Selected Session Highlights from Best Ideas 2014
SAHM ADRANGI, PORTFOLIO MANAGER, KERRISDALE CAPITAL MANAGEMENT JONES LANG LASALLE (NYSE: JLL): Industry leader in real estate advisory services. Asset-lite,
service-based business model (roughly 40% of revenue is recurring). Prestigious brand name with global footprint can attract and retain talent. Leading competitive position in an oligopoly industry (#1 market share in Europe and Asia). One of only two brokerages (C.B. Richard Ellis) with global scale and full product suite. Financial crisis has allowed JLL to consolidate weaker, regional brokerages. Ability to reinvest cash flows at attractive ROIs. Roll-up of boutiques provides for continued compounding (generally preferably to buybacks; pays 7 – 8x – 8x EBITDA for its deals, translating into immediate value creation ). Global commercial real estate transaction volume remains 35% below pre-recession pre-recession levels. JLL’s 14.5x 2014 P/E multiple appears too cheap given its competitive position and projected earnings growth of 15%+ based on European real estate recovery, a strengthening U.S. economy, and emerging market growth. Even after deducting revenue contributed from acquisitions, JLL has grown at a 12% CAGR over the past seven years. Margin expansion opportunity as JLL’s EBITDA margin is ~300bps below CBRE and newly installed, GE -trained CFO may drive cost efficiencies. Advisory-focused investment banks (Lazard, Evercore, Greenhill) are a decent comparable and they trade at 22x 2014E P/E versus JLL at 15-16x. At a 22x 2014 P/E multiple,
JEFF AUXIER, CHIEF EXECUTIVE OFFICER , AUXIER ASSET MANAGEMENT LABCORP (NYSE: LH): ~15% share price decline since mid-November provides an opportunity to
buy a compounder in the attractive clinical lab industry and benefit from a shareholder-friendly management team. Recent concerns about declining volumes and pressures on reimbursement rates are likely temporary as doctor visits have been delayed due to a slow recovery out of the recession and uncertainty over health care legislation. But, in time, this will change as patients cannot delay critical health testing forever (similar to Zimmer's experience over the past few years in knee and hip replacements). Bigger picture: long runway for demand growth as 10,000 people a day are turning 65 and that age group has historically been the biggest user of lab tests. Also, recent negative Supreme Court ruling related to competitor Myriad Genetics may provide opportunities for increased volumes for certain products. LabCorp has historically invested well in technology and relationships with doctors and through its increasing scale has become the low-cost provider in an effective duopoly with Quest. Potential for value-enhancing acquisitions as temporary pressures on volumes and reimbursement rates disproportionately hurt smaller-scale providers. Generating $600+ million of FCF, which implies a high single digit free f ree cash flow yield. CEO David King Ki ng has been a disciplined capital allocator (50% of cash flow has historically gone into buybacks, rest into acquisitions). Since 2002 shares are down from 147 million to 86 million. http://www.valueconferences.com/2014/01/ideas14-jeff-auxier/
DAVID ROLFE, CHIEF INVESTMENT OFFICER , WEDGEWOOD PARTNERS EMC (NYSE: EMC): EMC “stub” valued at just 4-5x 4 -5x earnings, adjusting for VMware stake at market
value (~$30 billion) and net cash (~$8.5 billion), which account for about 75% of EMC’s recent market capitalization. EMC's forward P/E, on a non-adjusted basis, is still only 11.5x. This is too low given EMC's entrenched ecosystem (services represent ~45% of revenue), sticky customers and unparalleled distribution (direct sales force). Company’s strategy of both R&D and scalable acquisitions drives competitive product/service offerings. At the recent valuation, the bear case (current decelerated growth is secular, not cyclical; flash storage and software-defined storage will cannibalize traditional hard disk drives; public cloud is only a threat and not an opportunity; VMware’s entrenched vSphere gets displaced by Open-Source Open- Source and Microsoft’s Hyper -V; -V; and recent premiumpriced acquisitions of Data Domain and Isilon are evidence of lack of internal product development) has to be so overwhelmingly right as to render EMC a “broken growth company.” - which Rolfe does not see materializing. Therefore, the new $6 billion stock buyback should be quite accretive at current valuation. Rolfe see downside of about 10% to $22 and fair value of $32-35, or 30%+ upside. http://www.valueconferences.com/2014/01/ideas14-david-rolfe/
JAKE ROSSER, MANAGING PARTNER, COHO CAPITAL MANAGEMENT
PAUL LOUNTZIS, PRESIDENT, LOUNTZIS ASSET MANAGEMENT PEPSICO (NYSE: PEP): Potential separation of snacks and beverages businesses to create value
(50%+ upside from recent share price). While investors still think of Pepsico as a beverages business, the majority of value is in the snacks business, which has better growth prospects than beverages. While management's willingness to effect a spinoff and an eventual timeframe are difficult to predict, Lountzis believes Yum! Brands, which was spun-off by Pepsico in 1997, represents a precedent for spin-off success at the company. Another issue favoring a spin-off is that Frito's volume weakness in recent years is likely linked to the weakness in the Americas beverages business. Lountzis agrees with shareholder Trian that the status quo is not a viable long-term option. However, Lountzis prefers the option of a simple separation of snacks and beverages to the more complex alternative (also proposed by Trian) of merging Pepsico and Mondelez, followed by a snacks/beverages separation. Separately, Lountzis also likes the following two preferred stock ideas for income-oriented investors: USB SERIES F (FRAP), WFC SERIES R (FRAP) http://www.valueconferences.com/2014/01/ideas14-paul-lountzis/
CHRIS SWASBROOK, PORTFOLIO MANAGER, ELEVATION CAPITAL MANAGEMENT
peers) due to structural advantages (owns midstream assets; shipper status on pipelines; relationship with Walmart; small format). This gives the company competitive fuel gross margins while also being a low-cost provider and making the business less sensitive to oil price swings. Recent insider buying. Likely year-end portfolio clean-up selling pressure (spin-off). Trading at discount to peers and absolute sum-of-the-parts value: 7.1x LTM EBITDA-capex (normalized), 7.0x base case CY2014E EBITDA-capex. Growth opportunity: plans to open 60 stores per year with 200 openings over the next three years and 400-500 more through 2020 within Walmart network. Equity offers 50%+ near-term upside. Downside protection: Retail segment real estate worth more than current enterprise value. Strong balance sheet. Catalysts: 1) sale of non-core ethanol plants; 2) increased appreciation of the quality of the business and its near-term growth prospects; 3) margin expansion from higher mix of larger floor plan stores; 4) announcement of dividend or restructuring (conversion to REIT or MLP). http://www.valueconferences.com/2014/01/ideas14-eric-delamarter/
CHRIS KARLIN, CHIEF INVESTMENT OFFICER , AQUITANIA CAPITAL MANAGEMENT CHIMERA INVESTMENT (NYSE: CIM): Mortgage REIT formed in 2007 and managed by FIDAC, a
subsidiary of Annaly Capital Management. Owns non-agency residential mortgage backed securities. Why this company might be mispriced: 1) financial statements are not current due to accounting
long ways off. In the meantime, investors collect a 4% dividend yield on a debt-free balance sheet. Earnings growth and multiple expansion are likely due to improving business sentiment in the U.K., possible higher utilization of balance sheet, and moving past prior issues (ICM, Sanofi). If, as Olesen believes, Creston is 30% undervalued (at a low teens fair value earnings multiple), and value increases 10% per year, a 20% IRR is possible if the stock is fairly valued in three years. http://www.valueconferences.com/2014/01/ideas14-christian-olesen/
RANDALL ABRAMSON, PORTFOLIO MANAGER, TRAPEZE ASSET MANAGEMENT MANITOK ENERGY (Canada: MEI): Western Canada oil and gas company trading at $2.15 per
share compared to Abramson's estimated value of $4.50 and growing. Short term noise has created an opportunity as the recent flow-through financing created an overhang on the stock and the company revised downward 2013 guidance (due to disappointing third quarter results) related to timing issues and production mix. In addition, the Entice acquisition created uncertainty about the future direction and the COO left the company. However, management are astute buyers of the stock and there has been insider buying recently. Currently trading at an enterprise value of $35,000 per boe/d, 4.5x Q3 annualized cash flow and 2.3x 2014 cash flow guidance. It is also trading at a discount to its 2012 reported reserve-based NAV per share of $2.84. Value added through 2013 and the
BEST IDEAS 2014: January 7-8, 2014* Ideas sorted by company (as compiled by the ValueConferences team) Price at Close Instructor
Company
Ticker
6-Jan-14
Josh Young
Austex Oil
Australia: AOK
AUD 0.15 http://www.valueconferences.com/2014/01/ideas14-joshua-young/
Jean-Pascal Rolandez
Bourbon
France: GBB
Chris Karlin
Chimera Investment
NYSE: CIM
$3.04
http://www.valueconferences.com/2014/01/ideas14-christopher-karlin/
Christian Olesen
Creston
UK: CRE
£0.95
http://www.valueconferences.com/2014/01/ideas14-christian-olesen/
€ 20.08
Link to Session Recording
http://www.valueconferences.com/2014/01/ideas14-jean-pascal-rolandez/
David Rolfe
EMC
NYSE: EMC
$24.86
http://www.valueconferences.com/2014/01/ideas14-david-rolfe/
Robert Deaton
H&R Block
NYSE: HRB
$28.48
http://www.valueconferences.com/2014/01/ideas14-robert-deaton/
Sahm Adrangi
Jones Lang LaSalle
NYSE: JLL
$102.79
Jeff Auxier
LabCorp
NYSE: LH
$90.35
http://www.valueconferences.com/2014/01/ideas14-sahm-adrangi/ http://www.valueconferences.com/2014/01/ideas14-jeff-auxier/
Randall Abramson
Manitok Energy
Canada: MEI
Eric DeLamarter
Murphy USA
NYSE: MUSA
CAD 2.12 http://www.valueconferences.com/2014/01/ideas14-randall-abramson/ $41.78
http://www.valueconferences.com/2014/01/ideas14-eric-delamarter/
Chris Crawford
Myriad Genetics
Nasdaq: MYGN
$21.03
http://www.valueconferences.com/2014/01/ideas14-chris-crawford/
Paul Lountzis
Pepsico
NYSE: PEP
$82.28
http://www.valueconferences.com/2014/01/ideas14-paul-lountzis/
Chris Swasbrook
Post Holdings
NYSE: POST
$49.50
http://www.valueconferences.com/2014/01/ideas14-chris-swasbrook/
Jake Rosser
UCP
NYSE: UCP
$14.50
http://www.valueconferences.com/2014/01/ideas14-jake-rosser/ Best Ideas 2014 Issue (click on link below, then look in right sidebar)
T h e M a n u a l o f I d e a s - T o p I d e a s f r o m B e s t I d e a s 2 0 1 4 Is Is s u e :
T he he Manua l of I de de as as
H ar ar ve ve st st N at at ur ur al al
N YS YS E: E: H NR NR
$4. 54 54
http://www.valueconferences.com/events/ideas14/
The The Manu Manual al of Idea Ideas s
Stra Straye yerr Educ Educat atio ion n
Nasd Nasdaq aq:: STRA STRA
$35. $35.18 18
http://www.valueconferences.com/events/ideas14/
The The Manu Manual al of Idea Ideas s
Weig Weight ht Watc Watche hers rs
NYSE NYSE:: WTW WTW
$31. $31.89 89
http://www.valueconferences.com/events/ideas14/
* Disclaimer:
The content presented here is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth here. BeyondProxy’s officers, directors, employees, principals and/or contributing authors may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated herein. This summary is meant in no way to limit or otherwise circumscribe the full scope and effect of the complete Terms of Use available at: http://www.beyondproxy.com/terms/
January 2014
Kerrisdale Capital Management, LLC 1212 Avenue of the Americas, 3rd Floor New York, NY 10036 Tel: 212.792.7999 Fax: 212.531.6153 Email:
[email protected] [email protected]
Jones Lang LaSalle LaSalle (NYSE:JLL)
Industry leader in real estate advisory services
Transaction-based: Leasing, capital markets, and property development
Recurring: Property management, advisory (valuation/consulting), (valuation/consulting), and investment management
Operations in 1,000 locations spanning 70 countries
Leading competitive position in Asia and Europe
Investment Highlights
Asset-lite, service-based business model
Roughly 40% of revenue is recurring
Prestigious brand name with global footprint can attract and retain talent
Leading competitive position in an oligopoly industry
One of only two brokerages (C.B. Richard Ellis) with global scale and full product suite
Financial crisis has allowed JLL to consolidate weaker, regional brokerages
Global commercial real estate transaction volume remains 35% below pre-recession levels
$500m expected in 2013 versus $758m in 2007
Industry cap rates have largely priced in future interest rates increases
14.5x 2014 P/E, mid-single digit FCF yields, and projected earnings growth of 15%+
JLL will benefit from a recovery in EMEA transaction volume, a falling U.S. unemployment rate, and long-term exposure to emerging market growth
Margin Expansion Opportunity
JLL’s EBITDA margin is ~300bps below it’s closest competitor, CBRE
Newly installed, GE-trained CFO may drive cost efficiencies
Modest valuation relative to growth expectations
JLL’s 14.5x 2014 P/E multiple appears too cheap given its competitive position
European real estate recovery, a strengthening U.S. economy, and emerging market growth should lead to 15 – 20% EPS growth for the next few years
Capitalization & Multiples
Financial Statistics
Fiscal Year End Dec 31st
$102.63 .63
Share Price (US$) (US$)
Dilut ed Shares
45.2
Ma rke t Ca p
$4, 635. 1
Ame America icas EM E MEA % Growth
2009
2010
2011
2012
LTM
$1,03 ,032.7
$1,26 ,261.2
$1,52 ,525.3
$1,74 ,746.7
$1,85 ,850.3
646. 5
728. 8
973. 7
1, 048. 9
1, 165. 3
(2 5.8 %)
1 2.7 %
3 3.6 %
7.7%
2 8.8 %
Add: Debt
815.6
Asia P acific
541.2
678.5
816.5
875.6
933.7
Add: Deferred Deferred Obligations Obligations
130.3
Invest Invest Mgmt M gmt
260.2
245.5
275.5
285.4
275.5
11. 4
(6. 4)
(23. 9)
(23. 9)
$2,92 $2,925.5 5.5
$3,58 $3,584.9 4.9
$3,93 $3,932. 2.8 8
$4,20 $4,200. 0.9 9
Les s : Cas h
(119. 7)
Ente rpri se Va l ue
$5, 461. 3
Corporat e Tota l Re ve nue
– $2,48 $2,480.3 0.3
% Growth
(8.0 %)
1 7.9 %
2 2.5 %
9.7%
9.6%
$238. 6
$336. 8
$394. 9
$436. 2
$475. 8
Trading Multiples
$475.8
11.5x .5x
EBI EBITDA(1)
EV / 2014E EB ITDA
530. 6
10. 3x
Capex
LTM P/ E
$5. 62
18. 3x
E B ITDA - Capex
EV / LTM EBI EBITDA
(2)
(44. 2)
(47. 6)
(91. 5)
(94. 8)
(95. 1)
$194. 3
$289. 1
$303. 4
$341. 4
$380. 7
2014E P/ E
7. 07
14. 5x
EPS
$1. 75
$3. 77
$4. 83
$5. 48
$5. 62
2015E P/ E
8. 08
12. 7x
ROE
5.7%
11.3%
13.2%
13.5%
13.0%
Source: JLL Corporate Filings (1) Excludes non-recurring non-recurring restructuring and acquisition costs (2) Excludes non-recurring and intangible amortization expense
Top-Tier brand with leading position in Europe and Asia Lipsey's Commercial Real Estate Brand Survey Firm
2013
2012
2011
2010
2009
C. B. Ric hard Ellis (CBRE )
1
1
1
1
1
Jone s La ng La S a ll e
2
3
3
3
4
Colliers
2
2
2
2
3
Cus hman & W ak efield
3
4
4
2
2
Newmark Grubb Knight Frank
4
5
5
6
5
Cas s idy Turley
5
7
8
8
9
Source: Lipsey Commercial Real Estate Training
JLL's Holds Leading Market Share in Europe and Asia 2010
2011
2012
LTM
Americas Revenue
Jones Lang LaSal Salle C.B. Ric hard Ellis
$1,26 ,261.2
$1,52 ,525.3
$1,74 ,746.7
$1,85 ,850.3
3,217.5
3,673.7
4,103.6
4,393.1
$728.8
$973.7
$1,048.9
$1,165.3
936.6
1,076.6
1,031.8
1,141.9
$678.5
$816.5
$875.6
$933.7
669 9
788 8
817 2
866 1
Europe Revenue
Jones Lang LaSalle C.B. Ric hard Ellis Asia Revenue
Jones Lang LaSalle C B Ric hard Ellis
#1 market share in Europe and Asia
Global real estate transaction volume continues to recover
Transaction volume remains 35% below pre-recession levels
$500m expected in 2013 versus $758m in 2007
JLL expects global transaction volumes to grow by 10% in 2014
European volumes are accelerating accelerating
EMEA transaction volume grew 31% in Q3 2013
Source: JLL Q4 2013 Market Perspectives
JLL’s EMEA business should experience operating leverage as it grows JLL's EMEA Division is Under-Earning 2008 Americas Rev Revenue enue EBITDA % Margin EMEA Revenue EBITDA % Margin Asia Revenue EBITDA % Margin
2009
2010
2011
2012
$933 $933.0 .0 115. 0 12. 3%
$1,03 $1,032. 2.7 7 134.0 13. 0%
$1,2 $1,261 61.2 .2 184. 0 14.6%
$1,5 $1,525 25.3 .3 $1,746 $1,746.7 .7 201. 0 210.0 13. 2% 12. 0%
$1,8 $1,850 50.3 .3 214. 1 11.6%
$870.8 50. 0 5. 7%
$646.5 11.0 1. 7%
$728.8 38. 0 5.2%
$973.7 $1,04 ,048.9 57. 0 75.0 5. 9% 7. 2%
$1 $1,16 ,165.3 95. 7 8. 2%
$536. 2 18. 0 3. 4%
$541.2 44.0 8. 1%
$678. 5 62. 0 9.1%
$816. 5 70. 2 8. 6%
$875.6 78.0 8. 9%
LTM
$933. 7 79. 6 8. 5%
Industry consolidation has favored the largest competitors
The 2009 financial crisis led to an industry reshuffling
Grubb & Ellis, formerly a Top-5 firm, filed for bankruptcy in February 2012 and merged with Knight Frank in April 2012
Poorly positioned middle-market brokers have lost market share
Full product-suite model has cost advantages over boutiques
Transitionally-oriented Transitionally-oriented boutiques (HFF, Eastdil Secured, Marcus & Millichap, etc.) generally don’t offer property management and leasing services
JLL can underbid on transactional fees in order to win recurring property management business and long-term client relationships
Along with CBRE, JLL is the only firm with a truly global footprint
Real estate is a local business, and global clients demand expertise in various geographies
Representatives for multi-million dollar transactions are risk-averse
Harder to be fired for hiring a top-tier brand like JLL or CBRE
“The real estate services business has evolved more and more into two models, the global model where you havemulitiple have mulitiple service lines and very broad geography to serv ice clients around the globe…Then you have the niche models. Anything in the middle is hard because either you’re competing against a global company with clout and infrastructure or a niche player who does a single job job in a single location better than anyone.” Cushman & Wakfield’s CEO (March 2012)
Ability to reinvest reinvest cash flows at attractive attractive ROIs
JLL has taken advantage of the crisis by investing in growth
55% of earnings have been reinvested into acquisitions over the past three years
Roll-up of boutiques provides for continued compounding (generally preferably to buybacks)
Generally pays 7 – 8x EBITDA for its deals, translating into immediate value creation
Acquisitions Acquisitions have translated into robust growth over the past three years
13% revenue and 18% EPS 3-year CAGR expected in 2013
Long-term Organic Growth CAGR
Even after deducting revenue contributed from acquisitions, JLL has grown at a 12% CAGR over the past seven years
This compares favorably against 16% total revenue growth
JLL's Organic Organic Growth (Illustrative) 2005 Total tal Revenue % R e v en u e C A G R
Inorganic Revenue Contribution 2006 - Spauling & Slye ($150m) 2007 - 13 bolt-on deals 2008 - 15 Deals incl. Staubach 2009 - No acquisitions 2010 - No acquisitions 2011 - King Sturge ($350m) 2012 - 4 deals ($16m)
Impli mplied ed Orga Organi nic c Rev Revenue enue % Organic Growth % O r g an i c C A G R
$1,39 ,390.6
2006
2007
2008
2009
2010
2011
2012
$2,01 ,013.6
$2,65 ,652.1
$2,69 ,697.6
$2,48 ,480.7
$2,92 ,925.6
$3,58 ,584.5
$3,93 ,932.8
1 6 . 0% (1)
– – – – – – – $1,39 $1,390. 0.6 6 –
97.3 – – – – – –
– (2) – –(3) 151.0 – 386.0 – – – – – – – –
$1,91 $1,916.2 6.2 $2,4 $2,403 03.7 .7 37.8% 25. 4%
– – – – – – –
– – – – – – –
$2,06 $2,063. 3.2 2 $1,84 $1,846.4 6.4 $2,2 $2,291 91.3 .3 (14. 2%) (10.5% ) 24. 1%
– – – – – (4) 197.0 –
$2,75 $2,753. 3.2 2 20. 2%
– – – – – – 8.0 $3,0 $3,093 93.5 .5 12.4%
1 2 . 1%
Source: Company filings, filings, press releases, CapitalIQ (1) Based on management's estimate of 7% growth contribution for H1 2006 (2) Management indicated that M&A added 5-10% to 2007 growth (3) Deals contributed $193m to 2008 revenue, and we annualized that figure since Staubach closed in July 2008 (4) Undisclosed. We assume that JLL paid 2x revenue
New CFO may improve JLL’s cost structure str ucture
JLL’s consolidated EBITDA margins remain 300 bps below CBRE
Christie Kelly, former CFO of Duke Realty and a 20-year veteran of General Electric, joined as JLL as the CFO in May 2013
Margin expansion is one of Ms. Kelly’s top priorities
Begun to exit unprofitable segments (e.g. closure of U.K. branch offices, sale of Swedish asset management business, etc.)
Will introduce new internal productivity measures to balance growth versus profitability Comparati Comparative ve EBITDA EBITDA Margins Margins 18% 16% 14% 300bps 300bps gap
12% 10% 8% 6% 2005
2006
2007
2008
C B. Rich d
2009
2010 Jo
L
2011 LaS lle
2012
LTM
Interest rate risks are overblown
Average U.S. cap rates are 6.5% - 7.0%, representing a 400bps spread to 10-yr treasuries
This wide spread reflects a well-choreographed expectation expectation of higher interest rates
Transaction Transaction activity is more dependent on a strengthening economy
Indicators such as GDP growth, unemployment rate, and the health of capital markets are more predictive of transaction volumes
Leasing, in particular, is highly correlated to the unemployment rate
Leasing revenue, representing 32% of JLL’s business, has lagged the transactional segments on high E.U. and U.S. unemployment
JLL is under-covered under-covered by Wall Street
$5bn business covered by a small hand-full of analysts
J.P. Morgan and Barclays are the sole bulge bracket analysts
Business model mismatch: J.P. Morgan’s analyst covers the REIT industry
The sellside focuses on relative rather than absolute valuation
Relative valuation is not applicable when an entire sector becomes cheap
Moreover, a direct comparison to CBG fails to capture JLL’s exposure to a European recovery, long-term Asian growth, and margin expansion opportunity
Source: Bloomberg
We believe JLL should trade trade at a premium premium to the S&P
Advisory-focused Advisory-focused investment banks are a decent comparable
Business posses robust capital efficiency, strong brand names, and minimal principal risk
At a 22x 2014 P/E multiple, JLL would be worth $155/share, or a 50% increase from the current share price
We believe a 20x – 25x P/E is warranted given JLL’s growth prospects, competitive competitive position in a oligopoly market, and exposure to the emerging markets
A European real estate recovery, a strengthening U.S. leasing market, and growth in Asia should drive consistent EPS growth of 15 – 20%+ Valuation Mk t Cap
EV
Capit al Effic ienc y
LTM EV /
LTM
2014
LTM
LTM
E BITDA
P/ E
P/ E
ROA
ROE
Investm nvestm ent Bank s
Laz ard
5, 765
n. a.
n.a.
25. 1x
18. 5x
3. 6%
14.5%
Everc ore
2, 175
n. a.
n.a.
37 37. 0x
21. 4x
7. 2%
14.6%
Greenhill
1, 726
1, 737
37. 3x
25. 8x
12. 2%
15.3%
33.2x
21.9x
7.7%
14.8%
21. 5x
Average Average Global CRE Brok ers
Jones Lang LaSall Salle e
$4,63 ,635
$5,46 ,461
11.5x .5x
18.3x .3x
15.5x .5x
6. 0%
13.0%
C.B. Ric ha hard Ellis
$8, 73 735
$ 10 10, 25 253
10. 4x 4x
21. 1x 1x
16. 1x 1x
6. 3%
21.6%
An illustrative illustrative discounted cash flow model yields yields a $150 fair value value His toric al
Es t
Illus trative Kerris dale Projec tions
Term Value
($ in Millions )
2011A
2012A
20 2 013E
2014E
20 2 015E
20 2 016E
20 2 017E
20 2 018E
Americas
$1,525.3
$1,746.7
$1,921.4
$2,113.5
$2,324.9
$2,510.8
$2,661.5
$2,821.2
% Growth
EMEA % Growth
Asia % Growth
Inves tment Mgmt + Corp % Growth
Tota l Re ve nue % YoY Growth
EBITDA % Margin
EBIT Les s : Tax es (25% Rate) Net Operating Profit After Tax
20.9%
14.5%
10.0%
1 0.0%
973.7
1,048.9
$1, 206.2
$1,387.2
15.0%
$945.6
20.3%
7.2%
8.0%
6.0%
269.1
261. 5
$253.7
4.7%
(2.8%)
(3.0%)
$3,584.6
$3,932.7
$4, 326.9
22.5%
9.7%
10.0%
10.1%
10.7%
9.2%
7.7%
6.6%
6.0%
$396.5
$437. 5
$484.6
$571.7
$685.3
$805. 7
$930.0
$991.1
$985.8
11.1%
11.1%
11.2%
1 2.0%
13.0%
14.0%
15.0%
15.0%
15.0%
$313.7
$358. 7
$397.9
$476.2
$579.7
$690. 4
$805.8
$858.7
(89. 7)
(99.5)
$269. 0
$298.4
Add: Depreciation Depreciation & Amortization
$82.8
$78.8
$86.7
Less: ss: Capita pitall Exp Expend enditu itures (excl xcl M&A) M&A)
(91.5) .5)
(94.8) .8) (100.0)
Les s (Add): Changes in W ork ing Cap
(99.5) $127.1
(7. 7) $2 $245. 3
(34.1) $2 $251.0
Implied Terminal Value Dis c ounted Terminal Value Add: Discounted Forecast Period Cash Flows Les s : Ex is ting Net Debt Dis co count ed ed Cas h Flow V al aluat io ion / Diluted Shares Outs tanding
$1,358.0
$1,520.9
8.0%
12.0%
12.0%
12.0%
$261.3
$269.1
$277. 2
$285.5
$294.1
3.0%
3.0%
3.0%
3.0%
3.0%
$4,764.3
$5,271.8
$5,755. 3
$6,200.1
$6,607.1
(119.1)
(144.9)
(172.6)
(201.4)
(214.7)
$357.2
$434.8
$517. 8
$604.3
$644.0
$95.5
$105.6
$115.3
$124.2
$132.4
(118. 118.2) 2)
(127 (127.0 .0))
(138. 138.7) 7)
(149. 149.4) 4)
(159. 159.2) 2)
(37.9)
(43.9)
(41.9)
(38.5)
(35.2)
$3 $369.5
$4 $452. 6
$5 $540.7
$5 $582.0
0.79
0.72
0.65
0.95
4.0%
$1,212.5
$296.6
Discount Factor (10 % Discount Ra te )
Exit EBITDA EBITDA Multiple
8.0%
6.0%
$1,971.0
7.7%
$1,082.6
10.0%
$1,895.2
875.6
$1,002.4
15.0%
$1,754. 8
6.0%
816.5
$235.3
Free Cas h Flow
$1,595.2
8.0%
33.6%
(78.4)
1 5.0%
10.0%
2019E
0.87
$6,572.1
0.59
10.0x $9, 858.2
$5,836.3 1,726.0 (826.2) $6, 73 736. 1 45 2
Wall Street’s Clouded View on EMC
EMC: The Alphabet The Alphabet Soup Soup of Data of Data
Information Storage 70% of revenues. of revenues. Virtualization 23% of revenues. of revenues. Products (Hardware & Software) 55% of Revenues. of Revenues. Services 45% of revenues. Gross Profit Split: Profit Split: 65% Storage & 31% Virtualization. EMC’s Alphabet EMC’s Alphabet Soup Soup of Products of Products (A Geek’s Wonderland): Storage Area Storage Area Network (SAN), Network (SAN), Network Attached Attached Storage (NAS), Direct Attached Attached Storage (DAS), Virtual SAN, All SAN, All‐Flash XtremIO, Atmos, XtremIO, Atmos, Avamar, Avamar, , Data Domain, Isilon, Pivotal, ViPR Software Defined Storgae, VMAX, VNX (Celerra and CLARiiON) , VNXe, VPLEX, VSPEX. Company’s strategy of both of both R&D and scalable acquisitions drives competitive product/service offerings.
The Bear Case
EMC’s current decelerated current decelerated growth is secular, not cyclical. not cyclical. Flash storage and software‐defined storage will cannibalize traditional hard disk drives. disk drives. Public cloud is only a threat (and threat (and not an not an opportunity) that disintermediates IT spend from both EMC (hardware) and VMware (software). VMware’s entrenched vSphere gets displaced by Open‐Source and Microsoft’s Hyper‐V. Recent premium Recent premium‐priced acquisitions of Data of Data Domain and Isilon are evidence of lack of lack of of internal internal product development. product development.
Valuation and The Bull Case
EMC forward P/E only 11.5X. EMC “stub” valued at just at just 4 4‐5X earnings, ex. VMware stake ($30 billion) and net cash net cash ($8.5 billion) account for account for 75% of EMC’s market cap market cap ($51 billion). The Bear Case has to be so overwhelming right as right as to render EMC a “broken growth company.” Given the Company’s entrenched ecosystem, sticky customers and unparalleled distribution (direct sales (direct sales force) key new products such as Pivotal (“the Android (“the Android operating system of cloud of cloud computing”), XtremeIO and ViPR should ramp‐up quickly in the hundreds of millions of millions of dollars. of dollars. Company’s new $6 billion stock buyback stock buyback quite quite accretive at current at current valuation. Stock downside Stock downside ‐10% to $22. Stock upside/fair Stock upside/fair value $32‐$35, or 33% upside.
The information and statistical data contained herein have been obtained from sources, which we believe to be reliable, but in but in no way are warranted by us to accuracy or completeness. We do not undertake not undertake to advise you as to any change in figures or our views. This is not a not a solicitation of any of any order to buy or sell. We, our affiliates and any officer, director or stockholder or any member of their of their families, may have a position in and may from time to time purchase or sell any of the of the above mentioned or related securities. Past results Past results are no guarantee of future of future results. This report includes report includes candid statements and observations regarding investment strategies, investment strategies, individual securities, and economic and market conditions; however, there is no guarantee that these statements, opinions or forecasts will prove to be correct. These comments may also include the expression of opinions of opinions that are speculative in nature and should not be not be relied on as statements of fact. of fact. Wedgewood Partners is committed to communicating with our investment partners investment partners as candidly as possible because we believe our investors benefit from benefit from understanding our investment philosophy, investment philosophy, investment process, investment process, stock selection stock selection methodology and investor temperament. Our views and opinions include “forward‐looking statements” which may or may not be accurate over the long term. Forward‐looking statements can be identified by words like “believe,” “think,” “expect,” “anticipate,” or similar expressions. You should not place undue reliance on forward‐looking statements, which are current as current as of the of the date of this of this report. We disclaim any obligation to update or alter any forward‐ looking statements, whether as a result of result of new new information, future events or otherwise. While we believe we have a reasonable basis for our appraisals and we have confidence in our opinions, actual results may differ materially from those we anticipate. The information provided in this material should not be considered a recommendation to buy, sell or hold any particular security.
Fat Pitch Capital, LP "... we try to exert a Ted Ted Williams kind of discipline. disc ipline. In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his "best" cell, he knew, would allow him to bat. .400; reaching for balls in his "worst" spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the Fat Pitch would mean a trip to the Hall of Fame; swinging Indiscriminately would mean a ticket to the minors." W a r r e n B u f f et et
Robert W. Deaton, CFA
R. J. Meurer, Jr.
Managing Partner Fat Pitch Capital, LP 1355 Greenwood Cliff, Suit #150 Charlotte, NC 28204 T# +980-207-0252 Cell# +704-996-0828
Managing Partner Fat Pitch Capital, LP 1355 Greenwood Cliff, Suit #150 Charlotte, NC 28204 T# +781-452-7365
High Percentage Idea for Manual of Ideas Conference 2014
THE MANUAL OF IDEAS TM
Our high percentage idea for 2014 is H&R Block. The company’ c ompany’s s stock looks good when viewed through the prism of our checklist. The Fat Pitch Capital Checklist: Durable competitive advantage with fortress balance sheet High returns on invested capital with low capital intensity Shareholder oriented management team
Durable competitive advantage
World's largest tax preparer 12,000 offices with 80,000 tax professionals 98% brand awareness (similar to Coca-Cola, McDonald’s and Walmart) Over 25 million tax returns filed in 2013 Industry leading client retention
Fortress Balance Sheet
No net debt Foolish flow ratio: (current assets - cash) / current liabilities = 26.18%
High returns on invested capital with low capital intensity:
ROA (TTM): 11.9%* ROE (TTM): 51.8%* Cap-ex as % of revenue: 4% *Source: Morningstar
Shareholder oriented management team:
William Cobb became CEO in May 2011 2011 Streamlined operations Shareholder friendly capital allocation FY 2012 Dividends $200 million Share Repurchases: $200 million FY 2013 Dividends: $217 million Share repurchases: $315 million
H & R Block in 2011
H & R Block Today
Tax Preparation Prepara tion • Assisted • Online, Mobile, Desktop • International
Financial Services • • • •
Emerald Prepaid Debit Card Refund Transfer Emerald Advance Advance Line of Credit Peace of Mind
A price that provides a margin for safety:
Rev
2900
Shares outstanding
274
Ebitda margin
0.3
Market price
29.53
Ebitda
870
Market cap
8,091
Cap ex%
0.04
Net cash
285
Cap ex
116
Enterprise value
7,806
Taxes
214
Free Cash Flow
540
FCF
540
FCF yield
7%
FCF yield
7%
Price Target
Target price = $38, based on 5% FCF yield Current price = $29.28 Discount to estimated intrinsic value = 30%
Potential catalysts and opportunities
Sell bank
Affordable Care Act expands market by approximately approximately 24 million Online returns – growing faster than leading competitors Tax plus: Continued growth of Emerald Debit Card
HR Block = Fat Pitch
Half Moon Capital MURPHY USA INC. ( NYSE:MUSA)
BEST IDEAS 2014
Half Moon Capital Disclaimer Half Moon Capital, LLC (“HMC”) (“HMC”) is is not providing investment advice through this material. This presentation is provided for informational purpose only as an illustration of HMC’s HMC’s investment investment philosophy and shall not be considered investment advice or a recommendation or solicitation to buy or sell any securities discussed herein. As of the date of this presentation HMC continues to own the securities discussed herein. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. HMC or its affiliates may engage in securities transactions that are inconsistent with this communication and may have long or short positions in such securities. The information and any opinions contained herein are as of the date of this material, and HMC does not undertake any obligation to update them. Information contained in this presentation has been obtained from sources which we believe to be reliable, but we do not make any representation as to its accuracy or its completeness and it should not be relied on as such. This material does not take into account individual client circumstances, objectives, or needs and is not intended as a recommendation to any person who is not a client of HMC. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. HMC does not provide tax advice. Investors should seek tax advice based on their particular circumstances from an independent tax advisor. In reaching a determination as to the appropriateness of any proposed transaction or strategy, clients should undertake a thorough independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their particular circumstances and make their own independent decisions .
Half Moon Capital Overview •
•
•
•
•
Launched July 1, 2011 Classic value-oriented investment partnership in the spirit of Benjamin Graham and the original Buffett Partnership Focused on equity securities in less efficient areas of the market Intensive research driven investment process Concentrated portfolio of best ideas
•
Goal: Consistent, positive returns compounded over the longer-term
•
Top 10 performance in 2012 and YTD 2013 in long-bias hedge fund category*
Half Moon Capital Investment Philosophy •
Value: Trading price significantly divergent from intrinsic value •
•
•
•
Emphasis on margin of safety for downside protection
Unbiased analysis of overlooked and out-of-favor companies
Generalist approach •
•
Disconnects create asymmetrically skewed risk/ return opportunities
Selectively contrarian mindset •
•
Technical and behavioral dynamics lead to inefficiencies ineff iciencies in the near and medium-term
Flexible mandate to look across all industries and sectors for the most appealing opportunities
Concentrated fund of high conviction ideas •
Deep knowledge of each situation provides an edge and mitigates risks
Half Moon Capital Sources of Opportunit Opportunity y •
Small and mid-capitalization companies •
•
Out-of-favor and misunderstood companies •
•
•
Frequently neglected or lack institutional following ($300M - $5B market capitalization)
Structural shifts in company and industry dynamics Market overreaction to a large, but solvable challenge
Special situations •
•
•
Corporate actions and market events create mis-pricings Perceived complexity or lack of easily accessible information causes investor aversion Spin-offs, post-reorg equities, stressed/distressed, demutualizations, merger securities, recaps, etc.
Half Moon Capital Investment Strategy and Process Identify mispriced securities - Idea generation: Systematic screens, news media, recurring situations, personal network, etc.
Evaluate reason for the mispricing through intensive research - Assess fundamentals: FCF generation, earnings quality, ROIC and asset value relative to price - Public filings, primary calls, management, trade publications, etc.
Find catalysts that may lead to value realization Size Position - Particular consideration to conviction/ edge, liquidity, leverage and market/ s ector exposure
Half Moon Capital Eric DeLamarter - Curriculum Vitae Prior to founding Half Moon Capital in 2010, Eric DeLamarter earned an M.B.A. from The Heilbrunn Center for Graham & Dodd Investing at Columbia Business School, with a concentration in applied value investing. While attending Columbia Business School, Eric was a research analyst at Stelliam Investment Management, a value-oriented hedge fund, where he focused on identifying and evaluating investment opportunities across various sectors. Prior to Columbia Business School, from 2006 to 2008, Eric was an associate at Lineage Capital, LLC, a middle-market private equity fund, where his responsibilities included evaluating and structuring leveraged buyouts. From 2003 to 2006, Eric was an investment banking analyst at RBC Capital Markets and during 2001, Eric was an equity research summer associate at Merrill Lynch. Eric earned a B.A. in history from the University of Michigan in 2002.
Half Moon Capital
Murphy USA Inc. (NYSE:MUSA)
Murphy USA (MUSA) Current Trading Statistics
Summary •
•
•
•
•
•
•
•
Gas stations adjacent Walmart Misunderstood business model Obscured fundamentals Underappreciated return and growth profile Overstated risks
(USD in Millions)*
Ticker Date 52-Week R ange Stock Price Shares Out. (Bas ic) Market C ap Net D ebt Enterpris e Value
N YSE:MUSA 12/27/2013 $46.91 - $36.12 $41.88 47.0 $1,968.4 $249.0 $2,217.4
Earnings Yield (LTM EBIT/EV) Earnings Yield (2014 EBIT/EV) FCF Yield (LTM FCF/EV) FCF Yield (2014 FCF/EV) ROIC (LTM) Float Short Interest ADTV
Net Debt / LTM EBITDA
0.7x
EV / LTM EBITDA EV / 2014 EBITDA EV / LTM EBITDA - capex EV / 2014 EBITDA - capex
5.9x 6.4x 6.3x 7.0x
13.9%
EV / LTM FC F
12.2% 10.5% 9.6% 28.4% 95.6% 8.8% 20.6
EV / 2014 FC F
10.4x
9.5x
Target Price Prem ium to Current
$65.00 55.2%
*Except per share data; Note: FCF = EBITDA - capex - cash taxes - chg. WC
Insider buying
48.00
Several catalysts
44.00
+50% upside
40.00
46.00
42.00
38.00 36.00 34.00 32.00 30.00
3 1 g u A
3 1 g u A
3 1 p e S
3 1 p e S
3 1 p e S
3 1 t c O
3 1 t c O
3 1 t c O
3 1 v o N
3 1 v o N
3 1 v o N
3 1 c e D
3 1 c e D
Background Regional owner and operator of small-format retail gas stations •
•
•
Founded in 1996 based on the European kiosk-style gas station in retail parking lots Focused on volume sale of retail fuel vs C-store merchandise 1,200 locations in the SE and MW, 85% adjacent to Walmart
Murphy Oil (MUR) Spin-off •
•
Spun-off from $12B market cap E&P and S&P 500 constituent MUR on August 19, 2013 Rationale: focus business and unlock value
Murphy USA (MUSA) Thesis •
•
•
•
•
Consensus erroneously focus on lower margins and consolidated financials (which include volatile, non-core segments that have been sold or are being sold) Obscured higher EBITDA and FCF, attractive return profile (ROIC 2x peers) and structural advantages which make the on-going business less sensitive to oil price swings Cursory sell-side coverage, wait and see mentality from buy-side buy -side Meaningful recent insider buying; likely year-end portfolio clean-up selling pressure (spin-off) Trading at significant discount to peers and absolute SOTP value •
•
•
7.1x LTM EBITDA-cape EBITDA-capex x (normalized), 7.0x base case CY2014E EBITDA-cape EBITDA-capex x
Equity offers +50% near-term upside Downside protection: •
•
Retail segment real estate worth more than current EV Strong balance sheet
Catalysts •
Sale of non-core ethanol plants •
•
•
•
Estimated after-tax value: $44M-47M Removes low return, volatile segment and focuses the business
Increased awareness and appreciation for the quality of the business and its near-term growth prospects Margin expansion from increased composition of larger floor plan stores Announcement of dividend or restructuring restructuring (conversion to REIT or MLP)
Investment Merits: Overview Operational Advantages 1.
Own midstream assets
2. Shipper status on pipelines 3. Relationship with Walmart 4. Small format
Result •
•
•
•
Maintain competitive fuel gross margins while also being a low cost provider Lower % margins, but much higher dollar margins at the unit level More rapidly manage oil price fluctuations Highly scalable business
Investment Merits: Strategic Assets Fuel Sourcing Advantages •
•
Midstream Assets: Owns 6 terminals Wholesale business (fuel sales to external customers) •
•
•
•
Midstream Assets
Priority is to source low cost gas for retail segment, remainder sold in the market Consolidated within its retail segment numbers for competitive reasons 1B gallons were sold wholesale (to external customers) at a 4c per gallon margin in 2012
Shipper status on Colonial pipeline: •
•
Procure gas at lower prices than competitors Opportunistically sell space on the pipeline when prices are elevated (as it did in 2012 for 8c a gallon rather than sell wholesale at 4c)
Real Estate
x
Current Station Sites
Investment Merits: Walmart Relationship Walmart Relationship Relationship •
•
•
•
•
•
+10 year relationship 910 of 1,200 MSUA locations with agreement to purchase and build +200 more over next 3-years Discount program: 1-3c per gallon customer reward paid by WMT Walmart card reduces interchange fee Proximity to highly trafficked supercenters supports high volume model MUSA owned land provides independence
Investment Merits: Unit Economics Store Metrics
Unit Economics Comparison (Annual per Store) MUSA
($000s, except unit l evel data) •
•
•
•
•
Lower overhead
2
208 ft Layo Layout ut 1,200 ft Layout C ap ex - Build ou t & La nd
Higher GM/ ft2
Fuel
ROIC 2x peers
C ap ex - Ma inten an ce
•
Optimized layout Margins will converge with its peers as converts and rolls out more 1,200 ft2 stores
Gallon s So ld
1 ,8 50
2 ,1 00
2,46 0
2,46 0
2 ,4 60
26
31
37
43
38
3 ,3 24
3 ,3 24
1,52 6
1,98 5
1 ,4 77
12 .9
12 .9
1 8.1
1 3.2
17 .7
Gros s Marg in
42 8
42 8
2 67
3 64
26 2
5 .5
5 .5
8.5
7.5
5 .0
1 ,8 60
1 ,9 80
1,38 4
1,96 8
1 ,6 26
Breakeve n Ma rg in (Cen ts / Gallon ) Merchandise Merchandise (Including Foodservice) 2
Revenue/ ft
8 .9 42
1 .6 50
0.46 1
0.65 6
0 .5 42
Gros s Marg in
24 2
30 7
3 92
6 32
54 0
GM%R even ue
1 3.0 %
1 5.5 %
28 .4%
3 2.1%
3 3.2 %
1 ,1 63
25 6
1 31
2 11
18 0
Gros s Marg in
67 0
73 5
6 59
9 96
80 1
Ove rhe ad (SG&A, C C, e tc)
36 0
36 0
5 26
7 14
59 3
GM/ ft2 ($s) Total
EBITDA
31 0
375
13 2
28 2
2 09
EBITDA-Maint. Capex
28 5
344
95
23 9
1 71
15.4%
16.4%
3.9%
ROIC
* NACS 2012 State of the Industry Report; CST, PTRY, CASY, ATD reporting
Top Quartil Quartile e Large Large Franchises ranchises
C en ts / Gallon
R even ue •
Average Average
Capital Costs
Lower breakeven Higher EBITDA
Industry* 2
9.7%
6.9%
Investment Merits Result •
Maintain competitive fuel gross margins while also being a low cost provider •
•
•
Cash breakeven: 6.6c vs 12.1c industry ave
High volume, low cost position leads to lower % margins than its peers, but much higher dollar margins at the unit level •
•
Operates at 56% of the average industry operating costs with lower breakeven fuel margins*
Per store: 50% higher EBITDA and 65% higher FCF per store and 2x the ROIC
More rapidly manage oil price fluctuations •
Largest GM drop from 2010-2011 was 34bps vs 300bps for its public peers
Growth Opportunit Opportunity y Open 60 stores/ year with 200 openings over the next 3 years and 400-500 more through 2020 within Walmart network •
•
•
All in the 1,200ft2 format, financed from FCF, half the land already acquired New stores ramp to capacity almost immediately im mediately and each contribute $375k in annual EBITDA or incrementally $75M in EBITDA, $69M EBITDA-mcapex by 2015
Low cost of build-out make business more scalable and flexible 200 Store Expansion Plan Prior to 6/30/2 013
Land cos t/ s tore($000s ) Land acqui red (units ) Land cos t ($000s ) Capex/ s tore($000s )
12/3 1/1 3
12/31/1 4
12 /31/15
Total
400 100
50
50
0
200
40,000
20,000
20,000
0
80,000
1,700
Stores buil t (units )
75
75
50
200
Capex ($000s )
127,500
127,500
85,000
340,000
Total Cost
147 ,500
147 ,50 0
85,000
735
735
735
25
150
200
18,383
110,295
147,060
344
344
344
25
150
200
GP/ s tore ($000s )
735
Producing uni ts GP contri bution ($000s ) EBITDA-Mai nt. Capex/ s tore ($000s ) Producing uni ts
344
42 0,00 0
275,738
Management CEO Andrew Clyde •
•
•
•
Joined at the spin-off Formerly downstream industry consultant at Booz & Co. Strategy consultant to MUSA Architect of the optimized 1,200ft2 format
Insider Ownership •
•
Hold 6% of S/O Insider purchases •
•
CEO Clyde, 2k shares (12/13-12/16) Direct Deming, 25k shares (11/25)
Non-core Assets Ethanol Facilities •
•
Began sale of both plants following the spin-off Dec. 19: Sold Hankinson, ND plant for $170M, $131M after-tax •
•
130M gallon capacity sold for $1.31/ gallon
Remaining Hereford, TX plant being sold ($47M after-tax value) •
105M gallon capacity estimated sale at $0.60/ gallon
Result •
•
•
Removes non-core, low ROIC, volatile business Performance drag: Drought in 2012 compressed corn crush for ethanol, resulting in a $38M hit to MUSA consolidated earnings Proceeds used for debt reduction and future growth capex
Renewable Identification Numbers (RINs) Overview •
•
•
•
•
RINs are created by blending ethanol and bio-diesel fuels Sold in the market (exchange trading started on CME in May) to companies that are unable to meet annual quotas as set by the EPA In 2012 D6 ethanol RINs traded for $0.05-0.10 per gallon FDAs increasing requirements under Renewable Fuel Standards 2 (RFS2) (RFS2 ) led to a spike in RIN prices (ethanol RINs R INs up to $1.45 per gallon in July 2013) RINs prices currently $0.30
MUSA •
•
•
RINs created in MUSA Wholesale business (not ( not related to ethanol plants) plants ) 15M RINs per month capacity with 100% contribution margin m argin Normalized EBITDA: $30M per year ($0.25 per RIN, 10M RINs/ month)
Financial Performance On-going Retail Business
Financial Perform ance ($000s)
•
•
Excludes: ethanol and refining (divested in 2011) Strong FCF Profile: Low maintenance capex and zero to slightly negative WC requirements
Revenue
Petroleum Merchandis e Other (RINs ) Total Revenue
Fuel Gros s Profit Fuel GM
Me rc rcha nd nd is is e Exp en en se se Merchandise GM Total Gross Profit
Total GM Total EBITDA
Margin
EBITDA (ex-RINs )
2010
2011
2012
13,377,841
16,586,845
16,854,985
16,253,824
LTM
1,969,220
2,115,567
2,144,347
2,162,496
9,042
9,538
11,708
79,954
15,356,103
18,711,950
19,011,040
18,496,274
484,186
625,683
556,668
602,641
3.6%
1 ,,7 7 17 17 ,,1 17 7 12.8% 745,271
4.9% 263,026
1.7%
3.8%
1 ,,8 8 51 51 ,,8 8 67 67 12.5% 898,921
4.8% 374,110
2.0%
3.3%
1 ,,8 8 55 55 ,,6 6 41 41 13.5% 857,082
4.5% 300,448
1.6%
3.7%
1 ,,8 8 81 81 ,,5 5 95 95 13.0% 963,496
5.2% 377,596
2.0%
253,984
364,572
288,740
297,642
147,347
48,626
72,895
178,145
Capex
Growth Maint. (Including Term inal Total Capex EBITDA-Maint. Capex
Les s : Chg. WC Les s : Taxes (38%) Unlevered FCF
29,900
28,890
30,250
23,050
177,247
77,516
103,145
201,195
233,126
345,220
270,198
354,546
–
–
–
–
81,380
123,618
92,059
121,965
151 746
221 602
178 139
232 581
Murphy USA (MUSA) Risks •
•
•
Secular decline in gasoline consumption: MUSA’s stations are located in the SE and MW, regions with a lower adoption of alternative fuel vehicles and limited transportation alternatives to cars Spike in oil prices: low cost sourcing and history of effectively managing through challenging pricing environments Walmart relationship: relationship: MUSA MUSA is not not permitted to sell higher margin prepared prepared foods, but are allowed to sell fountain drinks. WMT also also has right of first refusal on the sale of any MUSA land. Mutually beneficial relationship mitigates risk of separation. MUSA owns land limiting WMT’s leverage
Downside Protection Real estate value of retail network greater than current EV Strong balance sheet Asset base could be a source of liquidity (collateral for an ABL ABL or through saleleasebacks) •
•
•
Valuation Relative Basis •
5.9x EV/ LTM EBITDA, 3-4 turns less than its closest peers
•
EBITDA-mcapex and EBIT multiple gap even more pronounced
Peer Comparison (US$ (US$ in Millions)
LTM
LTM EV/
RE
EBITDA
Total
Fuel
Fuel % Capex
% Owned
Margin
GM
GM
of GM % Rev.
5. 2%
16. 5%
14.2%
23%
4.4%
23%
3. 7%
12. 8%
22.5%
26%
1.5%
Stores
EBITDA/
EBIT/
EBIT
(000s )
Stores
Stores
ROIC
11.5x
13.4x
1,749
$214.7
$145.3
16.4%
99%
10.9x
13.5x
16.7x
5,878
$258.9
$167.8
13.1%
EV
EBITDA
EBIT
EBITDA EBITDA-MCapex
$3,404
$375
$254
9.1x
$17,436
$1,522
$986
Casey's General Stores, Inc.
CASY
Alimentation Couche-Tard Inc.
TSX:ATD.B
CST Brands, Inc.
CST
$3,368
$399
$277
8.4x
9.4x
12.2x
1,034
$385.9
$267.9
23.0%
61%
3. 3%
9. 8%
18.8%
47%
1.8%
The Pantry, Inc.
PTRY
$1,283
$205
$88
6.2x
9.0x
14.6x
1,562
$131.5
$56.2
6.0%
26%
2. 9%
11. 4%
11.4%
26%
1.0%
MUSA
$2,217
$378
$307
5.9x
6.3x
7.2x
1,179
$320.3
$260.7
28 2 8. 4%
90%
2. 1%
5.8%
12.9%
68 68%
0. 9%
Murphy USA Inc.
•
•
More attractive return profile, growth prospects, competitive advantages and asset-base (terminals, ethanol plants and 90% of store real estate owned) 9-10x LTM EBITDA implies $65-75 per share, 55-80% upside to current ($59-67 per share, 40-60% upside normalized *)
Valuation Absolute Basis Basis •
Good business at a low quality business price
•
Normalized LTM: 6.6x EV/ EBITDA, 9.0% FCF yield
•
Normalized 2014: 6.4x EV/ EBITDA, 9.5% FCF yield Financial Performance ($000s)
Revenue
2010
20 1 1
2012
LTM
13 ,3 7 7 ,84 1
16 ,5 8 6 ,8 45
1 6 ,8 5 4 ,98 5
16 ,2 5 3 ,8 24
1 6 ,9 94 ,8 8 0
1 8 ,3 3 8,8 8 0
Me rch a n dis e
1 ,9 6 9 ,22 0
2,11 5 ,5 6 7
2 ,1 4 4 ,34 7
2,1 6 2 ,4 9 6
2 ,4 27 ,8 4 0
2 ,6 1 9 ,84 0
Oth e r (RINs )
9 ,0 4 2
9 ,5 3 8
1 1 ,7 08
7 9 ,9 5 4
3 6,0 0 0
3 0 ,0 00
15,356,103
18,711,950
19,011,040
18,496,274
19,458,720
20,988,720
745,271
898,921
857,082
963,496
928,231
992,791
Petro le u m
Total Revenue Total Gr oss Profit To ta l GM
Total EBITDA Marg in
4 .9 %
263,026 1 .7 %
4 .8 %
374,110 2 .0 %
4 .5 %
300,448 1 .6 %
2014E
5 .2 %
377,596 2 .0 %
2015E
4 .8 %
346,561 1 .8 %
4 .7 %
365,121 1 .7 %
EBITDA (e x-RINs )
2 5 3 ,9 84
36 4 ,5 7 2
2 8 8 ,7 40
29 7 ,6 4 2
3 1 0,5 6 1
3 3 5 ,12 1
EBITDA-Maint. Capex
233,126
345,220
270,198
354,546
316,261
332,624
Unlever ed FCF
151,746
221,602
178,139
232,581
213,828
223,137
Valuation Sum-of-the-Parts Analysis (US$ in Millions)*
Downs ide
Ba s e
Ups ide
Notes
MUSA Stores Stores (Core bus iness ) EV/ EBITDA
1,500.0
2,800.0
3,150.0
6x $250M EBITDA, 8x and 9x $350M LTM EBITDA (peers trade 8-10x)
EV/ EBITDA-m capex
1,840.0
3,200.0
4,160.0
8x $230M, 10x and 13x $320M LTM EBITDA-capex (peers tr trade 10-13x)
Retail Franchis e As se set Value
2,458.0
2,693.8
2,811.7
1,179 x $2.0, $2.2M and $2.3M per owned s to tore + $100M term in inal as se sets
1,932.7
2,897.9
3,373.9
210.0
300.0
300.0
200 s tores over next 2-3 years , cos t $2.1M/ s tore, 20% IRR
131.0
131.0
131.0
Sold 12/19 for $1 70M, 130M gallon s x $1.31/ gallo n ($131M after-tax) after-tax)
MUSA Current (Average above) MUSA Growth Plan Ethanol Ass Ass ets Hankins on, ND Hereford, TX
44.0
47.0
47.0
175.0
178.0
178.0
2,317.7
3,375.9
3,851.9
Total Debt
642.4
642.4
642.4
Total Cas h
262.5
262.5
262.5
379.9
379.9
379.9
1,937.8
2,996.0
3,472.0
$41.23
$63.75
$73.87
Total Proceeds - As s ets for Sale Enterprise Value
Les s : Current Net Debt Equi ty Val ue Equity Value per Share Prem ium to Current *Except per share data
(1.6% )
52.2%
76.4%
105M gallons x $0.50-0.60/ gallon; after tax (acquired i n 2010 for $40M)
Excludes proceeds from Hankins on plant s al e
47M shares outstanding
Murphy USA (MUSA) Catalysts •
Sale of remaining ethanol plant •
•
•
•
Removes low return, volatile segment and focuses the business
Increased awareness and appreciation for the quality of the business b usiness and its near-term growth prospects •
•
Estimated after-tax value: $44M-47M
Demonstrated stand-alone financial performance
Margin expansion from increased composition of larger floor plan stores Announcement of dividend or restructuring (conversion to REIT or MLP)
Half Moon Capital
Appendix
Murphy USA (MUSA): Detailed Financials Financial Performance ($000s, except unit level data)
Revenue
2010
2011
2012
LTM
13,377,841
16,586,845
16,854,985
16,253,824
Merchandis e
1,969,220
2,115,567
2,144,347
2,162,496
Other (RINs )
9,042
9,538
11,708
79,954
Total Revenue
15,356,103
18 18,711,950
19,011,040
18 18,496,274
Fuel Expens e
12,893,655
15,961,162
16,298,317
15,651,183
484,186
625,683
556,668
602,641
Petroleum
Fuel Gros s Profit Fuel GM
Merchandis e Expens e Merchandise GM Total Gross Profit
Total GM
Station Expens e
3.6%
1,717,177 12.8% 745,271
4.9%
3.8%
1,851,867 12.5% 898,921
4.8%
3.3%
1,855,641 13.5% 857,082
4.5%
3.7%
1,881,595 13.0% 963,496
5.2%
396,053
433,821
447,102
458,464
SG&A
86,192
90,990
109,532
127,436
D&A
55,336
61,136
66 6 6,913
70,219
Other
261
4 49
1, 1,893
2,043
EBIT
207,429
312,525
23 231,642
305,334
Taxes
81,380
123,618
92,059
121,965
Tax %
39 %
4 0%
4 0%
40 %
EAT
126,049
188,907
139,583
183,369
Total EBITDA
263,026
374,110
300,448
377,596
Margin
EBITDA (ex-RINs ) EBITD A(R et etai l, ex-w ho ho le sa sal e) e) Im plied Wholes ale EBITDA
1.7%
2.0%
1.6%
Growth Total Capex EBITDA-Maint. Capex
Les s : Chg WC
Includes overhead
2.0%
253,984
364,572
288,740
297,642
34 3, 3,680
3 56 56,48 0
3 67 67 ,0 ,0 40 40
37 2, 2,640
9,042
9,538
11,708
4,956
178,145
Capex
Maint. (Including Term inals )
Notes: - Historically Historically MUSA consolidate consolidated d financia financials ls include included d refining in 2010 (divested in 2011) and ethanol (being sold) - MUSA does does not provide provide separate separate financia financiall informat information ion for for the wholesale segment for competitive reasons - Any fluctuat fluctuations ions in its its financial financial contributio contribution n can be considered intercompany since the wholesale business’s purpose is to support retail - In order order to estimate estimate contribu contribution tion separ separately ately from from corecoreretail, wholesale and RIN, retail EBITDA per store is assumed to be is $320k per year and RIN revenue is assumed to have 100% EBITDA margins
147,347
48,626
72,895
29,900
28,890
30,250
23,050
177,247
77,516
103,145
201,195
233,126
345,220
270,198
354,546
$32 0k 0k/s to tore
Murphy USA (MUSA): Unit Financials Unit Level (Per stor e)
2010
20 1 1
2012
LTM
Stores Sta rt
1 ,0 4 8
1 ,0 9 9
1 ,1 2 8
1 ,1 5 0
N ew
51
30
37
30
–
(1)
En d
Clo s e d
1 ,0 9 9
1 ,1 2 8
1 ,1 6 5
1 ,1 7 9
Avg Avg Num ber Stores
1,074
1,114
1,147
1,165
0 .1 1 4
0 .1 5 6
0 .1 2 9
NA
Gallo n s s old p e r m o n th
307
278
277
NA
Merch . re ve n ue p e r m o n th
154
158
156
NA
Merch a n dis e m arg in
1 3.1%
1 2 .8%
1 3.5 %
–
(1 )
Re ve nu e a n d C os ts Fu e l m a rg in pe r g a llon (d o llars )
Fu e l Co s ts (An n ua l) Merch a n dis e Co s ts (An n u al) Sta tio n C os ts (Ann u a l) SG&A (An n ua l)
1 3 .0%
1 2 ,0 0 5
14 ,3 2 8
1 4 ,2 10
1 3 ,4 4 0
1 ,5 9 9
1 ,6 6 2
1 ,6 1 8
1 ,6 1 6
369
389
390
394
80
82
95
109
Murphy USA (MUSA) M&A Appeal: Private Equity •
•
•
FCF profile and asset base (ie. real estate, terminals) support leverage Lower economic sensitivity Fragmented industry presents consolidation opportunity for an established platform such as MUSA
Half Moon Capital
Half Moon Capital, LLC 304 Park Avenue South, 11 th Floor New York, NY 10010 Ph: 646.490.6744
[email protected] www.halfmooncapital.com www.halfmoonca pital.com
Land Develo veloper per Needs TLC Build your dream portfolio with UCP Presented by Jake Rosser Date: January 8, 2014
Com ompany pany Overvi vervie ew
UCP Ticker: UCP Price: $14.50
Capitalization Mkt Cap: $266M EV: $208M
• IPO in July 2013 at $15.00 per share • UCP is a hybrid land developer and home builder • Primarily acquires and develops land for residential use • Increased push into home building promises to unlock significant value • Focused on high growth western markets with three quarters of operations based in California and a growing presence in Washington
UCP, an Orphaned Home-Builder Looking for a Home • Poorly received IPO – Underwhelming results from conglomerate parent diminished demand – Small market-cap ($266M) failed to attract institutional interest
• Poorly timed IPO – Concurrent with IPOs of several mainstream homebuilders including WCI, WLH, TPH and TMHC – Taper tantrum hammered housing stocks immediately after IPO
• Hybrid business model focused on development first and building second adds complexity.
Wilbur Ross Like History • Markings of a Wilbur Ross distressed industry roll-up • PICO capitalized UCP in 2008 to take advantage of fire-sale prices during the worst of the housing crisis. • Over $190M in capital deployed to take advantage of dislocation in housing market. – Over 80% of lots acquired between 2008-2011 at distressed prices
Lots by Vintage
Significant Land Holdings consisting of 6,659 Lots in Strategic Coastal Locations
Land Portfolio to Fuel Future Growth • Ample land supply supply provides visibility into future development potential – No need to recycle cash flow into land replenishment – Existing holdings equate to 8 years of supply at current sales pace – Deliveries through 2015 sourced from current inventory
• Land pipeline should allow UCP to grow through the housing recovery – Guidance for revenue growth of 100% in 2014
Hybrid Homebuilding and Land Development Strategy Provides Optionality • Flexibility of land development and home building allows for highest return of capital – Less capital intensive than home building alone resulting in lower inventory carrying costs – Land sale versus development decision is determined by return on capital – Land holdings are a hidden asset dampening the need for reinvestment and creating potential for capital return to shareholders.
• Mark-to-market Mark-to-market impairments less likely l ikely with land recorded at historical cost
Significant Value Capture through Home Building • Funds raised from IPO will allow UCP to develop its land holdings • Home building subsidiary, subsidiary, Benchmark Communities, launched in 2010 • Increased community count from 2 to 9 over the last year – Expects a doubling of community count in 2014 with approximately 1,100 lots – Existing land portfolio capable of supporting 62 communities • Increased home deliveries from 5 to 62 on year over year basis during Q3 – Rise of 27% in Y/Y home ASPs ASPs from $271K to $345K
• Lower gross margins at 22% compared to 33% for land development but much higher absolute profits
What is i s UCP wo wort rth? h? • Book value analysis – P/B multiple of 1.2 compared to industry average of 2.2 • Return of 83% with industry multiple – Newly minted Homebuilding IPO peers including TPH, WLH, WCIC and TMHC, possess a P/B value of 1.7 • Return of 67% with rerating to IPO peer P/B – Direct comp of TPH has a P/B value of 1.9 indicating a potential return of 58%
• Trades below liquidation value – Enterprise value of $208M including net cash of $58M – Compare to $171M in real estate assets, carried at historical cost,along with $58M in net cash or $229M
Long-lived Assets Understate Under state True Economic Value
• GAAP accounting standards require land be carried at lower of historical cost or fair value – Accounting treatment treatment materially undervalues UCP’s UCP’s raw land holdings – More than 80% of lots purchased before 2012 with the majority of purchases incurred in 2008/2009, the worst years of the housing crisis.
• According to Case-Schiller, Case-Schiller, in UCP’s core markets of San Francisco and Seattle, housing prices have risen ris en 53% and 25% respectively from trough levels.
UCP UC P Markets Markets Ha Have ve Seen Seen Rapi Rapid d Pric Price e Ap Appr preciati eciation on Over th e Past Past Yea Year r
Pri riva vate te Buyer – Rece cent nt Deals High ighli light ght Value • Tri-Points (TPH) acquisition (Nov, (Nov, 2013) of Weyerhaeuser’s (WY) homebuilding lots. – A total of 27,000 lots spread across Arizona, California, Nevada Nevada and Texas for $2.7B or $100k per lot – On balance, lots in CA are more expensive than lots in AZ, NV and TX – Applying comp to UCP UCP equates equates to $665.9M a 2.2x return from current current EV
• Toll Brothers’ (TOL) acquisition (Nov, 2013) of lots owned by privately held Shapell Industries – A more direct geographical compare compare to UCP’s UCP’s geographic footprint footprint • A total of 5,200 lots concentrated concentrated in San Francisco, Los Angeles and Carlsbad Carlsbad – TOL paid paid $1.6B for the lots for a price per lot of $308K. We apply a 70% discount to TOL’s per price to account for TOL’s focus on higher-end homes. • Applying comp to UCP UCP equates equates to $615M, a 2x return from current EV
• Debt-free balance sheet enhances appeal of UCP as an acquisition candidate.
Hous ousing ing Fund unda amenta mentals ls Supp upport ort Stro trong ng Case for Appre Appr eciation
• According to the Case-Shiller 20-city Composite Home Price Index, home prices remain 20% below peak levels. • According to NAR, homes are more affordable now now than any of the previous 40 years prior to the crash in 2008. • Current cycle has legs – Most up-cycles in home prices last 5-10 years – “The US is clearly in a home-price home-price up-cycle that has has a lot of room to run.” – Mark Zandi, Chief Economist for Moody’s Analytics
• Household creation dipped to .5M for five years between 2007-2011, 2007-2011, compared to normalized levels of 1M suggesting significant pent-up demand • According to NAR, the nationwide nationwide supply of homes stands at 5 months compared to a normalized level of 10 months.
Histor istoric ic colla c ollapse pse in housin housing g sta starts rts
• Housing starts remain well below trend and would need to hit 1.7M to meet current demand.
