Gencorp: Real Estate Holdings, Synergies From Rocketdyne Acquisition Could Unlock Value

| About: Aerojet Rocketdyne (AJRD)

Gencorp (GY) could double to $25 from its ~$12 share price. The value can be unlocked as it integrates its acquisition of Rocketdyne and continues to get its land entitled (primarily in Sacrament0, CA).


GY was set up in 1915 originally as General Tire & Rubber Company. The company divested its tire business and spun off its Decorative and Building Products and Performance Chemicals (renamed to OMNOVA Solutions -- OMN). In its current form, GY has two businesses -- Aerojet (Aerospace/Defense propulsion technology) and Real Estate (primarily land in Sacramento).

Primary Business

The Aerojet division recently bought United Technologies' (UTX) Rocketdyne division for $550 million. The deal will more than double Gencorp's EBITDA from ~110 million to ~$216 million (using trailing 12-months). GY got a good deal because it was pretty much the only logical buyer and UTX had to raise capital for its Goodrich acquisition. The price paid was 5.5x EV/EBITDA but there are significant synergies that may add $50-75 million to EBITDA. Using the range of synergy estimates, the implied price paid is 3.1-3.6x EV/EBITDA.

The transaction is expected to close by mid year. The company received a Hart Scott Rodino 2nd request from the FTC and the investigation has been narrowed to focus on the Liquid Divert and Attitude Control Systems (LDACS). GY has agreed to divest this division if the FTC requires it to gain approval of the Rocketdyne transaction.

Real Estate -- Hidden Value

The real estate division is the result of land acquired in the 1950s to provide a buffer zone for testing propulsion systems. Due to relocating testing facilities and new technologies, GY is able to develop or sell ~6,000 acres in the Sacramento area. GY has ~12,00 acres but only ~6,000 acres are considered excess. Additionally, the company has 360,000 square feet of office space in Sacramento. Chino Hills (580 acres) is the final piece of real estate and is located outside of Los Angeles.

The 6,000 acres of land have a value of $300-360 million. This is based on a comparable transaction of raw land in Sacramento. The acquisition was made by the prominent California developer Mr. Angelo K. Tsakopoulos (AKT Development Corp.) and was estimated to be sold in the ~$50,000. This land is not as desirable as GY's land so the $49,000 seems to be reasonable with upside to $60,000/acre. The 360,000 square feet of office space has generated $5-6 million in the last few years. Applying an 8% cap rate implies a value of $60-72M. The Chino Hills land is in the process of being cleaned up so it may be some time before a sale or development can occur.

Real estate
Acres Low High
6000 300 360 50,000-60,000 per acre
Office* 60 72 8% cap rate on $5-6M
Pre-Tax 360 432

After Tax**

259 305

* 310,000 sq. ft. of office space. ** Assumes a $70 million cost basis and a 35% tax rate.

Shareholders and Research Coverage

The CEO Scott Seymour has done a great job on the company since he joined in January 2010. However, he has put Investor Relations on hold and has not held any recent conference calls. This is by design and he is expected to be investor friendly after the Rocketdyne acquisition is completed. This should help awareness and provide more analyst coverage. I think Oppenheimer is the only firm covering it. The stock is owned by many "smart" investors including Gabelli, Marcato and Steel Partners. Marcato has put together a great presentation and can be accessed here.

Gabelli 14%
Marcato 9%
Blackrock 8%
Steel 7%
GY Retiremnt 5%
Vanguard 5%
Total 48%


I believe GY will generate $300M EBITDA in a couple of years. I get there by using the TTM EBITDA ($216 million) for both companies and adding $50-75 million in synergies and assuming 5% organic EBITDA growth. I applied a 6.0X EBITDA multiple because its comps trade at 6.0-6.5X EBITDA. Thus, $300 million EBITDA valued at 6x = $1.8 billion. I then add the real estate - $330M for Sacramento and $66 for the office space. This adds $396M to the value. Combined, this implies $2.2 billion value. Subtracting the net debt of $638 million, which includes the Rocketdyne acquisition. This gives a value of $1.54 billion and there are 60 million shares so this translates to $25+ per share.

To be fair, taxes on land sales decrease the value by about $2 and pension and other obligations reduce the value by $1. Thus, maybe a more accurate value is closer to $22-23. However, if you are as bullish on land as me, the upside can be even higher. On almost every homebuilder conference call they keep saying the most critical issue is acquiring land to build on.

One risk is the deal for Rocketdyne gets rejected by the FTC. The downside seems somewhat limited if you consider a 5.0x EBITDA multiple on $100-105 million of EBITDA (this is the range for the last few years) you get $500-525 million of value. Adding in the low end of land estimates adds another $360 million before taxes and $259 million after taxes. This adds up to ~$775 million after taxes. Next, subtracting out net debt of $65 million gets you to $710M or ~$12 per share. Subtract another $1 per share for pension/environmental obligations and the downside seems to be $11 per share

Low Mid High Downside
EBITDA 255 297 330 100
Multiple 6.0 6.0 6.5 5.0
Value 1,530 1,780 2,145 500
Real Estate 360 396 432 250
EV 1,890 2,176 2,577 750
Net Debt 638 638 638 64
Mkt Cap 1,252 1,538 1,939 686
Value/Share 20.87 25.63 32.32 11.43
Upside 71% 110% 165% -6%


There are two angles on this investment. One is the hidden value of land in California and the other is the synergies and oligopoly status of the Aerojet/Rocketdyne division. There seems to be more than a margin of safety if one of the two legs of value creation are not achieved. However, one also has to weigh the upside to land appreciation since it is in tight supply as the housing market recovers. I would gladly trade $1-2 of downside for $10-15 of upside.

Disclosure: I am long GY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.