Description

Alliance One (“AOI”) is an off-the-run (0 sell-side coverage) stub equity with ~200% upside to our base case with a FV closer to ~$60 versus ~$21 current. AOI’s core biz (tobacco merchant) is steady and predictable and is worth $23 - $32 / share vs $21 current + AOI recently entered the cannabis market via creative acquisitions that have exciting n-term prospects with limited operational risk (AOI’s expertise in agriculture helps de-risk the capacity grwth plans) and augments equity value by $13 to >$100/share. Given a lopsided capital structure (~1.15Bln of net debt and a sub-$200MM market cap), limited float (only ~9MM shares outstanding but >4MM locked up so a sub-100ish float), recent changes to AOI’s biz model to enter the cannabismarket are under-appreciated and will have an outsized impact to AOI’s equity value = currently the “growth biz” is trading as free option but should drive ~200% upside to the equity over the next 12-months. We believe AOI is in the early stages of growth inflection and every 10MM of incremental EBITDA should drive >35% stock returns. Additionally, for investors more concerned about the core biz (l-term demand trends), there’s an easy way to hedge out that risk via UVV (mirror’s AOI’s core biz with identical ~40% market share and liquid / $1.2Bln market cap) and play the cannabis growth option.

At the current $21 / share px, AOI equity trades as if it’s an option on “business survival” and the market appears concerned w/ the 2021 debt maturities. In comparison to the market view, we believe the March-ending Q4 will put AOI in a strong position to refinance the capital structure + AOI is set up for exponential growth (more clarity will come on these initiatives in both June and a September Investor Day). Overall, AOI is an attractive equity as it’s 1) mis-understood: legacy balance sheet risk dissuades new equity stakeholders but this risk will largely be removed as the biz starts tracking closer to historical levels (>$180 - $190MM of EBITDA) + market is ascribing 0 value to the recent expansion into cannabis, 2) under-loved: 0 equity sell-side coverage sets up nicely for primary due diligence (Greenblatt quote comes to mind: “Stub stocks. There is almost no other area of the stock market where research and careful analysis can be rewarded as quickly and as generously”), and 3) mis-valued: asymmetric up / down with >200% upside to our base case and stock trades below our assessment of core biz FV (using conservative 8x unleveraged FCF multiple and ignoring the ~975MM of NOLs which helps on FCF deleveraging in the interim) and receiving the growth biz for free. 

While we believe AOI’s 9.875% notes due July 2021 (96 – 97 context) are attractive given >11% YTM and high probability of being refinanced over the next 6-12 months (102.5 call protection so path to >15.5% yield assuming early 2019 refinancing), we think the equity is the more compelling risk/reward at this point given the asymmetric up / down. AOI has 2 biz segments, “core biz” (tobacco merchant) and “growth biz” (cannabis). The equity currently trades at a discount to the core biz (FV of $27 vs ~$21 current) and we believe there is significant upside optionality to the “growth biz” (punitive value of ~$13 / share and blue-sky value of >$110 / share that we are receiving for free):

Summing it up, as noted below, we believe the core biz is worth $23 – 32 / share and the growth biz is worth $10 - $102 / share on the blue-sky high-end. In total, we believe AOI stock is worth ~$33 on the low-end (~55% upside), $63 under base case (~200% upside) and has the possibility of being a $134 / share stock if the growth biz surprises to the upside.

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Catalyst