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Monarch Services – Undervalued Liquidation Play (OTC: MAHI)

Monarch Services is an undervalued asset play with a plan to liquidate and distribute remaining assets to shareholders. The company used to be in the publishing business producing a magazine called “Girl’s Life”, the rights to which have now been sold in exchange for a promissory note of $600000.  Other assets included a restaurant business, “Peerce’s Plantation”, which has now been sold, and real estate adjoining the restaurant property. The company has not kept up to date with its regulatory filings due to the fact that it anticipates legal and accounting fees of up to $250,000 to accomplish this task.

In April 2008, the company published an 8-k report stating future business plans and containing pro forma financial statements for the year ended April 2008.

8-k
sec.gov/Archives/edgar/data/202685/00002...

Analysis of these exhibits reveals cash balance of $698000 and remaining liabilities of $36000. There are also $941000 worth of assets held for sale, which consist of the housing (referred to as “GLPM”) and land real estate (referred to as “GLPP”) connected to the restaurant property. The company spent $479000 in administrative expenses between April 2007 and 2008.

Since April 2008 there have been several developments; namely the sale of the GLPM property for cash value of  $560000 less $38000 closing expenses. Also, the company is in discussions with Baltimore County over the sale of the GLPP property for $624000 and is expecting closure in November 2009. The sale price could be substantially less then this value.

Also, the promissory note received in exchange for the sale of Girl’s Life magazine has substantially been written down to 0, implying the expectation of complete default. There is still the probability of receiving some denomination on this note although the value is probably negligible.

The $698000 cash balance was increased by $522000 due to the sale of GLPM, giving a pro forma balance of  $1220000. Adjusting for a possible discount in the sale price of the GLPP property, 75% of the offer price is $468000. Assuming payment in cash, the balance increases to $1688000. Expenses in the year are likely to be less then the 2007-2008 period when the company spent $479000 in administrative expenses. However, in order to err on the conservative side, assuming there is no decrease in expenses the cash balance will be reduced to $1209000. Subtracting the $36000 in liabilities, the estimated cash available to the equity holder will be $1173000, calculated conservatively.

The current market value of Monarch Services: $891791.
Estimated cash available for distribution: $1173000.

This implies a substantial discount from realizable value. The possible gain is 32% in a few months, with no correlation to the overall market, if the November 2009 closing date is correct.

Disclosure: Long MAHI.