STLY is a manufacturer of premium residential wood furniture who provides multiple options for material upside. The company just prepaid all of its debt with the proceeds from a recent rights offering and now has a strong balance sheet (net cash almost 50% of mkt cap) which should provide the company with a long runway to return to profitability and should help provide some downside protection for investors. STLY is undertaking a major restructuring with the aim of becoming breakeven at the current level of extremely depressed revenues. If either the company is successful with this turnaround or the premium furniture industry sees an upturn, STLY has the potential for over 100% upside because to its cheap valuation on the current depressed revenues. While I don't love the business and do not profess any expertise in knowing whether or not the turnaround will be successful, I believe the risk reward at current prices is very attractive.
Why Might It Be Mispriced
I believe investors have been concerned that the uncertain prospects for the company's material restructuring combined with a negative ST outlook for furniture demand would lead to continued struggles in 2011 for STLY and cause the company to trip its covenants in Q3 11, with the potential for a bankruptcy filing. However, since the completion of the rights offering and the prepayment of all of STLY's debt, the company now has a very long runway giving it a much better chance of successfully restructuring or surviving to see the furniture upcycle.
Cap Structure
STLY has 14.3mln shares PF for the rights offering or a $44mln mkt cap at $3.10. On Dec 16th, STLY announced that they had prepaid all the company's outstanding debt. Post the prepayment, STLY had 19mln of cash remaining and noted that they expected to receive 2.3mln of cash from the sale of machinery and equipment. However, we should also burden the company for future restructuring cash costs of 7mln which would put the adjusted EV at 30mln. TTM sales are $149mln meaning the STLY is trading at 0.2x TTM revenues (which are very depressed- see below).
Upside Potential
Precise measures of upside are difficult to determine because of both the uncertainty of any recovery in the furniture market as well as the uncertainty of the company's shifting business model. If demand for premium furniture recovers, one could easily see revenues recover to $250mln (2002-3 levels) . The company previously achieved EBIT margins of 10-11%. Lets haircut that by 50% for conservatism and say margins only recover to 5%. Under that scenario, STLY would earn 12.5mln of EBIT or ~90c per share. Value that at 6x EBIT and add back $1 of net cash less restructuring cash costs and you have a total value of STLY of $6.40 or more than a double from current levels under what I think are conservative assuptions. Further upside could come from a more material recovery in revenue or profitability as well as the receipt of ~40mln of CDSOA money (almost $3 per share).
Downside Protection
While LT downside could certainly be 0 if they are completely unable to restructure the business, the company's very strong balance sheet ($3.40 of net working capital and $1.50 per share of net cash) provides some protection in the near term.
Risks
STLY may fail to successfully restructure to return to profitability and market demand may get even worse than current levels. In that case the company might burn all its cash in the future.
Liquidity is also not great (~$100k per day) so this is best suited for pas or small funds.
Other Info
Restructuring
In Q2 2010, the company announced a major restructuring plan and converted their Stanleytown manufacturing facility to a warehousing and distribution center and transitioned the majority of the manufacturing to several off-shore vendors to lower costs. Future cash costs should be ~6-7mln. Due to this restructuring, mgmt expects the business to return to flat profitability in H2 2011 assuming flat revenues. Thus, with any recovery in revenue, STLY could return to material profitability and should be able to limit cash burn going forward.
Rights Offering
On Nov 15, STLY distributed rights to its shareholders where each right entitled them to purchase .322226 shares at $3 per share. Mgmt (owning 5% of common stock) and 3rd Avenue (owning 24%) fully subscribed to the rights offering.
CDSOA
The CDSOA provides for the distribution of monies collected by US Customs for imports covered by antidumping duty orders, in this case, wooden bedroom furniture which have been withheld by the government due to ongoing litigation. If the litigation resolves favorably, STLY expects to receive $36mln. While this is possible in 2011, mgmt says it is more likely that it will be after 2011. The company will also receive btw 2.3 and 6.3mln in additional CDSOA money spread over the next several years. While the timing is uncertain, the size of the payment relative to STLY's EV means that the impact would be material.
Historical Financials
| |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
TTM |
| Sales |
244 |
265 |
306 |
334 |
308 |
283 |
227 |
160 |
149 |
| COGS |
185 |
203 |
230 |
252 |
243 |
232 |
188 |
150 |
154 |
| GP |
59 |
62 |
76 |
82 |
65 |
50 |
38 |
11 |
(5) |
| SG&A |
33 |
36 |
41 |
44 |
42 |
40 |
35 |
29 |
25 |
| Ongoing EBIT |
26 |
26 |
35 |
37 |
23 |
11 |
3 |
(19) |
(31) |
| Impairment |
|
|
|
|
|
|
|
|
9 |
| Pension Plan Termination |
|
|
|
|
|
7 |
|
|
|
| Restructuring- COGS |
|
|
|
|
|
4 |
6 |
5 |
|
| Restructuring- SG&A |
|
|
|
|
|
|
1 |
1 |
|
| Reported EBIT |
26 |
26 |
35 |
37 |
23 |
1 |
(4) |
(25) |
(40) |