Christopher Bayliss

Long/short equity, deep value, value, research analyst
Christopher Bayliss
Long/short equity, deep value, value, research analyst
Contributor since: 2012
Great article. Very interesting and completely agree about the Cott comparison.
If that's the case, why did they shut down Athabasca and not move the lodges?
They do have a mobile segment called "mobile and open camp". This certainly matches your description. However, this only makes up 25% of the revenue. If the lodges were truly mobile, I don't think there would be such a differentiation in description.
I don't think this can be a book value play because the assets don't have much value to a buyer.
~75% of the companies tangible assets is in PP&E, which is largely lodges in remote areas such as the Canadian Oil sands. How much are those lodges worth if oil production shuts down in those regions for years? That's not a remote possibility because breakevens there are above $80 WTI which is higher than almost any other area in America, let alone offshore or middle eastern oil wells.
The question I would like to know, is what do their normalized cash flows look like if half of their Canadian operations are eliminated, and the other half receives a payment haircut from oil companies.
Really great concise article.
Just wondering, when RAS has to get rid of the Taberna business, do they get no proceeds?
Great article Dane. This is a great summary of recent developments and analysis. I think I will look to opportunistically add.
Nice article. Also agree with your assessment overall. Long as well. As you said this is a public LBO; however Wall St. is used to looking at things through the PE & EV/EBITDA lens. You really have to look at this through the an LBO/debt paydown framework.
Couple of items on which I have a different opinion. A 13x multiple for the whole business seems aggressive. I agree DSS is a better business than legacy Cott. But Cott has been trading consistently in the 6x to 7x EV/EBITDA over the past 3 years. Its P/FCF has been sub 10x for a while. 3 turns of expansion is significant.
Also, I know that you accounted for interest expense in your FCF per share calculation; however, I don't know if FCF yield is the best metric when they will still have multiple turns of leverage of to pay off (3.0x to 3.5x EBITDA in 2018 according to management).
On the flipside, there could be more upside because your interest expense may be a bit high. Management expects about 3.25x leverage in 2018. Thats about $1.2bn in debt. They will likely have paid off the high cost 10% DSS notes and preferred share, leaving them with an interest rate of about 6% based on their 5.375% notes, newly issued senior notes at 6.75% and ABL facility. At these figures, total interest expense will be about $70mm to $75mm, compared to $120mm your predicting. Granted interest expense will be higher in 2018 than 2017, but that could easily be an extra $40mm a year.
Like I said, just sharing my opinions so that we can all have a clearer picture.
Agreed. This seems almost too good to be true. What are we missing?
Anyone have a timeline for the conversion/next steps?
No skin in the game personally but I was at one point contemplating a position in DE. I too saw the little FCF generated and that was a big warning sign. But this is the first well put together short argument on DE I have seen. Don't think I'll be investing now.
Just curious, what was your thought process for 16x as a mid cycle multiple?
Very interesting and well thought out article. I was bearish on the company some time ago but the decline was more than I had anticipated. The SOTP story makes a lot of sense, and margins should improve over time: construction management industry is cyclical. I would need to look into capex spend a bit but I'm intrigued by this.
Thank you. Its been nice to see a regression to the mean of margins. However, I don't think anyone could have totally seen the blowout in top line numbers.
They can benefit from the solar trend. However, the companies you mentioned are much larger scale than WLDN. WLDN helps install and design small solar efficient products for municipalities and is not installing solar grids like the others.
Saw that. Another positive development. Although stock has declined since I wrote the article, book value has actually increased. However, it has done so in a very incremental way, and not with a big splash acquisition or sale. Patience will reward in the case of LUK.
No idea Barinder. Your guess is as good as mine.
Thank you. Appreciate your initial piece spurring me to look into the company.
Yes. Please see a recent article of mine. If you have further questions, please let me know.
I like both businesses because they're dominant players in industries with tailwinds and generate FCF. The ability to generate FCF is somewhat hidden in both. ESRX b/c of D&A, and GNC b/c it is still growing and pursuing growth CAPEX.
Sounds like we're on the same page. Rent expense while not trivial, is not exorbitant. If they're able to increase prices anywhere close to where they have in the past, they should experience positive operating leverage.
Good to know about Sprouts and their SKUs. I do think e-commerce is the more pressing concern because e-commerce has a differentiated business model and is much more likely to start a price war. A price war would be much more damaging to GNC than losing market share.
Where are you getting $1.1B of operating leases? On page 103 of their recent 10-K, they say they spent $216MM on total retail stores rent expense.
Why do you believe that natural grocers are a direct threat to GNC?
Agreed. With Leucadia, patience is the name of the game.
As an aside, a correction to the article was submitted, as this article was co-authored with Jack Schrager, another alumnus of the Duke Investment Club.
In today's frothy markets for startups/young companies, 1X sales, with a clear path to profitability looks like a steal.
Just took a quick look at VITC's 2013 financials. EBITDA was -$6.8MM. However, they had $30+MM in expenses related to each G&A and sales and marketing. A strategic buyer should easily be able to knock out about half of each of those categories. That would put us as EBITDA of about $27MM or an EV/EBITDA to an acquirer of about 7.2X. With its long growth runway, it should command a multiple well above 10X. A quick guess is that a buyer would be willing to pay 12X-14X post cut EBITDA.
Thanks Mike.
From a quick perusal of results over the past quarter or two, all retailers, and a lot of other industries got slammed due to the weather. I think even the economy contracted. Yet GNC is down more than others, in my estimation.
I read your article on VITC and agreed with the analysis. VITC could be a pretty easy bolt on acquisition, and a strategic acquirer could strip out almost all SG&A. I don't think a sponsor would buy it. While VSI has certainly been active in getting into e-commerce space, GNC has also been pretty active with acquisitions of, and luckyvitamins, and building out its own site. It will be interesting to see how that shakes out.
About a year ago I estimated it at a little below $220
Shameless plug I know.
Things have obviously improved as the company has generated more cash, and built out its factories. However, it likely isn't trading at a 20% discount like it was last year.
For full disclosure, I have sold my position in CF. I don't think there's a margin of safety buying a true commodity producer unless you buy below replacement value or below some level of conservative normalized earnings based upon return on investment. Earnings are certainly going to drop. If they drop a little, CF is a great buy. If they drop a lot, BluePac's call will prove omniscient. I simply don't have enough confidence in trying to predict normalized nitrogen prices based upon planned capacity increases. Its a great company that I would love to own in the future b/c its truly the low cost producer. But the margin of safety isn't there currently, in my opinion.
Thanks for the kind words and article reference.
I have actually sold my position in CF. I think that the discussion about earnings estimates are quite valid and CF is unlikely to continue these high level or earnings. I sold because I don't think there's a margin of safety in buying a major commodity producer anywhere above replacement cost. Nitrogen will be around for a long time, but prices change. And prices are clearly elevated. Supply is coming online and prices could drop and CF is still a good buy. But if they drop too far, long run earnings could drop precipitously from current levels. It simply is too difficult of an issue in my opinion to predict long term Nitrogen prices based upon planned capacity expansions. I was wrong in my initial analysis projecting a steady growth in prices is incorrect. I think valuing CF based upon replacement value and returns is much safer in a commodity based industry.
I would look to enter again if the price drops below $200, which in my estimation would be buying at 90% of book.
Well I think its been weak because of concerns about Jefferies and lack of major deal. Leucadia typically makes big moves when it realizes value from selling a major asset, or making a major investment. Leucadia has been active, just in smaller transactions. This is the type of stock that can stay sideways for 2 years and then shoot up 40% in a month.
Agreed. This investment, if it works out will take patience.
Also, there was a significant investment in testing this quarter, which given management's history of conservative CAPEX, should bode well for stabilization and potentially growth in this area.
Great article and I started doing some diligence after reading your article. Couple of questions.
1) Where did you find the date on Vantage Implants? I read the most recent 10-K and didn't find any mention.
2) How did you get maintenance CAPEX of $840K? Recent CAPEX has been high as they have upgraded offices and overhauled radiographic capabilities. However, I think moving forward, CAPEX levels normalizing is important to the thesis.
3) Have you come across anything about the unit economics of a dental office? Would love to have an idea about what the de novo offices may contribute, especially considering they have another one coming online the second quarter this year.
On a separate note, I seriously wonder why this company is public. The cost of being public like this must be pretty large relative to the size of this company.
Thanks for the color Valuable Insights. I think my original predictions for the testing segment were a little too bearish.
New Capital:
Excellent article. Value is quite clear. Almost too clear, and makes you think is this too good to be true.
I guess I would love to hear more thoughts on shareholder friendliness. It appears the market will certainly never revalue to book given the perpetual discount, and with a potential drop in property values looming, it could perhaps trade in line with its more historical discount. However, if the company could pursue more dividends, buybacks, spinoffs, the value would increase significantly, and the discount would close rapidly.
I would also echo the sentiment that this whole corner of the market is undervalued. Look at Keck Seng for example: