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EMERSON RADIO CORP MSN
July 13, 2012 - 5:34am EST by
dgn02000
2012 2013
Price: 2.10 EPS $0.40 $0.00
Shares Out. (in M): 27 P/E 5.3x 0.0x
Market Cap (in $M): 57 P/FCF 0.0x 0.0x
Net Debt (in $M): -39 EBIT 13 0
TEV (in $M): 18 TEV/EBIT 1.4x 0.0x

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  • Discount to Liquidation Value
  • China Exposure
  • Complex holding structure
  • Activism
  • Illiquid
  • Analyst Coverage
 

Description

Thesis:

MSN has a market cap of $57m and $42m of cash (no debt), selling below liquidation value.  The business is not sexy, or growing, but it generated $200m of revenue and $11m of net income in CY2011 and is more or less stable. The company is mistrusted because it is majority owned by a Chinese parent. But the Chinese parent is no longer in control of the business - provisional liquidators from FTI Consulting have been appointed to liquidate the Chinese parent and they control the board of MSN. There are activist investors who are pushing MSN to use the cash on the balance sheet to pay a one-time dividend of $1 to help realize the value. 

 

Business Description:

MSN designs and sources consumer housewares sold in the U.S. Emerson branded microwaves, compact refrigerators, wine coolers, and toasters made up  ~90% of sales in 2011 and many products are current bestsellers

MSN was founded in 1948 and the Emerson trademark has been in continuous use since 1912. After generating losses in ‘08-‘09, management restored the company to profitability through 1) cost cutting (i.e. employee count went from 170 in 2008 to 85 in 2011) – SG&A went from 10.5% of sales in 2008 to 3.7% of sales in 2011), and 2) increasing sales of Emerson branded housewares, while reducing investments in portable electronics and audio devices. Since March 2009, the company has generated approximately $66m of cash from operations and spent only $3m on CapEx. On March 2, 2010, MSN announced a one-time special dividend of $1.10 per common share, for a total payout of $29MM.

 

Valuation:

At $2 per share and $57m market cap, the company is currently trading under its liquidation value of $62m (current assets – all liabilities) so there is little downside risk.

of the PLs liquidating (which is unlikely since MSN generated $10.9MM of earnings in 2011, Emerson is a powerful and well recognized brand, the PL’s said they will not liquidate, and MSN is their only money making business), there is little downside risk. MSN has averaged 27% ROE over the last ten years (even including three years of losses), and has de minimis CAPEX requirements (13) leading to average annual 2008-2011 FCF generation of $17.6MM. (14)

 

Why so cheap?

Small market capitalization causing illiquidity, no sell side coverage, and little effort in investor relations. For example, they do not have earnings calls or investor presentations, the last press release on their website is from March 2010, the website link to the stock price is inoperative, and there is no name for an IR contact.

In addition, 56% of MSN’s stock is held by Grande Holdings, a Hong Kong holding company of electronics distributors. There were some insider dealings between Emerson Radio and its controlling shareholder in the past http://www.delawarelitigation.com/uploads/file/int68.PDF. As everything with a Chinese element trading in the US, MSN has not been trusted by investors.

Due to its own disastrous operating results, as of May 2011 Grande is being run by two court appointed “provisional liquidators” (PLs) from FTI consulting (public company with $1bn+ market cap), and the power of directors is suspended. 73% of Grande’s shares are held by its chairman, Christopher Ho, who has also been the chairman of MSN since 2007. As of 6/1/11, the PLs said that they have no intention of interrupting the business of MSN, nor disposing of their shares of MSN stock. The future of Grande holdings is unclear - As of 4/30/12 the Hong Kong courts have agreed to hear a “winding up” petition against Grande, while it also appears that the PLs are trying to restructure its debts and keep it as a going concern.

More importantly, the PLs from FTI are now in control of the shares and the board of MSN. FTI is a reputable firm, and the risks associated with Chinese ownership (e.g. insider dealings, diversion of cash, etc.) are not there anymore, or at least are not bigger than in any other US public company of similar size.

 

Potential catalysts

Lloyd Miller, an activist value investor, acquired 5% of MSN stock as of May 20, 2012, and is pushing for a special dividend or sale of the company. While Grande (and the PLs) can largely ignore him given that they own 57% of the stock, it is worth noting because Miller also acquired 5.8% of the stock in June of 2008 (at slightly higher than $1 per share), less than two years before MSN’s special $1.10 per share dividend. (Raging Capital Management, another activist fund, also owns 5.1% of the shares, acquired as of January 2012 at an average price of $2.08 per share.)

 

Risks

MSN has large customer concentration as Wal-Mart and Target made up 58% and 29% of 2011 sales, respectively. Also, Midea (China) comprises 73% of manufacturing capability. However, MSN believes that it would be easy to switch to a different supplier.

MSN is being sued by a creditor of Grande, alleging that MSN interfered with the ability to collect on a judgment (now approximately $47 million) by engaging in transactions (such as the dividend paid to all shareholders in March 2010) which transferred assets out of the United States. MSN believes the claim is devoid of merit, and moved to dismiss the action. Oral arguments were held on 2/27/2012 and MSN intends to defend itself vigorously. No public filings have been issued since the oral arguments were held.

From a technical perspective, there could be downside pressure on the stock if the PLs change their mind and decide to sell Grande’s shares of MSN. It is also unclear if Deutsche Bank has control of 12.6% of the shares and what Deutsche Bank’s intentions are.                                                        

For the Fiscal Period Ending

Mar-31-2003A

Mar-31-2004A

Mar-31-2005A

Mar-31-2006A

Mar-31-2007A


Mar-31-2008A

Mar-31-2009A

Mar-31-2010A

Mar-31-2011A

LTM²
Dec-31-2011A

Currency

USD

USD

USD

USD

USD

USD

USD

USD

USD

USD
                     

Total Revenue

        330.3

        180.0

        230.8

        233.8

        284.4

        223.2

        200.6

        207.0

        200.8

        177.5

  Growth Over Prior Year

 11.2%

 (45.5%)

 28.2%

 1.3%

 21.6%

 (21.5%)

 (10.1%)

 3.2%

 (3.0%)

 (16.0%)

                     

Gross Profit

          66.3

          26.3

          32.6

          29.8

          36.3

          22.2

          18.3

          31.5

          27.9

          21.8

  Margin %

 20.1%

 14.6%

 14.1%

 12.8%

 12.8%

 9.9%

 9.1%

 15.2%

 13.9%

 12.3%

                     

EBITDA

          21.7

            5.3

            9.8

            4.9

            8.8

         (6.5) 

         (3.7) 

          14.6

          19.4

          13.6

  Margin %

 6.6%

 2.9%

 4.2%

 2.1%

 3.1%

 (2.9%)

 (1.8%)

 7.1%

 9.7%

 7.6%

                     

EBIT

          18.7

            4.6

            9.0

            4.2

            8.0

         (7.2) 

         (4.4) 

          13.8

          18.9

          13.2

  Margin %

 5.7%

 2.6%

 3.9%

 1.8%

 2.8%

 (3.2%)

 (2.2%)

 6.7%

 9.4%

 7.4%

                     

Earnings from Cont. Ops.

          25.5

            0.1

            5.1

            3.7

            3.5

         (9.0) 

         (4.2) 

          11.4

          15.9

          10.9

  Margin %

 7.7%

 0.0%

 2.2%

 1.6%

 1.2%

 (4.0%)

 (2.1%)

 5.5%

 7.9%

 6.1%

                     

Net Income

          21.5

         (1.1) 

            5.9

          16.6

            3.5

         (9.0) 

         (4.8) 

          11.3

          15.9

          10.9

  Margin %

 6.5%

 (0.6%)

 2.6%

 7.1%

 1.2%

 (4.0%)

 (2.4%)

 5.5%

 7.9%

 6.1%

                     

Diluted EPS Excl. Extra Items³

          0.91

            0.0

          0.19

          0.13

          0.13

       (0.33) 

       (0.16) 

          0.42

          0.59

            0.4

  Growth Over Prior Year

 82.0%

 (99.8%)

 8,498.9%

 (31.4%)

 (1.8%)

NM

NM

NM

 40.0%

 (35.5%)

¹All results are taken from the most recently filed statement for each period. When there has been more than one, earlier filings can be viewed on the individual statement pages.

²Growth rates for the LTM period are calculated against the LTM period ending 12 months before.

          

 

Cash Flow

 

 

 

 

 

 

For the Fiscal Period Ending

12 months
Mar-31-2007

Restated
12 months
Mar-31-2008

12 months
Mar-31-2009

Restated
12 months
Mar-31-2010

12 months
Mar-31-2011

LTM
12 months
Dec-31-2011

Currency

USD

USD

USD

USD

USD

USD

 

            

Net Income

                           3.5

                       (9.0) 

                       (4.8) 

                         11.3

                         15.9

                         10.9

Depreciation & Amort.

                           0.6

                           0.7

                           0.7

                           0.8

                           0.5

                           0.3

Amort. of Goodwill and Intangibles

                           0.1

                           0.0

                           0.0

-

-

-

Depreciation & Amort., Total

                           0.8

                           0.7

                           0.7

                           0.8

                           0.5

                           0.3

             

Other Amortization

                           0.1

                           0.1

                           0.1

-

-

-

Minority Int. in Earnings

-

                           0.1

-

-

-

-

(Gain) Loss From Sale Of Assets

-

                       (0.9) 

-

-

-

                       (0.3) 

(Gain) Loss On Sale Of Invest.

-

-

                       (0.7) 

-

                       (1.0) 

                       (0.8) 

Asset Writedown & Restructuring Costs

                           1.7

                           3.8

                       (0.9) 

                       (3.6) 

                       (0.3) 

                       (0.8) 

Net Cash From Discontinued Ops.

-

                       (0.4) 

                       (0.3) 

-

-

-

Other Operating Activities

                           1.0

                       (1.8) 

                              0

                           2.1

                           4.6

                           4.3

Change in Acc. Receivable

                           0.5

                       (0.4) 

                           2.9

                       (2.8) 

                         10.3

                       (5.3) 

Change In Inventories

                       (2.4) 

                           8.2

                           4.4

                         11.5

                           2.1

                           7.4

Change in Acc. Payable

                           1.9

                           1.6

                       (2.8) 

                           1.8

                       (6.4) 

                           4.6

Change in Inc. Taxes

                           0.2

                       (0.2) 

                           0.0

                           0.0

                           0.0

                           0.0

Change in Other Net Operating Assets

                     (23.7) 

                         27.4

                       (1.7) 

                           2.1

                       (0.8) 

                       (2.5) 

  Cash from Ops.

                     (16.5) 

                         29.3

                       (3.0) 

                         23.4

                         25.1

                         17.7

             

Capital Expenditure

                       (0.4) 

                       (0.9) 

                       (0.4) 

                       (2.6) 

                       (0.2) 

                       (0.2) 

Sale of Property, Plant, and Equipment

-

                           2.0

-

-

-

                           2.7

Cash Acquisitions

-

-

-

-

-

-

Divestitures

-

-

-

-

-

-

Sale (Purchase) of Intangible assets

-

-

-

                       (1.5) 

-

-

Invest. in Marketable & Equity Securt.

-

                     (13.9) 

                           5.8

-

                           3.1

                           4.7

Net (Inc.) Dec. in Loans Originated/Sold

-

-

-

-

-

-

Other Investing Activities

-

                       (0.4) 

                           0.4

                           3.0

                       (0.7) 

                       (5.2) 

  Cash from Investing

                       (0.4) 

                     (13.2) 

                           5.8

                       (1.0) 

                           2.1

                           2.1

             

Short Term Debt Issued

                         31.9

-

                           9.3

-

-

-

Long-Term Debt Issued

                         86.9

                       183.1

                       141.6

                       124.5

                         88.2

-

Total Debt Issued

                       118.8

                       183.1

                       150.9

                       124.5

                         88.2

                              0

Short Term Debt Repaid

                     (31.8) 

                       (3.2) 

                       (3.6) 

                       (0.2) 

                       (3.1) 

-

Long-Term Debt Repaid

                     (85.8) 

                   (183.7) 

                   (141.7) 

                   (124.3) 

                     (88.2) 

-

Total Debt Repaid

                   (117.6) 

                   (186.9) 

                   (145.3) 

                   (124.5) 

                     (91.4) 

                       (2.4) 

             

Issuance of Common Stock

                           0.1

                           0.1

-

-

-

-
             

Total Dividends Paid

-

-

-

-

-

-
             

Special Dividend Paid

-

-

-

                     (29.8)  

-

-

Other Financing Activities

-

                           0.0

                       (0.1) 

-

-

-

  Cash from Financing

                           1.2

                       (3.7) 

                           5.5

                     (29.9) 

                       (3.2) 

                       (2.4) 

             

  Net Change in Cash

                     (15.7) 

                         12.4

                           8.2

                       (7.5) 

                         24.0

                         17.4

 

Current Capitalization (USD mm)

Currency

USD

Share Price as of Jul-11-2012

 $2.1

Shares Out.

          27.1
   

Market Capitalization**

          57.0

- Cash & Short Term Investments

          42.0

+ Total Debt

            0.1

+ Pref. Equity

            3.3

+ Total Minority Interest

-

= Total Enterprise Value (TEV)

          18.4

   

Book Value of Common Equity

          62.2

+ Pref. Equity

            3.3

+ Total Minority Interest

-

+ Total Debt

            0.1

= Total Capital

          65.7

 

Valuation Multiples based on Current Capitalization

 

 

For the Fiscal Period Ending

Mar-31-2008A

Mar-31-2009A

Mar-31-2010A

Mar-31-2011A

LTM
Dec-31-2011A

TEV/Total Revenue

0.1x

0.1x

0.1x

0.1x

0.1x
           

TEV/EBITDA

NM

NM

1.3x

1.0x

1.4x
           

TEV/EBIT

NM

NM

1.3x

1.0x

1.4x
           

P/Diluted EPS Before Extra

NM

NM

5.0x

3.6x

5.3x
           

P/BV

0.9x

1.0x

1.5x

1.0x

0.9x
           

Price/Tang BV

0.9x

1.0x

1.6x

1.1x

0.9x

 

Catalyst

MSN uses the cash on the balance sheet to pay a dividend or to buy shares back (whether under the pressure of the activist or otherwise).
MSN, under the control of FTI consulting, improves their investor relations function (currently zero IR effort).
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