Description

With even moderate levels of execution, Premier Exhibitions has 100-150% appreciation potential over the next two years with little downside risk. We feel that is an even better idea than we originally wrote it up in May of 06, despite the stock appreciating nearly 150%. Due to a large short interest and a proliferation of erroneous and misleading information about the company, the stock has pulled back 30% from its 2007 highs creating a very nice opportunity for the long term investor. The company is currently trading at only 10 times FY08 (began on 3/1) EBITDA and 7 times our very conservative estimates for FY09. The company has no debt, $25mm in cash, and this year will more than double revenues and increase EPS by at least 150%. The company currently generates over $5mm in free cash flow per quarter. Premier will also this year exceed their guidance (.68) on a cash flow/operation basis (they took some non-cash charges for new CEO options, etc). In FY 09 the company will go from 9 working Bodies shows to 16, will have increased the per show unit economics of the domestic shows by not having to pay Jam, will move their Las Vegas show to a top five property with room for additional exhibition concepts and no Jam, and are planning to launch at least two new exhibitions by the start of the fiscal year. Please refer to the original write up for a detailed explanation of the business. In sum, Premier is an exhibition with currently two lines of business-Titanic and Bodies. The company was originally formed by the chairman of Premier for the purpose of originally diving the Titanic wreck. The company ultimately became publicly traded and called Premier Exhibitions and later added the “Bodies” business-displays of human anatomy. In the current quarter Premier will have 7 Titanic shows working and 16 Bodies shows. Since our original write up the company has executed beautifully by successfully ramping up the Bodies business and increasing EPS 150%. However, the most significant development is the hiring of Bruce Esckowitz as the new CEO. Eskowitz was formerly one of the top executives at Live Nation, responsible for North American entertainment and merchandising which is one of the key profit drivers. All of our channel checks credit Eskowitz as one of the key factors in Live Nation’s success and consider his departure a substantial loss for Live Nation. Eskowitz’s goals for Premier is very clear. He simply wants to double-triple Premier’s EBITDA (currently $30mm) and make it a billion company ($30 stock price). We feel that if the company does $60mm in EBITDA it should easily trade to $25 (12xs EBITDA with no debt, strong growth rate and substantial cash balances). Current Business. In FY08 the company has guided to $30mm in EBITDA and has recently confirmed the guidance. Additional Bodies Shows. In Q4 and for FY09 Premier will have 16 Bodies shows working with is double the average they had for FY08. With even lackluster success, assuming all the shows are partnered 70/30 with lower ticket prices, the company would generate $10mm EBITDA in incremental EBITDA. Merchandising and Corporate Sponsorships. Esckowitz considers merchandising of the Bodies shows the lowest hanging fruit. King Tut for example gets on average an additional $20 per person for merchandising. Eskowitz thinks it will be relatively easy to get to $4 per person (they current Titanic figure) from $1 and will increase gross margins from 20% to 50% as they take it in house. The types of merchandise they will focus on are educational items like DVDs, coffee table books, software, etc. On 8mm Bodies visitors he will drop an additional $10-12 mm in EBITDA in two years, seeing some effect in FY 09. Premier will also be focusing on corporate sponsorships in Titanic and Bodies which is nearly 100% gross margins. They have already retained a firm specializing in procuring sponsorships to assist them. We feel that $5mm in EBITDA is a very reasonable goal. New Vegas. New Vegas venue will be a significant driver of new EBITDA revenues. The new site (rumored to be The Luxor) will open sometime in Q4 of FY08. If it is the Luxor it will move to a location with four times more hotel rooms in a much better venue with no Jam (takes 20% of the bottom line). There is also the likelihood of new exhibition concepts, a large merchandising center and food and beverage concessions. We estimate new Vegas could add $7mm in incremental EBITDA. New Exhibition Concepts. According to management they are working on nine exhibition concepts and they fully expect to announce at least two new exhibitions prior to the beginning of the fiscal year on March 1st. Hard to quantify how much EBITDA they will generate, but Eskowitz is adamant that he is at Premier to build out an exhibition platform and not to just do Titanic and Bodies. Pier A. For a very long time Premier has been in talks with the New York park service to host a permanent exhibition of Titanic assets at Pier A in a building adjacent to where the ferry leaves for tours of the State of Liberty. The project seemed dead, but in a recent development New York City took back the expired lease and invited Premier to come to New York and bid on the museum. Premier has met directly with New York officials twice and provides them with what they consider a very attractive proposal. They are supposed to hear about whether it has been accepted in January. We are giving them no credit for this happening in our model, but if it does happen it will generate at least $12mm in EBITDA ($1mm Txts @$25 with 50% gross margins). The ferry service currently sells 8mm tickets annually so; we think our estimates are extremely conservative. Earnings Power of the Business. To sum up the earnings power of the business, we fell that Escowitz’s goals of generating an additional $30 mm of EBITDA is very realistic giving them no credit for Pier A and modest credit for new exhibitions the company could do in excess of $30mm in EBITDA: Current Business $30mm Increment 7 Bodies Shows $10mm New Vegas $7mm Merchandising and Sponsorships $13mm New Exhibitions $10mm Pier A $0 Incremental SGA $5mm Additional EBITDA $35mm Valuation. $60mm EBITDA trading at a modest 13 times= $25 stock price Misperceptions/Short Thesis. While the stock is up nearly 100% in 07, it did become a heavily shorted stock with about 25% of the shares sold short. Of course, a stock that was up 150% in a bad market that is in the dead bodies business does sound like a short! The short arguments are primarily that the Bodies business is in decline, the company will miss guidance, and they will lose their Titanic salvor-in possession status possession. We have seen no evidence to suggest that that Bodies business has declined and the company is adamant that there is more demand for the Bodies show than ever before and there is no drop off in current ticket sales. The shorts argue that Bodies business is in decline because the “revenues per exhibition day” declined in Q3 despite the company having their best quarter even earning .17. This is metric is useless since some shows are partnered (meaning PRXI only gets their share of the net) and some are not. The company doesn’t even use this metric themselves so it probably doesn’t mean anything. Our channel checks don’t suggest there is any waning interest in the shows and their only competitor who posts ticket sales on their website doesn’t seem to be experiencing any decline in tickets sales. Most importantly there is a huge number of cities domestically and internally that have never hosted the show. One of the company’s goals is to publicly publish their exhibition schedule two years out. The company could miss their guidance EPS guidance of .68, but most likely will exceed it on an operational/cash basis. The company got a slight benefit from a lower tax rate but was penalized greatly for the non-cash charges, most notably Esckowitz’s options. The company has admitted that they have not explained this well and they are exceeding their internal expectations for the year, so far. The story that Premier will lose their Titanic Salvor-In-Possession Rights which is being aggressively portrayed by the shorts is clearly not the case. In a recent court letter the judge questioned whether or not Premier has the rights to the personal possession of the passengers currently on the bottom of the ocean (Premier believes they do). However, the court makes it very clear that Premier does have salvor-in possession rights of the artifices and it has been confirmed by the courts three times. Even in the worst case scenario, Premier does own 1800 artifacts outright which is almost all the artifacts they use in the shows. The short arguments that we agree with is that they use a no-name audit firm and there has been some related party transactions in the past. Summary: We consider Premier Exhibitions of one of our best ideas with limited downside risk and 100-200% + upside potential with moderate execution. We find it very unusual to find a company with so many growth drives in their business requiring so little cap ex, a strong balance sheet with no debt, high gross margins and a very low valuation.

Catalyst

1) Annoucement of New Vegas location 2) Annoucement of two new exhbitions by 3/1 3) Q4 Results of 16 Bodies shows working in one quarter 4) Execution of plan