2017 | 2018 | ||||||
Price: | 29.12 | EPS | 0 | 0 | |||
Shares Out. (in M): | 83 | P/E | 0 | 0 | |||
Market Cap (in $M): | 24 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | 34 | EBIT | 0 | 0 | |||
TEV (in $M): | 58 | TEV/EBIT | 0 | 0 |
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LSR is UK based REIT that is currently in liquidation mode and trades at 30% discount to NAV. More than half of the properties have already been disposed at a slight premium to BV. Despite reduction in the size of portfolio, operations remain cash flow positive. Timeframe for the liquidation of the remaining assets is 2-3 years. Thus investors have possibility to generate c. 10%-20% IRR with a well-protected downside.
Due to small capitalization and minimal liquidity this idea is applicable to PAs only.
Background
LSR is a collection of small retail RE properties spread across UK. Composition of current portfolio (Sep 2016 year-end):
327 properties that are divided into 1014 letting units;
50% of properties are valued at less than GBP120k, so tiny local shops;
Property yields are 9%+ with renewals happening at similar prices (like-for-like rents are -2%);
Vacancy rate is stable at 10%-11%.
Net Debt to value is at 52% and company is using proceeds from asset disposals and operations to pay down debt. Taking into account most recent asset sales (after year-end), net debt to value is reduced to 48%.
Overheads were cut successfully together with the reduction in AUM. Company is profitable at operational level and has generated 0.8p and 1.3p of per share operating cashflow (vs 29p share price) during 2016 and 2015 respectively. Capex outlays are minimal.
Liquidation timeline
The decision to liquidate the company was taken back in July 2013 so the process is already ongoing for more than 3 years. Initial plan was to complete the asset disposal process and return cash to shareholders by the end of 2017. However, disposals were moving far too slow. Recently (potentially due to unsuccessful proxy by the largest shareholder) a more detailed liquidation timeline has been announced and final wind-up targets have been pushed out by couple of years.
Liquidation is weighted more toward the outer years with the largest part of the portfolio up for sale only during H2 2018. So far management seems to be sticking to this plan with 44 smaller properties sold for net proceeds of GBP5.5m since the new timeline was announced.
Property disposals so far:
FY2013 – 12 properties for GBP1.4m, 16% premium to book
FY2014 – 23 properties for GBP4.3m, 17% premium to book
FY2014 – Single transaction 235 property sale for GBP79.3m, 1% premium to book
FY2015 – 37 properties for GBP5.3m, 9% premium to book
FY 2016 – 27 properties for GBP5.0m, 2% discount to book
2016 Q4 – 22 properties for GBP2.0m, 1.75% premium to book
2017 Feb – 22 properties for GBP3.5m, 8.5% discount to book
Overall assets have been sold around book value and the large discount during the last auction sales is either due to specifics of individual properties (worst properties are being disposed) or reflection of deteriorating RE environment following Brexit vote. I attribute this to the former, however results of further asset disposals will show whether properties are systematically overvalued on the balance sheet.
Even if the remaining properties are disposed at the same 8.5% discount to BV, such liquidation would still result in NAV of 36p/share or 15% upside relative to current share prices. Discount to book needs to widen to 16% for this trade to break-even.
Worth noting that LSR is also revising property valuations downwards every year with negative fair value adjustments of GBP0.5m in FY2014, GBP1.6m in FY2015 and GBP1.1m in FY2016 – this likely reflects minimal capex investment to maintain the properties in liquidation phase. However, due to cash positive operations and asset disposal at slight premium, BV per share has remained stable since 2013.
Risks
Further asset sales at or above book value
Final liquidation of the company in 2-3 years
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hi PGTenny,
would you be willing to share an update with us now on the thesis. thanks very much.
any specific thoughts related to SAH and GPI would be appreciated. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Hey Skimmer – that’s an interesting analysis – please do respond on this, I don’t have your data set and would be interested if this is the case….
I THINK what’s throwing off your correlation – the years you see P&S as a larger % of gross profit was because the front-end declined, not because of huge P&S growth. P&S very stable as a % of gross profit pre-downturn, then shot up in downturn as the P&S base was resilient while front end sales fell off a cliff. So in the downturn, P&S grew as a % of gross profit, but incremental margins were negative as the front-end fell off quickly. Then in the recovery, P&S decreases as a % of gross profit as the front end recovers, but the front end recovery is at good incremental margins, so here again, P&S was getting smaller as a % of gross profti but the business was seeing great incremental margins (again giving you that negative correlation) To summarize data below: ’03-’06: P&S steady at 37-38% of gross profit, margins expand from 23.2% to 24.8% Downturn: P&S grows as a % of GP from 40% to 48%, margins fall from 24.6% to 21.5% b/c front end fell off so hard Recovery: P&S falls as a % of GP from 45% to 40%, margins rise from 23% to 28% b/c front end recovered well and P&S continued growing due to all the initiatives to increase retention, and more OEMs offering included service etc.
Here are the stats, hoping they will show up in the formatting
Does that solve the question or does it go deeper?
Think the real way to deconstruct this is to look at same store sales gross profit growth historically front end vs. back end as that correlates to same store sales incremental margins (since acquisition growth doesn’t give you incremental margin, probably usually comes in at lower than group margin then you try to operate the stores better). Generally when you look at periods of strong SSS P&S gross profit growth, you see more margin expansion than usual, though it's sometimes mitigated by front end declines (remember SAAR last peaked in '00, around when these guys went public, so no growth/small decline for front-end was the industry norm during their history, though these co's all organically grew front end by taking share from mom & pops).
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Hey guys – thanks for Qs and sorry for slow response. Here are my thoughts:
Bdad – read across for PBY/AZO/ORLY. Think those aftermarket guys would be hurt by the trend of newer fleet growing, older fleet shrinking a bit – new cars don’t get serviced much DIY or mom & pop mechanic. This idea started out looking to see if there was a short thesis on guys like Pep Boys and Munro b/c so much more work would be retained by dealers on the new service plan models. But in the end didn’t see a strong short case there – the total car fleet is so large changes happen slowly, the shift much more pronounced for the smaller fleet of young cars, just kinda a rounding error headwind on the larger fleet of old cars, so I’d think roughly neutral for PBY/AZO/ORLY from this trend I’m focused on.
Spike945 – on SAH’s new used initiative. Think it makes sense people are looking at growing in the used market, also get some comfort that others are looking at this as well (ABG quietly looking, believe this push will be part of why AutoNation rebranded). Tough to get a lot of conviction on whether it works or not, SAH’s team hasn’t executed things well. Don’t think you need to beat KMX per se, they’re only 4% share of an enormous market dominated by mom & pops. Think the idea is you can really scale in used cars, the new dealerships should give you an advantage in used market (supply and possibly brand if that works). And because state franchise laws don’t apply in open-market used (they do protect stuff like CPO programs for dealers though), you can leverage your scale here to take share from mom & pops that people don’t really trust or want to work with. Again, we’ll see how well this works, huge market to go after, conceptually makes sense to me, but I can’t think of good ways to diligence whether it will be successful or not until we see it.
Lars – on earnings estimtaes, I don’t really publish estimates like a sell-sider. But still see the same results – I think 8% P&S growth is relatively conservative/easy to make assumption here now that we’re already seeing 6, 7, 8% growth --- no matter how you slice/dice P&S exposure to the relevant fleet vintage, it all shows significant multi-year P&S acceleration from here. At 8% and good incremental margins (and use of cash for acquisition/buyback which most of street doesn’t do), puts you way out ahead of consensus. Think it’s easy to pencil out 10, 12% growth cases which starts making the street numbers look silly. And all this on a group that’s trading 10-12x consensus, which I think should be trading at mid-teens multiples on higher numbers. On gross profit/unit – the only place there was really notable pressure was GPI (to a lesser extent some pressure at AN), which makes sense if it is J3/Toyota driven. We’ll see going forward, GPI said there’s been no lessening of the incentive pressure in October, but even if you extended out GPI’s 3Q numbers I’m still pretty far ahead of the street (and I’d expect that GP/car doesn’t stay so low). Total front end gross profit/unit is still stable for the group (new + used + F&I gross profit / new + used volumes) – so with the exception of GPI’s gaffe this quarter, everyone else still making the same amount of profit on a new/used sale, as volumes grow on both the new & used sides. 15.5m SAAR below replacement demand, so should grow from here. So feeling fine about the front end, and excited about P&S/back-end where the bigger growth and bigger incremental margins lie.
------------------------ Overall this quarter what I liked was everyone is showing clear acceleration in P&S. P&S can be bumpy q to q if there are big recalls etc, so wouldn’t expect the progression we’re seeing to be this smooth forever, but good to see the clear and marked trend to higher growth. What I didn’t like was inconsistency in the incremental margins.
Stocks are all down a lot after running up a lot. Don’t know what to make of that other than lack of big beats this Q after a lot of big beats recently, and existing holders who may be seeing the higher mutliples as an aberration and selling, some sentiment shift around weak SAAR commentary (though think there’s pretty much universal agreement 15.5m cars is cyclically weak not cyclically strong, so not sure why so much concern over a month). Stock are still up nicely from March. Our focus is more on what this looks like in ‘14/15/16 and feeling more confident on P&S thesis as we see it show up in the numbers. Despite the stock volatility, happy to see more attention being paid to the P&S thesis, thinking that attention should mean higher multiples in the future if the P&S growth does in fact play out the way we expect. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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hi PGTenny,
excellent write up and follow up. do you have thoughts on SAH's new initiatives that they announced this week?
given all the moving parts they must believe the returns on this are compelling and they can beat KMX.
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First off, good write up. Rarely do I feel people actually do the math/work on what the CFPB effect could be. I looked at shorting them off it, but passed as it's more like a 1-time EPS shock than a permanent issue if the new fee structure is indeed lower.
Second, I would, just b/c I'm bored on a Friday, point out that I expect the CFPB to remain a pain for the dealers, including and potentially particularly the used guy, KMX. There's a lot of shadiness in the cars sales business, and the worse guys out there are notorious for screwing people on loans. Plopping a 70 page legal document down in front of a guy with a 10th grade education and then confusing him into paying a higher rate than he is eligible for is EXACTLY the type of behaviour the CFPB is looking for... and the car business is rife with that.
I don't think it negates your thesis, but I expect the CFPB to be targeting the auto-dealer business for the next few years, even if the CFPB needs to find ways around the exemption for autos. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Excellent writeup, thank you.
one question at this point. In AN's July conf call management said 30% of their service business is 6-10 year old cars, then they backed off that a bit and said that 30% is not of the whole business, only of customer pay and warranty. (What are the other components of a service business?)
how do you think that fits with what you wrote? Is the relationship between service and 0-5 cars linear or should one multiply by .7? Maybe you already made an adjustment in your modeling.
You clearly know the business much better than I do, what are your thoughts on that? |
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