Value Investing Opportunities in Mexican Airlines |
- Opportunities in Mexican Airlines
- Emmis Communications
- Turnaround play: Hostelworld Group (HSW.L)
- History of banking failures/credit crises
- What are your returns / strategy?
- GPT-3 and the Writing on the Wall
| Opportunities in Mexican Airlines Posted: 12 Aug 2020 09:28 PM PDT |
| Posted: 12 Aug 2020 09:39 PM PDT Hi, I'm new to this and looking for feedback to improve. I wrote this about two months ago at lower prices, but it hasn't gone up that much. It's a deep value pitch on limited information of business in transition. Whatever feedback you have to help someone new(ish) would be great. Summary Emmis paid $75 million in March for a mature business, Lencore Acoustics. In addition, Emmis owns $14 million of real estate, gets $8 million annually from Disney, still owns several radio stations in Indianapolis and New York and should collect a $5 million receivable in the next 3 months. Emmis has an adjusted enterprise value of $19 million. We don't have enough information to really value Lencore, but there is enough to know that Lencore probably has positive cash flow material to Emmis. Along with the other assets, we have enough information to know there is a very significant disparity between price and value at the moment. There are some warts too which is why the opportunity exists. What is Emmis Emmis Communications is a microcap old media company controlled by the CEO that has been selling its media assets for some time. It has disappointed investors hoping it was a liquidation play by using most of the cash to acquire Lencore, a privately-held manufacturer of sound masking machines for offices and privacy sensitive locations. It delisted from a major exchange. There are a lot of issues: management circle of competence, governance, excessive pay and bloated corporate overhead, delisting and going dark, and how little is known about the acquired business. This is why the opportunity exists. History Beginning almost 10 years ago, Emmis management started to recognize that traditional broadcast and print assets weren't that great. But the realization was slow. The first stage of the transition was to add supposedly complementary businesses that would grow faster than broadcast and print media. Think radio apps. During this stage they also continued to add radio stations (though some print businesses were sold). That didn't really work. Next there was a long divestment phase culminating in the spin-off of MediaCo and the sale of the Austin radio stations last year. Note that as a result of these transactions, trailing EPS and revenue are not particularly useful to analyzing current Emmis. Finally, there was the acquisition of a non-media business, Lencore Acoustics, a few months ago. Three times in the past 14 years the CEO, Jeff Smulyan, has offered to take the company private, most recently in 2016. Emmis is such a different company now from the most recent attempt in 2016 that I don't think the valuation of his 2016 offer matters. Lencore Emmis acquired Lencore Acoustics for $75 million in March. Lencore also owned an mass notification SMS business that was not acquired. The SMS business seems to have been a small part of Lencore overall. Lencore sells sound masking solutions to government and enterprise customers. These systems are more sophisticated than they sound. The individual appliances are networked and can be controlled centrally. They work together and are tuned to make spaces quieter to the human ear. We don't know more than we know about this business. Lencore was privately held and Emmis has released barely any financial information about it: just the working capital that was acquired in the deal. We have some information on what Emmis was looking for during its search. We also know something about Lencore's clients. We know how it does relative to competitors in federal contracting. We know a few other details. All of these things point to a mature, stable business with cash flow that's material to Emmis's valuation. You can't value Lencore with this information. But Emmis doesn't have to go into the too hard bucket as long as we can conclude Lencore is probably worth a significant fraction of its purchase price. Let's start with what Emmis was looking for while it was shopping for a business to buy. Jeff Smulyan was asked on the July 2019 earnings call what he was looking for in terms of an acquisition: Q: Are there any parameters for target businesses that you can share? A: Well, I think, certainly I think it's size. I think businesses with probably $10 million to $25 million of cash flow. That would be probably the target size. Again that's -- I think we don't want startups. I think we've seen a lot of startups, we've done some startups, but I think we would really like to find businesses that are up and running that are mature where we think we see something that might make them a little bit better. https://finance.yahoo.com/news/edited-transcript-emms-earnings-conference-173628404.html Emmis disclosed that the $75.1 million purchase price included $5.3 million of working capital. If Lencore had 90 days of working capital, that would mean $22 million of sales. 45 days would be $42 million of sales. Emmis's business development VP publicly posted on LinkedIn during the search that Emmis was seeking businesses with 25% margins. 25% is as good a number to use as any for an exercise this imprecise. That gets us to an EBITDA range of $5.5 to $10.5 million, or an EV/EBITDA range for the sale price of roughly 7 to 13. This looks a bit expensive but not implausible for a mature business. In other words, Emmis overpaying somewhat for Lencore is baked into the analysis. We have a few other data points as well. It is not a lot but still something. Lencore has been in the sound masking business since 1990. It has survived several business cycles and has 33 employees. It lists 20+ Fortune 500 companies, 20+ large healthcare systems and 20+ federal government clients on its website. Federal contract data shows sales on par with competitor Cambridge Sound and above other competitors. While the actual sales numbers to the federal government are not material, it is evidence of how Lencore performs in its industry. It is hiring sales staff. (Relevant because of COVID-19) This is not enough to properly value Lencore. We do not have financials, we cannot know maintenance capex, growth rates, etc. But I do think it is enough to say that Lencore is likely worth something material relative to Emmis's current enterprise value. Enterprise Value Adjustments Let's look at the enterprise value first. As I said, this requires some adjustments from the most recent quarter. First, since we know Emmis spent $75.1 million in cash on Lencore and $3.1 million on transaction fees, we should subtract that from the MRQ cash. This moves that cash on the balance sheet to $14.8 million from $93 million. Long term debt and operating leases are $65.5 million on the balance sheet. $44.1 million of this is non-recourse to Emmis and its subsidiaries. Therefore, adjusted debt is $21.4 million. Emmis's financials consolidate an ESPN radio station in NYC that Disney operates and finances. The debt is Disney's economically, and there is also $1 million of restricted cash on the asset side that is Disney's economically which I have excluded from Emmis's cash. There is also a smaller amount of non-recourse debt related to the failed Digonex entity that I exclude. One final adjustment is that Emmis deposited $8 million in cash as collateral with the mortgage lender that lent against the headquarters. This was done to allow Emmis to divest some of its assets that were otherwise securing the mortgage and also to reduce the interest rate on the mortgage. The cash collateral is on the balance sheet as a non-current asset. It's reasonable to offset the cash collateral with the mortgage itself to establish net debt. This brings the adjusted debt to $13.4 million. Note that the cash collateral is not cash on the balance sheet, so this is not double-counted. Emmis's current market cap is $20.8 million, so my EV after adjustments is $19.4 million. (20.8+13.4-14.8) Non-Lencore Assets & Corporate Overhead In addition to Lencore, the company has a variety of assets:
I get a total value for other assets of $75.25 million even with some conservative or even draconian assumptions. At this EV, it doesn't have to be spot on. What is important is whether these assets, conservatively valued, provide an ample margin of safety and reward on the current EV. I am least confident in my value for the radio stations, but there is still a significant margin of safety even if they are worth nothing. Any valuation would be unrealistic of course without factoring in the $18 million spent last year in corporate overhead. This is very high for a company of this size. On the plus side, this should decline due to the delisting and two arguably one-off items. Delisting should save $1-2 million per year. The supposedly one-off items are $0.8 of fees related to the Lencore transaction and $6 million of additional executive bonuses for completing the divestment strategy. I am skeptical about the bonuses being exceptional. However, these adjustments bring corporate expense to $10-11 million, which was the previous fiscal year's number and still high for a company this size. It seems reasonable to believe the company can get back to the $10-11 million level. Management Management and the board own 22% of the company. Jeff Smulyan controls the company through a special share class. They could choose to loot the company into oblivion. That, combined with the negative story on radio, forced selling from delisting, and COVID-19's effect on advertising is why the stock is cheap. My biggest worry in researching Emmis was whether management just blew up $75 million. My second biggest worry was that they would continue to do things like that. But after looking at their capital allocation record, I think they have been about average and not terrible. Certainly management has made capital allocation mistakes in the past ten years, especially trying to be venture capitalists and incubators for radio-related technologies. But some credit is due for getting out of the print and radio business at decent valuations and using the proceeds to delever. For instance, MediaCo's assets do not look like they are worth the $90 million Emmis got paid for them. Some credit is also due for pulling the plug on the startups and ceasing that strategy altogether. A lot of capital is destroyed by sheer stubbornness and they didn't make that mistake forever. So, management got some decisions right: get out of the media and print business and get the debt off the balance sheet. Valuation In my base case, Lencore was not stupid, and things will work out for shareholders buying in at this level even without additional catalysts like asset sales or closing the remaining loss making businesses (though obviously that would help). The corporate overhead declines to $12 million/year, Lencore adds $7 million EBIT in 2021, Emmis collects the $5 million owed by MediaCo and gets 1 year of the management fee for another $1.5 million. In this scenario, Emmis will burn a small amount of cash and have net assets (less non-recourse debt) of more than $60 million. An EV of half net assets does not seem like a big hurdle and that implies adding $17 million to the current market capitalization of $20.8 million. In the modest bull case where some of the non-Lencore assets are sold for post COVID prices and corporate expenses decline from imperial to merely decadent, Emmis is a multibagger. How much? I can't say, but 2, 3, 4x are possible depending on the degree of cost savings and asset sales. For example, if expense at the corporate level returns to $10 million/year, one of the major assets is sold (headquarters or the NY FM station) and Lencore earns $7 million, Emmis would have $3 million in EBIT and perhaps have $20 or 30 million in net cash. In this case, valuing the cash at face value and the rest of the non-Lencore assets at half face value, we get $60 million. That is a triple in the equity from the current EV. The downside is limited given that debt is less than cash, the hard assets on the balance sheet relative to the enterprise value, and a controlling shareholder and CEO who has shown a willingness and the means to take the company private. The bear case is some combination of Lencore turning out to not be worth much and continued very high corporate overhead. It is possible that this turns out to be a value trap. However, this idea does have time to realize value. Even at last year's cash burn (ie, the scenario where Lencore generates no cash and expenses remain extremely high), there are over 4 years before the non-Lencore assets net of debt would be diminished beyond the current market cap. The margin of safety provided by assets plus Lencore should be sufficient for this to work out in the next few years, especially with multiple potential catalysts: a management led buyout, additional disclosure about Lencore, sales of some of the remaining assets, or even a re-listing on a major exchange. One final note about COVID-19 risk: I know that the world is different than when it was when the deal closed, but I am comforted that Lencore is still hiring sales staff. Combined with our margin of safety, I don't think COVID-19 is a significant risk to the thesis. [link] [comments]  |
| Turnaround play: Hostelworld Group (HSW.L) Posted: 12 Aug 2020 02:29 PM PDT Hey guys, last month I did a deep-dive into Booking Holdings (BKNG) so for August I wanted to follow this up with another, smaller OTA: Hostelworld Group. N.B. I have gone long on HSW this past week. This subreddit is always a goldmine for excellent questions, debate and feedback so any 2-cents given would be fantastic. SUMMARYA lesser known online travel agency ("OTA") in comparison to my last article on Booking Holdings (BKNG), hostel focussed Hostelworld (HSW) faces numerous challenges that have resulted in its valuation collapsing from ~£400M in 2018 to ~£70M in 2020. Their strategy to reinvigorate growth; dividend cuts; and present uncertainty in the travel & tourism sector has investors displeased. Yet, a solid balance sheet ensures their survival of COVID-19; favourable sector tailwinds; and a current valuation pricing their new strategy for failure mean Hostelworld provides an alluring prospect against considerable competitive risks. CURRENT PREDICAMENTCOVID-19 When assessing Hostelworld's current woes, let's mention the elephant in the room first. An updated version of a visualisation shown in my previous article shows tourism is recovering sooner than anticipated. Yet remember, booking volumes are typically seasonal. Inevitably, HSW will underperform generalist, large OTAs. Hostels' typically young, adventurous travellers may prove un-budging, but limited social distancing measures will inhibit a rebound compared to hotels or house-shares. Across 1H 2020, traffic declined 73.16%. Despite the 2H being better, this conservative figure is used in later assumptions. BUSINESS WOES / CHANGE IN STRATEGY Figure 2: Recent underperformance of HSW. Source: Author, based on HSW financials. COVID-19 follows a 2018 strategic shake-up, including a complete management overhaul. To shareholders' disappointment, HSW is yet to reap rewards from its "roadmap for growth" – such initiatives rarely yield instant results. At least we finally understand their direction. Traditionally, OTAs provide a centralised platform, allowing hostel goers and hostel providers access to a fragmented market. HSW aims to expand inorganically into hostel management services. As management states in their 2019 annual report:
This strategy appears customer-centric. Hostel providers will appreciate fee reductions and efforts to improve the hostel experience; encouraging preferential listings. This is a good move, yet it does not address low switching costs for hostel goers. Q4 2019 and 2020 were earmarked as the beginning of HSW's return to growth. Doubtless, this has been significantly derailed. Contrary, COVID-19 may provide an adoption tailwind for Backpack Online (Hostelworld's management services unit), as hostels look to reduce costs and encourage traveller confidence. Regardless, the ambiguity of their goals does not fill one with confidence of their execution. The "roadmap for growth" may be a good idea, but until there's concrete evidence of its opportunity then it remains merely a 'Call Option'. INVESTORS LOSE PATIENCE This echoes investors' frustrations as HSW has sank ~85%, which can be better understood through a historical lens. Hostelworld was controlled by private equity from 2009-2015. An established OTA is an alluring proposition for a PE firm, due to its consistent cash-flows. Hostelworld has cancelled its dividend policy. Thus, investors valuing HSW for its operating cash flows have left. A lack of top-line growth as well as shareholder remuneration explains a lack of demand for HSW equity. FUTURE POSTIVE/NEGATIVE CATALYSTSREASONS TO BE CHEERFUL: TAILWINDS Despite its origins in early 20th century Germany, hostelling is still an emerging industry. Early hostels were never considered profitable until open-source booking management software and OTAs emerged – incidentally, Hostelworld pioneered both. Now, "you're charging 4-star rates and you're offering a 2-star service, which is what makes it so profitable". Hostelling is expected to grow 7-8% annually; much higher than hotelling at 4.6% annually. This growth is attributed to burgeoning travel demand among young, 'lifestyle' travellers. Resultantly hoteliers, upstarts and investors have flocked. Hoteliers such as Marriott (MAR) and Accor (AC.EPA) have expanded their "budget" offerings. Simultaneously hostel chains (unheard of 20 years ago), backed by private equity, have emerged. Hostels now compete with hotels, as the observable differences lessen. Large, generalist OTAs – a la BKNG – benefit most, by offering all options to frugal travellers. Due to their niche, HSW can never compete on scale. Differentiation is therefore the strategy of HSW and operators. Concerning OTAs specifically, they have enjoyed trends towards online booking methods – 87% of hostel bookings are now made online. "Will the subsector grow?" is arguably the incorrect question; "will Hostelworld be the primary beneficiary?" better captures concerns of its weakening competitive position. REASONS TO BE CAUTIOUS: COMPETITION It should be noted HSW is the dominant hostel-focussed OTA, having acquired main rival HostelBookers in 2013. Despite this, HSW faces competition from many angles: namely large OTAs (BKNG, EXPE, etc.) and hostels' own platforms. As mentioned, OTAs covering multiple accommodation types have an advantage over Hostelworld. When considering travellers' preferences when booking, large OTAs "gives me more options". "Saves money" is another top preference, which is best attained when booking direct. Further qualitative insight can be found on this r/solotravel thread. Quantitatively, net bookings (Figure 3) have stagnated. A minor return to bookings growth in Q4 2019 cannot be given much credence, yet arguably an 85% decline in valuation is a tad extreme. Overall, it is difficult to pinpoint what advantage Hostelworld has. Low switching costs are concerning, particularly since many travellers appear to use the platforms to browse but opt to book direct – to support hostels and attain cheaper prices. This train of thought vindicates their redirection. Figure 3: QoQ bookings across HSW platforms. Source: HSW 2019 preliminary presentation. VALUATIONAnalysts identify competition as a key risk also. Failure to deliver their "roadmap for growth" will cause HSW to further succumb to competitive pressures. In 2020, HSW will comfortably survive, thanks to zero debt and a current ratio of 2.02 on current assets totalling €24M or ~35% of its current valuation (2019A figures). Beyond is more uncertain. Figure 4: Quick valuation based on P/S multiples in "Base" scenario. Source: Author's calculations. Revenue assumptions largely drive this DCF valuation. If HSW simply recovers 2019 revenues – based on 2019 P/S ratio – then investors would receive a 16.61% annual return. In a "Bear" scenario, CAGR is 9.41%. A significantly higher valuation could be seen in the "Bull" scenario, driven by higher revenue growth and a possible P/S re-rating. Figure 5: Discounted Cash-Flow ("DCF") valuation assumptions. Source: Author's calculations. Regardless of which scenario occurs, HSW trades in a range which aligns with the fundamentals. To minimise risk, HSW is attractive at a 21.45% return below 58 GBp. To test the robustness of the DCF assumptions a final valuation, a comparison against implied LT and "LT growth rate", presents a fair value estimate of 56 GBp. CONCLUSIONA minnow in the OTA-space, Hostelworld is undoubtedly a business with many challenges and unanswered questions. Recent director dealings are notable, though recovery of tailwinds within 'Travel & Tourism' are crucial. Here, a recovery is probable but turnaround of its gradually weakening competitive position is still dubious. Doubling-down on its niche position as a hostel services provider is appropriate but success is also dubious. Yet, HSW trades at a valuation where, even if 2019As sales are never recovered or strategic ambitions are never realised, it presents an attractive opportunity for those will to take the risk. [link] [comments]  |
| History of banking failures/credit crises Posted: 12 Aug 2020 03:17 PM PDT Does anyone have a good resource to learn about the history of banking and credit crises/failures? I've found one off papers covering the farmland lending crisis in the 70s/80s for example, but would enjoy learning about a history of a hundred years if possible. I'll take any suggestions. [link] [comments]  |
| What are your returns / strategy? Posted: 12 Aug 2020 08:23 AM PDT Why don't we all post our returns, how long we have been investing for, and our general strategy (keep it brief). The point is not to have a d*ck measuring contest - I think it would be interesting to get a lay of the land in terms of how people are doing around here and what strategies people are employing. Let's be honest here too... if you have been doing poorly over the last 5 years, that's fine, post about what went wrong and what you've learned.
Sorry in advance if this type of post does not belong here - I just haven't seen the question asked and I think this would spark interesting discussion. [link] [comments]  |
| GPT-3 and the Writing on the Wall Posted: 12 Aug 2020 09:53 AM PDT |
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