Description

Lindblad Expeditions Holdings, Inc. (LIND and LINDW)

Executive Summary

1. LIND is a high end adventure cruise line company.

2. You can buy LIND common equity at less than 8.5x EV/LTM Adjusted EBITDA and 10%+free cash flow yield to equity (FCFE) ex-cash while its peers with less compelling / attractive business model trade at 10.5 - 12x EV/EBITDA or higher.

3. Business has a very strong moat in an attractive niche of the market due to superb brand of LIND and, more importantly, National Geographic as evidenced by very high repeat customer percentage (37%) and high percentage of direct sales (~43%).

4. Shares have an upside potential of 100% - 120% in a scenario (assuming no smart capital allocation decisions) in 4 years or sooner.  

5. Warrants are even more attractive with upside of ~200% to ~250% in this scenario (assuming no smart capital allocation decisions).  

6. Any smart capital allocations decisions would lead to even more upside and warrants would benefit more than common shares from such incremental upside.  We can see warrants to generate 300% or more in 4 years.  

7. Why this opportunity exists:

1. Ex-SPAC

2. Virus Zika

3. Valuation methodology mismatch

4. Time arbitrage

5. Limited sellside coverage

The write up contains multiple tables; if they do not paste properly, we will provide a link to the PDF in Dropbox.  

The pitch is for both LIND common shares and LINDW warrants. Price provided in "Financial Information" section is for warrants.

1. Business Description and Customer Value Proposition

LIND is a high end adventure cruise line company which has a very strong business model, great unit economics, and a strong competitive advantage (aka moat).  

The business was founded in 1979 by Sven-Olof Lindblad.  

LIND owns 6 ships and rents 4 ships.  

LIND acquired a land based expedition business in May 2016 for less than 5.5x EV/EBITDA (more on this below).  

LIND provides a high touch premium experience at a high price ($1,000+ per night).  It serves customers with high propensity to spend on experiences.  The Company believes that aging baby boomers present a strong tailwind for LIND’s business.  

We have talked with half a dozen of customers in person and all of them rave about their Lindblad expeditions!  One fellow investor told us that his father went on LIND’s cruises 13 (thirteen!) times with his grandkids and all of them loved it.  That conversation made us realize something else: LIND creates great opportunities for grandparents to spend high-quality time with their grandchildren.  

What does make this travel experience premium?  First, it is a small number of guests on a ship that varies from 47 to 148.  If you compare this with a typical mass market ship that accommodates 2,000-3,000 guests, you will see the difference.  Second, all destinations are quite exotic and educational; Galapagos and Antarctica are good examples.  Third, various National Geographic experts participate in cruises, conduct lectures, and share their knowledge.  This access to experts is another element that makes travel very unique.  

2. LIND’s History

1. Ex-SPAC

Legally, LIND is a successor to a special purpose acquisition company (SPAC) called Capitol Acquisition II (i.e., CLAC II acquired LIND).  Whooper posted a great write up on VIC on June 27, 2015, that provides good background information on the deal.  We would encourage everyone who wants to know more about the merger between CLAC II and LIND to review that write up.  

2. Alignment of Incentives

While in a typical SPAC transaction public market investors are always worried about why a prior owner is selling to SPAC given the information asymmetry, we believe the continuous alignment of incentives in the case of LIND significantly mitigates such risks.  LIND’s private owners (i.e., the founder’s family) have a lot of skin in the game even after CLAC II acquired LIND.  

First, “only” $90M went to Sven-Olof Lindblad, the founder, while $110M will remain on LIND’s balance sheet and will be invested in LIND’s expansion.  

Second, the founder retains ~29% ownership in the combined company and is the largest shareholder.  We also like the fact that Sven-Olof Lindblad has been building this business for decades taking it from literally zero revenue to $210M of revenue in 2015.  We further like the fact that his own name is the brand of the business since it creates non-monetary incentives for the founder to make LIND succeed.

3. Capital Structure

FD S/O = ~46.456M.  Share price on July 5, 2015, was $9.53  Hence, market cap = ~$440M.

LIND also has 12.04M warrants outstanding with the strike price of $11.50 that expire in July of 2020 (i.e., 5 year period that commenced 30 days after the completion of the merger between Old Lindblad Expeditions and CLAC II).  The number of warrants was higher after the merger was closed; however, during 4Q 2015 and 1Q 2015 LIND repurchased ~4.06M warrants.

Finally, there are ~1.5 mln Founder shares that vest when the price hits $13.  

4. Moat

LIND’s core competitive advantage is based on two pillars:

1. experience / learning curve and

2. brand.  

1. Experience / Learning Curve

LIND has been in this business for more than 30 years and has learned a lot about organizing and running cruises in remote locations while providing happiness and satisfaction to guests.  While doable, any new competitors will need to go through that learning curve and learning is unlikely to be cheap.  

2. Powerful Brand(s!)

More important source of competitive advantage is brand of both LIND itself and National Geographic.  

While LIND’s own brand is quite powerful, it cannot be even compared to the power of National Geographic’s brand.  LIND and National Geographic established an exclusive partnership back in 2004.  So this strategic relationship has been in place for ~12 years.  

As part of the acquisition, the partnership has been extended until December 31, 2025, and National Geographic has received an option to acquire a 5% stake in LIND (the option covers a purchase of shares from Mr. Lindblad and not from the company; therefore, we do not need to adjust the number of shares outstanding and capital structure for this).  

We view the partnership to be instrumental to LIND’s continuous success and we are also very pleased with the 5% option arrangement: National Geographic has been an incredible partner without any upside from equity (NatGen was simply receiving certain fees if bookings are made through it, etc.) and we can only imagine what it will do with such incentives in place.

While we talk about power of brand as a source of a competitive advantage, it is worth noting some other relevant metrics that would speak for themselves.  

1. Recognition Awards

The list of various awards that LIND has won over the years is long and impressive (e.g., Conde Nast Traveler’s 2014 and 2013 rewards just to name a couple).  We would encourage everyone who is interested to review the full list in the LIND’s investor presentation.  However, this is the least quantitative metric and we view it as just “nice to have”.

2. Customer Loyalty and Number of Repeat Guests

The percentage of repeat customers is a good metric to evaluate brand strength and consumer’s loyalty to the brand.  

It is very telling that 37% of guests are repeat customers (2 trips or more), and 10% of guests have done 5 or more trips.  We also know (indirectly) that at least one guest has made 13 trips (and planning to do more!) but we do not how many 13-timers are out there.  

3. Distribution Channel Mix

We believe that only very powerful brands with incredibly strong competitive advantage can sell lots of “units” directly to consumer without much reliance on intermediaries.  

We believe that LIND fits this profile very well as 43%, 49%, and 46% of its sales for 2015, 2014, and 2013 were through direct channel.  

5. LIND vs. Mass Market Players

It has been our experience that when fellow investors hear us say “we own LIND and LINDW and we are very bullish on the name”, they react with one of these responses:

1. I have looked at Royal Caribbean and/or Carnival and/or Norwegian Cruise Lines, it is not a good business.

2. I have read a short thesis on RCL, Carnival, NCL, do you want me to find it and send it to you?  

3. Isn’t it the case that everybody is increasing capacity in cruise business?  

As a result of these conversations, we want to include a special section “LIND vs. Mass Market Players”.   Details are below but punch line is here: LIND and RCL, Carnival, and NCL have only one thing in common which is all of them own ships and they travel by water.  Everything else is different.  

1. Industry Dynamics and Industry Structure

Mass market cruise industry and premium expedition industry have strikingly different industry structures.  While the mass market cruise industry is consolidated (top 4 players control ~85%), the premium expedition business is highly fragmented.  

2. Basis of Competition

The basis of competition is also very different in two industries.  Mass market players compete based on the quality of ships.  The newer is the better.  The more “cool” features the ship has, the more attractive the ship will be for guests.  There is an obvious problem with this.  Modern ships with tons of cool features are very expensive to build.  The ship that was really-really cool and cutting edge 3-5 years ago is not that cool anymore because there have been several newer ships built since then.  Hence, there is a need for upgrades which are also quite expensive.

LIND competes based on the quality of experience which includes:

1. Destination (how intriguing and educational destination is)

2. Engagement (which type of educational activities are held during expeditions)

3. Quality of instruction provided by National Geographic personnel.  

In this context, the age of LIND’s ships is very telling.  Here is the age of 6 owned ships:

1. 1982 (rebuilt in 2008)

2. 2003

3. 1966 (not a typo!); this ship is being retired in 2016 after 50 years in service.  

4. 1981

5. 1995

6. 1982

As we can see, LIND is able to provide excellent customer experience with ships that are quite old.  We seriously doubt that RCL (just to pick one mass-market player) can operate with ships that are so old.  

3. Basis of Competition => Different MCX Profiles (MCX as % of Revenue)

Different basis of competition results in different fleet (as discussed above) and different maintenance CapEx (“MCX”) profiles.

Mass market players tend to spend between 6% and 10% of revenue on MCX while LIND is spending between 3% and 4.5% of revenue on MCX.  

4. Customer Loyalty

We have already discussed percentage of repeat customers for LIND: 37% of guests are repeat customers (2 trips or more), and 10% of guests have done 5 or more trips.  In our opinion,

Anecdotally, cruises offered by mass market players are perceived by customers as interchangeable (i.e., as commodities).  We have not seen disclosure by mass market players of the percentage of their repeat customers which indirectly confirms the anecdotal evince.  We think that if the percentage of repeat customers was high, mass market players would have definitely bragged about it in their filings.  

5. Distribution Channel Mix

Direct channel is the largest distribution channel for LIND which speaks tons about the strength of a brand and LIND’s business model.  Needless to say, the higher the share of the direct channel, the lower commission fees that are paid to 3rd parties.  As we mentioned in our discussion of LIND’s moat, “the direct channel represented nearly 43%, 49% and 46% of guest ticket revenues for 2015, 2014 and 2013, respectively.” (2015 10-K)

Bookings from travel agents and wholesalers is the 2nd largest channel which represented ~28%, 28% and 26% of guest ticket revenues for 2015, 2014 and 2013, respectively.

“The National Geographic channel represented approximately 24%, 20% and 22% of guest ticket revenues for 2015, 2014 and 2013, respectively.” (2015 10-K)

“The remainder of bookings, 5%, 3% and 6% of guest ticket revenues for 2015, 2014 and 2013, respectively, comes from affinity groups and charters.  Affinity groups are predominantly college and university alumni associations, and other travel organizations targeting specific market niches.”  (2015 10-K)

We do not have such granular data about distribution channel mix for mass market players.  We tend to think if there was something to be proud of, mass market players would have disclosed it.  The disclosure is scarce.  For example, RCL says that the travel agencies continue to be the largest distribution channel (see 2015 Annual Report).

6. Exposure to China Is Extremely Limited

Another question that fellow investors ask a lot is “how exposed is LIND to China?”  Details are below but the punch line is that the exposure is close to zero.

Below are relevant data points and some commentary from management.  

“Historically, our focus has been to primarily source guests for our expeditions from the U.S. Expedition cruise guests sourced from the U.S. represented approximately 87%, 84% and 92% of our total global expedition cruise guests in 2015, 2014 and 2013, respectively.  Guest ticket revenues generated by sales originating in countries outside of the U.S. were approximately 15%, 19% and 8% of total tour revenues in 2015, 2014 and 2013, respectively.” (2015 10-K).

“our primary market by far is the United States.  It's a market we know, we understand, and we do have international business from all over the world including China, but it is not a significant part of our business.  We have decided -- strategically decided to focus our marketing efforts here in the United States where we believe we can get the best return for our investment to date. But in the future you never know, these are expanding markets, we're keeping our eye on them and they do represent future opportunities.”  (3Q 2015 Earnings Call)

7. Oil and Fuel

Fuel is a relatively small part of the cost base (as % of revenue).  While the Company benefitted from low oil in 2015, the benefit was small.  Holding all else equal, LIND got 210 bps of higher margin due to lower oil prices in 2015.

“Due to the specific geographies in which we operate and the cost of providing access to fuel in our remote destinations, we have historically not experienced significant fluctuations in fuel costs with changes in world fuel commodity prices.  However, the continued downward pressure is now becoming evident on fuel prices in all areas of the world in which we operate.  Fuel costs represented 4.3%, 5.9% and 6.4% of tour revenues for the years ended December 31, 2015, 2014 and 2013, respectively.  We have not hedged our fuel purchases historically, but we are evaluating a hedging strategy to manage cash flows related to variable interest and fuel prices.”

So even with higher oil prices, the negative impact on LIND’s margins will be fairly small.  

8. Management

We have a very high opinion of management.  The management team in its current form is really an amalgamation of “Old” LIND’s team and CLAC II team.  We think both teams bring a distinct set of skills to the table.  “Old” LIND management would continue running and growing the business while CLAC II team would focus on capital allocation.  We expect that such combination will be both highly complementary and very powerful.  

Sven-Olof Lindblad, the founder of the business, is still running the company and will be responsible for operations.  Let’s keep in mind that this is a person who founded this business in 1979 and grew it into a multi-million dollar business.  We also tend to think that Mr. Lindblad really loves what he does.  We think that Mr. Lindblad falls into a category of intelligent fanatics.  

Ian Rogers is a COO who has been with LIND since 2009 (he previously served as a CFO).  We like that Mr. Rogers has been with LIND for almost seven years.  

We recommend that one check the Proxy Statement (Form 14A dates June 19, 2015) to review background of other management team members who are coming from “Old” LIND.  

Mark Ein is a creator of CLAC II and is currently Chairman of LIND.  He is an entrepreneur and investor.  While prior success is not a guarantee of future success by any means, we still want to point out a success story of CLAC I.  CLAC I was the first SPAC that Mr. Ein founded.  CLAC I acquired Two Harbors Investment Corp.  That transaction turned to be success for investor and generated ~17.9% IRR over 5 years since closing.  We did some asking around about Mr. Ein and people who know him personally speak about him as a very smart person who has made several highly successful moves in his career and who is very much driven by financial success.  

Dyson Dryden was a CFO of CLAC II and now is LIND BoD member.  Mr. Dryden is a career investment banker (the last position was MD at Citi) who is clearly capable to help LIND properly allocate capital.

Among recent SPACs (LIND, AGFS, TACO) we think LIND has done the best job in terms of communicating to investors, explaining its story, and making capital allocation decisions.  We think that this is a product of a great match between “Old” LIND and CLAC II teams.  

Here are some relevant data points:

1. Investor Communication and Earnings Calls

LIND did the first earnings call shortly after the merger closed (2Q 2015 earnings call).  It also posted the transcript on its website right away to make life of investors easier as Bloomberg did not transcribe it at that time.  On the earnings call management did very well articulating the company’s strategy and answering questions.  If you take into account that it was the first earnings call in their lives, they did extremely well.  We tend to think that CLAC II executives provided good amount of coaching to “Old” LIND management.

You can compare this with Agrofresh’s (SPAC Boulevard) behavior.  First, AGFS decided not to host an earnings call for 2Q 2015 at all (Boulevard closed an acquisition of AGFS around the same time when CLAC II closed its acquisition of LIND).  Second, when AGFS did its earnings call for 3Q 2015, it was a manual of what not to do and how not to communicate with investors.

2. Share and Warrant Buyback

LIND was the first one to announce the share and warrant repurchase program and moved quite aggressively in 4Q 2015 and first half of 1Q 2016 in executing it (we will discuss it in late section of this report).  AGFS and TACO announced their capital allocation decisions on this front later and were not as willing to buy their own shares and/or warrants as LIND.  

While these data points do not indicate that LIND will be a better investment than AGFS or TACO, it does show us that there is thoughtful management behind LIND who acts consistently with their vision.  

9. Business Operating and Financial Characteristics

1. Key Operating Metrics

Below is a historical overview of key operating metrics for LIND: numbers of guests, occupancy, and yield.  

Based on our conversations with management and review of LIND’s filings, we believe that a drop in occupancy in 3Q 2015 was attributable to mix of routes rather than underlying health of the business.  Particularly, National Geographic Orion that was deployed for voyages in Africa and Indian Ocean encountered softer demand in 2015.  The good news is that the ship has been relocated in 2016 to routes that management expects to have higher demand and as a result be more profitable.  Occupancy recovered back to ~92% after 3Q 2015.  

2. Key Financial Metrics

1. Revenue Growth and Adjusted EBITDA Margins

LIND has been able to grow its revenue at a nice pace.  Adjusted EBITDA margins (ex-stock based compensation and one-time merger related expenses) have been in the range of 18.8% to 22.5%.  

2. Maintenance CapEx

LIND’s MCX needs are very limited.  Over the past few years MCX was running about 3% of sales.  

3. Structurally Low Taxes

Another structural characteristic of LIND’s business model is low taxes.  

Please note that in the calculation above we are using EBITDA and not Adjusted EBITDA.  

Structurally low taxes are due to U.S. income tax rules that govern taxation of income derived from shipping.  Here is a very high level explanation.  If a ship owned by a foreign corporation (i.e., a foreign subsidiary of LIND) conducts voyages that do not touch U.S. territory, any income derived from such voyages is considered to be foreign source income and not subject to the U.S. income taxation until it is repatriated to the U.S.  

Obviously, it is just a deferral rather than complete elimination of U.S. taxation.  However, compounding capital tax free for a long period of time can be very attractive.  

We expect that combined cash tax rate will go up somewhat when two new coastal vessels start operations because income derived from their use will be U.S. source income.  See more on this below.

4. High EBITDA Margin + Low MCX + Low Cash Taxes = High FCF

Not surprisingly if you combine high EBITDA margins with low MCX and low cash taxes, you get a business with very strong ability to generate FCF and very high cash conversion ratio.  This is exactly what LIND does.  

10. Capital Allocation

LIND is relatively levered on the gross debt basis (3.44x LTM EBITDA) but has net cash position: ~$181.8 of cash (we are not including any restricted cash or marketable securities here) minus ~$163M of debt = $18.8M (as of March 31, 2016).  Even on the gross basis, LIND is less levered than its peers.  

We expect that major uses of capital will be:

1. Growth CapEx

2. Ships acquisitions in the secondary market

3. Business acquisitions in adjacent spaces and product extensions

4. Share and warrants buybacks.

1. Growth CapEx

The narrative behind growth plans is increasing interest in travel and acquiring impressions among aging U.S. population (as opposed to acquiring material possessions).  

As part of LIND and CLAC II merger, LIND has disclosed that LIND would build three new ships:

1. Coastal vessel #1 that should be delivered in 2017 and it will cost ~$48M.

2. Coastal vessel #2 that should be delivered in 2018 and it will cost ~$46.8M.

3. Blue water vessel that should be delivered in 2019 and it will cost ~$135M.

LIND paid $4M non-refundable deposit for to reserve capacity at a shipyard (that payment happened in 3Q 2015) and on December 8, 2015, LIND announced that it signed a final contract to build two coastal vessel ships.  Thus, CapEx above should be reduced for $4M already paid.  

Management expects ROIC of ~23% on two coastal vessels and ~17% for blue water vessel.  While we cannot do own our high quality work on how achievable such ROIC numbers are, we would point out that even if the reality comes short of expectation and ROIC would be ~14%, it will still create significant value for shareholders given where LIND’s cost of capital is (cost of debt = 5.5% and one can choose cost of equity that fits their views).  

2. Ships Acquisitions in the Secondary Market

As we would show later, even all Growth CapEx will not exhaust LIND’s cash balance when you add FCFE generated over the next several years.  This makes us think that the management is contemplating tuck-on acquisitions.  

Management indicated during earnings calls that are they definitely looking at acquisition opportunities – both ships and other assets in adjacent businesses and product extensions.  

The playbook may look something like this: buy a ship from a smaller competitor, put it on LIND’s platform, leverage its sales channels and National Geographic brand to increase occupancy and price per night and as a result of these actions reduce the acquisition multiple and increase LIND’s free cash flow.  

Finally, on December 31, 2015, LIND announced an acquisition of Via Australis.  LIND paid $18M.  In addition, LIND will also spend ~$10M to refurbish Via Australis.  LIND will use Via Australis to replace its oldest ship (National Geographic Endeavour built in 1966).  The management expects that Via Australis acquisition will increase earnings capacity of the business and will be accretive to earnings.

A completion of Via Australis is a good indicator of LIND’s future ability to acquire ships.  However, we expect future ships acquisitions to be in addition to existing ships rather than replacement of existing ships.  

3. Business acquisitions in adjacent spaces and product extensions

From the very beginning of its life a public company, LIND was very vocal about doing acquisitions in adjacent spaces.  The first such acquisition was announced on May 5, 2016.  LIND acquired Natural Habitat, Inc.  

We are providing here key details about the acquisition but we would encourage everyone to review the presentation released by LIND in connection with the acquisition.  

1. Natural Habitat: Business Description

Natural Habitat is an adventure travel and ecotourism company that is focused on responsible land-based travel.  Similar to LIND’s strategic partnership with National Geographic, Natural Habitat has a long-term partnership with World Wildlife Fund (“WWF”).  Its partnership with WWF was supposed to be up for renewal in December 2018 but as a part of the acquisition it was extended up to December 2023.  It is worth noting that Natural Habitat partnership with WWF started in 2003.

Some examples of land-based expeditions that Natural Habitat does are

1. Churchill, Canada,

2. Alaskan grizzly bear tours,

3. small-group Galápagos tours

4. African safaris.

2. Key Financial Metrics

Financial disclosure about Natural Habitat is quite scarce but here are a few data points that we know.  

2015 2015 revenue = $41M

2015 EBITDA = $3.7M

2015 Net Income = $1.5M

It has also been disclosed that Natural Habitat has had a 25% revenue CAGR over last four years.  

3. Business Model: Striking Similarities to LIND

There many similarities between LIND and Natural Habitat.

1. Founded by passionate founder who has been running the company since the inception.  

2. Powerful brand due to a strategic partnership (National Geographic in case of LIND and WWF in case of Natural Habitat).  

3. Direct sales as the major distribution channel: 86% for Natural Habitat and 43% for LIND.  

4. Very high percentage of repeat travelers: 35% for Natural Habitat and 37% for LIND.  

5. Loyal customer base.

6. Similar target demographic group.  

4. Transaction Structure and Details

As far as we understand, there was no auction involved in acquiring Natural Habitat.  Founders of LIND and Natural Habitat have known each other for years (if not decades).  It is our impression that similar outlook of founders coupled with significant similarities in business models allowed LIND to complete the acquisition without engaging in competitive bidding.  

LIND acquired 80.1% in Natural Habitat and paid consideration of ~$20M that consisted of:

1. $14.85M in cash

2. 264,208 Lindblad shares (valued at $2.65 million)

3. ~$2.5M note.  

There were two sellers of Natural Habitat:  Gaiam who owned 51% and Natural Habitat’s founder Mr. Bressler who owed 49%.  Gaiam sold its entire 51% stake for cash.  Mr. Bressler sold ~29.1% and retained ~19.9% stake.   Her received cash, Lindblad shares, and a note.  He will also stay as Natural Habitat CEO which we like.  

So LIND paid ~$20M for 80.1%.  Natural Habitat also had ~$5M of cash on hand at the time of the acquisition that stayed with it.  Natural Habitat had zero debt.  

So acquisition multiples look as follows:

Paying ~5.4x EV/EBITDA for what seems to us as a high quality business with little CapEx strikes us as a very good deal, and we have not even talked about synergies.

We think that cross-selling synergies can be quite significant due to overlap in customer demographics.  Natural Habitat also provides platform for expansion into land-based offerings.  

It is too early to say how the acquisition of Natural Habitat plays out but even if revenue and EBITDA do not grow at all, it should work out fine due a low acquisition multiple.  

We tend to think that LIND can do more M&A transactions in adjacent areas.  Smart capital allocation decision here can create significant shareholder value.  

4. Share and Warrant Buybacks

At current levels LIND’s own shares present attractive investment opportunity for LIND.  LIND warrants are even more attractive.  

On November 9, 2015, LIND announced a $20M share and warrant buyback.  The Company did not indicate its preference between acquiring shares or warrants at that time.  Given capital allocation acumen of management, we expected the Company to acquire mostly warrants and management did not disappoint and has bought quite a few of warrants since then.  

So let's put numbers in perspective here.

(1) as of 9/30/2015 there were 16.1M warrants outstanding.

(2) as of 9/30/2015 6.1M out of 16.1 (~37.9%) are owned by insiders.

(3) as of 9/30/2015 the rest (~10M) is owned by public shareholders.

(4) On November 9, 2015, LIND authorized a buyback.

(5) Between November 9 and Dec 31, 2015, LIND repurchased 2.09M of warrants at an average share price of $2.62.

(6) Between Jan 1, 2016, and March 11, 2016, LIND repurchased 1.97M of warrants at an average price of $2.76.

(7) There were no further repurchases between March 12, 2016, and March 31, 2016.  

So since inception of the buyback program up to March 11, 2016 (123 calendar days and fewer trading days) LIND repurchased 25.2% of all warrants outstanding.  However, all warrants outstanding is a wrong metric given that 6.1M of warrants do not actually trade (insider owned). Thus, LIND repurchased ~40.6% of warrants in slightly more than 4 months.

Let's keep in mind that LIND still has ~$9.087M outstanding under the repurchase program.  Given that warrants traded down to $1.90 - $2.20 range, I expect LIND to buy more warrants.  There are still just under 6M warrants owned by the public.  So there is still room to go.

Most importantly, I love seeing the company buying warrants hand over fist when insiders own the same instrument.

5. Replacement CapEx

Since we are talking about capital allocation, we should also address an issue of replacement CapEx.

We do not expect LIND to spend a significant amount of cash on replacing ships in the next 5 years (and probably even 10-12 years).  

As we mentioned, LIND owns 6 ships.  Here is a table that lists these vessels.

National Geographic Endeavour is the oldest ship (built in 1966).  So it is literally more than 50 years old.  Now it is being replaced with Via Australis.  Two oldest ships now were built in 1981 and 1982.  The third ship (National Geographic Explorer) was also built in 1982 but was re-built in 2008.  

While a useful life of a ship depends on many variables, a large gap in age (1966 vs. 1981-1982) makes us think that these ships will last for quite a few more years without the need to be replaced.  

11. LIND Valuation

There are many different ways to approach LIND valuation.  None of them fits all investors.  Hence, we will present several various approaches.  

1. Current Valuation

1. Current EV/EBITDA

Using LTM EBITDA numbers of LTM Adjusted EBITDA or 2016E EBITDA per company’s prior guidance, it is easy to see that LIND trades at less than 8.5x EV/EBITDA.  Its peers typically trade in the range of 11x – 14x though we think that LIND has a better business model and higher ROIC and, therefore, should deserve a premium multiple, not a multiple discount.

Using 12x EV/EBITDA multiple (more in line with peers), shares have an upside of ~40%.  Please note that we are ignoring impact of warrants and founder shares for now but we will address it later.  

Please also note that we are not incorporating two things in this valuation:

1. Acquisition of Natural Habitat (we are neither reducing cash / increasing share count nor including the “acquired” EBITDA in our calculations)

2. Acquisition of Via Australis.

We will take care of incorporating impact of those two transactions into our valuation later.

2. Current FCFE Valuation

On FCFE basis LIND shares ($9.53) currently trade at the yield of ~6.15%.

However, if you exclude cash that produces nothing in terms of FCFE (we excluded any cash interest earned from FCFE), then LIND shares trade at the yield of ~10.5%.  

Given quality of LIND’s business, we think LIND shares should be trading at the yield of 6% - 8%.  Using 7% mid-point FCFE yield, we get to an upside of ~ 30%.  Please note that we are ignoring impact of warrants and founder shares for now but we will address it later.  

Similarly, we are not incorporating the impact of Natural Habitat acquisition and Via Australis acquisition.  

We are also not modelling working capital changes which are favorable to LIND as long as the business grows.  LIND enjoys negative working capital since customers pay 6-12 months before the trip takes place  Over the past several years LIND has had a working capital between minus ~$67 to minus ~$83.5M.  

We want to explain why we are taking out the cash on the balance sheet and using market cap excluding cash to calculate the FCFE yield.  This cash balance is not necessary for operations.  We expect that it would be used for Growth CapEx (as outlined by the Company), ship acquisitions through secondary market transactions, and business acquisitions (similar to Natural Habitat).  Right now that cash balance is generating very little interest income and we are not including any interest income into our FCFE calculation.  

While cash sits on the balance sheet and earns next to nothing, the debt carries ~5.50% coupon rate.  Thus, LIND is incurring massive negative carry.  

The most conceptually accurate way is to model LIND putting its cash to work and model the company’s earnings once such full deployment of cash occurs.  This is exactly what we are doing in the subsequent valuation sections.  However, in order to get a sense of what LIND’s business is worth “as it is right now”, we believe that cash should be subtracted when we calculate the FCFE yield.  In other words, we want to value LIND’s business “as it is” and value growth opportunities separately.  

2. LIND in 2020

Given that LIND will be building 3 new ships that are expected to produce ROIC above cost of capital and generate meaningful cash flow and LIND already has cash on its balance sheet to finance theses ships, the better way to look at LIND is based on 2020 numbers.  

As part of the SPAC merger process, LIND provided a fairly detailed set of projections.  While we are generally skeptical about company’s own projections, we think that in the case of LIND they can be a reasonable place to start.  

Few points re: these projections.  

1. What comes from Company’s projections:

1. Guests

2. Current revenue

3. New ship revenue

4. Current Adjusted EBITDA

5. New ship Adjusted EBITDA

6. MCX

2. What comes from Company’s projections with our revisions due to new information that has become available after the proxy was filed:

1. Growth CapEx

3. What comes from our own inputs:

1. Interest expense

2. Cash taxes

4. Note that we adjusted BOP cash in 2016 for 4Q 2015 FCFE.

5. New information not included into LIND’s projections in the proxy statement:

1. Everything related to Natural Habitat transaction.  

We want to highlight two important things about calculations above:

1. We are relying on Company’s projections as a starting point to get a sense of how LIND would look like in 2020 if the management executes.  One can make their adjustments (either bullish or bearish) to arrive to their own conclusions.

2. We are assuming the simplest capital allocation decision (or rather indecision!): LIND would be accumulating cash on its balance sheet.  We do not expect that to happen.  We expect that the cash would be spent on accretive ship and business acquisitions, share and warrant buybacks, and some debt paydown.  Any of these capital allocations would increase value per share if properly executed.  

3. 2020E EV/EBITD Valuation

Below is our 2020 LIND common shares and warrant valuation based on EV/EBITDA multiples.

4. 2020E FCFE Valuation

Below is our 2020 LIND common shares and warrant valuation based on FCFE yield methodology.

12. Warrants: What Else You Need to Know

Below is an explanation of how warrants work:  

“The warrants may be redeemed by the Company, at its option, in whole and not in part, at a price of $0.01 per warrant at any time the warrants are exercisable, upon a minimum of 30 days’ prior written notice of redemption, if, and only if, the last sales price of the Company’s shares of common stock equals or exceeds $24.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within a 30 trading day period ending three business days before the Company sends the redemption notice; and if, and only if, there is a current registration statement in effect with respect to the shares of common stock underlying such warrants.”  

“If the Company calls the warrants for redemption as described above, the Company’s management will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the warrants for that number of shares of common stock equal to the quotient obtained by dividing (x) the product of the number of shares of common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the fair market value by (y) the fair market value.  The fair market value shall mean the average reported last sale price of the shares of common stock for the 5 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants.”

It means that maximum intrinsic value of warrants is likely to be $24 minus $11.50 = $12.50.  However, as far as we understand the legalese, if the average reported last sale price of the shares for the 5 trading days is above $24, then such ceiling goes up.  For the sake of simplicity, we assume that the maximum intrinsic value is $12.50.  

13. Capital Allocation as an Extra Source of Upside

As we pointed out, we do not expect LIND simply accumulate cash on its balance sheet.  We expect that such cash will be put to good use which would significantly increase returns.  

One can decide to themselves how much value can be created through capital allocation by LIND management and model it accordingly.  We will skip this part here; otherwise, the write up will be way too long plus it is an exercise that everyone can do on their own using assumptions that they find reasonable.  

14. Commons Stock Vs. Warrants

It is a matter of personal preference and we and / or our affiliates are long both.  

While we believe the downside in shares is very limited, there is no downside protection in warrants due to time expiration.  However, warrants provide a very asymmetric risk / reward.  

15. Sellside Coverage

There are currently two banks that cover LIND: Citi and Credit Suisse.  It is our understanding that after Credit Suisse launched coverage, the analyst on the name left, and CS effectively stopped covering it.

16. Risks

1. Cyclicality of Business

One serious concern is how cyclical this business is and what will happen with the company when another large crisis hits the economy.  From conversations with management we have learned that during 2008 – 2009 LIND had to cut prices by ~10% to keep occupancy high.  This strategy succeeded and revenue was down by ~10%.  Given LIND’s 21% - 24% EBITDA margins and assuming that the company was not able to cut any costs (very unlikely), EBITDA margin will drop to 10%+.  We believe that under such circumstances LIND would be able to weather a recession well.  

While this is definitely a cyclical business, it was able to generate strong EBITDA and strong cash flow (low taxes plus small maintenance CapEx) even in 2008 – 2009.  This definitely gives us comfort that LIND should be able to survive another large crisis.

2. Zika and Other Viruses

We believe that one of the reasons for recent weakness in LIND shares is Zika virus.  

We are not doctors and we do not have superior insight into Zika virus.  

However, we do have a few observations and thoughts.

1. Viruses and various diseases hit the planet periodically.  Do you remember Ebola panic in October 2014?  Do you remember how people were explaining a sharp market selloff by Ebola?  If you do, you know what we mean.

2. Humanity has been doing a very good job of figuring our cure for such viruses.

3. Only one or two of LIND’s ships conduct expeditions in areas that are affected by Zika virus.

4. Ships can be relocated to new routes.  While it would take some work to get this done, it is definitely doable.

17. Catalysts

1. Further ship acquisitions in the secondary market.

2. M&A transactions in adjacent spaces.

3. Increase in sellside coverage.

4. Delivery of new ships.

5. Continuation of warrant and / or share buyback.  

18. Conclusion

We think LIND common equity and warrants today present an attractive investment opportunity.  You can buy a wonderful business at a cheap price and partner up with experienced managers who love what they do and are good at allocating capital.  We are happy to be in the same boat with this management team (pun intended).  

DISCLOSURE: We and / or our affiliates are long LIND and LINDW, and may buy additional shares or sell some or all of our shares, at any time.  We have no obligation to inform anybody of any changes in our views of LIND.  This is not a recommendation to buy or sell shares.

We do not hold a position with the issuer such as employment, directorship, or consultancy.

Catalyst

1. Further ship acquisitions in the secondary market.

2. M&A transactions in adjacent spaces.

3. Increase in sellside coverage.

4. Delivery of new ships.

5. Continuation of warrant and / or share buyback.