Description
Avalon Holdings (AWX, 3.8m out), at half of net-net working capital and a 20% discount to net cash is absurdly cheap. Plus you get a Pete Dye championship golf course for free!
Avalon was spun out of American Waste in 1998 as part of a sale of that company's solid waste division. At the time, Houlihan, Lokey valued the Avalon operations at $8 per share. I surmise that there was some pressure to keep the value low because the transaction was taxable.
Business
In addition to holding cash, Avalon hauls waste, does environmental consulting and remediation, brokers waste and owns and operates the Avalon Lakes golf course near their headquarters in Warren, Ohio. They've had a tough time making money in their waste businesses. They are highly competitive, tough businesses. Consolidation among landfill operators has hurt the waste brokerage business and hoped for transport orders from former landfill competitors have been slow to materialize. The environmental consulting and remediation business requires expertise, but is subject to cost overruns if not managed properly. Until recently, higher fuel prices have also hurt them. The big drop in oil should help their results going forward.
Total revenues are running about $75m (almost $20 per share). Each business line (ex the golf course) has been reporting positive operating income, but not enough to overcome corporate overhead. I believe they have gotten some hauling and remediation business from the World Trade Center cleanup effort. It is somewhat difficult to value these businesses because of their erratic performance.
Golf Course: Avalon Lakes reopened late this summer after an $8m overhaul. Before the work, the course probably generated about $500k in cash flow based on $55 greens fees. The new course is asking $150 for prime time. The course can do 20-25 thousand rounds once the new grass if fully rooted. If they can net $50 more per round, that would add over $1m to cash flow from the property. The course recently received national recognition when it was named one of the top 10 new golf courses in the country by Golf Digest Magazine. You can take a tour of the course at:
http://www.avalonlakes.com/
Valuation Metrics
Per Share
Tangible Book Value 13.13
Net-net Working Cap. 5.68
Cash 3.68
Sum of the Parts:
$
Cash 14m
Waste Businesses 0-15m $15m represents the minimum values
from the Houlihan, Lokey report.
Golf Course 12m 8x 1.5m projected CF
Total Value 26-41m
Per Share 6.05 – 10.78
Risks & Issues
The primary reason for massive discount is the fact that Chairman Ron Klingle controls 67% of the votes through his ownership of the “B” shares. He secured his position by buying out the widow of his dead partner at $4 per share. As far as I can tell, he has not done anything egregious to warrant the Posner-like discount. He takes about $150k in salary and a bonus of less than that. His wife is employed as the controller of the company. I believe he has tried to make positive changes at the operating businesses.
Lack of execution on the Buyback. In December 2000 the Board approved a 1million share buyback. To my knowledge, no shares have been repurchased. Although, filings have indicated the company is not aggressively looking for acquisitions, it remains a possibility. Klingle has tried to buy a golf course near Pittsburg. Perhaps, though, with the completion of golf course cap ex, the buyback will look more attractive.
Klingle has made no effort to court the Street, or communicate with his own shareholders. He doesn’t even bother to write a shareholder letter! If persistent, he will talk to you, though.
It should be noted that some value investors have taken big stakes at higher prices. Constable Partners owns 15% and Keeley Inv. has a filing position.
Catalyst
Reopening of the golf course should improve reported results. Chairman may use the presence of so much cash and shareholder ennui to effect a going private transaction that would almost certainly occur at a premium to present prices.