Description

Introduction

Aimia has been written up multiple times already. However, none of the writeups or comments have addressed what we feel is the true size of the opportunity here. 

Imagine you could invest in one of the best funds in the world. However, unlike the fund’s other clients, you don’t enter the fund at net asset value. You pay only 50% of NAV. On top of this, you never pay fees and have a tax shield. Now another wrinkle: the fund runs a time-tested strategy that hasn’t ever been this out of favor ever. And historically when this underperformance has occurred, the fund—and others like that—have gone on to put up career-making returns.  

As a result of these factors, Aimia’s shares are poised to return 30% a year over the next market cycle, roughly 7 years. The shares currently trade for C$4.00 (Canadian dollars). We think at the end of the seven years—and potentially sometime before then—they will be worth C$26 for an MOIC of 6.5x. In present value terms, that would make the shares worth C$13, implying 225% upside. That said, they will never trade anywhere close to that in the near-term.

No one will believe what’s set up to happen here until it’s already happening. 

The Set up

Chris Mittleman, someone we think is one of the best investors in the world, has taken control of Aimia and turned it into a holding company where he is the CIO. His commitment to Aimia is shown by the fact that he sold his fund, which represents his life’s work, to Aimia in exchange for Aimia shares. Now that his fate and Aimia’s are one and the same, Aimia is finishing the process of selling down legacy assets. This will give the company a war chest, double the size of its market cap, which it can deploy into a market where many value stocks worldwide are trading at lows last seen in 2000-2003 and 2009-2011. 

At present, Aimia is a pile of cash, publicly-traded shares and a 49% ownership interest in PLM. In order to fully execute its holding company strategy, Aimia is trying to sell PLM. The sooner, the better. PLM own owns Club Premier, the loyalty program for AeroMexico. This loyalty program is a wonderful business, growing 10% a year while putting up 34% EBITDA margins and 20% net margins. It’s a crown jewel asset. And just as much as Aimia wants to sell it, AeroMexico wants to buy it.  

Setting the stage for an imminent sale, AeroMexico recently acquired an option to purchase Aimia’s stake in PLM. The minimum purchase price is C$625MM, an attractive, if not compelling multiple of 9x EBITDA. The valuation suggests that Aimia is willing to bake in some “clear and present” profit to get the transaction done sooner rather than later. Meanwhile AeroMexico likely shares Aimia’s interest in an immediate sale. Due to Covid-19, AeroMexico is in bankruptcy. But it’s recently received a $1 billion DIP loan from Apollo Group, at least $800MM of which is convertible into AeroMexico shares. Given Apollo’s sophistication and this conversion feature, Apollo will likely push for a purchase of PLM. The quicker that’s done, the higher Apollo’s IRR will be. 

When a sale happens, Aimia’s net asset value will look like this:

Aimia has a C$400MM capital loss carryforward and a C$300MM operating loss carryforward, which we don’t account for. Aimia also has C$236MM in preferred shares, which we don’t deduct here at full face value. Mittleman has indicated in interviews that he sees the preferred shares as equity, meaning permanent financing. Moreover the blended interest rate on the preferreds is just 4.5%. This is cheap financing with no maturity. It’s about the most ideal financing a company like this could find, and Aimia is poised to earn a large spread on that 4.5%. The preferreds, therefore, will likely never get redeemed and are a permanent layer in the cap structure. And as for how to account for them, capitalizing the annual interest payments at 10% more accurately captures their true burden on the company than face value does.

Going through the assets line by line, once PLM is sold, Aimia will have a war chest of C$875MM in liquid investments. That’s the focus of the writeup. The compounding of that capital is where the real opportunity lies. Aimia’s other investments have been left at book value because the upside here isn’t dependent on their success. That said, these are strong businesses. We have no opinion on the ultimate value of Kognitiv. However, both Mittleman Investment Management and BIGLIFE are worth multiples of what they’re carried at on the balance sheet. In a few years, the fee income from Mittleman’s fund alone could equal its book value. And BIGLIFE is a 20% equity position in the loyalty program of AirAsia. You only have to look at PLM’s 34% EBITDA margins and 10% annual growth to see the value in owning a loyalty program long-term. 

Overall we see that Aimia trades at a massive 50% discount to net asset value. So even if Aimia were in the hands of mediocre managers, the stock is worth 100% more. Aimia, however, is in the hands of a great manager. And given that Aimia could compound its own capital at 15-20% a year, buying this return stream at half off means investors stand to earn rare, Buffett partnership-esque returns.

Chris Mittleman

I ask every so often on VIC for the names of the investors that people on here most respect. In addition to considering an allocation, there’s a very specific reason why. We’re looking for a very specific type of investor. But first let me backtrack. 

My firm has compiled a database of the most successful investors throughout modern history. We’re looking for substantial outperformance and at least a 20-year track record. When we go into our database, the first thing that jumps out is that the overwhelming majority of great investors are value investors. Of the total sample, we find that 35% of the greats come from the Buffett school of “great businesses at a fair price.” We also find that 40% of top investors, an eye-catching number, were deep value investors. We define deep value as a strategy focused on especially low-multiple stocks, e.g. those trading below, often well below, 8-10x normalized earnings.  What’s interesting is that when we look around at our peers, we find a ton of Buffett stylists and relatively few deep value professionals. In fact the general attitude toward deep value investing today is that the stocks are cigar butts and only negligible returns are available hoovering this crap up.

The historical record, however, suggests otherwise. John Templeton, who returned 14.8% versus 11% for the market from 1955 to 1991 was a deep value investor, buying some of Japan’s best businesses in the 60s at 3x earnings. So was John Neff, who beat the market by 3.15% a year over a 31-year career running one of the largest mutual funds in the world. There’s also Seth Klarman, Donald Smith, Peter Cundill, Walter Schloss. The list goes on and on. 

I bring up this database because, one, it shows there’s an entire school of thought that’s fallen out of favor and could be worthwhile. But, two, it shows that great investors are far more alike than not. The fact that the vast majority of successful investors happen to fall broadly into two camps—deep value and the Buffet school—suggests that at least within each camp, it was these investors’ similarities that made them successful far more than their uniqueness. When we examine those similarities, we then have a powerful framework to judge present-day investors. Who out there is doing what the great ones did—tapping into time-tested principles? Who perhaps has, because of that, a far higher chance of success? 

I first got Mittleman’s name from someone here on Value Investors Club back in 2016. I looked at him and his strategy in depth. I’ve done the same for many, many others. And I’ve tried to set the bar high. For example, I’ve looked at dozens of top mutual funds and have never found a single one that does what the great investors did. Even renowned mutual funds hold too many positions, and they have far too much asset bloat. But Mittleman’s fund was different, strikingly so. In fact even before I’d ever heard of Aimia, one of the people I’d zeroed in on as being one of the most interesting investors around was Chris Mittleman. 

Mittleman is a deep value investor, typically buying stocks at 4-7x FCF. Unlike most value investors, who avoid debt, he often holds companies that are highly leveraged. Generally speaking he has a deep value, private equity in public markets approach. And it’s worked. Up until several years ago, Mittleman’s fund was in the top 1% of the Lipper universe after returning 21% net versus 8% for the market from 2003 to 2014.

As an investor, Mittleman did two things that a lot of the greats did and that mediocre investors don’t. The first one was that he avoided forays into terrible, low-percentage businesses. He restricted himself to companies whose long-term economics were repeatable and thus somewhat forecastable. In other words, he bet on sameness more than change. And he focused on industries with a relatively fixed character that rewarded that. He also avoided businesses where when things went south, the business absolutely incinerated cash. So his starting point as a deep value investor was to avoid the parts of the market that liked to kill the deep value investor.

The second thing he did, though, was what made him truly unique. He only bought things trading at extremes. And when I say extremes, I mean extremes. All value investors claim to do this. They say they’re contrarian. They buy what everyone else hates. But look at their holdings. They don’t hold dollar bills trading at fifty cents. They hold much more tepid fare. Either the growth isn’t high enough or low-cost enough to significantly earn out the current valuation. Or the multiple isn’t low enough to produce those extreme mispricings that make deep value tick. The truth is most professional investors simply do not invest sufficiently in situations with big enough payoffs to give them exceptional results. Why? Because investing is hard. But also because despite their brave talk, they generally only invest in a way that can be readily justified to others. They’re like Art Howe in Moneyball telling Billy Beane that he doesn’t manage the team to win but in a way that’s explainable in job interviews. Mittleman, by contrast, was far more like the greats. He routinely invested in things that were mentally off limits even to other value investors. And it was clear he didn’t need markets or other smart people to love him. He needed to do well. That was obvious from the way he wrote about investing. He needed to be good. But he didn’t need to be loved. And there's something powerful about that, even beyond the fact it separates you from 95% of the field.

A prototypical Mittleman investment was Playtex Products. He bought Playtex shares at $10 in 2002. The shares declined to $5.50 in 2003, and he bought more, bringing his average cost to $7.75 a share. Meanwhile during this period, Playtex’s topline had fallen 23%, a seeming death spiral for a “stable” consumer products company. How many people would double their investment in this scenario, in the face of not just profits but revenue crashing? How many would buy into a situation where the “smart” money is sitting back and sneering at the clown show? Mittleman, however, was convinced that this was a one-time, not a secular shock. And if this proved true, he’d be buying a growing business with 25% EBITDA margins at just 6x FCF. In 2005, as sales stabilized, his fund sold their shares at $14.50 for a 19-23% CAGR. Playtex was later bought out at $18, vindicating his belief in the company.

Another investment was Icahn Enterprises. Thinking he was bottom-fishing Carl Icahn, Mittleman bought the shares in 1996 at $9 when the company had $13 in net cash. Six years went by, and the stock hadn’t moved. Most investors would have lost faith or interest. But Mittleman held on—for another four years—and in 2007 the shares proceeded to go from $9 to $140. He sold in the $70s, netting him a 20% CAGR.

I can’t think of another approach that better meets the definition of doing the ordinary thing when everyone else is losing their mind. Mittleman’s bread and butter is making an ordinary appraisal at an extraordinary time. Then he sticks to his guns. Think about how much higher percentage that is than selling a stock because the price action doesn’t come soon enough or dabbling in macro or trying to call the bottom on palm oil prices. The first activity is repeatable—across time, across cycles, across borders. The other activities provide stimulation, the liquor that speculators love.

One last thing, though, really cemented Mittleman as someone to watch. He viewed investing in such somber, personal terms. There was a depth there that made me trust him.

Some quotes: 

“I find myself often times alone in my convictions about these things. And you wonder sometimes, am I crazy? Am I really thinking things through clearly because when I’m the only person who thinks a certain way it can be a little bit disconcerting.”

“You have to be willing to sometimes stand there, stoically, while a nuclear explosion is ripping off your skin and you’re the only person there.”

The last quote is perhaps the best line I’ve ever heard about investing. In addition to revealing humility, these quotes—along with others like them—tell me that this guy lives value investing. This stuff means something to him. Overall his interviews give the sense that he views investing in almost moral terms—as a great and important struggle. In my experience, people who find moral purpose in their work are motivated in ways that people who lack that couldn’t even imagine.

Of the handful of investors I’ve taken an interest in, I have to admit: he was the one I came back to the most. The truth is I’d never come across someone whose approach made such immediate sense to me. Plus I admired that both his words and actions stood for the idea that great investing really takes something. It's precisely that which makes investing about more than money. The reason I mention all this is that it caused me to take an even closer look at him than I would have otherwise. Which is relevant because his character and that of his partners will determine Aimia’s future value far more than anything else.

For all the above reasons, I believed—and still believe—that Mittleman is one of those great investors who can compound capital at 15% a year or more for decades. Now a caveat. The very moment I formed this opinion, the world did what it always does: it rose up to smash it. The tech bubble 2.0 went into overdrive. And everything changed. Mittleman suffered his worst underperformance on record. His time, it seemed, had come and gone. However, as a deep value investor myself, I was acquainted with something most people aren’t. Deep value, even more so than other value strategies, has a feature that keeps most people away: it can be particularly, agonizingly cyclical. And that cyclicality doesn’t correlate with much else, making its victims lonely in addition to everything else. 

So Mittleman was going through the worst period of his career. Given the steep discounts his holdings traded at, an inflection point seemed close at hand. Then something unusual happened. He sold his fund to Aimia, a company he’d taken a large position in. It was a move that didn’t make sense at first. Why would anyone sell their fund at its low point? It was then we took a serious look at the company and saw what was going on. Mittleman was managing C$200MM in his fund, but through Aimia he could jump up to managing C$875MM. And unlike a fund, this could be permanent capital. Aimia’s massive tax shields added to the upside. But one other feature made this investment uniquely compelling. He was getting in at a discount, and because Aimia’s publicly traded, so could we. And at today’s price, you get to enter Mittleman’s investment vehicle at a 50% discount to NAV. 

So a great investor has not only been beaten down, much like one of the companies he invests in, to a once-in-a-generation low. But through Aimia, you’re able to swoop in and purchase his capital at a 50% discount. So whatever returns you think he can achieve, that discount will magnify them. 

This is a rare situation. And while we have no insight into the timing here, we think Mittleman and his strategy are one of those “inevitables” Warren Buffett wrote about thirty years ago.

Value investing is dead

In 1969, Warren Buffett, 39 years old, had just gone on one of the greatest runs in investing history. The Buffett Partnership returned 29.6% versus 9.5% for the market from 1957 to 1969. What most people don’t know is that Warren Buffett was a deep value investor then, buying shares trading at extremely low P/E and low P/B. In fact when we ran a regression on Buffett’s results, we found that he was the most deep value investor we’ve ever seen. Also interesting, the value decile, the cheapest 10% of the US market, returned 25% over the same period. This suggests that while Buffett’s stock-picking added value, it was his recognition of the opportunity within this segment of the market at the time that provided the lion’s share of the historic returns.

What happened next is something even fewer people know of. In 1969, when Buffett closed his fund and distributed Berkshire shares to his LPs, Berkshire’s share price was $42. Six years later, the share price was only $38. Buffett and Munger after six years had little to show for their efforts. And in fact Berkshire was down 50% from an interim high of $80 in 1972. On the surface, the shine on an ascendant career was gone.

Over that same period, another investor, Bill Ruane, was trying to get his career off the ground. Ruane ran Sequoia fund. He didn’t know it at the time, but from 1970 to 2005, he would go on to return 15.5% net vs 11.68% for the market, one of the greatest feats ever for a money manager. Like Mittleman now and Buffett in the 50s and 60s, Ruane at the time was a deep value investor. He liked good businesses without a lot of capital intensity, and he liked to buy them at 5x or even 3x earnings. In an interview in 1981, he said that when one of his stocks got to 12x earnings, he sold it. Buying something at 3x and selling at 12x is the battle hymn of deep value. 

Bill Ruane was destined for great things, but when he started Sequoia in 1970, the fund went on to trail the market for five years. In other words, despite the fact he was as good as he was, Ruane got the same rough treatment as Buffett—and the same rough treatment Mittleman would get almost fifty years later. 

What happened? And why did Ruane and Buffett both happen to stall at the exact same time?

This chart shows the 5-year annual alpha of the value decile, the cheapest 10% of stocks, versus the market. As you can see, both Buffett and Ruane lost their luster in the 1970s because there was a protracted period in the 70s during which value investing, particularly deep value investing, ceased to work. Meanwhile the period Mittleman—and all of us—have been in is even worse. Value has not only stopped working since 2014, it has produced staggering underperformance, the most on record ever.

The experience of Buffett and Ruane in the 70s, though, couldn’t be more relevant to today. From the low in 1975 to 1983, Ruane grew capital 10.5x, returning 30% a year net vs 16% for the market. Berkshire, meanwhile, went from a low of $38 in 1975 to $1310 in 1983, a 34x MOIC and a 56% CAGR. We don’t need to anoint anyone as the next Buffett or the next so-and-so to see the lesson here. When you’ve identified a great investor, the exact time to invest in that person is when the world says they’re not great anymore. 

On top of this, Mittleman has shown that, like the others, his strategy works best when it’s been beaten down. In the wake of the tech bubble, his fund returned 25% net from 2003 to 2007. And in the aftermath of the financial crisis, his fund increased 15x from the lows of 2009 to 2014. A 70% CAGR.

The spring is compressed, and Mittleman’s strategy is poised to put up substantial returns for a substantial period of time. In an era of SaaS, SPACs and FANG, classic value investors seem like they’re on the wrong side of history. But we think Mittleman and others like him are an anachronism that will soon become timely again—with prejudice. 

Valuation

Post-sale of PLM, Aimia will have C$875MM to invest. Long-term we think Aimia can earn what many great investors earned over 20 or 30 years: 15% a year. But Mittleman’s strategy is at such a low point that outsized returns—20% or more—are possible for a sustained period. We also assume that as the market turns, Mittleman Investment Management brings in substantial fee income. 

When we run these factors through the income statement, this is what we get at the end of seven years.

C$2.45 billion in investments  

+ Kognitiv 

+ BIGLIFE stake 

+ Mittleman Investment Management 

– capitalized corporate expenses 

– capitalized interest on preferred shares

= Aimia’s net asset value

Excluding the C$2.45 billion, we think the remaining assets and liabilities roughly net out. Assuming the shares trade at NAV and not at a premium, that would make the shares worth $26, or 6.5x where they trade today for a 30% CAGR.  

Other than owning your own fund, we think there is no better way to bet on value investing itself than buying Aimia at half off. 

Disclaimer: This isn't investment advice or a recommendation to buy or sell specific securities. Please do your own research. We may buy or sell securities at any time.

Catalyst

Sale of PLM.