Patriot Transportation and FRP

Patriot Transportation Holding (PATR) is splitting into two companies. At $335 million market capitalization and 10,389 in average (three months) volume, this is not a company that would be appropriate for institutional or high net worth investors. It is classified and best known as a transportation company, operating under the title Florida Rock and Tank, Inc. It is spinning off to what is creatively titled, New Patriot Transportation Holding (PATI). The company has been involved for a number of years in real estate and mining operations. These companies will remain under PATR, but be renamed FRP Holding and trade under FRPH.

Transportation  Per Share TTM 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004
Revenue         13.02    126,571          112,120          103,476          97,801       89,637       91,420       105,087        89,366       126,252       112,824          99,424
COGS         11.21    108,917            93,600            87,619          81,930       73,778       73,282          89,219        65,021          98,264          88,218          76,312
Admin Expenses           0.19        1,822              1,765              1,631            1,574          1,480          1,617            1,665          1,711            1,700            1,700            1,700
EBITDA           1.63      15,832            16,755            14,226          14,297       14,379       16,521          14,203        22,634          26,288          22,906          21,412
Depreciation           0.88        8,505              7,401              6,750            6,269          6,143          6,670            5,840          5,663            8,769            8,166            8,200
Taxes           0.30        2,878              3,648              2,841            3,051          3,130          3,743            3,178          6,449            6,657            5,601            5,021
Net Income           0.46        4,449              5,706              4,635            4,977          5,106          6,108            5,185        10,522          10,862            9,139            8,191

 

PATI separates its revenue under the spin off documents into fuel surcharges and transportation revenues, which are both essentially the same items and have been consolidated here to keep with the continuity of reporting done in earlier periods.  As in other analysis done here, the latest data was used to ensure the most accurate information and comparable to other periods. The shares for the per share amounts were 9,718, which is the last reported share numbers. The split is expected to be a one for one share distributions to existing shareholders and will be all stock available will be distributed. Additionally, administrative costs were not reporting for the period 2006 and earlier, so 1,700 was used as an estimate. This was consolidated in the COGS amounts and the overall expense remains the same as what was reported. Unlike other spin offs, there will be no new debt the new entity will undertake and give back as a dividend prior to the distribution. In fact, nearly all of the management is leaving for the new entity as it will be clear from all prior obligations. To ensure it is properly capitalized, it will be given a line of credit with Wells Fargo for $25 million at 1.5% over Libor with potential reductions to the rate based on the debt to equity ratio.

 

 PATI

Current assets:
Cash and cash equivalents

0.01

Cash held in escrow
Accounts receivable, net of allowance for doubtful accounts of $227 and $162, respectively

                    0.85

Real estate tax refund receivable

                        –

Inventory of parts and supplies

                    0.09

Deferred income taxes

                    0.02

Prepaid tires on equipment

                    0.21

Prepaid taxes and licenses

                    0.03

Prepaid insurance

                    0.00

Prepaid expenses, other

                    0.01

Real estate held for sale, at cost

                        –

Total current assets

1.23

Property, plant and equipment, at cost

                 10.16

Less accumulated depreciation and depletion

                 (5.68)

Net property, plant and equipment

4.48

Real estate held for investment, at cost

(1.20)

Investment in joint ventures

                        –

Goodwill

                    0.35

Unrealized rents

                        –

Other assets, net

                    0.00

Total assets

4.87

Current liabilities:
Accounts payable

                    0.46

Federal and state income taxes payable

                        –

Accrued payroll and benefits

                    0.41

Accrued insurance

                    0.12

Accrued liabilities, other

                    0.04

Long-term debt due within one year

                        –

Total current liabilities

1.04

Long-term debt, less current portion

                    1.05

Deferred income taxes

                    0.95

Accrued insurance

                    0.10

Other liabilities

                    0.04

Shareholders’ equity:
Common stock, $.10 par value; 25,000,000 shares authorized, 9,657,419 and 9,564,220 shares issued

                        –

Capital in excess of par value

                    3.28

Retained earnings

                        –

Accumulated other comprehensive income, net

                    0.01

Total shareholders’ equity

3.29

Total liabilities and shareholders’ equity

6.47

 

PATI has almost not average revenue growth with strong cyclical swings. They state that 82% of revenues relates to petroleum transportation and the ten largest customer accounts for 54.2% of revenue. It has averaged 18% EBITDA with variance from 14-25% and 7% net income with variance from 4-12%. One would assume the reason that most of the management team is leaving and the spinoff is planned is to take advantage of the hypothesized upswing in transportation business. That said, the trailing twelve months does not show things are increasing, but instead are decreasing from the prior year-end. There seems to be little growth potential, but increasing in volume from existing clients. This would make sense as it is an established business with competitors providing a commodity like service. As the current margins are slightly lower than historical averages, using a valuation with current numbers would be a more conservative valuation. Looking at the following competitors, the valuation appears to be around $10 per share for this business line, which gives it a slightly lower multiple that it has now.

PATR

QLTY

PTSI

MRTN

Market Cap

345.82

391.46

296.38

673.30

P/S

2.13

0.4

0.73

1.00

P/E

24.58

N/A

41.02

24.00

EV/EBITDA

11.41

11.25

6.96

6.19

Profit Margin

9.24%

-0.59%

2.49%

4.31%

ROA

3.97%

5.95%

2.83%

5.04%

ROE

7.48%

N/A

8.05%

7.95%

 

The mining and real estate operations will remain with the original business, and although management has not stated by management, the hope would be that management would create a more focused strategy as a REIT for these operations. For the analysis here, there will be a separation between mining and real estate for valuation purposes with an expectation that the real estate operations will continue and the mining operations will be dissolved or remain not the primary focus of the operations. Prior to 2007 interest and administrative expenses were not reported and estimates were used for the following chart.

Mining  Per Share  TTM 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004
Revenue           0.55                 5,317                       5,302                  4,483                 4,261          4,510          5,067            5,585          6,680            6,643            6,143            5,822
COGS           0.05                    476                           458                      466                    643             711             905                851          1,181                998                801            1,289
Admin Expenses           0.08                    769                           731                      674                    650             588             551                480              400                400                350                350
EBITDA           0.42                 4,072                       4,113                  3,343                 2,968          3,211          3,611            4,254          5,099            5,245            4,992            4,183
Interest Expense           0.01                    118                             59                        40                       37                39                74                  71                70                  70                  70                  70
Depreciation           0.01                    122                           105                      112                    111             103             134                193              150                235                227                248
Taxes           0.15                 1,496                       1,540                  1,213                 1,072          1,166          1,293            1,516          1,854            1,877            1,784            1,469
Net Income           0.24                 2,336                       2,409                  1,978                 1,748          1,903          2,110            2,474          3,025            3,063            2,911            2,396

 

The mining operation is primarily driven by one land lease, which accounts for approximately 74% of mining revenues. These mining operations substantially involve Vulcan Materials Company (VMC), who also has representation on the board. FRPH owns the land and has long term leases with VMC extracting sand to make concrete. VMC and FRPH then have a profit sharing of the sand extracted with FRPH holding the land for development purposes after the mining is completed. There will be substantial costs to be able to develop the land due to typical sand mining using open pit extraction although the contract states the mining will not deter development. The company states these pits will be used as water attractions. The residual land value of these tracks is excluded from valuation of the mining. Using the average sand extracted, average profit per ton, average profit margin, and 80% of estimated reserves (only current mining operations) to make the calculation more conservative, there can be a calculation of the value of the operation. These amounts have only been disclosed for the last three years, which have been years lower than prior extraction amounts. There was no upward adjustment for that fact to keep the valuation conservative. These values were discounted at 10%, which is several basis points higher than the company’s weighted average cost of capital due to the risky nature of the mining operation and joint venture. Given these values, the mining operation at $1.00 per ton, 4,700,000 tons, 269,508,000 tons in reserve, which implies 60 years of extraction, would result in $2.03 per share of value. This is less than the $3.12 per share the mining operation has as asset book value, which is a strong sign the operation needs to be discontinued.

Real Estate  Per Share  TTM 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004
Revenue           2.60              25,228                     22,352                19,555              18,044       17,191       18,066          18,499        15,660          14,479          12,069          10,543
COGS           0.89                 8,621                       6,784                  8,329                 6,948          7,012          6,803            6,755          3,183            2,560            1,705                636
Admin Expenses           0.12                 1,152                       1,094                  1,012                    975             883             826                720              794                790                790                790
EBITDA           1.59              15,455                     14,474                10,214              10,121          9,296       10,437          11,024        11,683          11,129            9,574            9,117
Gain on Land Sold           0.69                 6,745                       7,333                         –                        –                 –                 –            3,111                 –                   –                   –                   –
Interest Expense           0.14                 1,352                       2,461                  2,598                 3,309          3,889          3,408            4,480          3,808            3,885            3,206            3,837
Depreciation           0.68                 6,622                       6,141                  5,729                 5,222          5,053          5,081            4,688          4,527            4,506            4,086            3,782
Taxes           0.47                 4,604                       4,123                      717                    604             135             740                705          1,272            1,040                867                569
Net Income           0.99                 9,622                       9,082                  1,170                    986             219          1,208            4,262          2,076            1,698            1,415                929

 

The real estate valuations are typically based on FFO amounts, and average a multiple of 16x. FFO being net income with depreciation added back and gain on sales taken out, which would result in $0.81 per share for the trailing twelve months. This would imply a value of $12.96. There is some question as to that being the most appropriate valuation as the company has not been run as a REIT previously. This means there will most likely be some change to the portfolio to offer investors a more focused investment product. Additionally, there will be a change of leverage for the entity to engage in future real estate development. It is hard to imagine with all the costs of restructuring, which will not just be legal, but include restructuring of debt to allow for cash dividends, the future real estate growth would overcome the approximate 30% deficit with the current stock price. The current price given the above would imply an FFO growth of 48%, which would require more cash capital for growth than currently available. This means there is a potential shorting position available for those that do not agree with the one analyst following this stock according to Yahoo.

 

 FRPI

Current assets:
Cash and cash equivalents

                0.05

Cash held in escrow

                0.02

Accounts receivable, net of allowance for doubtful accounts of $227 and $162, respectively

                0.07

Real estate tax refund receivable

                0.04

Inventory of parts and supplies

                    –

Deferred income taxes

                0.01

Prepaid tires on equipment

                    –

Prepaid taxes and licenses

                0.00

Prepaid insurance

                0.01

Prepaid expenses, other

                0.00

Real estate held for sale, at cost

                0.45

Total current assets

0.65

Property, plant and equipment, at cost

             27.83

Less accumulated depreciation and depletion

             (6.86)

Net property, plant and equipment

             20.98

Real estate held for investment, at cost

                1.96

Investment in joint ventures

                1.40

Goodwill

                    –

Unrealized rents

                0.49

Other assets, net

                0.97

Total assets        26.45
Current liabilities:
Accounts payable

                0.39

Federal and state income taxes payable

                0.03

Accrued payroll and benefits

                0.05

Accrued insurance

                    –

Accrued liabilities, other

0.05

Long-term debt due within one year

0.47

Total current liabilities

0.99

Long-term debt, less current portion

4.41

Deferred income taxes

1.46

Accrued insurance

                    –

Other liabilities

                0.41

Shareholders’ equity:
Common stock, $.10 par value; 25,000,000 shares authorized, 9,657,419 and 9,564,220 shares issued

0.10

Capital in excess of par value

                1.54

Retained earnings

15.94

Accumulated other comprehensive income, net

(0.00)

Total shareholders’ equity

17.58

Total liabilities and shareholders’ equity

24.85

 

 

 

 

One thought on “Patriot Transportation and FRP”

  1. Hello and thanks for the writeup.

    Have you considered valuing FRP from a GBV point?
    Real estate, acquired between 1987 and 2014, is valued at cost in the reports. Could real prices be much higher? Could this be reason for the spin-off?
    Back of the envelope indexing of house prices from the point of construction to today gives a value 83% higher than GBV.

    Appreciate your thoughts

    Stefan

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