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8th annual new york value investing congress October 1, 2012 new york, ny Underfollowed ad Undervalued: More Small Cap Bargains Guy Gottfried, Rational Investment GrOUP Join
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8th annual new york value investing congress October 1, 2012 new york, ny Underfollowed ad Undervalued: More Small Cap Bargains Guy Gottfried, Rational Investment GrOUP Join us for the 8th Annual Spring Value Investing Congress in Las Vegas! To register and benefit from a special discount go to Underfollowed and Undervalued: More Small Cap Bargains Guy Gottfried, Rational Investment Group (647) From the Father of Value Investing Investment is most intelligent when it is most businesslike. -Benjamin Graham Do I understand the business? Is the balance sheet sound? Am I partnering with the right people? Am I getting a great deal? Rarely worth compromising on these criteria; why not insist on the complete package before committing your hard-earned capital? Investment Idea: ClubLink Enterprises (TSX: CLK) Golf Club and Tourism Operator Snapshot Price $7.55* Diluted Shares O/S 26.7 million Market Cap Dividend $201 million* $0.30* (4.0% yield) *All financial figures pertaining to ClubLink are in Canadian dollars unless otherwise noted ClubLink: Two Segments Golf 51 golf clubs in Canada and US Three geographic clusters: Southern Ontario/Muskoka, Quebec/Eastern Ontario, Florida Rail, Tourism & Port Three docks providing four berths in Port of Skagway, Alaska White Pass & Yukon Route: railway built in 1898 during Klondike Gold Rush, now operated as tourist excursion between Skagway and Yukon Why is ClubLink Worth Your Attention? Two high-quality, predictable and growing businesses trading at 5.5x free cash flow (FCF) Golf and tourism business each worth more than stock price Tremendous growth opportunity in distressed industry and financial strength to fully exploit it Excellent management and capital allocation Why is It So Cheap? No sell-side coverage or conference calls Illiquid due to high insider ownership Unusual business: owns two totally unrelated divisions; named after golf segment yet also runs tourist operation in Alaska Recently-acquired Florida golf clubs significantly under-earning; masks true earnings power and magnitude of US opportunity Brief History 1997: outside investor Rai Sahi wins proxy contest against metals distributor Russel Metals, begins divesting non-core assets Spins off White Pass via rights offering into public firm called Tri-White Rights offering underfollowed, Sahi takes control of Tri-White 2001: Tri-White buys 25% stake in ClubLink Corp. (LNK) held by ClubCorp (US golf club owner) In ensuing years, uses additional purchases, buybacks by LNK to boost ownership to over 70% 2009: Acquires rest of LNK, changes name from Tri-White to ClubLink Enterprises Asset Quality: Golf Canada s largest golf club owner with some of top clubs in country 7 of its 39 Canadian clubs ranked among 100 best in Canada* Highly cash flow generative Annual dues and portion of entry fees paid upfront, no cash taxes for years due to accelerated depreciation Competitive advantage: scale allows members to enjoy numerous clubs under one membership Creates compelling acquisition economics; each acquisition enhances value of both acquired club and rest of network *Source: SCOREGolf magazine 2012 rankings Asset Quality: Tourism 80% of all Alaska cruise ship passengers dock at ClubLink s docks in Port of Skagway (e.g. 81% in 2011) Approximately half of cruise passengers arriving in Skagway take White Pass excursion White Pass recognized as one of 36 International Historic Civil Engineering Landmarks (others incl. Panama Canal, Eiffel Tower, Statue of Liberty) White Pass: Alaska s most popular excursion and truly irreplaceable asset Cruise lines promote White Pass to their passengers, bringing business to ClubLink with little effort by company itself Tourism Segment: Revenue and Profitability % 38% 41% 37% 40% 39% 38% 40% 45% 40% % % % % 15% Revenue EBIT EBIT margin 10% 5% 0% Earnings resilient during economic decline, will reach all-time high in 2013 Note: amounts in millions of US dollars (segment s local currency) Terrific Owner-Operator CEO Rai Sahi: control investor whose whole career built on opportunistic acquisitions Outstanding capital allocator, aggressive buyer of stock Has issued options only once in past eight years (131K granted less than 0.5% of outstanding shares) History of Shrewd Capital Allocation Repurchases: 19% of shares in past 12 years, 5% in H Impressive given stock s low float (Sahi owns 66% of company) Purchase of initial 25% stake in LNK from ClubCorp 2001 ClubCorp desperate for cash to avoid violating covenants; sold to Tri-White at 17% discount to LNK market price, greater discount to intrinsic value Buyout of remaining 28% interest in LNK 2009 Takeover done at ~15% discount to midpoint of bankers valuation of LNK; valuation prepared amid one of worst market crashes in history Florida/US: A Massive Opportunity Florida golf market significantly overbuilt Many lenders pulled out of golf industry in ClubLink entered FL in 2010, has since acquired 11 clubs at fraction of replacement cost Potential to expand dramatically in FL and elsewhere in US at extremely attractive prices US Acquisitions at Fire-Sale Prices Approx. cost to develop 18-hole club on turnkey basis: $15 million to $18 million Cost of FL Acquisitions ($ millions) Sun City Center Heron Bay Woodlands Palm-Aire (6 clubs*) (36-hole club) (54-hole, 2 clubhouses) Spent $25 million acquiring properties with replacement cost considerably over $100 million *Excluding one club closed by previous owner. Management is reviewing options for this facility. Insider Buying: Rai Sahi Shares (thousands) Average Price Cost (thousands) % of Shares Outstanding Past five years 1,466 $7.34 $10,757 6% Year-to-date 462 $6.80 $3,140 2% Balance Sheet Strength Weighted average maturity of long-term debt: 2022 Approximately three-quarters of debt comprised of fullyamortizing mortgages on golf clubs; avg. maturity: 2025 Paying higher interest rate in order to minimize refinancing risk Numerous unencumbered assets Consolidated P/FCF Op. cash flow before changes in WC $40.8 Non-recurring items* (2.6) Maintenance capex (8.8) Taxes (2.9) Consolidated FCF $26.5 Per share $0.99 P/FCF 7.6 While already attractive, consolidated multiple does not adjust for assets that generate no FCF but are nonetheless highly valuable *Amounts in millions. Non-recurring items include prior-year property tax refunds, severance and other one-time items. Valuable Assets Contributing No FCF Florida clubs: sustained losses in 2011, breaking even on trailing twelve-month basis Capable of material cash flow in normalized environment Development assets: 757 acres of surplus land, up to seven potential future 18-hole equivalent courses These holdings presently making no money yet have substantial hard asset value P/FCF Excluding Florida Clubs, Development Assets FL clubs $35 Development assets 21 Value $56 Per share $2.11 Price excl. FL clubs, dev. assets 5.44 FCF per share 0.99 P/FCF 5.5 Truly compelling valuation for high-quality business with outstanding management and strong growth prospects Note: amounts in millions FCF Multiple: Golf Segment Only EBITDA $39.5 Membership fee instalments 10.0 Land lease rent (5.3) Interest (19.6) Allocation of corporate costs (2.2) Maintenance capex (5.5) Taxes (1.4) FCF: golf segment $15.5 Per share $0.58 Price excl. FL clubs, dev. assets 5.44 P/FCF: golf 9.3 Golf business alone worth more than ClubLink s stock price, valuing tourism segment s irreplaceable assets below zero Note: amounts in millions FCF Multiple: Tourism Segment Only EBITDA $17.8 Land lease rent (0.2) Interest (1.2) Allocation of corporate costs (0.5) Maintenance capex (3.5) Taxes (1.5) FCF: tourism segment $11.0 Per share $0.41 Price excl. FL clubs, dev. assets 5.31 P/FCF: tourism 13.2 Even smaller tourism segment singlehandedly justifies entire stock price; ultimately, either way one looks at it, investors get one of ClubLink s two businesses for free Note: amounts in millions Catalysts Normalizing of results from existing Florida portfolio and incremental acquisitions highlight earnings power and growth potential of US golf operation Built-in growth in tourism segment: passengers to Port of Skagway scheduled to rise 10% next year*; earnings/fcf will grow at greater rate due to operating leverage Continued aggressive repurchases *Source: Cruise Line Agencies of Alaska Conclusion: ClubLink High-quality business available at depressed valuation Enormous growth potential History of exemplary capital allocation, aggressive insider buying 4% dividend yield while you wait Investment Idea: Canam Group (TSX: CAM) Construction Products Manufacturer Snapshot Price $5.05* Diluted Shares O/S 42.1 million Market Cap Enterprise Value $213 million* $476 million* *All financial figures pertaining to Canam are in Canadian dollars unless otherwise noted Background Main product lines: steel joists and decks, structural steel, steel bridges Largest steel joist and deck producer in Canada (75% market share), third in US (15% market share, top three control 90%) Largest Canadian producer of steel bridges (35-40% of market) 20 manufacturing facilities in Canada and US Why is Canam Worth Your Attention? Valued at paltry 3.8x normalized FCF Just 2.7x FCF excluding non-core assets being actively monetized Intelligent management: exploited economic downturn to execute substantial repurchases, takeovers at extraordinary prices Trades at 69% of meaningfully understated book value Why is It So Cheap? US operations (approximately two-thirds of revenue in normal environment) remain mired in severe cyclical downturn Industry slump has masked significant acquisitions, repurchases and capital investments in recent years that have substantially boosted earnings power Multiple non-core investments unrelated to business, generate minimal earnings, create confusion Management That Thinks Like Owners Canam founded over 50 years ago and still run by Dutil family; owns 16% of company The theme is very simple... we went through some very, very nice years... didn t go overboard on capex, didn t go overboard on share buybacks, didn t go overboard on dividends, didn t go overboard on acquisitions. And it was to prepare ourselves for a period where the dollar goes a little further. -CEO Marc Dutil That period arrived starting in late 2008 and Canam pounced Investments Since Economic Slowdown From 2008 to 2011, Canam opportunistically deployed capital into acquisitions, buybacks and capex initiatives that have materially enhanced intrinsic value per share $ $39 $64 0 Acquisitions Repurchases Growth Capex Note: amounts in millions Transformative Acquisitions Purchased two US companies in 2010 cyclical trough FabSouth: structural steel producer with six plants in FL, GA and NC United Steel Deck: deck manufacturer; Canam acquired two plants in IL and NJ plus machinery and equipment of third Together, these deals will boost Canam s normalized FCF by 50% or more Transaction Valuation: FabSouth Cost $83.2 EBITDA $29.8 Maintenance capex (1.5) Taxes (8.5) FCF $19.8 EBITDA multiple 2.8 FCF multiple 4.2 FabSouth also came with some $20 million in real estate (owned all its plants), making actual purchase price even cheaper Note: amounts in millions of US dollars Transaction Valuation: United Steel Deck Cost $23.8 EBITDA $11.0 Maintenance capex (1.5) Taxes (2.9) FCF $6.7 EBITDA multiple 2.2 FCF multiple 3.6 Canam recorded US$7.2 million gain (30% of cost) acquired working capital and real estate alone worth more than purchase price Note: amounts in millions of US dollars Share Count Reduction Q (8%) (7%) Repurchases: 8/08-1/09 Repurchases: 11/11-6/12 Present Retired 15% of outstanding shares at average cost of $5.37; at current prices, Canam is almost certain to execute another large buyback in coming year Note: amounts in millions Financially Sound Weighted average maturity of long-term debt: Nov Excluding US revolvers in process of being renewed: Apr Only 27% of debt currently subject to earnings-based covenants $263 million in debt backed by $527 million of net WC, land and buildings at cost, and non-core assets being actively monetized Land and buildings at cost understate real estate value Debt not only manageable but also incurred for good reason; accretive investments highlighted earlier account for 82% of present debt levels Real Estate Square Feet (thousands) Built/Bought St. Gedeon, QC Mississauga, ON Washington, MO Point of Rocks, MD Jacksonville, FL Boucherville, QC Calgary, AB Laval, QC Sunnyside, WA (2 plants) Quebec City, QC Total 2,097 % of total owned sq. ft. 67% Average year acquired 1989 Canam owns every one of its 20 facilities 3.1 million sq. ft. in total, of which 2.1 million owned on average since late 1980s P/FCF Based on Average EBITDA in Last Cycle Average EBITDA in last cycle $63 Contribution from acquisitions 40 Pension adjustment (2) Interest (15) Maintenance capex (12) Taxes (19) FCF $56 Per share $1.32 P/FCF 3.8 Note: amounts in millions P/FCF Based on Results Prior to Economic Downturn* Op. cash flow before changes in working capital $68.5 $66.9 $56.5 $64.5 Stock-based compensation (1.6) (0.9) (0.4) (0.2) Pension adjustment (1.1) (0.9) (0.9) (1.2) Maintenance capex (12.0) (12.0) (12.0) (12.0) FCF $53.9 $53.0 $43.2 $51.2 Per share $1.28 $1.26 $1.03 $1.21 P/FCF Using either methodology, Canam egregiously cheap *Amounts in millions. Results in these years were above mid-cycle levels; however, this is more than offset by absence of results from FabSouth and United Steel Deck (acquired in 2010) and other factors. Non-Core Assets For more accurate valuation, we must adjust for assets unrelated to Canam s business, which it is in process of disposing Alta Industriel* $16.6 Long-term debenture from Manac* 3.7 Note receivable from Placements CMI 13.0 Aviation CMP/SEC GIPZ 15.2 United Steel Structures 10.0 Investment in LP 6.0 Est. recovery from BC Place supplier 5.0 Value of non-core assets $69.5 Per share $1.65 Non-core assets: % of price 33% *Amounts in millions. For conservatism, book values of Alta Industriel, Manac debenture have been discounted by 25%. FCF Multiple Adjusted for Non-Core Assets FCF $55.5 Income from JVs and associates (0.6) Distribution from LP (1.8) FCF excl. non-core assets $53.0 Per share $1.26 Share price $5.05 Non-core investments per share (1.65) Share price excl. non-core assets $3.40 Implied P/FCF: core business 2.7 As undervalued as Canam appears on surface, in fact it is even cheaper Note: amounts in millions Price to Tangible Book Value Reported equity $357 Intangible assets (9) Goodwill (39) Tangible BV $309 Per share $7.33 P/TBV 69% Book value understated due to real estate: company has owned vast majority of its facilities for average of 23 years Note: amounts in millions Catalysts Rebound in US operations earnings, FCF will skyrocket Market underestimates degree to which earnings power has grown due to investments in recent years Improvement already visible: consolidated EBITDA totaled $20.5 million in H vs. $(14.7) million in H Continued monetization of non-core assets, debt repayment Resumption of dividends as earnings rebound Canam previously paid dividends; reinstating payout will attract investors who sold out following their suspension Conclusion: Canam Numbers speak for themselves: stock incredibly undervalued Weathered serious downturn, results now turning corner Shareholder-friendly management with record of shrewd acquisitions and buybacks
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