Description

We find Premier Exhibitions to be one of the most attractive risk/reward opportunities we have seen in the past few years. In our opinion the stock has little downside risk with 100-300% upside potential over the next six to eighteen months. The company is at its inflection point, as it is now layering its new cash generating business on top of its steady, legacy business. The company has extraordinary leverage in its business model and very high returns on capital. In addition, the company has quite a bit of visibility into their steady cash flow, no debt, significant yet illiquid assets and strong management. Additionally, in about one year the company has the option of removing its partner whose economic contributions will have diminished significantly. This will allow them to increase their bottom line earnings by about 50%. The company has applied for a NASDAQ small cap listing, and should receive it shortly as it has satisfied all of the requirements.

The company has provided guidance, which they call extremely conservative at $0.40 EPS for FY07 (fiscal year begins on March 1st). By our calculations, we agree the guidance is extremely conservative and we estimate that they will do $0.49 in EPS this fiscal year and $1.03 in FY08. We assume the stock will trade at least at a P/E multiple of 15 and perhaps a 20/25 P/E multiple, which would be appropriate given the consistency and predictability of their cash flow, as well as multiple opportunities for upside, and favorable industry comps.

The Premier story is completely unknown to Wall Street with no analyst coverage and almost no institutional ownership. In fact, on a recent trip to the company, management remarked that we were the first institutional investor to visit the company.

As an overview, Premier is an exhibition company that currently exhibits two shows around the world. The first show displays artifacts from the RMS Titanic, and for which they have “salvor-in-possession” rights. The second show is called “Bodies…The Exhibition” (“Bodies”) with five shows running currently and a sixth scheduled to open this June. The third business opportunity, which they have publicly discussed, is a permanent home for the Titanic, which would be located at Pier A in New York City. This is slated to open in their fiscal fourth quarter of ’07, pending final lease negotiations.

By virtue of just executing on their two current businesses, we consider Premier to be one of our favorite investment ideas. However, there are other potential drivers, which could make the story even more attractive. This includes the permanent display of the Titanic in New York, a potential sale of the Titanic artifacts, a potential sale of the Carpathia, a third exhibit which is on the drawing board for FY08, additional “Bodies” shows in FY08, a potential permanent Titanic site in Belfast Ireland, and most importantly the opportunity to eliminate/modify the agreement with their “Bodies” partner.

Titanic Business

The company was founded in 1987 for the purpose of exploring the wreckage of the Titanic. The company was originally called Titanic Ventures Limited Partnership (TVLP) and in 1993 the assets and liabilities were purchased by RMS Titanic Inc, a wholly owned subsidiary of Premier Exhibitions. There have been numerous legal contests and court battles. However in 1996 the courts declared that Premier (called RMS Titanic Inc) was given “salvor in possession” right to all of the artifacts. Therefore, they have exclusive rights to exhibit the Titanic artifacts and salvage the wreck for additional artifacts. The company has unsuccessfully petitioned for full ownership rights. These petitions have been declined by the courts, however, the salvor-in-possession rights have been confirmed and never been challenged. The company has completed seven dives to the wreck, and has salvaged 5500 artifacts.

Originally, Premier licensed the rights to exhibit the shows to Clear Channel Communications and received a 20% gross royalty fee. During that time, the company was fighting numerous legal battles and building out the infastructure and establishing the financing for the company. In April 2004, the contract with Clear Channel expired and Premier chose not to renew. The company assumed the exhibition operations and increased its bottom line significantly.

Premier’s traditional Titanic business is becoming a small percentage of revenues and less important to the basic investment thesis. Nevertheless, it has high margins and generates predictable ticket sales. The significant upside is spawned with the potential sale of the artifacts that are worth tens of millions of dollars but sit on the balance sheet at a fraction of appraised value.

With the salvor-in-possession rights, Premier has no direct costs with the artifacts. In many instances the hosting venue will guarantee certain payments, sometimes also paying the exhibition set up/break down costs, and provide Premier a letter of credit. In every instance, for both shows the company has been very successful at putting very little capital at risk, yet enabling significant upside.

The company currently has five major traveling Titanic shows and two small shows. Collectively these shows consistently generate about $6 million in gross revenues and $5 million in net revenues. We don’t expect much variability in these numbers. There are several very unique artifacts that have never traveled (due to them being fragile) which will make them excellent additions to the permanent show. However, they will need some artifacts from the touring shows to fill out the permanent show. This means that they will probably reduce the large shows from 5 to 4, but increase the small shows from 2 to 3. We estimate that the net effect will be in reducing net income from $5 million to $4.5 million for the traveling shows. There is upside in our numbers as the show revenues have been trending up, and they have recently announced a return to Las Vegas, which was by far their most profitable venue.

We anticipate that net revenue from the permanent NY show (still in negotiation) will be about $8 million per year. There are currently 3.5 million people who buy tickets to the ferry for a tour of the Statue of Liberty that will pass right by the Titanic exhibit. In addition, there will be significant number of people who will come specifically to see the Titanic as it “Finally Arrives in New York.” By assuming that very conservatively 600,000 people will review the show annually at $20 per ticket, and projecting a very conservative 70% gross margin, the exhibit will net over $8 million. According to our channel checks, tourism professionals have told us that they expect the show to draw between 750,000 to 1,000,000 people annually. Only a small amount of revenues will fall in FY07, but significant revenues from the show should be realized in FY08.

The Bodies Show

The “Bodies” show is where the story really gets exciting. Premier leveraged their exhibition expertise and the good relationships they had with the museum communities to create the “Bodies” shows. “Bodies” is a fascinating exhibition of the human anatomy. It may sound gory and bizarre, but the shows have been a smash hit and loved by the public. There is something about these shows which seem to appeal to the core of who we are. They are a fascinating look at human anatomy.

The “Bodies” exhibits typically contain 22 bodies and 260 organs. The dissected specimens are displayed exhibiting muscular, circulatory, neurological systems etc. in an educational manner. The specimens are displayed in a variety of poses; conducting a symphony, throwing a football, etc. The organ displays typically contain the blackened lung of a smoker along side the healthy lung of a non-smoker. According to the director of the Tampa exhibit, literally every day an attendee leaves behind a pack of cigarettes after seeing the show. While Premier has skilled marketers, the show attendance accelerates by word-of-mouth. From our research, we have concluded that an overwhelming majority of attendees would strongly recommend “Bodies” to friends and family members.

While Premier’s first “Bodies” shows have great successes, the concept has been proven by their only real competitor, Gunther von Hagens (www.bodyworlds.com). Body Worlds (private company) has been touring a nearly identical show for the past eight years to enormous crowds through out the world. Being second to market has benefited Premier as management learned to handle the inevitable controversary that accompanies the show as well as to hone their marketing and exhibition skills. Over 20 million people have seen von Hagen’s show, averaging 800k visitors per show.

Premier’s bodies have all been legally obtained through one medical facility in China. The bodies have either been unclaimed or been donated to the facility. Some shows have been protested by individuals who think the bodies were executed political prisoners. The company has all of the appropriate paperwork documenting how the bodies were legally obtained.

The process that preserves the bodies is called plastinzation and was pioneered by von Hagens. It is basically a process in which all of the body’s fluid and fats are drained. Polymers are injected into the bodies, preventing the decay and maintaining a natural look. The bodies are then displayed by removing the skin or by dissection. The work is incredibly difficult and labor intensive, taking close to a year for the medical facility to prepare one set of bodies.

The “Bodies” show is a profoundly educational experience and has been embraced by medical and education professionals.

Von Hagens has sued Premier for violation of intellectual property. Premier’s argument was that von Hagen’s copyrights had expired and the poses were not copyrightable. The matter was settled out of court. According to Premier they paid von Hagens a non-material amount of cash.

Importantly, according to the company (substantiated by our channel checks), there seems to be an overwhelming, worldwide demand for the “Bodies” shows. According to the company, there is currently such strong demand that they could do at least 20 different shows right now if they had additional sets of bodies. After reviewing the “Bodies” shows, we are confident that there is nothing faddish about the shows, and they will run for many, many years. Channel checks with exhibition experts seen to unanimously agree. Due to the expertise required in producing the shows, the cost of leasing the bodies, and the great difficulty in obtaining the sets of bodies, it seems extremely unlikely that much more supply will come onto the market.


“Bodies” Economics

Based on eight years of van Hagens data, along with date from the shows already produced by Premier, we are estimating a minimum of 350,000 people per six-month show. This is significantly below any of von Hagens’ or Premier’s shows. In Tampa, a relatively small city, there has already been 450,000 tickets sold, and in New York over 300,000 tickets have been sold in only four months. Atlanta attendance started off sluggishly but is now on pace with Tampa and New York. The London show opened strongly and Mexico City is doing extraordinarily well.

The biggest variable cost for Premier is the cost of leasing the bodies. A set of bodies costs $1 million per year. The leases are for five years with a five year option. There are minimal variable costs after that. The company owns most of the necessary exhibitory for both shows, which were funded by the financing last year.

For “Bodies”, Premier has a partner, Jam Theatrical Productions, Inc and Concerts Productions International Ltd (Jam). Jam has provided financing for the company, made some introductions into markets, has guaranteed all of the start up costs for each of the shows (except London which is excluded from their agreement), and on an ongoing basis provides some accounting functions.

When a “Bodies” show opens, Jam pays Premier $500,000 upfront. Those fees have actually already been paid to Premier, but when the show opens the revenue is recognized, and the money flows through to the income statement. Jam then pays all the start up costs. After Jam is reimbursed for the start up costs, Jam and Premier split the net revenue until Jam has a 50% return on its costs. A show will typically have about $1,000,000 in start up costs, and operates on a 70% gross margin. After the expenses are paid, Jam and Premier then split the next $1.5 million in revenue 60% Premier/40% Jam; and after that they split revenue 70% Premier/30% Jam.

In a simple example a “Bodies” exhibit that has 350k attendees (significantly less than their goal, their attendance on the first “Bodies” exhibits or the Von Hagan exhibits) at $20 per ticket grosses $7 million in revenue. Jam would pay Premier $500,000 in licensing fee and pay $1,000,000 in start up costs. After deducing these costs we then apply the 70% gross margin, which would be $3.85 mm ($5.5 mm xs .7=$3.85 mm). Each party would then get $750k so Jam gets a 50% return on its original cost ($1.5mm xs .5=750k). The parties then split the next $1.5mm 60/40 ($1.5 mm xs .6= $900k PXHB). Finally, the parties split the remainder 70/30 (850k xs .7=595k PXHB). In sum:

PXHB Jam

Licensing Fee $500k
50/50 split $750k $750k
60/40 split $900k $600k
70/30 split $595k $255k

Total $2.74 mm $1.6 mm

In this example if there was no revenue sharing, PXHB’s income would be $4.34 mm.

Of course, it is in Premier’s interest for the shows to run as long as possible, since they will enjoy that 70% split and costs as percentage of revenue drop sharply. Also, there is less downtime, as management estimates it takes up to one month to take down, transport and install a new show. Both Tampa and New York shows have been extended, and it seems that New York and Mexico City could be a multi-year shows.

Jam and Premier’s deal is for 12 shows; however after 6 shows Premier’s upfront payment will increase from $500,000 to $1,000,000. This will not affect the bottom line, but will improve Premier’s balance sheet. Jam has already paid Premier for the first six shows. The show opening in July will be the 5th show in the agreement. There are four shows scheduled to conclude around Labor Day, so when the four replacements shows close (mostly likely in the spring of ‘07 which approximately coincides with the end of Premier’s fiscal year) they will have completed 9 out of 12 shows. So, Premier and Jam will only have 3 “Bodies” shows remains in their agreement in FY08. We anticipate that the New York show, which has been extended through December 06, will be extended again through calendar ‘07. This is once again advantageous to the company, since they don’t get a new show opened against the 12 in the deal, but will be in the 70% split.

As shown above, the economics of the business become more attractive without Jam’s participation. As this point, Jam’s value to Premier has diminished, as the company doesn’t have a need for capital or introductions to potential ventures. While Jam does assume the start up costs of opening a show, Premier could increase its bottom line profits significantly be assuming those risks. According to the company, they could replace all of Jam’s current functionality by hiring 8 people at most. By our estimation, that would mean increasing SG&A by no more than $750,000 and see the bottom line net income improve by 50%. Most of those gains (9/12 shows) can be realized in FY08.

Earnings

Management has provided guidance of $0.40 EPS for FY2007. They stated that this is conservative guidance. The story is even more exciting and cleaner for fiscal ‘08, as they have the opportunity to run their current 6 “Body” shows (we are modeling in only two additional shows) consecutively for the entire year. Also, they would only have to share revenue with Jam for approximately 3 of those shows. They will also have the opportunity to have the NY Titanic show for the entire year.

In FY07, they will have Tampa running for six months at 70% split, NY running for a large part of FY 2007 at a 70/30 split; London (which is excluded from the Jam agreement) can run up to four months. Atlanta and Mexico City run for at least six months thru Labor Day. Presumably those four shows will be replaced with four new shows which will draw at last 350k people and run for approximately five months from October 1st thru the end of their fiscal year on February 28th.

Estimated FY07 Earnings

Traveling Titanic $5 million
NY Titanic (Q4 sched open) $0 million
Bodies
NY (entire fiscal year) $7 million
Tampa (will most likely end 9/5) $2.5 million
London (show can only runs 4 months) $2.6 million
Atlanta (can run longer) $2.7 million
Mexico City (can run longer) $2.7 million
6th Show (entire fiscal yr) $3.6 million

4 shows starting 10/1, 5 months $11 million
(4xs2.74xs .8)


Total Revenues $37.1 million

In terms of the expense side of the ledge, we estimate for FY07

SG&A $11 million
Deprec/Am $1.3 million
Exhibit Costs $6.5 million

Total Costs $18.8 million

Net Income- $18.3 million

NOL- $8.7 million

Net 07 Earnings: $8.7 million untaxed
$9.6 x.65 (after tax return)= $6.24 million

After tax income 14.94 million

14.94/30.2= .49 EPS
For fiscal year ending 2/28/07


Estimated FY08 Earnings

Traveling Titanic $4.5 million
NY Titanic $8.0 million

Bodies
3 six month shows with Jam 2.74x3 8.2 million
6 six month shows without Jam 4.34x6= 25.8 million
7 five month shows without Jam 4.3x7= 24.3 million

Revenues 70.8


SG&A $13 million
Deeper/Am $1.5 million
Exhibit Costs $8.5 million

Total Costs $23 million


Net Revenues 47.8

After tax 47.8xs.65=31.0

31.0/30.2=$1.03 EPS
For fiscal year ending 2/28/08

Management

The company’s primary driver is CEO Arnie Geller. Geller has been in the entertainment business for 27 years working as a talent agent and recording company executive. Management owns a considerable amount of stock. Arnie and his wife (who works at the company) own 4.5 mm shares. CFO Steve Couture and his family own 1.8 mm shares. No pun intended, but we like the fact that they have “skin” in the game!

The company only has 32 employees and 75% of them own stock or options. After visiting the company, it is clear that the employees have a passion for what they do, work very long hours, understand they are at the inflection point of the business and are excited about the opportunities with their stock and options.

Risks

1) Health of the CEO. Arnie Geller is 66 years old and is very much the driver of the business. He has expressed his intent to hire a president, while he remains CEO/chairman.
2) A terrorist attach could greatly effect tourism. After 9/11 Titanic shows dried up considerably, but rebounded to their previous levels after only three months.
3) People could lose interest in the shows. The is the biggest risk to the story, but also it is extremely unlikely. Interest in the Titanic is still strong after the ship sunk 94 years ago, and should only accelerate as we get close to the 100th anniversary. The “Bodies” shows are doing extraordinarily well. According to the company and our channel checks, there is great worldwide demand for the shows, and importantly the company has had success returning to two cities that Von Hagens was at previously.

Comps

There seem to be few direct comps, the closest ones appear to be other entertainment companies such as Imax (IMAX), Regal Entertainment (RGC), Westwood One (WON) and World Wrestling (WWE). Most of these comps have P/E multiples of over 20. We consider that to be a very reasonable multiple for Premier as the company has high earnings visibility, strong returns on equity, no debt and a 100% growth rate. However, conservatively a P/E 15 multiple on next year’s fiscal number implies a stock of at least 15 in the next 6 to 18 months.

Upside Opportunities

Obviously the opportunity to terminate or amend Premier’s agreement with Jam next year could have a big impact on their earnings. Other realistic opportunities for upside in the story include:

The sale of the Titanic artifacts. The company owns 1,800 artifacts awarded to them by the French government. They are salvor-in-possession of the rest of the artifacts, as well as having exclusive salvation rights to any other future dives. They are allowed to sell all of these to an appropriate non-profit, as long as the courts approve it. A donor would purchase the artifacts and future rights, donate them to a museum or a university, and the donor would receive a tax deduction and tax credit. The company has publicly said they think this is a realistic opportunity and the CEO has said publicly he works on it every single day. The artifacts have been appraised at $71 million. We estimate that they are worth more, but they certainly could be worth less. The company has said they would most likely pay whatever they receive as a special dividend. At a valuation of $45 million, they are worth $1.5 per share.

Sale/charitable donation of the Carpathia. The company owns outright the artifacts of the Carpathia that have not been salvaged yet. The Carpathia is the ship which rescued the Titanic survivors, and subsequently sunk in World War II after being hit by a torpedo. It is valued at $15 million. Premiere had a joint venture agreement with a third party, which purchased a 3% interest in the company for $500,000. That party defaulted on one of its payments, so they lost their original payment, and Premier now once again owns 100% of the Carpathia. There are no restrictions on selling it, and the company has expressed their interest in monetizing this asset.

A third exhibition in ‘07. The company has publicly stated there is a 3rd exhibition on the drawing board. The company has given few details, but has said it could be a simultaneous 15 city exhibition. According to Arnie Geller, the venture will require very little capital, but should generate significant cash flow.

Permanent exhibition in Belfast Ireland. The Irish government creating a redevelopment project at the site where the Titanic was built. The head of the project has been in contact with Premier about potentially building a permanent museum at the site. The project has a sizeable budget, and presumably they would offer Premier substantial guarantees.

Additional “Bodies” shows. We have only modeled two additional bodies shows for FY08 despite significant demand. Management is very judicious, and we anticipate that management will only order sets of bodies if they are confident they can be fully deployed for at least five years.

Catalyst

1) NASDAQ small cap listing.
2) Announcement of venue for sixth "Bodies" show
3) Completion of lease for Pier A NY Titanic show
4) Q1 earnings which should be the best in company's history. Potential to see guidance raised.
5) Q2 earings which will be even better with the summer months and 6 "Bodies" shows.
6) Analyst coverage.