Elah Holdings Inc fka RELYQ (ELLH)

[Enterprising Investor]

This Sam Zell Favorite Could Double in Value (6/02/16)

Acquisition-oriented Real Industry has sat on its hands since last year, frustrating short-sighted investors.

By David Englander

Investors are really losing patience with Real Industry (ticker: RELY ).

The acquisition-oriented company — backed by Sam Zell, who has a 7% stake — hasn’t struck a deal since February 2015, when it paid $525 million for Real Alloy, an aluminum-recycling operation.

On Real’s May 11 earnings call, management reported it had been close to reaching a major deal in the quarter, but a disagreement over price caused it to fall through. Even still, the company appears upbeat on its M&A prospects. In the earnings release, CEO Craig Bouchard said, “We are seeing opportunities we like.”

Since the report, the shares have dropped more than 15% to a recent $6.68. That selling looks short-sighted. Real’s management team is disciplined in its approach, and the delay in making a deal likely reflects its desire not to overpay. That’s not a bad thing.

In Barron’s, I’ve been positive on Real stock as recently as March when it traded for $7.65. I still see plenty of upside. Real has $930 million in federal net operating losses (NOLs). As the company steps up its activity, it should realize that value, which will send its earnings and free cash flow soaring.

B. Riley analyst Josh Nichols values the stock at $16 a share, assuming Real Industry monetizes all its NOLs.

Formerly a shell company known as Signature Group Holdings, Real Industry is a legacy of subprime mortgage originator Fremont General, which filed for bankruptcy protection in 2008. Zell gained control in 2013. The aluminum-recycler, Real Alloy, is responsible for nearly all of its revenue.

In 2015, Real generated $58 million in Ebitda on $1.1 billion in revenue from 10 months of ownership of Real Alloy. This year, Nichols looks for $69 million in Ebitda (earnings before interest, tax, depreciation and amortization), reflecting a full 12-month contribution from the business. Those estimates don’t include any potential acquisitions

Real Alloy is one of the largest aluminum recyclers in the world. The unit buys scrap aluminum and converts it into reusable metal for use on cars, trucks, and airplanes. Most of its finished goods are sold to the auto industry.

Aluminum prices have weakened in the past year, but business has held up, in part due to the company’s tolling agreements with aluminum mills and auto companies. Under tolling, Real converts customers’ scrap aluminum to finished aluminum for a fee and takes no commodity risk. In the March quarter, tolling accounted for 53% of total tonnage.

Management, too, has made strides with its efficiency initiatives. In the latest quarter, Ebitda per ton improved 6%, sequentially, on flat volumes. Ebitda in the quarter rose 7% to $18.3 million.

Real has ample liquidity to do another big deal. Net debt stands at just over $300 million. It’s likely that the company could finance a new acquisition through a combination of debt, equity, or a rights offering.

What’s clear is that management values its equity highly, and isn’t apt to do anything that would be dilutive. In his 2015 letter, CEO Bouchard wrote, “we will treat common shares like gold.”

In time, investors could reap the rewards.

http://www.barrons.com/articles/this-sam-zell-favorite-could-double-in-value-1464866824