Meritage Hospitality Group (OTCQX:MHGU) engages in restaurant and real estate development business. In this post, I hope to demonstrate that this micro cap company is trading at a significant discount to its true value on a variety of valuation metrics. In a way, the company itself represents a double turnaround play - they are exposed to any improvements in the weak Florida and Michigan markets AND any improvements in the Wendy's (WEN) franchise system. In addition, they have substantial amounts of real estate hidden on their balance sheet.
What they do
At this point in time, Meritage mainly operates restaurants. They currently operate 69 Wendy’s (49 in Michigan, 20 in Florida), three O’Charleys (CHUX) restaurants, and one Twisted Rooster (a restaurant brand the company developed), but they plan to convert all of the O’Charleys into Twisted Roosters. The company also owns an interest in a development property known as Lighthouse Point that owns 900 acres on the island of Eleuthera in the Bahamas.
How’d we get here? Some background on key events in recent years.
First, towards the end of 2006, the company engaged in a “going private” transaction in order to avoid the costs of complying with Sarbanes Oxley. To do this, they engaged in a 1 for 300 reverse stock split, then paid anyone who didn’t have one full share after the split $5.25 per share (well above the current share price). They then re-split the stock 300 for 1 to get shareholders back to their original share count. By doing this, they reduced the number of shareholders below 300. They then delisted from national stock exchanges and moved their listing to the pink sheets.
Then, in an effort to shore up their balance sheet, in the past five years, the company has undergone sale and leaseback of 26 of their
