Description

Intro:

Salant Corporation designs, produces, imports and markets to retailers throughout the United States brand name and private label menswear apparel products. It’s main source of income is its Pery Ellis wholesale line of clothing (previously 90% of company revenues), although the company is acquiring and developing new brands (Axis, Ocean Pacific, etc.) to reduce the dependence on Pery Ellis. Salant also operates 39 retail outlet stores in various parts of the United States (10% of revenues). The business is unexciting and is similar to hundreds of other apparel manufacturing/licensing companies, albeit the company has some operating momentum. Rather than focus on what is a fairly mundane business, we refer you to recent financials and we will focus instead on the investment story.

Thesis:

While the company story is relatively straightforward, we find the investment story to be particularly interesting. To begin, the valuation is too compelling to ignore. Additionally, based on the company’s balance sheet, certain corporate actions the company has and may continue to pursue, and the recent distribution and sale of overhang shares associated with the company’s 1999-2001 banktruptcy and plan of reorganization, we find this now very timly.

Bankruptcy History:

It is important to understand the events surrounding SLNT’s BK and subsequent plan of reorganization. Less so as it relates to the risks associated with the business (as the company is not levered currently and has net cash on its books, as opposed to 1997 when it was highly leveraged) than as it relates to improved liquidity and market recognition. Salant filed for BK in December 1998. The company was overleveraged and began to experience significant operating difficulties in 1997. Magten Asset Management was a significant debtholder at the time and Apollo Apparel Advisors was a significant shareholder. The parties attempted to sell the company in 1997 and 1998 but was unsuccesful and the company was ultimately forced to reorganize. The company’s plan of reorganization was filed in May 1999 and in November 2001 the Company emerged from banktruptcy. Magten became the largest shareholder post reorg (+60% ownership) and subsequently began distributing shares to limited partners. Essentially, SLNT has been a private company for the past 3 years but Magten’s recent distribution of its share holdings to its LPs now provides improved liquidity.

Valuation:

Unless we are missing something, SLNT just appears to be absurdly cheap. Below we present some data for the first 9 months of the year...

Market Cap = $27mm
Enterprise Value = $16mm


FOR FIRST 9 MONTHS OF 2002 (as of Sept 2002)

Cash (as of 9/02): $11mm
Debt (as of 9/02): ---
EPS (9 mos YTD): $0.62
EBITDA (9 mos YTD): $10mm
Sales (9 mos YTD): $170mm


EV/EBITDA = 16mm/10mm = 1.6x
P/E: $3.05/0.62 = 4.8x

Capex: $3.0mm
FCF: $7.0mm

Shareholders Equity = $98.2mm
Intangibles = $22.8mm
Hard Book Value = 75mm/8.8mm =$8.50 per share.

The Company also has NOLs of $130mm (so you can make whatever adjustment you want to the pretzx numbers above), expiring from 2002 to 2021. Based on a conservative projection of 7-8% growth, and subject to the limitations of the NOL, as well as a 15% discount rate, we calculate the value to be approximately $1.50-2.00 per share.

Comps:

Comps are kind of irrelevant at these valuation levels, but we provide a summary here of a group of similar companies. We would never expect such companies to get multiples, but SLNT’s valuation seems a bit absurd in comparison and seems to provide a signifcant opportunity for appreciation even if the company does not improve operations. We used the following apparrel companies - Ashworth (ASHW), Nautica (NAUT), Kellwood (KWD), VFC Corp (VFC), Oxford Industries (OXM).

Ranges:

Forward P/E: 8x - 15x
Sales: 0.3x - 0.7x
Book: 0.8x - 2.5x

REMEMBER -- THE NUMBERS THAT WE PRESENT FOR SLNT ARE FOR THE FIRST 9 MONTHS (TRAILING) OF THIS YEAR.

Risks:

Customer concentration –May, Federated, and TJ max represented close to 50% of sales.

Further acquisitions – They could certainly do dumb acquisitions, burn through cash, get leveraged, etc. This is my primary concern.

Economic deterioration - self-explanatory

Illiquidity of shares – always an issue in this market. Regardless of progress made, SLNT could certainly do nothing for a long time. It seems, however, that the company is intent on becoming “real again,” now that they have emerged from BK and have some flexibility re the balance sheet.


Catalysts:

In October 2002, Salant retained the services of an investment bank to provide advisory services to the Company and to assess the Company's strategic alternatives. Prior to this, in July 2002, the Company purchased 1.1mm shares of its stock at a price of $2.50 per share directly from one of the Magten LPs. The company currently has over $1.00 per share in net cash and while it appears that their objective may be to diversify the business by making add-on acquisitions, we find the company’s balance sheet, in conjunction with its valuation, particulalry appealing. The July purchase indicates to us that the company may know how to effectively deploy capital.

Improved Liquidity – Magten’s beneficial ownership in SLNT has been reduced from 60% in April to 2% currently. Over 5.5mm shares have been distributed to LPs and since April approximately 2mm shares have traded (not including the private purchase of 1.1 mm shares by the company). Consequently, over ½ of the LP shares have been resold it appears, which we believe marks an opportune time to get involved.

Valuation – should help over time. As we all know, however, these things may remain cheap for a long time. This one seems particulalry cheap and undiscovered, though.

Catalyst