ALJJ - ALJ Regional Holdings, Inc.

[slkiel]

ALJ released an 8K on Friday night. It can be found here: http://www.otcmarkets.com/financialReportViewer?symbol=ALJJ&id=112211

 

Their acquisition did not include Harland Technology (HTS), but did include MDT and everything else. The financials for the part of Fanueil that transfers are below:

 

2013 run rate (extrapolated through the end of Q3, likely to improve in Q4 because of new contracts signed in Sept. and Oct.)

Revenue: $106.2m

Operating income: $8.6m

EBITDA: $11m

 

2012

Revenue: $93.6m

Operating income: $3.4m

EBITDA:$5.8m

 

If we use the 2013 figures, shares are currently trading at 3.8x EBITDA after taking into account dilution and Van Buren's stake. I'm sure Ravich will have some cost-cutting and other ideas going forward, but it's still pretty cheap at today's price using both the 2013 and the 2012 numbers. A company like this should trade more like 8x-10x.

 

[matjone]

So we expect something like 9 million in EBIT.  They have the note at 25 m and the market cap is around 50 m.  That doesn't seem that cheap - am I missing something?

[writser]

ALJ agreed to buy Las Vegas based Carpets 'n More according to a press release. Unfortunately I cannot find any financial information (operating results) regarding the take-over apart from what is discussed in the press release. Has anyone else had more luck?

 

The aggregate consideration for the acquisition of all of Carpets was $5.47 million, including expenses of the transaction, payable by ALJ in cash to the seller.  Concurrently with the closing, Carpets will be recapitalized in a transaction resulting in ALJ owning 87.94% (basic) or 82.63% (fully diluted) and Mr. Chesin, the Chief Executive Officer of Carpets, owning 12.06% (basic) or 17.37% (fully diluted) of Carpets.

 

ALJ is funding the acquisition through existing cash, the sale of 1.4 million shares of its common stock in two separate private placements at a price of $1.60 per share, and the incurrence of $2.0 million in debt from Libra Securities Holdings, LLC, a related party.  The Promissory Note, which was approved by the disinterested directors on the Board of Directors of ALJ, carries a 5-year maturity with a balloon payment due April 2019 and a 10% annual interest rate.  The note may be pre-paid at any time without penalty.  Interest is payable quarterly but may be capitalized by ALJ at its election.

[writser]

Latest quarterly: link

 

Let me be very frank: I barely know anything about this company :). I just kept a small position after the tender offer; Ravich seemed like a good guy to side with. That said, the numbers look really good again. 3.5m net income and 4m CFFO for the quarter, and they still have a $60m tax shelter. I Would love to get some more information about their subsidiaries: I have no clue about what Faneuil is doing, how sustainable these earnings are, growth perspectives, influence of Obamacare etc. I don't know much about carpet selling either but that's a smaller part of the puzzle (and it's not incorporated in the financials yet). Has anybody had luck contacting IR? Is anybody still following this?

[writser]

Any news out today? Couldn't find anything despite the large move.

 

I sold my position a few weeks ago unfortunately. Happy about the decision though - the stock price just kept moving up and up and I have no knowledge at all about their competitive edge and / or future prospects. It didn't seem prudential to me to justify the current stock price based on two quarterlies only. Nevertheless Ravich seems like a good guy to partner up with so I will keep an eye on this.

 

next day: I see now, a pump on SeekingAlpha.

[cje]

7/17 move was likely due to SA article out on name: http://seekingalpha.com/article/2319285-despite-run-alj-regional-holdings-deal-making-offers-continued-upside

[plusalpha]

http://finance.yahoo.com/news/alj-announces-refinance-faneuils-note-131800181.html

 

[slkiel]

For those following ALJ, a bit of news:

 

They refinanced their Harland Clarke, Libra, and other debt: http://www.otcmarkets.com/stock/ALJJ/news/ALJ-Announces-Refinance-of-Faneuil-s-Note-Payable--Senior-Credit-Facility-and-ALJ-s-Senior-Debt-and-Carpets-new-Senior-Credit-Facility?id=88957&b=y

 

This extends the term, lowers the rate, and takes care of any lingering debt issues for quite some time. It's a great deal.

 

It looks like the protest over one of their three Florida Dept. of Transportation contracts will be denied: http://www.theledger.com/article/20140907/NEWS/140909403

 

This is not altogether unexpected. I believe the contract runs for another year before switching over. It will be a revenue hit (but not the amount listed in the 10k), but it also appeared to be a lower margin contract, so shouldn't be as big of a hit to the bottom line.

 

Looks like their just got a new temporary contract with California that may become permanent: http://www.bizjournals.com/sacramento/news/2014/10/01/covered-california-signs-14m-temporary-call-center.html

 

It sounds like some of their healthcare exchange work will ramp up this quarter.

 

[Laxputs]

Good article. http://seekingalpha.com/article/2697695-alj-regional-holdings-building-a-solid-holding-company-one-acquisition-at-a-time

 

What holds me back is Faneuil--I don't understand toll services, contact center operations and health benefit exchange. But I like management.

[ragnarisapirate]

Bump.

 

Just released earnings and the market seems upset. I think if you look at the changes in the balance sheet, things actually are looking pretty good and that the company is poised for growth.

 

Plus, I'd be willing to bet that they sell Faneuil in a few years, which will likely use up their remaining nols.

[Hielko]

Wouldn't that be a waste of their NOLs?

[rohitc99]

My understanding of the results is that they had a one time contract in 2014 due to which their Q2 2015 results are down by a bit. In addition, they seem to have incurred extra costs to ramp up for new contracts. they have invested close to 4-5 Mn  in the business in last 6 months to manage new contracts.

the carpets business also has stopped losing money from this quarter.

[plusalpha]

http://seekingalpha.com/pr/14061625-alj-regional-holdings-announces-acquisition-of-phoenix-color-and-other-financing-transactions

 

 

 

[Laxputs]

Anyone have a pro forma valuation? EV/EBITDA and P/FCF?

[NoCalledStrikes]

Underwhelming Q2 release Friday, but I was pleased to see the Phoenix Color acquisition has closed. 

[NoCalledStrikes]

Somebody out there is really anxious to buy ALJJ.  It's up about 20% in a week.  I'm thinking its recent Nasdaq up-listing may have put into an index or the eye of institution, but I'm not aware of any news which has changed its IV. 

 

If we're lucky, its Phil Mickelson buying in advance of a take-out:)

 

[TBW]

Why is this stock so weak?  It seems to be constantly lower.  Is it the tax changes affecting the NOL values?  Is it the downward pressure from the CEO's stock selling program?

 

Seems like the companies owned are performing well.  Management seems sharp.

 

I don't own, just have been following for a while and am curious.  Any thoughts?

[PSDFinancier]

I've got no idea why the stock has underperformed so much this year, but the stock seems extremely cheap at current levels on LTM #s. The business generated ~$31M of EBITDA and ~$10.5M LFCF in the LTM period. If you back out WC build, which I think makes sense on a normalized basis given that these businesses are 0 growth, then you're looking at LTM LFCF of ~$15M. That compares to TEV of ~$195M and a market cap of ~$105M, getting you to EV/EBITDA of ~6.3x and P/LFCF of ~7x.

 

Ravich sold a small portion of his stake earlier in the year, but he still owns ~40% of the stock, and you continue to benefit from his superb capital allocation skills & deal-making ability, along with the continued delevering of the stock and the high likelihood of multiple rerating. In a market that has very few cheap stocks, this one seems like a steal at current levels.

[Tim Eriksen]

What am I missing here?

 

Faneuil they paid $53 million plus 3 million shares.  Operating profit has declined from $14M in first year to $5M. 

Carpets paid $5 million.  In aggregate has lost $1M since acquisition.  Op inc of just 100k in last year

Phoenix Color and Color Optics paid $95 million via debt.  Operating profit for TTM was $12M.  Debt costs $9M.  So gained $3M of additional op inc.

 

Faneuil seems like a good acquisition but the profit decline is a big concern.  Carpets was bad and seemed obvious at the time.  Phoenix Color was so-so due to high cost debt.   

[PSDFinancier]

Tim, thanks for the comment. In response:

 

1. Faneuil: Yes, they lost a few contracts right after the acquisition of the asset, but backlog for the entity has stayed stable in the $250-300M range since the initial loss of those contracts (i.e., since 2015).

 

2. Carpets is a pure cyclical bet, and I think about it as a call option within the context of the portfolio. Ravich acquired the entity for $5.5M vs. Levine Leichtman's price for the asset of $46M in 2007. Granted, I don't think any reasonable base case could assume that kind of multi-bagger given the crazy operating environment for Carpets in 2007, but Ravich picked up this business for a song.

 

3. Regarding Phoenix, and in my mind, this applies to Faneuil as well, I wouldn't use EBIT as the right proxy. D&A is running well ahead of CapEx, resulting in higher FCF than you would otherwise think. Most of the D&A is amortization of intangibles that I don't think are a real economic expense when thinking about the business. Thus, I wouldn't use EBIT.

 

I'll be the first to say that these are not the greatest businesses in the world. But Ravich is singularly focused on cash-on-cash returns, and he's been able to achieve that given his low purchase prices and the NOL.

[KJP]

This letter has a bull thesis on ALJJ, along with an estimate of "normalized" cash flow:  http://alluvialcapital.com/wp-content/uploads/2017/10/Alluvial-Capital-Management-Q3-2017-Letter-to-Partners-10.23.2017.pdf

 

The estimate seems high to me for a first-look at the financials, but I have not fully dug into to details nor do I know the author's assumptions.

[mbrock77]

It looks like ALJJ held a conference call on January 8th. Was there any notice of this?

https://finance.yahoo.com/news/edited-transcript-aljj-earnings-conference-133750642.html

 

Anyway, they dropped some 2018 guidance:

 

For fiscal 2018, we are forecasting a range of $36 million to $39 million of adjusted EBITDA compared to $31 million for fiscal 2017. The improvement is based on the final integration in the Color Optics acquisition and relocation of the production facility from Rockaway, New Jersey to our existing Hagerstown, Maryland facility.

 

Also, the full year impact of Faneuil's Vertex acquisition, which closed in May of 2017, and Phoenix's Moore-Langen acquisition, which closed in October 2017, also increased customer contract awards at Faneuil and cost-saving measures at Carpets.

 

For fiscal 2018, we are forecasting cash capital expenditures to be in the range of $79 million, cash interest to be in the range of $8 million to $10 million, and cash taxes to be in the range of $1 million to $1.5 million.

 

I assume capex should be "7 - 9 million"!

[Foreign Tuffett]

Is anyone else concerned with the Phoenix commercial printing segment? Organic revenue declined by around 2.1% in FY 2017. Many parts of commercial printing are in a slow, secular decline (right?). I think some of their recent acquisitions in the space can, in part, be thought of as maintenance capex, since without them revenue would be down.

 

[Broeb22]

It’s a little bit too simplistic to compare them consolidating parts of a declining industry to maintenance capex. I get your point that without it, revenue would really be declining, but when industries begin to decline, the rational decision is to reduce capacity. ALJJ is not just buying these companies and bolting them on. They are restructuring the businesses too. I recall in their filings a discussion of them moving all their printing from an acquired company to an existing facility. Doing such a move should be accretive to ROIC. This makes their acquisition prices in the mid-single digits look even better when accounting for these real synergies.

[mbrock77]

Hmmm:

 

https://www.cnbc.com/2018/01/26/tcw-harassment-case-could-hit-all-of-wall-street-commentary.html

 

Sara Tirschwell says TCW managing director Jess Ravich successfully coerced her into sex by threatening to withhold company resources from a fund she managed. Then when she ended the affair, Tirschwell says Ravich followed through on the threat to cut those resources. She was eventually fired from TCW last month.

 

Tirschwell is suing the Los Angeles-based TCW for $30 million, but if her allegations of retaliation against her fund are true, the financial ramifications could be dire.