Replies to post #2648 on Elah Holdings Inc fka RELYQ (ELLH)

[DennyCrane550]

Good Stuff, Pagz!

Here was the writeup i read that got my attention

http://www.zenolytics.com/2014/10/portfolio-update-its-all-in-the-details/

On Monday, I tweeted the following:
10-22-14

https://twitter.com/AMeshkati/with_replies


SGGH is Signature Group, which was an NOL shell, with approximately $900 million in NOLs. The NOL part is great, but it’s not the reason I bought into the company here.
On Friday, the company announced their first acquisition, paying $525 million for the world’s largest independent aluminum recycler.
Before getting into the micro view of the SGGH, let’s talk about the timing of this announcement. I don’t think they could have timed the announcement of the acquisition at a worse time for fetching any kind of premium or gaining any kind of new interest from investors. In other words, the 20%+ reaction on the first day that has now been reduced to about a 10% upside premium for the shares post-announcement does not reflect the new reality, capabilities or potential for this company going forward.
The market of Q3 and Q4 2014 is incapable of factoring in premiums to anything with a market cap below $500 million. Invariably, a pessimistic view has been given to small companies unless they present clear, straightforward data that requires very little in the way of analytic interpretation. This is what occurs during negative cycles in the micro/small-cap space. Nobody cares. And that is exactly where the opportunity for 200, 300, 500 or even 1000 percent upside in names resides. The simple act of Wall Street being in a drunken, depressive malaise that creates a black hole for proper pricing of tangible, positive fundamental changes in these companies is where the opportunity lies.
So let’s look at SGGH and the new form they have taken with this acquisition:
First point: Recycled aluminum is a growth industry not because individuals are going to be increasing their consumption of Dr. Pepper, but rather, automobile manufacturers are being held to a higher standard of fuel efficiency. As such, they need a lighter material that doesn’t compromise strength or safety. Tesla uses aluminum frames. The new Ford F-150 is the first Ford model to use an aluminum frame. Toyota is increasing use of aluminum in their automobiles. You get the picture. It is a sustainable trend in automobile manufacturing.
Recycled aluminum is preferred as aluminum can be recycled without compromising quality. There is no need to have “virgin” material.
Aluminum sheet deliveries to auto makers are forecast to rise from 504 million pounds in 2014 to 2.7 billion pounds by 2018.
Second point: SGGH is paying $525 million for a company with approximately $75 million in EBITDA in 2014. The high point of their EBITDA was $105 million in 2011 on revenues of approximately $1.6 billion. This is going to be financed with a combination of debt, preferred stock, cash and a rights offering, the details of which are yet to be announced. The cost of debt being taken on hasn’t been announced. Even assuming the higher end of the rate spectrum 6-7% interest their senior facility, credit line etc. would equate to approximately $25-30 million in debt service per annum. Leaving the company with $45 million in earnings on the low end before CAPEX. This is a capital intensive business so I’m assuming that CAPEX as a percentage of EBITDA will be approximately 20-30 percent, which equates to roughly $20 million. Leaving the company with $25 million in cash flow. Meaning that at the current valuation the company is trading at approximately 4 times free cash flow (pre-equity/rights offering) based on the current earnings.
Third Point: The management of the company is going to be taking a private equity approach to this business. Meaning that they will be cutting costs, increasing margins and enhancing revenues. The numbers that are reflected based on previous management’s operational ability will be completely different than what we see one year from now when SGGH reports. The high end of EBITDA was $105 million in 2011. Management is eyeing this figure as their goal going forward. There is no growth or enhancements to the business being reflected in the current per share price.
Fourth Point: The CEO of the company, Craig Bouchard, is stellar. Craig Bouchard’s father was a successful steel executive rising from the mail room at Inland Steel. In 2004, Bouchard founded Esmark starting with revenues of $4 million and growing it through 9 separate acquisitions to a $3.5 billion company before it was acquired in 2008. In the recent conference call for SGGH, following the acquisition, Bouchard said he wants to take a Warren Buffett approach to growing SGGH through multiple acquisitions over time. He has a track record of accomplishing this with Esmark. I expect similar results here.
Experience that comes from generational family expertise in an industry is invaluable and cannot be replicated easily. Bouchard has this advantage given the family history.
Fifth Point: Especially with the recent weakness in share price, the rights offering is going to be priced extremely well. It is going to be great way of building the position at a very favorable discount.
Sixth Point: Multiple acquisitions will take place here as soon as the aluminum business begins proving its worth. The stock will really begin moving once Bouchard proves to Wall Street that he is running an efficient operation with potential to reduce debt in order to facilitate further accretive acquisitions. Once Wall Street gets this point, the stock has 200% plus upside potential from the current share price. I’d expect this reality to start becoming clear by Q2-Q3 2015.
The bottom-line here is that Wall Street is in a pessimistic mood currently. As such they are pricing SGGH as if margin compression is on the way and EBITDA will be flat to down in the quarters ahead. Investors are not factoring in the private equity approach to efficiency that will be taken here that will actually boost margins and EBITDA in the quarters ahead making this already attractive investment grand in the scale of opportunity presented.
I look forward to the pending rights offering to make this a large position.

[Olmsted]

Thanks for kicking off, Vince.

I ran some numbers last week:

Debt

Secured debt: $70M (new asset-backed loan)
Sr. debt: $300M (new debt)
Sub debt:$18.3M currently held at NABCO (not the parent)
Other liabilities: ~$17M
Total debt: $405.5M

Cash: not much after acquisition

Equity
Preferreds: $30M
Current common shares: 12.5M
New shares: 12.25M
(I used $10 a share as a placeholder as well. Doesn't really matter for the rights offering if you participate - but it does for the secondary offering)
Total equity mkt cap @ $10/shr: $277.5M
(basically agrees with your numbers)

Earnings

EBITDA: $80M - $105M (TTM ~$80M, TTM + growth indicated by last YoY quarter - $105M)
Interest: $23.2M (assumed blended 6% on debt - this is probably too high. NABCO pays ~5%, but I didn't check the details on its guarantees.)
Taxes: assumed ~0 (10Q indicates 72K, probably state/local)
Maint. CAPEX: $30-$35M per management
FCF: $24M (low EBITDA, high CAPEX) to $54M (high EBITDA, low CAPEX)

Let's go with $36M as a good midpoint using $90M EBITDA and $32.5M CAPEX.

That's an EV/EBITDA of ~7 and a P/FCF of ~7. The most optimistic scenario has P/FCF at ~5, pessimistic P/FCF at ~11.

Of course, this gives no value to the NOLs - at least those that will not be consumed by this acquisition.