Thursday 20 November 2014
Sears: VW 2.0
Sears.
5% free float. 20% short interest.
$8.6b in real estate value. $1.4b in working capital. $3.5b in net debt.
Est. market capitalization = $6.5n = $61/share
This does not take into account of some of Sears most valuable businesses. For e,g, - Sears home service and protection business, Kenmore, Craftsman & Diehard to name a few.
I believe the value of the above additional value is more than enough to offset Sears pension liabilities and cost of winding down uneconomic stores.
In addition, you get a world class CEO. Eddie Lampert, who is an excellent capital allocator. Excellent is actually an understatement. Since 1988, Eddie Lampert hedge fund returned 29% CAGR. So you can be rest assured that you are in good hands. He WILL monetize Sears.
You can buy Sears today at $36/share, or a 70% upside to a very conservative intrinsic value. What is better is that the current short interest to free float ratio is 4 to 1. And the cost of borrow for Sears is 20%. Eventually, people will recognize the monetization efforts of Eddie Lampert and we will see a massive short squeeze. Similar to the one that occurred to VW in 2008. Probably not as bad, but it is a precedent.
The best part is that you can do this via warrants. Yesterday, Sears distributed its warrants. These are 2019 call warrants with a $28 strike price. You can buy these warrants at $17 per piece today. That translate to a 100% upside assuming no time and volatility premium. As I think that this will happen in short order (if not I will switch to a stock position), I believe that the premium, which is currently at ~$9, will actually expand. Assuming no expansion, these warrants have a 150% upside and optionality from additional value from Sears business, gamma expansion, or a massive short squeeze.
Thank you.
Wednesday 19 November 2014
Blucora: An Update
Since my last post, BCOR has dropped 12%, all while INTU, a closest comparable in the online tax segment, rose 6.7%.
When you wish for a stock price to go down so you can buy more, you know you have a great stock.
Over the LTM, BCOR Tax Preparation business had managed to achieve $50m in segment income, assuming run-rate EBITDA conversion, EBITDA is expected to be $40m, or roughly 17% higher than FY 2013.
While a crude method of valuation, using a comparable company valuation method is a good way to giving one a good ballpark estimate of the value of BCOR hidden tax prep asset.
INTU, the closest comparable, trades at 16.6x EBITDA. Using the same multiple would mean that TaxAct is worth $664 million, more than the entire EV of BCOR right now.
A fellow value investor have commented that I might have placed too high a multiple of BCOR search business and E commerce. I agree. I believe BCOR E-commerce and Search business is set to generate $70m-$80m in EBITDA collectively. Using a low 5x EBITDA on that, we get a valuation between $350m-$400m.
Tax Prep + Search + E commerce + net cash = ~$1.1B market capitalization, or roughly 100% upside from current prices.
When you wish for a stock price to go down so you can buy more, you know you have a great stock.
Over the LTM, BCOR Tax Preparation business had managed to achieve $50m in segment income, assuming run-rate EBITDA conversion, EBITDA is expected to be $40m, or roughly 17% higher than FY 2013.
While a crude method of valuation, using a comparable company valuation method is a good way to giving one a good ballpark estimate of the value of BCOR hidden tax prep asset.
INTU, the closest comparable, trades at 16.6x EBITDA. Using the same multiple would mean that TaxAct is worth $664 million, more than the entire EV of BCOR right now.
A fellow value investor have commented that I might have placed too high a multiple of BCOR search business and E commerce. I agree. I believe BCOR E-commerce and Search business is set to generate $70m-$80m in EBITDA collectively. Using a low 5x EBITDA on that, we get a valuation between $350m-$400m.
Tax Prep + Search + E commerce + net cash = ~$1.1B market capitalization, or roughly 100% upside from current prices.
Soilbuild Construction & TA Corporation
Interesting company.
Positive EBIT but yet negative ROIC. How is this possible? The denominator is negative.
Unlike many of its peers, Soilbuild is highly capital light, has low corporate overhead but trades at distress levels.
Soilbuild Construction
Corporate Overhead Margin: 2.7%
EBIT Margin: 7.0%
ROIC: 35.7%
EV/EBIT: 4.62x
However I would like to highlight that EBIT margin has been trending downwards, from ~11% in Q4 2012 to 7% in Q3 2014. Quite large a margin compression.
TA Corporation
Corporate Overhead Margin: 7.9%
EBIT Margin: 10.0%
ROIC: 2.6%
EV/EBIT: 11x
Net Debt/EBITDA: 6.2x
I believe TA Corporation is the closest comparable to Soilbuild construction but yet they trade at such different levels.
Similar to Soilbuild Construction, TA Corp had seen margin compression from 14.6% in Q4 2011 to 10% in Q3 2014.
As I do not have much to contribute to the future of the Singapore property market, I believe that a pair trade would be the most appropriate.
Long Soilbuild, short TA Corp.
Positive EBIT but yet negative ROIC. How is this possible? The denominator is negative.
Unlike many of its peers, Soilbuild is highly capital light, has low corporate overhead but trades at distress levels.
Soilbuild Construction
Corporate Overhead Margin: 2.7%
EBIT Margin: 7.0%
ROIC: 35.7%
EV/EBIT: 4.62x
However I would like to highlight that EBIT margin has been trending downwards, from ~11% in Q4 2012 to 7% in Q3 2014. Quite large a margin compression.
TA Corporation
Corporate Overhead Margin: 7.9%
EBIT Margin: 10.0%
ROIC: 2.6%
EV/EBIT: 11x
Net Debt/EBITDA: 6.2x
I believe TA Corporation is the closest comparable to Soilbuild construction but yet they trade at such different levels.
Similar to Soilbuild Construction, TA Corp had seen margin compression from 14.6% in Q4 2011 to 10% in Q3 2014.
As I do not have much to contribute to the future of the Singapore property market, I believe that a pair trade would be the most appropriate.
Long Soilbuild, short TA Corp.
Sunday 16 November 2014
Haw Par Corporation
Link to long write-up: https://www.dropbox.com/s/tgbzuvpw7qnvi4x/Haw%20Par.pdf?dl=0
Short write-up
At $8.50 per share, Haw Paw is an attractive long opportunity to own valuable assets at negative implied enterprise value.
Summary:
1) Owns the iconic Tiger Balm brand which has a long growth runway and is able to
consistently earn significantly above cost of capital.
2) Concerns surrounding the Singapore oceanarium are exaggerated from a macro view
and the company has levers that it can pull to stem further losses.
3) Significant equity investments in Singapore and Hong Kong which value surpasses Haw
Par EV.
4) Owns several investment properties which have ascertainable value which generates
consistent FCF.
Market Capitalization: $1.86 billion
(+) Cash: $213.4 million
(-) Debt: $43.4 million
= Enterprise Value: $1.69 billion
EV/Core EBIT: 57x
From the standpoint of a typical investor, Haw Par would fall through most screening criteria:
high EV/EBIT and a deteriorating situation in a capital intensive segment. However, a simple
reading into Haw Par’s annual report would reveal the enormous hidden asset the company
owns.
SOTP Valuation:
Tiger Balm
High ROIC, long growth runway.
FY 2013 EBIT: $25.9 million
Using a DCF methodology, believes that on highly conservative assumptions, Tiger Balm is worth $283 million, or 11x EBIT.
Using general comparable methodology, Tiger Balm is worth $413 million, or 16x EBIT.
Using a closest comparable methodology, Tiger Balm is worth between 22x to 40x EBIT, or between $570 million to $1036 million.
I will use an average between a DCF approach and a general comparable approach to get a $350 million valuation, or 13.5x EBIT. But understand that on a closest comparable approach, Tiger Balm could easily be worth 2x as much.
Underwater World
Underwater World business can be split into two distinct geographically location with very different situation: Singapore and Pattaya.
Singapore UWW business is dying but Pattaya is thriving.
The market seems to be valuing the UWW segment on a whole and failed to realize that the UWW Singapore lease is due in three years. Management could shut down operations and stem losses easily.
While a SOTP on the UWW segment is ideal, it is extremely hard to de-consolidated this business. Instead, I will use an extreme worst case DCF scenario to arrive at the fair value.
Using a worst case DCF approach, I value the UWW segment at a negative $40 million.
Equity Investments
Haw Par owns many listed equity securities such as UOB and UOL.
The value of Haw Par equity holdings is worth $2.3 billion, 50% higher than Haw Par's current market capitalization.
This is where the bulk of Haw Par's value is derived upon.
Investment Properties
Haw Par owns several real estate with a value from external valuer at ~$220 milion.
Using my own conservative assumptions, I value this to be $145 million
Sum of the Parts
Short write-up
At $8.50 per share, Haw Paw is an attractive long opportunity to own valuable assets at negative implied enterprise value.
Summary:
1) Owns the iconic Tiger Balm brand which has a long growth runway and is able to
consistently earn significantly above cost of capital.
2) Concerns surrounding the Singapore oceanarium are exaggerated from a macro view
and the company has levers that it can pull to stem further losses.
3) Significant equity investments in Singapore and Hong Kong which value surpasses Haw
Par EV.
4) Owns several investment properties which have ascertainable value which generates
consistent FCF.
Market Capitalization: $1.86 billion
(+) Cash: $213.4 million
(-) Debt: $43.4 million
= Enterprise Value: $1.69 billion
EV/Core EBIT: 57x
From the standpoint of a typical investor, Haw Par would fall through most screening criteria:
high EV/EBIT and a deteriorating situation in a capital intensive segment. However, a simple
reading into Haw Par’s annual report would reveal the enormous hidden asset the company
owns.
SOTP Valuation:
Tiger Balm
High ROIC, long growth runway.
FY 2013 EBIT: $25.9 million
Using a DCF methodology, believes that on highly conservative assumptions, Tiger Balm is worth $283 million, or 11x EBIT.
Using general comparable methodology, Tiger Balm is worth $413 million, or 16x EBIT.
Using a closest comparable methodology, Tiger Balm is worth between 22x to 40x EBIT, or between $570 million to $1036 million.
I will use an average between a DCF approach and a general comparable approach to get a $350 million valuation, or 13.5x EBIT. But understand that on a closest comparable approach, Tiger Balm could easily be worth 2x as much.
Underwater World
Underwater World business can be split into two distinct geographically location with very different situation: Singapore and Pattaya.
Singapore UWW business is dying but Pattaya is thriving.
The market seems to be valuing the UWW segment on a whole and failed to realize that the UWW Singapore lease is due in three years. Management could shut down operations and stem losses easily.
While a SOTP on the UWW segment is ideal, it is extremely hard to de-consolidated this business. Instead, I will use an extreme worst case DCF scenario to arrive at the fair value.
Using a worst case DCF approach, I value the UWW segment at a negative $40 million.
Equity Investments
Haw Par owns many listed equity securities such as UOB and UOL.
The value of Haw Par equity holdings is worth $2.3 billion, 50% higher than Haw Par's current market capitalization.
This is where the bulk of Haw Par's value is derived upon.
Investment Properties
Haw Par owns several real estate with a value from external valuer at ~$220 milion.
Using my own conservative assumptions, I value this to be $145 million
Sum of the Parts
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