2008 | 2009 | ||||||
Price: | 5.85 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 25 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT |
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AFMI gives you a potential
double in 2 years or you get an annualized IRR of 20% on the downside. And since the deal vote is this Friday, the
catalyst is soon. Buying a share of AFMI now gives you a cost of $3.84 a share (I will explain later), and the stock could reach as high as $7.60 by end of 2009 using reasonable valuation multiples.
Competitive Advantages
HAH is the market leader with 39 partner programs, 1.4
million rooms under management and catalog penetration of 500,000 rooms. Has European headquarters in
1. Identifying and reaching targeted customers – HAH avoids the average 10% postage expenditure because it distributes catalogues at low-cost, and only to potential buyers who have sampled the merchandise in a comfortable environment.
2. Minimal product returns – HAH buyers have already tested the merchandise
3. Purchasing excessive inventory to achieve strong margins – HAH utilizes partners buying power and pays bulk prices for small quantities. HAH maintains only 60 days of inventory; suffers from almost no excess.
Growth opportunities
Hotels at Home’s current hotel partners have total of 1.4
million total rooms and the products are only in 500,000 rooms right now. Furthermore, there are 8.9 million total
rooms in the world, 5.5 million rooms owned by all hotel brand chains, and 3.8
million owned by 10 largest hotel brands.
And there’s more hotel rooms being built … in the
There are earn-out clauses. In one way, it is good because
management is obviously comfortable with them or they would not have agreed to
the deal. But in another way, share dilution hurts.
2008. 750,000 shares for net income of 2.8 million
2009. 750,000 shares for net income of 3.3 million
2010. 750,000 shares for net income of 3.9 million
Valuation using 2 methods
The tricky part is how to deal with the warrants. I will present 2 methods.
Capital Structure |
|||||
Shares |
|||||
Promote |
250,000 |
||||
Promote Transferred to Public |
500,000 |
||||
Public Shares |
3,162,500 |
||||
Private Placement Common |
125,000 |
||||
Private Placement Transferred
to Public |
125,000 |
||||
U/W Stock Conversion |
87,719 |
||||
Hotels @ Home Share Issuance |
2,281,571 |
||||
Hotels @ Home Share Issuance
Transferred to Public |
175,000 |
||||
Basic |
6,706,790 |
||||
Warrants Outstanding |
6,825,000 |
||||
Estimated Warrant Strike Price |
$4.50 |
||||
Sensitivity Across Various
Multiples |
|||||
2008 |
|||||
Basic Shares |
6,706,790 |
6,706,790 |
6,706,790 |
6,706,790 |
|
Accumulated Earnout Shares |
750,000 |
750,000 |
750,000 |
750,000 |
|
F-D Warrant Shares |
150,022 |
792,619 |
1,322,356 |
1,766,566 |
|
Net Income |
2,800,000$ |
2,800,000$ |
2,800,000$ |
2,800,000$ |
|
EPS |
$0.37 |
$0.34 |
$0.32 |
$0.30 |
|
Mutliple |
12.50x |
15.00x |
17.50x |
20.00x |
|
Implied Stock Price |
$4.60 |
$5.09 |
$5.58 |
$6.07 |
|
2009 |
|||||
Basic Shares |
6,706,790 |
6,706,790 |
6,706,790 |
6,706,790 |
|
Accumulated Earnout Shares |
1,500,000 |
1,500,000 |
1,500,000 |
1,500,000 |
|
F-D Warrant Shares |
409,661 |
1,069,490 |
1,606,248 |
2,051,430 |
|
Net Income |
3,300,000$ |
3,300,000$ |
3,300,000$ |
3,300,000$ |
|
EPS |
$0.38 |
$0.36 |
$0.34 |
$0.32 |
|
Mutliple |
12.50x |
15.00x |
17.50x |
20.00x |
|
Implied Stock Price |
$4.79 |
$5.34 |
$5.89 |
$6.43 |
|
2010 |
|||||
Basic Shares |
6,706,790 |
6,706,790 |
6,706,790 |
6,706,790 |
|
Accumulated Earnout Shares |
2,250,000 |
2,250,000 |
2,250,000 |
2,250,000 |
|
F-D Warrant Shares |
725,290 |
1,391,925 |
1,927,203 |
2,366,467 |
|
Net Income |
3,900,000$ |
3,900,000$ |
3,900,000$ |
3,900,000$ |
|
EPS |
$0.40 |
$0.38 |
$0.36 |
$0.34 |
|
Mutliple |
12.50x |
15.00x |
17.50x |
20.00x |
|
Implied Stock Price |
$5.04 |
$5.65 |
$6.27 |
$6.89 |
|
The 2nd method simply assumes all warrants will be exercised, and I do an estimate of the cash on the balance sheet, cash from the warrant exercised and do an EV/FCF analysis.
By 2010, balance sheet will have around 38 to 41 million in cash (Exercise of warrants is 31 million plus 7 to 10 million of free cash generated.) For argument sake, I use 40.
Using FCF by 2010 of 3.9M and applying a 12.5, 15, 20 multiple. A 20 multiple is not unusual for this business model. I get valuations in the range of:
2010 FCF 3.9M 3.9M 3.9M
2010 FCF multiple 12.5 15 20
Cash on B.S. (millions) 40 40 40
Fully dil shares outst 15.5M 15.5M 15.5M
2010 Implied stock price 5.73 6.35 7.61
IRR 22% 28% 40%
Since the market tends to look out a year ahead, I won’t be surprised if the stock price reaches these targets by end of 2009 in which case the IRRs go much higher.
However, there is a lot of future upside optionality:
Catalysts:
Deal vote on Friday
Analyst coverage after deal vote
Company quarterly results after deal vote
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