite small-cap ideas
Simon Caufield 12th February 2014
1
SIM Capital Ltd.
Disclaimer
2
•
The following material is for information only and is not intended as a recommendation to purchase or sell any security
•
I give no warranty as to its accuracy
•
I own both stocks featured in this presentation, so I am biased
•
Do your own research
SIM Capital Ltd.
Background
3
•
Invest my family’s capital
•
Advise private clients
•
Write ‘True Value’ newsletter for Moneyweek
•
Professional investor since 2007
•
Previously a software entrepreneur, strategy consultant and engineer
•
MA Engineering (Cambridge) 1979
•
MBA (London Business School) 1989
SIM Capital Ltd.
My investment style What’s different •
Bargains = bad news or obscure
•
2/3 Graham; 1/3 (cheap) Buffet
•
Equally-weighted positions (20-25)
•
4
Circle of Competence Top-down asset allocation overlay
Valuation-based, Templeton-like
To guard against emotion
•
Industrials, non-bank financials, consumer and some technology
•
NOT banks, miners, energy, drugs, utilities and most tech
•
All caps, with small-mid bias
•
Global, with UK bias. Funds for Japan and emerging markets SIM Capital Ltd.
The good, the bad and the ugly
•
Rents smart meters to commercial gas users
•
Small, short-term loans secured on jewellery, watches etc.
•
Secure, long-term, inflation-proofed revenue growing at 30% pa
•
Used for household bills, cash flow by low income and jobless
•
Subscription-model; but customer acquisition another profit centre
•
Net interest margin ~50% and no losses – rather default is profitable
•
High RoIC, entry barriers, in duopoly
•
80% of loans are repeat business
•
Run-rate PE is 14
•
P/B 0.7, P/NNCA 1.2
£84m mkt. cap 5
£63m mkt. cap SIM Capital Ltd.
How pawnbroking works
6
•
Customer is advanced 65% of resale/80% of scrap values on jewellery and watches
•
Median loan is £100; average £180
•
Renewable six month agreement, regulated by UK Consumer Credit Act
•
Interest charged at 4-9% monthly in advance - by far, the cheapest form of credit for small, shortterm loans
•
Customer may redeem at any time, at no penalty
•
Three profit sources; net interest revenue, sale or scrapping of unredeemed valuables
SIM Capital Ltd.
Customers and competition
7
Customers
Competition
•
50% unemployed; average income £300 per week; 60% female
•
Founded in 1897, Harvey & Thompson largest UK pawnbroker with 192 stores in market of 2,157
•
Choose pawnbroker on location and personal recommendation
•
Traditional competitors are Albemarle & Bond (public) and Ramsden (private)
•
71% never use another pawnbroker
•
Little competition on rate; limited on loan size
•
>50% of customers and 80% of loans are repeat business
•
Four ‘cash converter’ competitors taking household goods as collateral
•
85% redeem pledges; 15% default
•
No threat from on-line
SIM Capital Ltd.
RoA averages 8%; RoE 15% (excluding the bubble years of 2009-11) Return on Assets and Return on Equity since 2006
8
SIM Capital Ltd.
H&T shares are down ~60% from their 2011 peak H&T 3-Year Share Price Performance
9
Source: Bloomberg
SIM Capital Ltd.
The market is looking backwards at two short-term problems – both related to gold but different •
•
Unwinding of the 2009-11 bubble in the gold-buying business
One-time hit, now largely over
Many competitors geared-up and are now struggling
Albemarle & Bond (no. 2) breached bank covenants, put itself up for sale (unsuccessfully) and is now likely to sell assets
Lower gold prices reduce the average advance and revenue per customer as the loan book rolls-over (~six month lag)
10
Also a one-time hit, should be over by full-year results in March, but is dependent on the gold price
SIM Capital Ltd.
The market does not see the upside •
Book value understated because inventory (1/3 of BV, ½ of NNCAV) held at collateral, not resale, value
•
Restructuring
•
11
Liquidating excess inventory, paying down debt
Closing (few) unprofitable stores
Rare opportunity to acquire stores, loan books etc. from ABM and other competitors at distressed prices. “The strong get stronger”
Growth
Built-in growth: 30% of stores are less than 3 years old, account for 15% of pledge book. As they reach average productivity after 5 years, >90% of revenue flows through to bottom line
Cyclical market will grow with stronger UK economy
SIM Capital Ltd.
Summary • High margin & attractive roe business trading at near net-net valuation • Downside protection from solid, understated asset value (not v. sensitive to gold price) • Earnings sensitive to gold price, but maybe close to trough, and several growth drivers
Share Price
172p
Market Cap
£63m
P/B
0.7
P/TBV
0.9
P/NNCA
1.2
P/E (h)
4.8
P/E (f)
12.2
Dividend yield (f)
• 2-3 active analysts + £63m mkt. cap means story is overlooked • 3.8% dividend yield while you wait
12
3.8%
2012A
2013e
£130m
£97m
Pledge book (12/31)
£51m
£44m
Net Debt (12/31)
£28m
£21m
Revenue
SIM Capital Ltd.
What Energy Assets does Revenue Breakdown (£m) FY 31st March 2013
Designs and manages installation
Buys & rents smart meters to gas suppliers who pass costs to users
Cash margin 62% Sitew orks, £5.7
Meters, £7.8
Average meter cost £850; 80% debt financed, annual rent £135 Recurring 20 year rental income Annual increases EBITDA margin 100%
Data loggers, £4.5
Rents data loggers for wireless transmission Average cost £110; annual rent £120 5 year life
13
SIM Capital Ltd.
Three factors are driving rapid market growth •
•
•
14
End-users ask their suppliers to switch to smart meters for energy efficiency
Controlling consumption
Accurate billing
Monitoring carbon emissions
Suppliers required by regulation to switch 23m users to smart meters by 2019
1.5m are industrial and commercial (I&C) meters
600k are large meters – EAS target segment
~40k are >732MWh which must be replaced by 6th April 2014
Replacements and new installations
SIM Capital Ltd.
EAS is the leader in a market duopoly Energy Assets ~85k I&C meters Long term contracts with Gazprom, Corona and British Gas Southern (34% of the market)
Smart Metering Systems ~17k I&C meters Contracts with Dong and Total (30% of the market) Previous focus domestic market, 400k meters
Exoteric ~ 20k I&C meters Currently inactive
National Grid
90% of installed base of old style meters Previously fined for abusing position in domestic meters Regulator wants NG to cede share Not yet active in smart meters, JV in data loggers
NB. Suppliers with 36% of market still to place contracts 15
SIM Capital Ltd.
EAS has several sources of competitive advantage •
Switching costs protect installed base of 85k meters and 60k data loggers
•
Long-term exclusive contracts protect growth from existing gas supplier relationships
•
•
16
Potential to ~double installed base over 3 years
Superior process, software and end-user service provide (short-term and weakish) advantages against incumbents when bidding for new supplier contracts. These matter to gas suppliers because meter service is a cost without revenue
SMS is used to the domestic gas meter market and lacks the engineering expertise, processes and software to manage complex installations
NG service culture is that of former state-owned monopoly
Five advantages provide strong barriers against new entrants
Largest scale amongst incumbents; gas suppliers must switch another 500k meters in 5 years
Small market (600k meters at £135/year) deters entry
Established reputation with suppliers
Agreements with all gas suppliers to enable end-users to switch supplier
Accreditation with regulator OFGEM SIM Capital Ltd.
Revenue is expected to double, and eps triple, in the next three years
£40
40
£35
35
£30
30
£25
25
£20
20
£15
15
£10
10
£5
5
£0
0 2010
2011
2012
2013
Revenue (LHS)
2014e
2015e
EPS (pence)
Revenue (m)
Energy Assets Revenues and EPS 2010 – 2016e
2016e
EPS (RHS)
Nb. Energy Assets IPO 22nd March 2012 17
SIM Capital Ltd.
Shares have pulled back 20% since peaking last December EAS Share Price Performance since IPO in March 2012
18
Source: Bloomberg
SIM Capital Ltd.
Summary • Fast growing, high RoIC utility/subscription business with secure, long-term inflation-proofed rental income
Share Price
308p
Market Cap
£84m
• Valuation justified by installed base alone; growth is free
Meter assets
£61m
IRR of meter rental income is >20%
Gross/Net debt
£55m/£47m
• Existing supplier contracts to double installed base in 3 years • Well-placed to win more business from gas suppliers yet to place MAM contracts (36% of market) • Longer-term opportunities in electricity and water meters • Run rate PE 14
19
Y/E March
2013
2014e
2015e
2016e
Revenue
£18m
£24.8m
£29.5m
£33.8m
EPS
10.9
19p
27p
35p
PE
28.3
16.2
11.4
8.8
SIM Capital Ltd.
Questions
•
Rents smart meters to commercial gas users via their suppliers
•
Small, short-term loans secured on jewellery, watches etc.
•
Secure, long-term, inflation-proofed revenue growing at 30% pa
•
Used for household bills, cash flow by low income and jobless
•
Subscription-model; but customer acquisition another profit centre
•
Net interest margin ~50% and no losses – rather default is profitable
•
High RoIC, entry barriers, in duopoly
•
80% of loans are repeat business
•
Run-rate PE is 14
•
P/B 0.7, P/NNCA 1.2
£84m mkt. cap 20
£63m mkt. cap SIM Capital Ltd.
INVESTMENT CASE PRESENTED BY KEITH WEISSMAN – SIBILLA CAPITAL FEBRUARY 2014 TASER International Inc. (NASDAQ: TASR)
Disclaimer 2 The ideas expressed in this presentation are solely the opinions of the author and do not necessarily represent the opinions of firms affiliated with the author, including the employing firm of the author. The views expressed are current as of the original publication date and are subject to change without notice. Reproduction of any content from this presentation is strictly prohibited. The content in this presentation is subject to various factors and risks. All information is presented in good faith. The content in this presentation might have errors, might not be accurate, or might not have been changed with recent data. and is provided as general information only and should not be taken as investment advice. All presentation content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The author may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this presentation is ultimately your responsibility. Consult your investment adviser before making any investment decisions. Under no circumstances is the author held liable for anybody(s), or any individual(s) or any organization(s) or any firm(s) or any company(s) or any entity(s), any LLC(s) or any LLP(s) or any Partnership(s) or any agency(s) or any government(s) etc. or any combination of these, decision or decisions based on views and/or ideas and/or opinions expressed in this presentation. Should you view other content near where this presentation is archived, or via a link near where this presentation is archived, you do so at your own risk. The author makes no guarantees or representations as to, and shall have no liability for, any electronic content delivered by any third party, including, without limitation, the accuracy, subject matter, quality or timeliness of any electronic content.
Company Overview 3
Recent Price: $15.89* Market Cap: $824 million* Average daily volume (3 mo): ~1.3 million shares Sells the following products:
* Priced as of January 29, 2014
Business Model 4
Two main reporting segments:
CEW segment (~95% of revenue)
Manufacture and sale of conducted electrical weapons and cartridges
Used in law enforcement, military, corrections, private security, and personal defense
Sells direct and through a network of distribution channels
1 year warranty offered and extended warranty plans for sale
Video segment (~5%)
Offers TASER Cam, AXON Video products, and Evidence.com
Video product integrated with the Evidence.com platform
Investment Themes 5
Shifting business model towards technology driven cloud storage and software solution
Attractive recurring revenue model and high switching cost of new Evidence.com platform Existing relationships with police agencies around the world give a boost to growing new video product
Unit is only ~5% of revenue at this point
Already over 16,000 law enforcement agencies around the world have deployed or tested TASER products
Existing Taser weapon business has a replacement and upgrade cycle model to keep CEW revenue stream refreshing
Business Strategy - Video 6
Focus on building out software and service offering Priced video camera to drive quicker adoption in order to establish first mover advantage and avoid fragmentation
Lowered prices in the fall to be more competitive
Lock in customers by uploading mass amounts of video data leading to a recurring revenue stream Offer comprehensive evidence management solutions rather than generic cloud storage
Pricing Strategy - Video 7
Old MSRP
Old ASP
New MSRP
AXON flex
$949
$750
$499
Evidence.com Licesne Yr 1
First Year Free
First Year Free
$9.95-$39.95/user/month
Evidence.com Storage Yr 1
First Year Free
First Year Free
$80-$150/user/year
Evidence.com License and Storage
$750-$900/officer/year $200-$500/officer/year $200-$500/officer/year
Why Video Product? 8
Natural extension of existing weapons business
Sales relationships already in place
Relatively under-developed market for the product
Product can provide evidence for law enforcement agencies to defend themselves from frivolous lawsuits Easy to gain customer lock in for the product using the evidence management system Introduces a recurring revenue stream to what was a replacement/upgrade cycle type revenue stream
Competitive Position - CEW 9
Recognized leader in electroshock weapons (“stun guns”)
Name synonymous with electroshock weapons
Other competitors such as Stinger Systems have struggled to gain traction
Established relationships with law enforcement agencies across the U.S. and in several international markets
Still expanding the corrections, military, and private security markets
Relatively untapped opportunity in international markets
Sits alongside or replaces traditional firearms
Non-lethal restraint of suspects compared with traditional firearms
Other products that compete with Taser weapons include pepper spray and other non-lethal impact weapons
Competitive Position - Video 10
Several competitors in on-officer video
Only company with accompanying full cloud storage and management software offering
Company set pricing to be more in line with competitors and serve a variety of different price points Hired several executives from the technology industry
Jason Droege – President of Evidence.com
Danny Dalal – VP of Software Engineering
Douglas Klint – President
Market Opportunity 11
It is estimated that there are approximately 1,200,000 patrol officers in the U.S. Taser weapons have made good inroads in the U.S. already as there is nearly 1 weapon for every 2 officers
International markets present large opportunity for weapons as the penetration rate is closer to 1 in 50
Active in countries such as United Kingdom, Australia, France, and Brazil
Video market is equally as large, however it is much less penetrated
It is estimated that storage and software has less than 2% penetration
Key determination is the rate of adoption
Valuation 12
Stock offers 28% upside in expected case for 2014 with a bias towards the bull case versus the bear case given our belief in the growth prospects for the video segment Growth prospect and improving margins suggest a premium valuation is warranted Consensus expectations have been lowered recently providing a better opportunity for outperformance
Valuation (cont’d) 13 Consensus FY2014
Extreme Bear Case
Bear Case 127 10 6 143 5.1%
89% 7% 4%
130 18 11 159 16.9%
Extreme Bull Case
Bull Case
CEW Video - Product Video - Service Revenue % growth
128 14 10 152 12.0%
117 6 3 126 -7.4%
Gross margin % margin
96 63.2%
80 63.5%
89 62.3%
104 65.5%
110 59.5%
128 58.9%
Sales, general and administrative % of revenue
58 38.0%
48 38.1%
52 36.4%
55 34.6%
58 31.4%
62 28.4%
10 6.6%
9 7.1%
10 7.0%
10 6.3%
10 5.4%
11 5.0%
EBIT % margin
28 18.7%
23 18.2%
27 19.0%
39 24.6%
42 22.8%
55 25.4%
D&A EBITDA % margin
7 35 23.2%
7 30 23.8%
7 34 23.9%
7 46 29.0%
7 49 26.6%
7 62 28.6%
Interest/other Pre-tax income Tax rate Net income EPS
0 28 34% 18 $0.35
0 23 34% 15 $0.29
0 27 34% 18 $0.34
0 39 34% 26 $0.49
0 42 34% 28 $0.53
0 55 34% 37 $0.70
Revenue % change
152
126 -17.3%
143 -6.1%
159 4.4%
185 21.5%
218 43.1%
EPS % change
$0.35
$0.29 -17.6%
$0.34 -2.6%
$0.49 40.3%
$0.53 51.3%
$0.70 99.0%
EBITDA Multiple Implied P/E Multiple Equity value Share Price % change
22.1x 45.4x 825 $16
10.0x 22.9x 343 $7 -58.4%
16.0x 33.3x 590 $11 -28.4%
22.0x 41.5x 1,058 $20 28.3%
24.0x 44.5x 1,223 $24 48.3%
26.0x 46.1x 1,668 $32 102.2%
Research and development % of revenue
93% 5% 2%
Expected Case 82% 11% 7%
143 26 16 185 36.0%
77% 14% 9%
163 34 21 218 60.3%
75% 16% 10%
Investment Risk 14
Squeeze on municipal budgets Video product does not become widely adopted Existing competitors round out their product offering Legal risk from Taser weapon
Not considered firearms so no permit needed
Various lawsuits over the years have mostly been dismissed
Google Glass becomes a viable alternative
NYPD beta testing
More functional than Taser video product
Appendix: Biography 15 Keith Weissman is a fundamental analyst and Head of Investment Research at Sibilla Capital. He has more than 15 years of experience in equity research and principle investment. His approach to fundamental analysis has been developed over his career having looked at investment opportunities across a variety of sectors from both the perspective of a market-oriented and private equity investor. Prior to joining Sibilla, Mr. Weissman served as a research analyst at CLSA Asia-Pacific Markets covering companies in the aerospace sector. During his time at CLSA, he developed a comprehensive framework for analyzing investment opportunities which serves as the basis for fundamental research performed at Sibilla. Before transitioning to CLSA, he closed over $1 billion in principle investments. In doing so, Mr. Weissman developed deep due diligence and valuation skills that formed the foundation of his approach to investment research.
Mr. Weissman holds a Master’s in Business Administration from Columbia Business School and a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania. In addition, he is a CFA charter holder, a CPA license holder and is an adjunct professor of Finance and Economics in the Gabelli School of Business at Fordham University, the Lubin School of Business at Pace University, and CUNY/Hunter College. He has lectured on topics such as corporate valuation, investment analysis, portfolio management, banking and central bank policy, the securities industry, and risk management. Contact:
[email protected]
1
VALUING THE SUM OF THE PARTS A case study of Forestar (FOR)
Ben Claremon Cove Street Capital
2
Safe Harbor • The opinions expressed herein are those of Cove Street Capital, LLC and are subject
to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing. • The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that the security discussed in this report is or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the security discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data. • Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in security mentioned herein. • Cove Street Capital, LLC is a registered investment advisor. More information about us is located in our ADV Part 2, which is available upon request.
3
Cove Street Capital • SEC-registered firm founded in 2011 • Concentrated, small cap value focus
• Business, Value, People • Small team of analysts
• Jeff Bronchick, Eugene Robin • Ben Claremon • Also known as The Inoculated Investor • http://www.covestreetcapital.com
4
Investment Philosophy • Classic fundamental, research-driven value investing • Concentrate on best ideas
• 30-35 stock portfolio • Think and act long-term • Mathematics of compounding • Less is more
5
4 Step Investment Process • Idea generation
• Screen for both good and cheap businesses • Management meetings • Collective investment experience • Data download • CSC Capital IQ linked spreadsheet • Company quality • Buffett stock—great business at a reasonable price? • Graham stock—cheap security that provides a large enough margin of safety?
6
4 Step Investment Process (cont.) • Team tackle and deep dive
• 2 long, 1 short • Triangulate intrinsic value • DCF, SOTP, multiples analysis, EPV • Sustainable competitive advantage? • PEST analysis—Political, economic, social, technological risks • Portfolio consideration • Full (5%) or half (2.5%) position?
7
Ruby Tuesday: Update • Profiled Ruby Tuesday last year • Sold out near our cost basis • Stock ran up then fell back to earth • Initial excitement over new CEO and his turnaround plan • Realization that turnarounds take time • Casual dining struggles • Falling EBITDA + increased debt= rising leverage ratio • Debt shortens turnaround timeframe • Limited buybacks and leasebacks • Sold to avoid permanent impairment • Lesson learned: • Restaurant turnarounds are tough! Source: Ruby Tuesday website
8
Forestar: Background • Austin, TX based company founded in the 1950s
• Spun off by Temple-Inland in 2007 • Pre 2012: a collection of real estate, timber and land assets • Acquired Credo Petroleum in 2012 • Forestar today: asset rich • Non-op position in the Bakken/Three Forks • Operator of wells in Kansas and Nebraska • Land lessor in Texas and Louisiana • Residential lot developer • Multi-family developer • Seller or timberland • Owner of water rights • Lot of detail in slides • Key Points Source: Company website
9
Forestar: Market data & financials • Stock price: $18.70 • Shares outstanding: 34.7mm • Market cap: $650mm • Enterprise value: $950mm (Q3 2013 debt levels) • Dividend yield: N/A • 52 week low: $16.82; 52 week high: $25.12 • Five year stock price chart
Sources: Capital IQ and Yahoo Finance
10
Forestar: Management • James DeCosmo has been CEO since 2006 • Previously group VP at Temple-Inland • Chris Nines has been CFO since 2007 • Previously Temple-Inland’s Director of IR from 2003-2007
• Flavious Smith has been Chief Oil and Gas Officer
since 2012 • Has been with FOR since 2008 • Previously Division Land Manager for EOG Resources
• CSC questions: • Are these real estate guys or oil & gas guys? • Do they really know what they are doing in oil & gas? • How much are they willing to dilute to fund CAPEX?
11
Forestar: Management Goals • Goal laid out at 2012 analyst day: Triple in FOR • Triple EBITDA in 4 years •
CSC question to management: Triple EBITDA or EBITDA per share?
• Triple oil & gas production in 4 years • Triple residential lot sales in 4 years
Source: FOR 2012 Analyst day
12
Forestar: Not an EBITDA story! • FOR should be valued on a sum-of-the-parts (SOTP)
basis • EBITDA and cash flow are clearly important • But with so many assets in the ground and in-development, trailing
metrics are not very instructive
• Thesis: value of parts well above the stock price • Real estate • • • • • •
Residential lots Multi-family sites Joint venture assets Raw land/timberland Water assets Development cash flows
• Oil & Gas • Fee and leasehold interests • Producing wells Source: FOR 2012 Analyst day
13
Forestar: Real estate opportunity • Major real estate land assets
as of Q2 2013 •
4 stages of land development • • • •
•
Each stage requires additional investment •
•
Raw land/ timberland In-Entitlement Entitled Developed
But makes land worth more
Value realized through sales of acres/lots Source: FOR 2013 Enercom presentation
14
Forestar: Texas is the driver • Texas real estate makes up 70% of total invested capital • Rising prices and increased lot sales benefit FOR
Source: Company presentation
15
Forestar: Texas is the driver • February 3rd report from the Texas Association of Realtors • “According to the Texas Quarterly Housing Report, 60,998 single-family homes were sold in Texas in the fourth quarter of 2013, which is 6.78 percent more than the same quarter of 2012. During the same time frame, the median price for Texas homes was $172,600, up 8.48 percent from 2012-Q4, and the average price was up 8.88 percent to $226,216.” • Jim Gaines, Ph.D., economist with the Real Estate Center at Texas A&M University, explained, “One thing that is notable about the price increases seen in the fourth quarter is that they are relatively consistent across the state. Those increases are being seen in markets of every size, not just in the largest Texas markets, so that indicates broad-based appreciation for Texas real estate.”
Sources: http://www.businesswire.com/news/home/20140203005156/en/Texas-Real-Estate-Market-Finishes-2013-Strong#.UvKMNPldU60; www.greatplacestoyou.com
16
Forestar: Valuing the residential lots/acres • Using a weighted average sales price going back to Q1 2009 • Conservative given the state of housing in 2009/10 • Price per developed lot: $52.5K • Price per undeveloped lot: $2.98K • What about entitled/in-entitlement lots? • Management guidance • Costs $20-$25K to develop a lot
• Entitled lots: sell for $10K on the low end, $40K on the high end • In-entitlement land: sells for for $5-$9K per acre • Undeveloped acres: sell for $1.6K-$1.9K • Raw land price=timberland price (assume no development value)
• Using the lower end for each to be conservative
• Lot sales still far below 2006 peak • Sales and margins picking up recently Sources: CSC estimates, company presentations and company comments
17
Forestar: Valuing the commercial acres • Using a weighted average sales price going back to Q1
2009 • Price per developed acre: $150.3K • Price per undeveloped acre: valued as timberland
• What about entitled/in-entitlement lots? • Entitled acres: $30K • Assume 20% of developed value
• In-Entitlement acres: $14.4K • Assume ~50% of entitled value
Sources: CSC estimates, company presentations and company comments
18
Forestar: Commercial+ Residential • Applying a discount to all values adds a margin of safety • Produces value/share around $12.50 Dollar Per Acre/Lot Assumption $30,070 $10,452 $14,384 $5,000 $1,600 $150,348 $52,261
Owned Entitled/Developed/ In-Entitlement Real Estate Entitled Commercial Acres Entitled Resi Lots In Entitlement Commercial Acres In Entitlement Resi Acres Undeveloped Resi Land Developed/Under-development Commercial Acres Developed/Under-development Residential Lots Total Value
Value Based on Avg. Transaction Price ($M) $35.7 $167.7 $38.4 $115.8 $136.5 $88.0 $127.4 $709.4
Applied Discount 25% 25% 25% 25% 25% 25% 25%
Implied Value $26.8 $125.8 $28.8 $86.9 $102.4 $66.0 $95.6 $532.1
Value Per Share $0.63 $2.95 $0.67 $2.04 $2.40 $1.55 $2.24 $12.48
Sources: CSC estimates, company presentations and company comments
19
Forestar: More real estate • Consolidated joint venture assets • FOR provides average sales per acre/lot since 2008 • Assume that FOR owns ~60% of the total stakes • Taking a 25% discount leads to about $3.65/share • Unconsolidated joint venture assets • Valued based on equity invested in the projects • Leads to ~$1.50/share • Water assets • Valued at $.25 per acre foot • Leads to ~$.63/share • Municipality reimbursements/Improvement district cash flow • For receives reimbursements and recurring cash flows in return for infrastructure/development work • Leads to ~$1.35/share • Timberland • Included as raw land in real estate
Sources: CSC estimates, company presentations and company comments
20
Forestar: Still more real estate • Income producing properties and development sites • FOR is involved in a number of multi-family and hotel developments • Company has given guidance on the valuation of some assets • Others valued based on total investment • Taking a 10% discount, properties are worth ~$2 per share Income Producing Properties/ Development Sites Radisson Hotel Harbor Lakes Golf Course Midtown Cedar Hill (under construction) Eleven Nashville Charlotte 360 Total Value
Projected Value/Book Value $46.3 $1.7 $0.0 $55.0 $11.9 $6.0 $65.0 $185.8
Sources: CSC estimates, company presentations and company comments
% Ownership 100% 100% 100% 25% 100% 100% 20%
Value/Share $0.98 $0.04 $0.00 $0.29 $0.25 $0.13 $0.27 $1.95
21
Forestar: Oil & Gas Assets • Producing wells • Mostly based in Kansas and Nebraska • Lansing-Kansas City formation • 154 vertical wells/160K net acres • 100% IRR on KS/NE wells • Increased CAPEX in 2013 • Owned Mineral Interests • Texas, Louisiana, Georgia, Alabama, California, Indiana • 590K total acres • 517K un-leased • 38K leased • 35K held by production • When natural gas prices were higher in 2008, FOR received $42mm in EBIT from leasing land • Lower gas prices make it harder to lease land • Cheap option on higher gas prices Sources: Company presentations and company filings
22
Forestar: Oil & Gas Assets (cont.) • North Dakota assets acquired with Credo • Crown jewel of Credo assets: Bakken and Three Forks working interest • $146mm purchase price • FOR major partners: QEP Resources (QEP) and Halcon Resources (HK) • Very high initial production rates with many more wells planned • Aggressive drilling schedule for 2014
Sources: Company presentations and company filings
23
Forestar: Oil & Gas Valuation • Well values based on Net Asset Value (NAV) • Producing wells in KS and NE • Assumptions • $80/ barrel oil; 100% oil wells • Well drill costs ~$900K (includes ~60% dry holes) • 135 drill locations (300 total/135 successful) • Value • $81mm or $1.90/share • Mineral interests • Generated $32mm in rental/lease bonus revenue in 2012 • That number was down by $5.8M through Q3 2013 • Tough to value given up and down cash flow • Conservatively assume $20M run rate revenue • Assuming a 15% cost of capital (reflecting the declining asset) yields $133mm in value or $3.12/share
Sources: Company presentations and company filings
24
Forestar: Oil & Gas Valuation (Cont.) • Bakken/Three Forks NAV • Assumptions • 500 gross wells • 8% working interest • 40 net wells to FOR • $80 oil; $4 gas • 85% oil/15% gas • $9.5mm cost to drill • Value • $205mm or ~$4.80/share • Conclusions • Given the quality of North Dakota wells, just those assets worth 40% more than Credo acquisition price • FOR got the Kansas/Nebraska assets for free Sources: Company presentations and company filings
25
Forestar: SOTP • Real Estate: $21.34/share
• Water: $.63/share • Oil & Gas: $9.86/share
Source: www.cliqueclack.com
• Net Debt as of Q3 2013: $182mm or $4.28/share • Includes $125mm face value of converts • Excludes ~$3mm in non-recourse debt • Includes $23mm in tangible equity unit debt • Includes $199mm of cash post issuance of tangible equity units • Total Value/Share: $27.55 • ~50% upside versus current price • Total shares outstanding (42.6mm) includes anticipated
dilution from Nov. 2013 issuance of tangible equity units •
$150mm issued in lieu of issuing convertible debt •
Adds 6.5mm shares and $23mm in debt to balance sheet
26
Forestar: Short Thesis • Drilling requirements in North Dakota will
•
• •
•
•
continue to force FOR to dilute though repeated capital raises Lack of management experience in oil & gas will lead to poor capital allocation An inevitable slowdown in the Texas real estate market will hurt pricing and volumes Company is now double levered to oil prices given the Texas economy’s dependence on energy spend/prices Imprecise valuation techniques lead to gross overvaluation of real estate assets Non-op position in North Dakota means there are very few buyers of those assets
Source: www.smartliving365.com
27
Forestar: Conclusion* Source: www.greatpriceshere.com • Contrarian thesis • Difficult to value real estate assets and working interests cause
the market to underestimate true net asset value • Given the business mix, FOR receives limited interest from new sell-side analysts • Current analysts are not oil & gas experts and thus don’t appreciate value of Credo • Investors spooked by recent capital raises; but they fund high return CAPEX that accelerates value realization • Bottom line • Using conservative estimates yields a price of $27.50 • Even if CSC valuation estimates are high, share price around $19 limits downside • Management team focused on creating shareholder value through Triple in FOR • FOR’s assets are well positioned in North Dakota and Texas • Over next 3 years value will be realized
*Please read in conjunction with the Safe Harbor statement located on Slide 2 of this presentation
Yellow Media Ltd (Y CN) Christopher Karlin Aquitania Capital Management, LLC
Small-Cap Investing Summit 2014
February, 11 2014
Disclaimer The discussion of portfolio investments represents the views of the investment manager. These views are current as of the date of this commentary but are subject to change without notice. As of the date of this publication, Aquitania Capital Management has a position in the securities mentioned herein and may purchase or sell shares at any time without notice. All information provided is for information purposes only and should not be considered as investment advice or a recommendation to purchase or sell any specific security. Security examples featured are samples for presentation purposes and are intended to illustrate our investment philosophy and its application. While the information presented herein is believed to be reliable, no representations or warranty is made concerning the accuracy of any data presented. Portfolio composition will change due to ongoing management of the portfolios. References to individual securities are for informational purposes only and should not be construed as recommendations by Aquitania Capital Management or its members.
Aquitania Capital Management Aquitania Capital Management seeks to maximize risk-adjusted returns by identifying
and capitalizing on securities trading at values significantly divergent from their respective fair values through:
an intensive fundamental research discipline a private equity valuation methodology an event-oriented perspective
Long-Biased, global investor across the capital structure Seeking dislocations where our counterparties are making uneconomic decisions
Asymmetric reward-to-risk situations with high conviction in a variant thesis through intensive independent research Securities that are either being accidentally overlooked or actively avoided by most investors
How the Market Views Yellow Media
How ACM Views Yellow Media At the current price, we believe we are paying a reasonable price for a growing
digital media business We are getting the significant cash flow of the dying print business for free Mandatory debt paydowns are a catalyst to transfer value from bondholders to shareholders We get a free call option on accelerated growth of digital business under new CEO
Why Might Yellow Media Be Mispriced? Rocky history created bias Income trust, conversion to corporation, dividend cuts, restructuring Investors have an expensive obsession with growth Huge disconnect between pure-play and embedded business valuations Investors struggle in analyzing declining businesses Investors look at stock price movement, not enterprise value metrics Deleveraging impact is often overlooked
Risks Decline slope of print business uncertain Believe most probable for percentage declines to taper off at a lower revenue base At some point, the business will disappear Main risk is that declines accelerate in near term
19% of advertisers represent 43% of revenues, get shaken out quickly with -20% revenue declines
Yellow needs to aggressively downsize G&A expense as print revenues decline Capital spending is restricted through 2015 with debt paydowns, but risk
increases in 2016 Downside is limited given clean balance sheet and low valuation
Print Business Quasi-Monopoly, yellow pages publishing 262K advertisers spending $2,300/yr $1B TTM revenues, declining -20% to -25% per year High end declining fastest in spend Low end declining fastest in advertiser count 80% contribution margin, high variable cost business Will ultimately disappear, urban faster than rural
Digital Media Business Robust advertising platform of online properties plus partner network $400MM TTM revenues, growing 10% - 12%+ 173K advertisers paying $2,300/yr 66% of print advertisers also purchase digital products Reach 30% of Canada’s online population every month Smartphone penetration is higher in Canada (62%+) than United States (50%+) Yellow Media’s applications have been downloaded onto 38%+ of Canadian smartphones Serves same target advertiser client as print: small-medium businesses As a standalone business, it has greater revenues than Yelp ($6b EV) – and
much more profitable
Debt Reduction Shares appreciated significantly in 2013, but enterprise value rose moderately Shares rose $14.00, while net debt declined $8.84/share, 63% of market cap increase 12/31/12 3/31/13 6/30/13 9/30/13 12/31/13 Senior Secured Notes 800 800 774 766 647 Convertible Notes 108 108 108 108 108 Total Debt 908 908 882 874 754
CAGR
Cash Total Net Debt
107 165 198 254 200 801 743 684 620 554
Share Price Market Capitalization
$ 6.56 $ 9.34 $ 11.30 $ 11.04 $ 20.56 183 261 316 309 575
213%
Enterprise Value
984 1,004 999 928 1,129
15%
Net Debt/EBITDA 1.4x 1.3x Note: figures in blue are ACM estimates
1.3x
1.3x
1.3x
Debt Reduction Contractually required to use 75% of ‘Excess Cash Flow’ each six months
through 2015 to redeem senior secured notes at par Actual Payment Beg. Notes Minimum (75% Excess Outstanding Payment Cash Flow) 2013 800 100 118 2014 647 75 149 2015 463 50 143 Note: figures in blue are ACM estimates
Additional Ending Notes Paydowns Outstanding 35 647 35 463 35 285
Minimum payments in 2014 – 2015 represent $4/per share in value transfer from
bondholders to shareholders – 15% of current price Estimated payments could result in an additional $5 - $7/per share in value transfer from bondholders to shareholders – 20% - 28% of current price
Potential for 35% - 43% gain in equity value on unchanged enterprise value over two years
Forecast Print Revenues Digital Revenues Total Revenues Print Revenues Digital Revenues Print Growth Digital Growth Total Growth
2010 2011 2012 2013 2014 2015 2016 2017 2018 1,134 983 741 556 417 323 258 207 165 267 346 367 409 462 527 601 673 740 1,401 1,329 1,108 965 879 850 859 880 906 81% 19%
74% 26%
67% 33%
58% 42%
47% 53%
38% 62%
30% 70%
23% 77%
18% 82%
‐24.6% 6.0% ‐16.6%
‐25.0% 11.5% ‐12.9%
‐25.0% 13.0% ‐8.9%
‐22.5% 14.0% ‐3.3%
‐20.0% 14.0% 1.1%
‐20.0% 12.0% 2.4%
‐20.0% 10.0% 3.0%
Print Gross Margin % Print Gross Margin
80% 80% 82% 80% 80% 80% 80% 80% 80% 907 786 608 445 333 258 207 165 132
Digital Gross Margin % Digital Gross Margin
48% 43% 44% 46% 48% 50% 50% 50% 50% 129 150 161 188 222 264 300 337 370
Total Gross Margin Total Gross Margin %
1,036 936 769 633 555 522 507 502 502 74% 70% 69% 66% 63% 61% 59% 57% 55%
General & Admin exp 279 256 198 190 180 175 180 183 185 Total EBITDA % 54% 51% 51% 46% 43% 41% 38% 36% 35% EBITDA 757 680 571 443 375 347 327 319 317 Note: figures in blue are ACM estimates
Enterprise Value $107.5MM Convertible notes due 2022 exchangeable at $19.04 Dilution (21%) offset by de-risking of balance sheet by removing the need to settle for cash Y CN
$ 25.10
Shares o/s Convertible Notes Diluted Shares o/s
28 6 34
Market Cap
$ 843
Cash Senior Secured Notes Convertible Notes Net Debt
$ 200 647 ‐ $ 447
Enterprise Value
$ 1,290
Valuation Current valuation is highly attractive for a business with these characteristics High cash flow generation, limited capital requirements and reasonable visibility 2013 EBITDA 443 Maint Capex (25) Growth Capex (20) PTFCF 398 EV/EBITDA PTFCF Yld%
2.9x 31%
2014 375 (25) (25) 350
2015 347 (25) (35) 322
2016 327 (25) (40) 302
2017 319 (25) (45) 294
2018 317 (25) (50) 292
3.4x 27%
3.7x 25%
3.9x 23%
4.0x 23%
4.1x 23%
Comparables Y CN Equity Company Name: Latest Fiscal Year: LTM as of: 52‐Week High 52‐Week High Date 52‐Week Low 52‐Week Low Date Daily Volume
Current Price (2/11/14)
YELLOW MEDIA LTD 12/2012 09/13 25.52 2/10/2014 7.12 2/11/2013 82,014
DXM Equity DEX MEDIA INC 12/2012 09/13 23.86 5/20/2013 4.30 11/14/2013 22,105
LOCAL FP Equity
ENRO SS Equity
YELP Equity
SOLOCAL GROUP 12/2012 09/13 2.71 2/12/2013 1.07 1/3/2014 3,469,784
ENIRO AB 12/2013 12/13 58.30 1/16/2014 10.60 3/18/2013 712,177
YELP INC 12/2013 12/13 96.96 2/10/2014 20.94 2/26/2013 6,836,735
ANGI Equity ANGIE'S LIST INC 12/2012 09/13 28.32 7/18/2013 11.88 11/25/2013 654,021
GRPN Equity
RLOC Equity
GROUPON INC 12/2012 09/13 12.76 9/19/2013 4.24 2/28/2013 10,795,335
REACHLOCAL INC 12/2012 09/13 17.39 5/3/2013 10.27 9/3/2013 50,201
25.25
6.24
1.40
53.75
91.11
17.26
11.08
12.80
52‐Week High % Change 52‐Week Low % Change Total Common Shares (M)
‐1.06% 254.63% 28.0
‐73.8% 45.1% 10.2
‐48.3% 30.8% 277.7
‐7.8% 407.1% 100.2
‐6.0% 335.1% 57.9
‐39.1% 45.3% 57.9
‐13.2% 161.3% 656.9
‐26.4% 24.6% 28.2
Market Capitalization
705.9
109.8
393.4
Total Debt Preferred Stock Minority Interest Cash and Equivalents
888.5 0.0 0.4 106.8
Enterprise Value
1,306.5
1‐Yr Default Likelihood Issuer Credit Rating 5‐Yr CDS Spread
0.065% IG7 174 bp
5,476.1
6,403.8
2,009.6 1,853.2 2,567.0 ‐ ‐ ‐ ‐ 0.0 68.0 172.0 111.5 113.0
‐ ‐ ‐ 389.8
2,726.8 7.219% HY6 4121 bp
2,021.8 0.339% IG10 320 bp
7,998.1 Bloomberg Ratings Model 0.100% IG8 154 bp
6,014.0
1,008.4
7,551.6
355.6
14.9 ‐ ‐ ‐ ‐ (1.9) 53.1 1,209.3
960.7
6,409.7
‐ ‐ ‐ 95.5
270.1
0.020% IG5 77 bp
0.052% IG7 149 bp
‐ ‐ ‐
0.044% IG6 134 bp
233.0 233.0 358.7 509.5 15.5x 15.5x 16.8x 11.8x 3.3 3.3 58.8 106.6 1089.0x 1089.0x 102.7x 56.2x (0.14) (0.15) 0.50 0.86 ‐ ‐ 182.6x 106.1x
155.8 223.1 245.3 334.3 8.0x 5.6x 4.0x 2.9x (48.3) (27.8) (18.3) 21.1 ‐26.0x ‐ ‐ 45.2x (0.92) (0.58) (0.42) 0.21 ‐ ‐ ‐ 83.4x
2,334.5 2,443.5 2,524.4 2,903.8 2.7x 2.6x 2.4x 2.0x 155.4 128.7 292.5 387.9 40.8x 49.3x 21.0x 15.1x (0.15) (0.10) 0.09 0.25 ‐ ‐ 124.5x 44.3x
455.4 502.3 516.5 591.8 0.5x 0.5x ‐ ‐ 14.1 16.7 30.5 39.5 17.4x 14.7x ‐ ‐ 0.07 (0.02) 0.42 0.53 ‐ ‐ 30.6x 24.2x
Valuation Total Revenue
EV/Total Revenue
EBITDA
EV/EBITDA
EPS
P/E
LFY LTM CY+1 CY+2 LFY LTM CY+1 CY+2 LFY LTM CY+1 CY+2 LFY LTM CY+1 CY+2 LFY LTM CY+1 CY+2 LFY LTM CY+1 CY+2
1,107.7 1,300.0 1,066.2 3,660.0 998.3 1,331.4 1,041.6 3,660.0 962.0 ‐ 999.6 3,413.7 855.0 ‐ 954.4 3,396.0 0.8x 2.1x 1.9x 2.0x 0.9x 2.1x 2.0x 2.0x 1.4x ‐ 2.0x 2.3x 1.4x ‐ 2.0x 2.1x 570.6 544.4 444.7 953.0 466.4 388.8 424.7 953.0 413.0 ‐ 409.1 935.0 322.0 ‐ 360.4 951.0 1.6x 5.1x 4.6x 7.9x 1.9x 7.1x 4.8x 7.9x 3.2x ‐ 4.9x 8.3x 3.7x ‐ 5.3x 7.6x (70.66) (2.05) 0.55 ‐ 18.35 (18.25) 0.51 2.32 6.90 ‐ 0.45 4.32 4.76 ‐ 0.37 4.69 1.4x ‐ 2.7x 23.2x 1.4x ‐ 2.9x ‐ 3.7x ‐ 3.1x 12.4x 5.3x ‐ 3.8x 11.5x
Dying Businesses Have Value Print business should last through the decade Can flex down publishing costs to preserve margin Being run to harvest cash and convert advertisers to digital Print business is likely worth $14 - $16/share in runoff Print Revenues Print Growth
2013 2014 2015 2016 2017 2018 2019 2020 556 417 323 258 207 165 132 106 ‐25% ‐25% ‐23% ‐20% ‐20% ‐20% ‐20% ‐20%
Print Gross Margin % Print Gross Margin
80% 80% 80% 80% 80% 75% 75% 75% 445 333 258 207 165 132 99 79
General & Admin exp 109 85 66 54 43 34 22 20 EBITDA Maintenance Capex PTFCF
335 248 192 153 123 99 77 59 (5) (5) (5) (5) (5) (5) (5) (5) 330 243 187 148 118 94 72 54
PV @ 20% 552 203 130 85 57 38 24 15 PV @ 25% 499 194 120 76 48 31 19 11 Note: figures in blue are ACM estimates
Potential for Multiple Expansion What would a private buyer reasonably pay for a business that: Is a pure play online and mobile digital marketing services Has 30%+ reach online and 38% mobile penetration Is growing revenues 12%-14% per year and pre-tax discretionary cash flow 15%-20%+ High cash flow generation, limited capital requirements and reasonable visibility 9x – 11x EBITDA would not be unreasonable = $34 - $41/per share Digital Revenues Digital Growth
2013 2014 2015 2016 2017 2018 409 462 527 601 673 740 12% 13% 14% 14% 12% 10%
Digital Gross Margin % 46% 48% 50% 50% 50% 50% Digital Gross Margin 188 222 264 300 337 370 General & Admin exp 81 95 109 126 140 151 EBITDA 108 127 155 175 197 219 Maint + Growth Capex (40) (45) (55) (60) (65) (70) PTFCF 68 82 100 115 132 149 PTFCF Growth 22% 22% 15% 15% 13%
Valuation Because of the debt paydowns, we are not reliant on the market to accurately
value the cash flow stream of the print business Print Viewed as a Cash Flow Stream Print Business $15 ‐ $16 Digital Business $34 ‐ $41 Total $49 ‐ $57
Only Debt Paydowns Recognized Digital Business $34 ‐ $41 Less: Net Debt $ (13) Total $21 ‐ $28
Less: Net Debt Equity Value
Mandatory Paydowns Excess Paydowns Equity Value
$ 4 $5 ‐ $7 $30 ‐ $39
Upside
20% ‐ 55%
Upside
$ (13) $36 ‐ $44 43% ‐ 75%
Catalysts Debt paydowns Market is focused on digital becoming greater than 50% revenues: 2014 Market is focused on revenue growth Revenue declines will taper sharply in 2014 Revenue growth should occur in 2016 Stock performance is best advertising New CEO ran digital at Solocal – free option to upside on accelerated digital
growth
Contact
AQUITANIA CAPITAL MANAGEMENT 4700 N CAPITAL OF TEXAS HWY., SUITE 524 AUSTIN, TEXAS 78746 512 329-5999
[email protected] WWW.AQUITANIACAPITAL.COM
Small-Cap Investing Summit Economic Opportunities & Investment Ideas in South Africa
Adrian Saville Founder & Chief Investment Officer, Cannon Asset Managers
@CannonAssets
Our Business Established 1994, owner-managed since inception • • •
alpha-generating, high conviction, value investment philosophy emphasizes quality 21 employees: 6 investment & 7 internal operations R3bn AUM
•
Institutional clients incl. ABSA, Accenture, Clientele Life, Oppenheimer Memorial Trust, Investment Solutions, Macsteel, Transnet Pension Fund, UPS & Verso Peregrine shareholding (2013) with group AUM R82bn
•
Cannon’s Investment Results
1400
1261%
1200
1000
806%
800
600
400
200
0 2000
2002
2004
2006 Cannon All Equities
Cannon Asset Managers and McGregor BFA
2008 Market
2010
2012
A Fundamental, Repeatable Global Process Number of Stocks
250
25 – 35
Attractive Prices Fundamental Analysis Data Cleaning and Analysis Value measured by our own PE, DY, PBook, P-Sales, CAPE Fundamental analysis (Graham Net-Net, Sonkin ratio, PEDY toolkit) Backward and forward looking
Quality & Risk Forensic tool (Benford) Fundamental Score Bankruptcy & Chuck Years to buy back Environmental, Social & Governance Qualitative risk overlay 25 Management events in 2013
+ Good businesses
Return Expectations Valuation (PE, PBook, PER)
= Excellent prospects Construction Super-sector risk rules
Sell Discipline
Alpha weights only
Negation of VQR
Maximum two entities per sub-sector
Valuation triggers
Horizon (three years) Fundamental protection (quality, cash power, balance sheet)
Momentum (catalyst)
Real-time decision making
Influences: Benjamin Graham, David Dreman, Anthony Bolton, Bob Haugen , James Montier & John Neff
Unashamedly & Unequivocally In Search Of Intrinsic Value Top down not about forecasting – this is a fool’s errand But economic architecture & industrial makeup key influences • • •
Survival Sustainability Quality & prospects
Overlooking this elevates the chance of “permanent destruction of capital”, the single greatest investment risk
From Left Behind
Per capita income ($ per person in 2000 prices)
7000
6000
5000
Africa (sub-Saharan) World
4000
3000
2000
1000
0 1900
1910
1920
Adapted by Cannon Asset Managers (2012) from Angus Madisson (2008)
1930
1940
1950
1960
1970
1980
1990
2000
To Leading Edge
Real GDP Growth (%) 8
World Advanced Economies
6
Sub-Saharan Africa
4
2
0
-2
• Consequence of advanced world structural decay • Coupled with African structural reform IMF data (2013); African Statistical Yearbook (2014)
2015
2010
2005
2000
1995
1990
1985
1980
-4
Five Forces Commodity Prices & New Demand
5.0
Debt Relief & Sustained Debt Improvement
Economic Management & Policy Platforms
Africa’s Demographic Dividend
Rising Economic Mobility
Saville and White (2013)
% change GDP (annual average)
4.0
3.9
3.2 3.0
2.7
1.8
2.0
1.0
0.0
