Description

A 300% forecast earnings increase for the next two years makes this the cheapest grocery store, convenience store, gasoline bar retail chain in North America.

This extremely low risk investment sells at less than 4.5 times my estimated 2002 earnings. I feel quite strongly that Unimart carries excellent potential for a 24 to 36 month doubling of an investors capital.

Description of Company and Industry: Uni-Marts is a dominant regional self serve gas bar-convenience store chain primarily located in Pennsylvania. Uni-Marts holds the number #1 market share in every market they serve. Presently, they operate a total of 300 stores, of which 168 are owned and 132 are leased.

The gasoline bar-convenience store industry is highly fragmented, and characterized by high fixed costs, relatively high barriers to entry and extremely low profit margins. This makes it relatively prohibitive for new competition to gather market share by any means other than acquisition. Competitors include national chains such as 7-Eleven and A-Plus as well as numerous regional chains which include Sheetz, WaWa, Stop-N-Go, Convenient Food Mart, Turkey Hill, Coastal and Co/Go.

History of Unimart: Until 1997, Uni-Marts was a stock market darling. The company grew rapidly through acquisitions in this highly fragmented industry and was considered to be a consolidator of independent gas bars and small regional chains. Regretfully, the pace of expansion was too swift, and left the Unimart with too many operations generating losses or inadequate profit margins. At its’ peak in 1997, Unimart owned a total of 400 stores. After a thorough review of all operations, it was determined that a total of 144 stores needed to be sold or closed. This divestiture program took place in stages and was finally complete in 1999. At the conclusion of 1999, Unimart owned a total of just 256 stores.

During this period of rationalization, Unimarts took many non recurring writeoffs to complete its divestiture program. Including one time charges, Unimarts lost money in three of the last four years of operations. Accordingly, the stock price suffered. The shares peaked at $8.25 in 1997 coinciding with a favorable report in Forbes. The price range during the past five years has been as follows:

Year High Low

1997 $8.25 $4.125
1998 $5.50 $2.625
1999 $3.375 $ .75
2000 $4.25 $1.375
2001 $2.50 $1.50

Note that the share price troughed shortly after the completion of the rationalization program.

Historical and Present Revenues and Profits: For the periods 1997 to 2000, revenues and profits were as follows:




Year--------Revs------ Stores------ Rev per Store------- Profits--------EPS


1997--------352mn------400----------- $880,050-------- (4.6mn)-----($.67)
1998--------266mn------276----------- $965,105---------(.37mn)---- ($.04)
1999--------252mn------256--------- --$985,570---------(2.2mn)---- ($.31)
2000--------349mn------298----------$1,170,147---------.88mn------- $.13
2001E-------442mn-----302----------$1,463,576--------2.2mn ------ $.32
2002E------ 457mn----- 306--------- $1,494,117--------3.1mn--------$.44

The periods 1997, 1998 and 1999 were profitable on an ongoing basis. One time charges for asset impairment in accordance with the disposal program resulted in the net losses

Despite a decline in the total number of stores, the revenue per store rose constantly throughout the past four years. This indicates that the divesture program was a success.

Upon completion of the disposal program, a slimmed down Unimart began to cautiously expand once again. Management has stated that they intend to be a consolidator in this highly fragmented industry. Unimarts did tighten their acquisition policy. Currently, only immediately accretive purchases which offer significant opportunities for economic synergies will occur. The first such acquisition took place in April 2000, with the purchase of Orloski Service Station for $42.7 million. Orloski is a chain of 43 service stations, and holds the largest market share in its area of service (Northeastern Pennsylvania). The purchase was entirely funded with a combination of fixed and floating rate bank debt, and was determined to be highly accretive for UniMart.

Further cautious expansion continues. Thus far in 2001, 3 new sites are presently under development, and a major travel centre in Pennsylvania (servicing long haul truckers) has recently been completed. The travel centre was completed at a cost of $5.5 million and represents Unimart’s largest operation (over 10,000 square feet of retail space). Feasibility studies indicate that profit margins on these travel centers may be up to five times as high as conventional gas bars. Therefore, Unimart intends to build more travel centres in the future.

Historical and Present Trends of Sales and Profits: As previously mentioned, the company operates in an industry characterized with high fixed costs and low profit margins. Modest changes in net profit margins result in major swings in profitability.

Year Net Profit Margin
(as a % of net sales)

1997 (1.7%)
1998 (0.13%)
1999 (0.87%)
2000 .25%
2000 (calendar) .30%
2001 (to date) .50%
2002 (estimate) .70%

The Orloski acquisition has resulted in fixed overhead costs being spread out over a much larger store base. This is proving to be positive for net profit margins. Declining interest rates and the revenues now being generated from the travel center should also enhance net profit margins by another 20 basis points in 2002.

Balance Sheet Analysis: Unimart has a moderately levered balance sheet, as a result of the Orloski purchase. Roughly half of their debt is floating rate and roughly half is fixed. Every 1% increase or decrease in interest rates adds or subtracts $.04 per share to net earnings.

As of December 31st, 2000, shareholders equity stands at $4.19 at the end of the first quarter of 2001. This is roughly $29.5 million of equity. Of this amount, $8 million or roughly $1.12 represents goodwill. Therefore, net of goodwill, hard shareholders equity stands at $3.07. Total long and short term liabilities stand at $103,030,000. Total assets stand at $142,175,000.

Forecasts: There is limited seasonality to Unimart’s revenue and profit stream. For the fiscal year ending September 30th, 2001, I forecast that Unimart will generate net profits of roughly $2.33 million of revenues of $440 million. The increase vs. 2000 comes as a result of an entire year’s contribution of profits from Orloski Service, as well as six months profit from the new travel center. I assume a 35% tax rate. Furthermore, in 2000, over $200,000 of one time costs were expensed as a result of the Orloski purchase. This will not be duplicated in 2001. Finally, the recent interest rate decline will add $285,000 ($.04 per share) to 2001 earnings.

For 2002, I estimate that interest rates will remain constant, that the tax rate remains constant, that gross merchandise sales increase by 2% and that there are a total of 4 new locations providing revenues, net of any closures. This produces an eps estimate of $.44 for 2002.

Why Invest In Unimart today? 1. The earnings growth is clearly defined. Unimart clearly turned the corner in 1999, and the market is only now starting to see the benefits of their asset disposal and selective acquisition strategy. Investors are on the cusp of significant earnings surprises. I can find no retailer in North America whose earnings are forecast to increase by 300% within two years. At the current price of $1.95 per share, investors are paying less than 4.5 times my fiscal 2002 earnings forecast. The earnings visibility is high and easily predictable.

2. The company will benefit from continued acquisitions or may be acquired. Lukoil and other firms have indicated that they wish to consolidate regional players in Unimarts’ market. As Unimart is the dominant firm in its area, it is a logical candidate for purchase.

3. The company may be taken private. Management has continued to purchase common shares and now owns roughly 50% of the outstanding shares.

4. Further declines in interest rates may render my projections to be conservative. Should interest rates fall by an additional 1%, the leverage benefits on the balance sheet would bring earnings up to $.50 per share in 2002.

With a 2002 forecast shareholders equity in excess of $4.75, the margin of safety is very high on this investment, and the risk absurdly low. I would purchase the shares now, and hold for a period of two to three years. The potential reward could be well in excess of 100% over that timeframe, all else being equal.

Catalyst

A 300% forecast earnings increase over the next 18 months brings the 2002 p/e down to less than 4.5 times. The company will continue to act as a consolidator in a highly fragmented industry with high barriers to entry...or it will itself be taken over. A growing possibility of a management led buyout exists. A probability of further declines in interest rates will greatly enhance my earnings forecast for 2002.