market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Arnaud Ajdler of Engine Capital whose presentation was entitled "Investing in Change" and he pitched Hill International (HIL).


Arnaud Ajdler's Value Investing Congress Presentation

·         Arnaud is a former partner of Crescendo Partners, an activist value investing firm.
·         Launched engine in July 2013 – a special situations value fund focused on change.
·         Why is change important? It is a catalyst for the value gap to close – increases the odds of avoiding a value trap.
·         Three buckets.
·         Proactive- be the change agent like Crescendo. Arnaud has waged over 6 proxy contests, and has served on multiple boards.
·         Anticipatory – Management announces change that is not priced in or some capital structure event.
·         Reactive – Follow-in other activists and other opportunities.  
·         Always ask why the company is mispriced –identify the problems in order to fix them or find solutions. Arnaud has a LT horizon.   
·         What is his edge? Experience.   
·         In this environment many factors can contribute to companies creating value – i.e. companies focusing on a core competency, or events like restructurings, spin off of a division, or return of excess cash.  
·         It used to be hard to get meetings with large firms like Fidelity– now they are open to shareholder activists along with ISS.   
·         Different types of change.   
·         Some examples include operational, capital allocation, capital structure, strategy and finally governance.   
·         Some example of stocks Arnaud has invested in – IRG – a Canadian franchisor for which he is on the board, STC a title insurer where he is on the board and helped implement a buyback program, among others.   
·         Security Selection – focuses on FCF generation, low operating margins which can improve, poor capital allocation (can improve), lazy balance sheets, corporate discounts or a take-out candidate.   


·         Presented Hill International (HIL) – he was on the board from 06-09 knows the company.   
·         A global project management firm – manage projects, low capex model, for which they get paid 2% -3% of the project value.   
·         Owner operators – management team owns 30% of the business. Their incentives are aligned with shareholders.   
·         Two businesses the larger project management business and a smaller construction claim business.   
·         Some positives: diversified business – by project, etc, high barriers to entry, strong ROIC, fast revenue growth and backlog visibility.   
·         Currently trades around $5.4 or a ~$218MM market cap. Cash is ~$55MM and debt is around ~$150MM. Trades at 6.2x FY14E EBITDA and 5.4x FY15E EBITDA.   
·         Peers trade for 10x EBITDA.   

·         Why is this cheap?   
·         (1) No US peers, hence sell-side analysts use wrong peer group such as E&C companies or consulting firms like FTI. This is a project management firm (capex light).   
·         (2) Has a Libyan receivable of $60MM for which it hasn’t collected on (due to issues in the Country of course). Has since started to receive cash - $10MM and expect to eventually collect the rest. Arnaud has completed diligence on Companies in similar situations.   
 ·         (3) Leverage – When revenues declined due to the Libyan issue, the Company broke its covenants and had to refinance into expensive debt. This is an opportunity as the Company will most likely refinance over the next year or two, which should decrease interest expense.   

·         Catalysts?   
·         (1) Recovery of the Libyan receivable   
·         (2) Refinance of debt.   
·         (3) Revenue growth – one strong point about the business, revenue visibility through the backlog.   

·         Valuation wise – believes there is ~80% upside – cheap on an absolute business as it is hard to find cheap quality businesses trading below 7x EBITDA.   
·         On FY15E FCF – thinks they will generate $33.6MM of FCF after maintenance capex, or at a 10x multiple would equate $8.40 per share (pre-w/c changes).   
·         Risks? Doesn’t look like the business is getting sold, thinks this would garner a strong price given it is a scarce asset. Management team is focused on acquisitions, think this will distract them from reaching 10% EBITDA margins. Further, insider selling, but they still own a lot of stock.   
·         In regards to idea generation: Look for Companies trading at cheap multiples, look at special situations like spin offs, looks at 13Ds/ delayed annual meeting filings, and 13Ds filed by Private Equity firms.   
·         An example of making money off a 13D filed by a PE firm – O’Charleys and Baker. Woke up one morning and saw that Fidelity National Financial filed on O’Charleys, signaled that they were a potential acquirer and ultimately purchased the asset. Baker is a similar situation, DC Capital filed the 13D, Arnaud contacted the sponsor who informed him that they have a similar portfolio company they want to merge. Offered to buy the business in the mid $20’s, ultimately paid a price in the $40s.

Be sure to check out the rest of the Value Investing Congress presentations.