Weekly Bulletin #10

Portfolio: DHG, PANR, WIX, YCA | Monitoring: IWG | Developing: Ipsos SA (IPS)

Disclaimer

Value Situations is NOT investment advice and the author is not an investment advisor.

All content on this website and in the newsletter, and all other communication and correspondence from its author, is for informational and educational purposes only and should not in any circumstances, whether express or implied, be considered to be advice of an investment, legal or any other nature.  Please carry out your own research and due diligence.

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Model Portfolio Updates

There are brief updates for four of the Model Portfolio names from last week:

DHG

Another private market hotel transaction provides an interesting read across for Dalata Hotel Group (DHG).

It was announced last week that UK real estate investment firm Tristan Capital Partners have acquired a “majority stake” in Raag Hotels Limited, which operates the Point A Hotels group in the UK, for £420m (~€500m / $551m).

Point A is a budget-boutique hotel brand, with a portfolio comprising 1,520 rooms across 10 hotels, with 80% of the portfolio value in London, with all hotels strategically situated in city centre locations.

Tristan is buying the majority stake from Wellcome Trust, and while the % interest being acquired is not disclosed in the deal announcement, historic reports indicate that Wellcome Trust previously held 50% of Raag Hotels/Point A, with the balance held by minority holders Queensway Group (which operates the hotels) and UK-based financier Naguib Kheraj.

The current deal implies a headline equity value of ~£840m / €1bn for the Point A portfolio, which equates to a value of €658k/room, assuming the 50% shareholding assumption is still accurate. This provides an interesting read across for DHG - it has a current market cap of ~€860m and EV of €1.6bn (including lease “debt”), which equates to an average value/room of €159k (including owned and leased hotels) across DHG’s portfolio.

This appears to be another indicator of how the public markets continue to value DHG’s portfolio at a substantial discount to its private market value.

PANR

Pantheon Resources Plc (PANR) CEO Jay Cheatham and Technical Director Bob Rosenthal were interviewed by Core Finance last week, in which they discussed the latest Theta West drilling results and outlined next steps for the company following the Winter drilling programme. One notable comment made by Jay Cheatham in the context of the ongoing energy crisis and political efforts to reduce reliance on Russian oil was his view that PANR can be “very impactful for energy security for both the US and our allies.” The implications of this are clear - PANR’s vast oil assets are set to now benefit from increased strategic value beyond higher oil prices.

Separately, there has been an interesting development on PANR’s shareholder register with the disclosure that investor Sanjay Motwana and his firm Sansar Capital have acquired a 3.05% shareholding in PANR. Following Heights Capital Ireland’s convertible bond investment last December (through which Heights now hold equity in PANR), the addition of another institutional investor to PANR’s traditionally retail-heavy shareholder register is a welcome development and indicates a growing understanding of the value and potential of PANR’s enormous oil resource in my view.

The market has responded positively to these latest updates, with the stock up ~23% since March quarter-end and up ~150% since I first published the idea last September.

PANR’s management team will host a technical webinar on 26 April, in which they’ll discuss the results and their conclusions from the recent drilling and testing programme, and outline next steps in greater detail. I also expect management will provide a resource estimate upgrade following the recent drilling results which should be the catalyst for a further market re-rating of the stock.

WIX.LN

This past week has seen some insider buying at Wickes Group Plc (WIX.LN), firstly with the disclosure of CEO David Wood buying ~£100k in WIX stock at ~£1.80/share, followed by a ~£20k purchase of stock at ~£1.90/share by connected person Rachel Wood (presumably the CEO’s wife).

While the amounts are small (combined the £120k invested equates to ~24% of Wood’s CEO salary), it is perhaps the start of insider buying at what appears to be a bottoming of WIX’s stock price following the sustained selling by shareholders of WIX’s former parent Travis Perkins post its spin-off. The lack of meaningful insider ownership at WIX was the one aspect to the situation that I’d like to see improve and perhaps this is now happening.

YCA

Last week Yellow Cake Plc (YCA) announced a small $3m buyback, with the rationale being to help close the persistent and often material discount to NAV (up to ~15% at various times) exhibited over the past few months. The buyback will be funded from existing cash resources, and is an accretive move particularly as the spot price of uranium has moved up to ~$63/lb as at the time of writing (+47% YTD).

Last Friday YCA closed at an all time high of £4.73/share but was still trading at a discount to NAV at 0.94x vs. ~1x NAV for the Sprott Physical Uranium Trust (U.U / SRUUF) which continues to hoover up lbs in the spot market (SPUT holds ~54m lbs of uranium vs. ~15.8m for YCA, with YCA contracted for a further 3m lbs for delivery this quarter).

My sense is that the uranium thesis is only beginning to take off now and I’m very comfortable holding YCA in the model portfolio, as I see it as the most efficient way to gain exposure to the commodity while also offering the best risk/return profile.

I also believe there may be an event-driven catalyst down the line with YCA in that as the price of uranium increases and supply tightens to the point that utilities may have to procure lbs at any price to “keep the lights on,” YCA would be an obvious takeover target for a large utility or group of utilities in a supply squeeze scenario. Recall that the uranium market is in a structural supply deficit that is set to widen, and a buy-out of YCA would ensure multi-year security of supply without the hassle of negotiating supply contracts in a panicked market, and amid an energy crisis that looks set to continue for time time.

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Situations Monitor

For this week’s situation I’ve been prompted to return to IWG Plc (IWG) having recently listened to Andrew Walker’s discussion of the name with Swen Lorenz on the excellent Yet Another Value Blog podcast.

IWG is a name I previously wrote about last October when I presented a “WeWorked” valuation of IWG based on the market valuation then ascribed to the newly public WeWork (WE). Since then, both companies share prices have declined, with IWG down ~10% while WE is down ~53%.

WE’s decline is perhaps not that surprising given the many questions over its business model (it continues to be significantly loss-making) and liquidity concerns amid reports that a dilutive new equity raise may be required in the near future.

Regarding IWG, at the current share price of ~£2.70/share, it has a market cap of ~£2.7bn and an EV of ~£3.1bn (or £9.2bn on a post-IFRS 16 basis including its £6.1bn of lease obligations across its office network). This equates to an EV/EBITDA of ~39x LTM EBITDA on a pre-IFRS 16 basis, and ~9x EBITDA on a post-IFRS 16 basis (adding back rent - essentially EV/EBITDAR).

While this doesn’t appear very cheap on a headline basis, the current valuation reflects a very depressed level of earnings for FY21 as COVID hit occupancy and workstation rates, reducing IWG’s group-wide gross margin from ~16% pre-COVID (FY19) to 3.6%, attributable to the company’s high fixed cost base which comprises substantial property rental expenses (~£1bn per annum on the current network).

However with workers now finally returning to the office as COVID subsides and public health restrictions lifted, flexible office space is expected to see a sustained increase in demand as part of new hybrid and flex-working practices in the post-COVID era. It’s therefore reasonable to assume that as we enter an office market recovery supported by seemingly structural tailwinds for flex office space, IWG should see the full benefits of its operating leverage to the upside.

In this context, IWG appears to be at a possible inflection point with the following catalysts for value creation:

1. Office network occupancy and pricing are steadily recovering again as corporate occupiers start to implement new flex office working plans

2. Capital-light growth strategy via franchise and partner model, targeting a 50/50 mix of conventional / franchised office space by end of 2022 (vs. 65/35 mix currently)

3. Merger of IWG’s Digital & Technology assets with privately-held The Instant Group to create an online workspace booking platform

So with these tailwinds, what does the potential value situation look like here?

Taking each of the components in turn:

1. Core office network - I estimate IWG’s existing core office network can generate ~£2.9bn in revenue on a stabilised basis, assuming a return to pre-COVID levels of occupancy and workstation rates across the network (a reasonable assumption given flex demand). Assuming a 20% gross margin (in line with IWG’s historic mature network gross margin), this implies stabilised gross profit of ~£597m; after deducting SG&A expenses of ~£300m, offset by adding back D&A of approx. £300m (excluding IFRS 16 Right-of-Use asset depreciation) this gets me to a stabilised (pre-IFRS 16) EBITDA of £597m. On a post-IFRS 16 basis, adding back current rent of approx. £1bn (rounding up FY21 rent of £982m), EBITDA is ~£1.59bn.

2. Franchise/Partner Growth - IWG doesn't break out the earnings from its Franchised operations in its financial reporting but the FY21 results presentation states that the capital light growth strategy has the “potential to produce additional £200m+ contribution by 2024.” Given the high margin nature of franchise fee income and likely little incremental cost to generating this, one could assume that this £200m drops straight to EBITDA.

3. Digital Platform - the merger of IWG’s digital assets with Instant Group is set to unlock meaningful value for IWG if spun-off as intended by the end of FY23. Again, IWG doesn’t disclose the financials for this segment in its reporting, but it is possible to guesstimate an approximate spin-off value for this platform based on IWG’s recent merger announcement for the deal, which states:

It is expected that the business will, on a pre-synergy basis, nearly double its EBITDA in 2022 to approximately £31m. Post the merger and with synergies, the EBITDA is expected to be significantly higher.

So the combined IWG Digital/Instant Group business will generate EBITDA of ~£31m this year. Furthermore, the merger announcement also states that the Instant Group grew revenue at a 20% CAGR and EBITDA at a 31% CAGR over the 2019-2021 period, while citing flex office market growth of ~30% per annum post-COVID. Given the tailwinds for flex office space we can assume that this £31m in EBITDA should continue to grow at a 30% CAGR through to end of FY23, implying EBITDA at the time of the planned spin-off of ~£52m.

The spun-out business is essentially being pitched as an “Airbnb” for flexible office space, and IWG envision it becoming:

… the preferred platform for booking, services and inventory management, following the similar models already successfully operating in the travel and hotel sectors.

In that respect, relevant valuation comps for this asset are Airbnb (ABNB), Booking Holdings Inc (BKNG) and Expedia (EXPE). The average NTM EBITDA multiple across these three comps is ~25x NTM EBITDA, and applying this to my FY23 EBITDA of £52m indicates a potential spin-off valuation of £1.3bn for the IWG digital platform. This equates to ~48% of IWG’s current market cap, or incremental value of ~£1.30/share.

Bringing the above value components together implies IWG should be worth substantially more than its current market cap of ~£2.7bn by FY24 at the time of the spin-off of its digital platform, with a high-level SOTP analysis as follows:

Source: Value Situations analysis.

Key assumptions:

• Analysis presented on a pre-IFRS16 basis, EBITDA is net of all rent.

• PF EBITDA of £797m comprises stabilised core office network EBITDA of £597m as estimated above, plus £200m in incremental Franchise contribution by FY24 as per management guidance for its capital-light growth strategy.

• IWG has historically traded at an average multiple of 8x, however, given the flex office tailwinds post-COVID, IWG’s future growth prospects are materially greater than its historic trajectory in my view (recall the expected market growth of ~30% CAGR). Furthermore, the strategic shift to a capital-light, higher margin franchise model also enhances IWG’s earnings power. On this basis, I believe a higher multiple of 10x is merited here to price in IWG’s stronger future growth and earnings profile. Also PF EBITDA assumes stabilised earnings on the current office network only and does not assume incremental growth or expansion of the existing network - as such I believe a higher multiple is justified to price in the scope for incremental growth of the core network.

• Under the terms of the Instant Group merger, IWG will hold an 85% interest in the Digital Platform business to be spun-out, implying its stake is worth £1.1bn, based on the £1.3bn valuation outlined above.

This high level analysis implies IWG could be worth £8.60/share by FY24 post-spin of the Digital Platform, implying ~220% upside from the current share price. Conversely, the downside appears very limited given that at the current share price IWG is trading at the same price as it did through the COVID market trough of Q2/Q3 2020 when restrictions were in place across all major cities and no vaccine had yet been developed - i.e. the market has not priced in any office recovery despite clear evidence that this is occurring with flex office set to benefit.

On this quick update analysis, IWG looks to be a very interesting situation that is worth monitoring.

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Developing Situations

The recently announced take-private of Nielsen Holdings Plc (NLSN) by a private equity consortium led by Elliott Management and Brookfield Asset Management has highlighted another potential value situation in the market research industry.

Elliot and Brookfield are paying $28/share to acquire NLSN in an all cash transaction, which reflects a 60% premium to NLSN’s share price prior to the deal being announced. The bid values the entire NLSN business at $16bn or ~11x LTM EBITDA.

NLSN is the world’s largest market research company by revenues, and its buy-out follows another PE deal back in 2019 involving the industry’s second largest player Kantar Media, when Bain Capital acquired 60% of Kantar from WPP for ~$4bn, or 8.2x EBITDA at the time.

These recent deals mean that the #3 player, French-listed Ipsos SA (IPS), remains the only publicly-listed company of the big three players in the market research industry. IPS is a market research, analytics and consulting firm that is perhaps best known for its Ipsos surveys and polls, and serves a wide range of sectors across four main audience categories - Consumers, Clients & Employees (corporate), Citizens (public sector) and Doctors & Patients (Healthcare/Pharma). In FY21, it generated revenues of €2.1bn and EBITDA of ~$360m, with revenues growing +17.9% YoY.

Economic, political and social uncertainty is a growth driver for IPS as clients seek out real-time data to gauge public and consumer attitudes to a wide range of issues and questions. As is evident from its FY21 top-line growth IPS benefited from the uncertainty and disruption wrought by COVID. The outlook for FY22 appears positive for the company given that global uncertainty is perhaps more pronounced now than pre-pandemic, with the ongoing energy crisis, rising inflation and a cost of living crisis, and the conflict in Ukraine creating a highly uncertain outlook for consumers and corporates alike.

Supported by this macro backdrop management are guiding +5% revenue growth in FY22 and an operating margin of 12% - 13% which implies revenues and EBITDA for this year of ~€2.25bn and ~$380m respectively. On this basis, IPS appears to be valued at a material discount to its private market value based on the recent comps, at just ~5.5x FY22 EBITDA (or half NLSN’s multiple). A re-rating to the low-end of the private market multiple range at 8x implies ~54% upside to IPS’ current share price, while a re-rate to say 10x (still below the NLSN deal ) implies upside of ~95%.

Another noteworthy point is that CEO and founder Didier Truchot is the largest shareholder, owning ~10.5% of the company. Given IPS’ material valuation discount to peers, it is conceivable he could partner with a PE firm to take IPS private, which would likely require paying a substantial premium similar to the NLSN deal. In this instance, IPS’ capital structure would lend itself well (no pun intended) to an LBO - it has net debt of just €180m and is very modestly leveraged at 0.5x net debt/EBITDA (compared to Kantar which was leveraged in excess of 6x).

An alternative catalyst to unlock value and drive a re-rating could also be an activist campaign to push for an expanded share buyback programme given IPS’ ~€300m cash balance, or payment of a special dividend (note that IPS has both an active share buyback programme and pays a dividend of ~2.7%).

With a positive outlook, a cheap valuation, a solid balance sheet and plausible catalysts for a value re-rating, IPS has all the attributes of a value situation, and one that I will continue to track.

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Any Other Business

For this week’s AOB I’d like to point readers to my recent discussion of WIX with Andrew Walker, Portfolio Manager of Rangeley Capital and author of the excellent Yet Another Value Blog mentioned above (which I’d recommend reading and subscribing to).

My discussion on WIX can be found here.