Weekly Filings

Weekly Filings August 7-14, 2014

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Spin Offs:

Vectrus, Inc. (VEC) updates the financial information as it spins off from Excelis, Inc. (XLS). It also filed to be traded on the NYSE.  While XLS appears to improve margins and have extra cash for operations, VEC will be a pure play on defense spending. Given the current state of world affairs, there might be value there. The planned spin off is now planned for September 27, 2014.

Ashford, Inc. continues to be split from Ashford Hospitality Trust. (AHT).

Keysight Technologies, Inc. continues to be separated from Agilent Technologies (A).

Enova continues to spin off from Cash America International (CSH). The update focused on adding China as a pilot program.

Mergers:

Symmetry Medical, Inc. (SMA) and Tecomet, Inc. propose merger with cash and stock.

Bally Technologies, Inc. (BYI) and Scientific Games Corporation (SGMS) will merge for cash.

Fortegra Financial Corporation (FRF) and Tiptree Financial, Inc. (TIPT) will merge for cash.

STR Holdings, Inc. (STRI) and Zhen Fa New Energy will merge for cash.

Franklin Financial Corporation (FRNK) and Towne Bank (TOWN) will merge for equity.

Bank of Kentucky Financial Corporation (BKYF) and BB&T (BBT) will merge for cash and stock.

Fidelity National Financial Inc (FNF) and Remy International Inc will merge for cash and equity.

Albemarle Corporation (ALB) and Rockwood Holdings (ROC) will merge for cash and stock.

Cape Bancorp (CBNJ) and Colonial Financial Services (COBK) will merge for cash and equity.

Alliance Data Systems Corporation (ADS) and Conversant (CNVR) will merge for cash and stock.

Poage Bancshares (PBSK) and Commonwealth Bank will merge in an stock transaction.

IPOs:

Alibaba Group Holding (BABA) has filed the paperwork to be traded.  This section is to find stub stocks and BABA has two: Yahoo and Softbank. Softbank just acquired Sprint, which increased its size to the point of a sizable holding discount to be unrealistic. Yahoo; however, appears to have little intrinsic value. The pricing on BABA based on early demand looks to be under priced as well. This could lead to favorable valuation of Yahoo once the ownership of Yahoo Japan and BABA are subtracted. The question remains if that differential will be realized. If so a synthetic short of BABA and acquisition of Yahoo may be in order.

Tokai Pharmaceutical (TKAI) will trade on the NASDAQ at $15 with a history of negative income and cash flows.

Ecopetrol (EC), a Colombian government majority owned business, issued debt.

Barclays also issued debt.

Affirmed Therapeutics (AFMD) will trade on the NASDAQ at $13 with a history of income and cash losses. Novo Nordisk (NVO) will own 9.9% of the company post IPO.

ReWalk Robotics (RWLK) will be on the NASDAQ at $16 with a history of losses.

Invesco Mortgage Capital REIT (IVR) is issuing preferred shares.

Middlefield Bancorp (MBCN) is being upgraded to the NASDAQ.

Bank of America (BAC) issued debt.

Nxt-ID (NXTD) is upgrading stock and warrants with its history of losses to the NASDAQ.

Weekly Filings

Weekly Filings August 2-6, 2014

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Spin Offs: 

Kimball Electronics continues to separate two bad businesses.

ADP’s spinoff of its dealer services division is now being called CDK Global, Inc (CDK). There is an update to show that it will now be $825 in dividend will be paid to ADP. To pay for the dividend a $250 million loan facility and a $750 million bridge loan will be issued. Additionally, there will be $300 million revolving credit facility. Once the spin off is completed, the bridge loan will be replaced with senior notes. The financial statements were also updated to reflect the additional quarter of activity. An update the prior analysis with a specific focus on the cash flows to service this debt will be posted soon.

Mergers:

Heritage Financial Group, Inc. (HBOS) and Alarion Financial Services, Inc. (ARFS) will merge for equity.

Omniamerican Bancorp, Inc (OABC) and Southside Bancshares, Inc. (SBSI) will merge for cash and stock.

Cole Corporate Income Trust, Inc. and Select Income REIT (SIR) will merge for stock and cash.

Lamar Advertising Company (LAMR) is reorganizing with Lamar Advertising REIT to become the La mar REIT.

IPOs:

Paragon Shipping, Inc (PRGN) issued debt at 8.275% due in 2021.

Medifast Inc. (MED) issued a rights agreement, which will take further understanding.

FlexShares Trust is issuing new securities related to an MBS fund.

Dragonwave Inc. (DRWI) is issuing warrants for the company that has a history of income and cash losses.

Analysis

Patriot Transportation and FRP

1 Comment

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

 

 

 

 

Weekly Filings

Weekly Filings July 24-August 1, 2014

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Spin Offs:

New Senior Investment Group continues their spin off.

Vectrus (VEC) continues to be spun off from Excelis (XLS).

Kimberly Clark continues its spin off of Halyard Health (HYH). Details of the stock option plans, tax distributions, and retirement plans were updated. Proforma adjustments and updated to recognize six months of activity instead of three were added, but no change to the original analysis was deemed necessary. There appears to be little investment opportunity here.

ADP continues its spin off of its Dealer Services division. The separation agreement, transition service agreement, etc. No change to the financial statements were made.

KLX, Inc. (KLXI) is a spin off from BE Aerospace (BEAV). It is the aerospace fastener and consumables segment as Aerospace Solutions Group and Energy Technical Services. It will issue debt to pay BEAV a dividend, which does not appear to be much of an issue for the company unless the inventory is not realizable.

Mergers:

SP Bancorp, Inc. (SPBC) and Green Bancorp (GNBC) are proposing merging for cash.

National Property Investors 6 will sell to DRA Fund VIII LLC for cash.

Burger King Worldwide (BKW) and Tim Horton, Inc. (THI) propose merging for cash and stock.

There were no changes in merger consideration types for previously disclosed mergers.

IPOs:

Global Ship Lease, Inc. (GSL) is going to the NYSE for preferred shares, common shares and warrants. It has a positive history of cash flows and income.

Liberty TripAdvisor Holdings (LTRPA) of TripAdvisor website fame is spinning off from Liberty Ventures (LVNTA),  Liberty via the CEO will still own 28% of the company. It has a history of positive income and cash flows.

Volt Information Science Inc (VISI) is issuing preferred stock. It has income losses and negative cash flows.

Fibrocell Science, Inc. (FCSC) is issuing more stock to fund the negative cash flows and income.

Aurinia Pharmaceuticals (IPHAF) is being upgraded to the NASDAQ.

Blue Earth, Inc. (BBLU) is upgraded to the NASDAQ.

Northern Trust Company (NTRS) is issuing preferred shares.

Weekly Filings

Filings from August 17-23, 2014

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Spin Offs:

Aquabound continues to file what appears to be the incorrect filing as it appears to be not a spin off.

New Patriots Transportation Holding (PATI) is spinning off from Patriots Transportation Holding (PATR). The interesting part here is that it is primarily a hauling company and they are spinning off the hauling portion, leaving the remaining enterprise of real estate and mining rights. The management looks all to be jumping onto the new ship. Look for an analysis of this one in the coming weeks.

California Resources Corporation continues to spin off from Occidental Petroleum Corporation (OXY). Unless specialized knowledge of the oil and gas business leads to better insights, this still appears to be best viewed in terms of a stub stock opportunity.

Mergers:

Kodiak Oil and Gas Corporation (KOG) is planning to merge with Whitting Petroleum Corporation (WLL) in an equity combination.

GSI Technology (GSIT) and GigOptix (GIG) will merge for cash, stock and a dividend.

Banco Santander (SAN) will merge with its Brazil entity as part of a reorganization.

JMP Group Inc (JMP) will merge with its LLC entity as part of a reorganization.

Reliant Bank and Commerce Union Bancshare (CUNB) will merge for equity.

Richfield Oil & Gas (ROIL) and Stratex Oil and Gas (STTX) will merge for equity.

IPOs:

MB Financial Inc. (MBFI) is issuing preferred stock as it merges with Taylor Capital.

Gramercy Property Trust (GPT) is issuing Series B stock.

Cellectar Biosciences (CLRB and CLRW for the warrants)  is upgrading to the NASDAQ at $6.15 with a history of negative earnings and cash flows.

Sino Mercury Acquisition (SMACU) is going onto the NASDAQ at $10 with essentially nothing. Virtually no assets, the expenses are sitting in payables, and there is no revenue or cash flows.

Sajan (SAJA) is going to the NASDAQ at $6 with a positive history of income and cash flows.

RAIT Financial Trust (RAS) is issuing debt to be traded.

Immune Pharmaceuticals is issuing preferred as part of its reorganization, which will affect common stock and warrants.

WaferGen Bio-Systems (WGBS) is issuing shares and warrants to attract capital to the negative history of income and cash flows.

Analysis

Enova – Cash America International

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The contradictory titled Cash America International (CSH) is considered a credit service industry and typically tied to payday loans. Over the last several years the payday loan industry has faced increased scrutiny and regulations. Many states have passed laws reducing the rates below a sustainable amount given the high default rates. As a result many payday lenders have had losses for the last several years as they shut down offices in these states. Now federal agencies, in particular the US’s Consumer Financial Protection Bureau (CFPB) and UK’s Financial Conduct Authority (FCA), have taken on the payday loan industry. You can see the CFPB white paper here and the field hearing (town hall) is here. From the paper, it appears that 30-60% of all loans are paid or defaulted in the first sequence of loans given and a majority of customers extend their loans for long sequences of time. The focus of this white paper is only on these payday loans, although some testimony in congress suggests they have considered non-payday loan regulations as well; however, this was not discussed in any of the sample language provided to date. The concern of the CFPB appears to be people continuing to renew at greater amounts, thus finding themselves unable to get out of debt.

The UK has just passed regulation, which restricts the loan amount from becoming more than double the original loan and how lenders can advertise. FCA predicts this will reduce the payday loan industry by 40%. There were no restrictions on the rollover of loans, which the CFPB was fixated on. CSH has predicted investors should see the impact of the FCA regulations during the second half of 2014. They are also opening an office in London (previously only operating online there) as a sign of good faith as they work with FCA on ensuring compliance. The limitation on continuation of the loan will most likely only be limited until consumers realize they can switch companies to perpetuate the loans for longer time periods. If that occurs, there will be little change in loan volume industry wide.

 Revenue  6/30/14 TTM/ Shares   6/30/14 TTM  2013 2012 2011 2010 2009 2008
 Retail
 Pawn Fees 9.83 324,334 311,799 300,929 282,197 243,713 231,178 184,995
 Merchandise Sales 18.44  608,417 595,439  703,767 688,884 588,190  502,736 465,655
 Loans 3.27 107,901 113,211 121,892  119,192  113,973 117,997 141,134
 E-Commerce
 Short Term Loans 9.40 310,349 389,706 459,835 400,810
 Installment Loans 7.25 239,099 203,924 126,202 48,054
 Line of Credit 8.09 266,910  170,496 73,532 30,590
24.74 816,358 764,126 659,569 479,454 376,979 253,859 223,469
 Other 0.30 9,898 12,651 14,273 13,337 14,195 14,620 15,541
 Total  31.83 1,050,550 1,797,226 1,800,430 1,583,064 1,337,050 1,120,390 1,030,794
 Operating Profit
 Retail
 Pawn Fees 9.83 324,334 311,799 300,929 282,197 243,713 231,178 184,995
 Merchandise Sales 5.43 179,026 184,826 225,588 241,267 205,723 178,459 170,295
 Loans 2.21 72,985 79,852 92,667 95,191 96,536 96,355 107,581
 Operating and Administrative Costs (12.81) (422,664) (401,477) (413,461) (372,851) (329,762) (349,272) (337,493)
4.66 153,681 175,000 205,723 245,804 216,210 156,720 125,378
 E-Commerce
 Short Term Loans 8.48 279,771 253,749 282,783 241,228
 Installment Loans 3.75 123,786 97,137 51,020 14,431
 Line of Credit 5.57 183,945 98,188 37,281 22,078
15.25 503,377 446,230 371,084 277,767 212,022 144,685 116,299
 Operating and Administrative Costs (8.73) (288,247) (278,505) (245,005) (173,121) (136,170) (98,784) (68,861)
6.52 215,130 167,725 126,079 104,646 75,852 45,901 47,438
 Other (0.73) (24,137) (57,671) (40,459) (51,959) (41,007) 14,620 15,541
 Total  10.44  344,674 285,054 291,343 298,491 251,055 217,241 188,357
 Depreciation and Amortization (2.32) (76,498) (73,271) (75,428) (54,149) (43,923) (41,589) (39,651)
 Interest Expense (1.30)  (42,843)    (36,245) (28,987) (25,447) (22,020) (20,778) (15,726)
 Foreign Currency (0.04) (1,173) (1,205) (313) (1,265) (463) (158) (177)
 Extinguishment of Debt (0.52) (17,169) (607)  –  –  –  –  –
 Non-Controlling Interest  –  –  (444) 5,511 693 158 (1,258)  (46)
 Taxes (0.88) (29,194) (30,754) (84,656) (82,360) (69,269) (56,780) (51,617)
 NI  5.39 177,797 142,528 107,470 135,963 115,538 96,678  81,140

 

The income statement goes back to the change in reporting period of operating units. The data from the spin off reporting was used for Enova and the difference from the consolidated reporting was placed in the other section. The per share calculation was based on the 33,000 shares per the spin off.

At first glance this has value investment potential, but the driver for lower value is the regulations described above. The belief is that the pay day lenders will be regulated out of business or at least will have their services dramatically reduced. The evidence of what is being proposed does not support the argument that there is not a viable lending business available. CSH was the target of a CFPB action in November 2013. They discovered the company to have violated regulations in the state of Ohio under a subsidiary they acquired to properly file and review loan documentation in addition to overcharging military personnel. The most damning item is the fact they destroyed evidence prior to the investigation in the Enova entity. The pending management came in after the destruction was ordered and the current CEO is stepping down after the spin off. CSH was ordered repayment to consumers and charged fines totaling $19 million or less an average quarter’s net income. There was similar litigation from Ohio on these issues. Finally, there is a pending settlement for loans that violated lending laws in Georgia, which is estimated by the company at $18 million with a maximum estimated damages of $36 million. These appear to be divisions that were acquired as part of their expansion programs, and not endemic of the company’s overall operating program. Additionally, now that they have been investigated, one can assume this to be the extent of federal investigations for the time being. As they acquire additional chains as a growth strategy; however, potential future litigation should be considered with similar settlement amounts.

Current Assets ENOVA/Share CSH/Share
Cash and cash equivalents 2.42 3.87
Restricted Cash – 0.00
Pawn Loans – 9.01
Consumer Loans, Net 8.85 1.57
Merchandise Held for Sale – 6.80
Pawn Loan Fees Receivable – 1.78
Income Tax Receivable – 0.00
Prepaid Expenses and Other Assets 0.42 0.98
Deferred Tax Assets 0.78 0.31
Total Current Assets 12.47 24.32
Property, Plant and Equipment, Net 1.15 7.43
Goodwill 7.75 15.39
Intangible Assets 0.00 1.68
Other Assets 0.68 0.45
TOTAL ASSETS 22.05 49.26
Current Liabilities
Accounts Payable and Accrued Expenses 1.89 1.98
Consumer Deposits – 0.63
Total Current Liabilities 1.89 2.61
Long-Term Debt
Deferred Tax Liabilities 1.48 2.20
Other Liabilities 0.00 0.04
Long-Term Debt 14.97 10.25
Total Liabilities 18.34 15.10
Stockholders’ Equity
Common Stock – 0.10
APIC – 2.95
Retained Earnings 3.52 33.03
Accumulated OCI 0.19 0.06
Treasury Shares – (1.98)
Total Stockholders’ Equity 3.71 34.16
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 22.05 49.26

 

Additionally, CSH has taken steps to reduce its dependence on short term loan revenues, but is now deciding to take that one step further by spinning off the online loan business. This will have CSH be a pawn shop with some loans given at their store locations, along with check cashing and other bank like services.

The projections for normalized earnings in the next year that would reduce all the pawn shop loan business by 70% and minimal growth in the pawn operations, which leaves EBIT of 3.18/s and NI of 1.61/s assuming average expenses and 600 for foreign currency. This new pawn show business would tepidly earn EBIT/(NWC+FA) of 10.9%, ROA of 3.3%, and ROE of 4.7%. There is still room for controlled growth through their acquisition strategy and management’s comments of focus on the retail side of the business through inventory turnover, margins and same store sales would leave some room for improvement, which is ignored in this analysis. The lower returns might justify a 17 multiple of P/E (a discount to comparable FCFS, who is 19.89), making the stock worth $27.37. This is lower than the only comparable found of First Cash Financial Services (FCFS), which operates in the US and Mexico, like CSH.

The remaining speculative, high growth, high return business of online loans, now called Enova International, valued at 16.95 based on above. The business can quickly move locations to best maximize profits due to its online presence and have already started experimenting with non-English speaking countries. Run by a CEO that sold optionsXpress to Charles Schwab, this company has focused on installment loans and lines of credit to grow their business. Taking the same 70% hit to short term loans, but allowing the other loans to grow at current rates would leave a business with a projected EBIT/(NWC+FA) of 37.7%, ROA of 9.2% and ROE of 54.6%. Assuming this stellar performance deserves a P/E of 20x, then the value of Enova at $40.52. This combined give a current value of $67.89 and a gain from current value of over 50%. Please do your own analysis and review for the suitability of these projections.

Weekly Filings

Filings from August 11-16, 2014

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Spin Offs:

Xenia Hotels and Resorts, Inc. (XHR) will spin off from Inland America Real Estate Trust (IARE) as a hotel real estate trust. It would appear these hotels need significant capital improvement in the near term. Potential for IARE if the distribution is significant enough.

Keysight Technologies, Inc. (KEYS) and Agilent Technologies, Inc. (A) continue their separation.

Vista Outdoor, Inc. (VSTO) is spinning off from Alliant Techsystems, Inc. (ATK). Immediately following the spin off, Vista Outdoor will merge with Orbital Science Corporation to become Orbital ATK, Inc. (OA). The spin off will have ATK owning a remaining 53.8% of the spin off and therefore will have a controlling interest in the merged entity. As OA will trade separately this will create a stub stock situation for ATK. This complicated situation needs further investigation because following the value chain will be difficult and with any luck doing the work will be rewarded.

Vectrus, Inc. (VEC) is being spun from Exelis, Inc. (XLS) and was formerly a logistics division. XLS appears to be shrinking its overall revenue as defense spending slows. VEC has lower margins and appears to be decelerating at a faster pace than the main company. VEC will issue or obtain debt and then distribute that to XLS in order for XLS to survive the defense spending slow down. This smaller entity will be too large to be a takeover target. There does not appear to be much value in this transaction.

Asford, Inc. continues to be spun off from Ashford Hospitality Trust (AHT).

Mergers:

PLC Systems, Inc. (PLCSF) willl spin off RenalGuard and then merge with Viveve . Viveve is a foreign company and the spin off is expected to be public. PLCSF has a history of loss income and cash flows.

Sysco Corporation (SYY) and US Foods are in process of their merger.

Carmike Cinemas, Inc. (CKEC) and Digital Cinema Destinations Corp (DCIN) will merge for stock.

Coca-cola (COKE) purchased a 20% stake in Monster Beverage Corp (MNST).

Minnesota Municipal Funds (MXA) and Nuveen Funds (MXN) will merge.

IPOs:

C1 Financial, Inc. (BNK) is trading on the NYSE as a bank for entrepreneurs. It has a recent history of positive cash flows and income.

Capnia, Inc. is issuing stock at $8.50 and warrants valid until 2019 under the tickers CAPNU, CAPN, and CAPNW. This biotech firm has a history of losses and negative cash flows.

Otonomy, Inc. will trade at an estimated $16 on the NASDAQ under the symbol OTIC.  This biotech company also has a history of income and cash flow losses.

Weekly Filings

Filings from August 3 to 10, 2014

3 Comments

Spin Offs:

Halyard Health spin off from Kimberly Clark (KMB) continues. Please see analysis for further details.

Ashford Inc continues from Ashford Hospitality Trust (AHT) with an update that primarily involved the fact it will be a blank check stock.

Mergers:

Silver Bay Realty Trust (SBY) is internalizing management via a merger.

Chindex International (CHDX) is merging with TPG and Fosun (0656.HK) for cash and stock.

Professional Diversity Network (IPDN) is merging with National Association of Professional Women for equity.

Chiquita Brands International (CQB) is merging with Fyffes (FFY.L) in an inversion involving cash, equity and warrants. Let’s hope those warrants trade.

Sports Chalet (SPCHA) and Vestis Retail Group are merging to privatize for cash.

Liberty Interactive Corp (LINTA, LINTB) and Provide Commerce, Inc. as part of the consolidation to QVC.

GTECH (GTK) and IGT will merge for cash and stock.

Pyramid Oil Company (PDO) and Yuma Energy, Inc. merge in an all equity transaction.

BBX Capital Corporation (BBX) and BFC Financial Corporation (BFCF) will merge for equity.

Walgreen Company (WAG) and Alliance Boots will merge for cash and an option to fully purchase.

Griffin American Healthcare REIT II and North Star Realty Finance Corp (NRF) will merge for cash and equity.

Independent Bank Corp (INDB) and Peoples Federated Bancshares, Inc. (PEOP) will merge for equity.

Breithburn Energy Partners (BBEP) is buying QR Enegery (QRE) for stock.

Hilltop Holdings, Inc. (HTH) and SWS Group (SWS) will merge for cash and equity.

Auxilum Pharmaceuticals, Inc. (AUXL) and QLT, Inc. (QLTI) will merge for equity.

Verso Paper Corp (VRS) and NewPage Holdings, Inc. will merge for cash.

Mylan, Inc. (MYL) and Abbott (ABT) will merge for equity.

IPOs:

Hoegh LNG Partners will trade on the NYSE as HMLP at $21 with negative income, operating income and operating cash flows.

T2 Biosystems will be on the NASDAQ for $17 with negative income and cash flows.

Wilhelmena International is moving from OTB to NASDAQ as WHLM.

Green Bancorp will be on the NASDAQ as GNBC for $17 with positive cash flows and income.

iDreamSky Technology will be $14 at the NASDAQ as DSKY with mixed results although on an uptrend.

Ryerson Holding is on the NYSE as RYI for $12 with positive income and cash flows.

Independence Contract Drilling will be $11 on the NYSE as ICD with negative income and cash flows.

Tyson Food Inc. has a debt issuance.

 

 

Analysis

Halyard Health Preliminary Analysis

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The parent company is Kimberly-Clark Corporation (KMB) has four divisions it operates. Personal Care, Consumer Tissue, K-C Professional and Health Care divisions all involve cleanliness products. Personal Care is the leading division in revenues with brands Huggies and Kotex. Consumer Tissue is known for Kleenex and Scott. K-C Professional is clean products for the workplace and driven also by the Kleenex and Scott brands. The final division is being spun off, Health Care. It is divided into Surgical and Infection Prevention and Medical Devices. It is sold under the Kimberly-Clark name, which is now being changed to Halyard Health.

Revenue Growth 3/31/14 TTM 2013 2012 2011 2010 2009 2008 2007 2006
Personal Care 0% 0% 5% 5% 4% 1% 9% 12% 7%
Consumer Tissue 0% 2% -4% 4% 1% -5% 4% 8% 3%
K-C Professional 0% 1% 0% 6% 3% -5% 4% 8% 5%
Health Care 0% -1% 1% 12% 6% 12% 1% -2% 8%
  Surgical and Infection Prevention -1% -3% 0%
  Medical Devices 3% 4% 6%
Total 0% 0% 1% 6% 3% -2% 6% 9% 5%

 

As you can see in the revenue growth over the last several years that there has been little growth as this is a fully mature industry with little innovation without competition stealing the advantages.  However, you can see that it has been able to maintain operating margins. The company then partakes in share buy backs and dividends with the profits obtained. This becomes less of a stock and more like a bond that’s payment is tied to GDP. The spin-off will be large enough to be accessed by all large investment institutions. The multiples of medical companies is not materially different from personal product multiples. The only growth opportunities that are available are demographic based for the main company. There is growth from baby boomers and their echo both needing diapers for different reasons. This would only impact the US and it’s hard to determine the magnitude of diapers within the Personal Care segment. Additionally, this impact is a few years from maturing. There appears no near term investment opportunity.

Operating Profit 2013 2012 2011 2010 2009 2008 2007 2006 2005
Personal Care 18% 17% 17% 20% 18% 20% 21% 19% 20%
Consumer Tissue 15% 14% 11% 10% 12% 9% 11% 13% 14%
K-C Professional 18% 17% 15% 15% 16% 13% 16% 17% 18%
Health Care 14% 15% 14% 12% 16% 12% 16% 17% 17%
  Surgical and Infection Prevention 13% 13% 13%
  Medical Devices 17% 19% 17%
Total 15% 12% 11% 14% 13% 13% 14% 13% 15%

 

Weekly Filings

Filings from July 27-August 2

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Spin Offs:

Kimball Electronics has an update. It now appears the Chairman and the CEO will both retire after this spin off is complete. Additionally, they updated the credit line and foreign tax information. This spin off and parent company continue to look unattractive.

New Senior Investment Group gave an update with nothing changing the opinion that this is not an attractive spin off.

Merger:

CU Bancorp (CUNB) and 1st Enterprise Bank (FENB) will merge for equity pending shareholder voting.

Tyco International (TYC) is moving from Switzerland to Ireland as not only a tax inversion, but also to skirt criminal liabilities, executive compensation rules and shareholder voting laws. They are worried these areas will change pending new regulation that allows citizens to vote laws into being without legislative review.

Susser Holdings Corporation (SUSS) and Energy Transfer Partners (ETP) will merge for cash and equity.

FSP 50 South Tenth Street Corp is planning to sell it’s building and disolve.

Vapor Corp (VPCO) and International Vapor Group will merge as an asset sale.

R. G. Barry Corporation (DFZ) and MRGB Holding Co. will merge for cash.

Family Dollar Stores, Inc (FDO) and Dollar Tree (DLTR) will merge for cash and equity.

LVB Acquisition, Inc., who was created for Zimmer Holdings, Inc. (ZMH), to help merge with Biomet, Inc. for cash, equity and assumption of debt.

Trulia (TRLA) and Zillow (Z) will merge for equity.

Old National Bancorp (ONB) and LSB Financial Corp (LSBI) will merge for cash.

Questcor Pharmaceuticals Inc (QCOR) and Mallinckrodt Pharmaceuticals (MNK) will merge for cash.

CU Bancorp (CUNB) and 1st Enterprise Bank (FENB) will merge for equity.

Triquint Semiconductor Inc. (TQNT) and RF Micro Devices Inc. (RFMD) will merge for equity.

Chiquita Brands (CQB) and Fyffes plc will merge for equity.

Intermountain Community Bancorp (IMCB) and Columbia Banking System Inc. (COLB) will merge for cash and equity.

Tyco (TYC) will merge with itself to move to Ireland.

Coviden (COV) and Medtronic (MDT) will merge for cash in this inversion.

First Citizen’s BankShares (FCNCA) will merge with First Citizen’s Bancorporation as a share swap.

Georgia-Carolina Bancshares (GECR) and State Bank Financial Corporation (STBZ) will merge for a cash and stock transaction.

Lorillard, Inc. (LO) and Reynolds American Inc. (RAI) will merge for cash and equity.

AbbVie continues to pursue Shire Plc (SHPGY) for another inversion.

GFI Group Inc. (GFIG) and CME Group (CME) will merge for cash.

Boulder Growth & Income Fund, I (BIF) and

Journal Communications INC (JRN) and E.W. Scripps (SSP) will merge for equity then plan spin off the newspaper business.

The Williams Company (WMB) acquired 50% of Access Midstream Partners LP (ACMP) for equity and cash.

C&J Energy Services (CJES) and Nabor’s are merging to get the tax advantages of Bermuda using cash and equity.

Rockwood Holdings, Inc. (ROC) and Horizon Oil Ltd. (HZN) will merge for equity.

Home Bancshares (HOMB) and Broward Financial Holdings will merge for for cash and equity.

Fiat and Chrysler will merge.

Going forward only new mergers or merger consideration will be discussed.

IPOs:

Lantheus (LNTH) will trade on the NASDAQ with trade around $15 with a history of negative income and cash flows.

Healthequity (HQY) will trade around $12 on the NASDAQ and has a positive history of income and cash flows.

VTTI Energy (VTTI) will trade on the NYSE for $21 and has a positive history of cash flows and income.

Zosano Pharma (ZSAN) will trade on the NASDAQ for $12 although it has a mixed history of earnings and cash flow.

Westlake Chemical Parnters (WLKP) is the exciting pick this week as it is owned by Westlake Chemical Corp. (WLK) and has a positive history of earning and cash flows. One to watch for sure.

Royal Bank of Canada issued notes.

CONTRAFECT CORP (CFRXU) issued stock and warrants with its history of negative earnings and cash flows.

Loxo Oncology (LOXO) will trade on the NASDAQ for $14 with its history of negative earning and cash flows.

Sirva, Inc. (SRVA) will trade on the NASDAQ for $17 with a history of negative earnings and cash flow, although the most recent operating cash flow was positive.

Marinus Pharmaceuticals, Inc. (MRNS) will trade for $14 on the NASDAQ with a history of negative earning and cash flow.

Auris Medical Holding AG (EARS) will trade on the NASDAQ for $14 with a negative history of earning and cash flows.

Transocean Partners LLC (RIGP) was headed to the NYSE at $21 with a history of positive income and cash flows.

Macrocure Ltd. (MCUR) trades on the NASDAQ at $15 with negative income and cash flows.

Vascular Biogenics Ltd (VBLX) is on the NASDAQ for $15 with negative income and cash flows.

BioPlast Pharma (ORPN) is on the NASDAQ for $13 with negative cash flows and income.

Avalance Biotechnologies, Inc. (AAVL) will trade on NASDAQ for $17 with negative income and cash flows.

FCB Financial Holdings, Inc. (FCB) will on NYSE will be $23 for a history of negative income and cash flows.

Atara Biotherapeutics will trade for $16 on NASDAQ for negative income and cash flows.

Catalent, Inc. (CTLI) will trade for $22 with NYSE with negative income and cash flows.

Tobira Therapeutics, Inc. (TBRA) will trade for $14 with negative earnings.