We're posting up notes from the Sohn Canada Investment Conference 2015 (Capitalize For Kids.) Next up is Mick McGuire from Marcato Capital. He presented two long ideas: Sotheby's (BID) and Virtus Investment Partners (VRTS).
Mick McGuire's Sohn Canada Presentation
- LONG Sotheby’s (BID)
- Agent in the art collection industry primarily hosting auctions and private sales
- Trading at 8x EBITDA, 31% EBITDA margin, 47% share of a $12.9Bn market
- Business is split into two divisions: agency and financial services
- Agency performs the auction and private sale process
- Not capital intensive, provides consistent return with a fairly amount of inherent leverage as larger purchases provide additional commissions.
- Interest at 7%, < 50% LTV, guaranteed by collector
- Funds this business with a low cost $1Bn revolver
- Run rate $50MM
- Frothy art market may be a negative catalyst but Mick sees growth in the private sales market as this has little penetration to date from Sotheby’s.
- Opportunity to grow financing division to add additional net interest income
- Reasons for undervaluation
- $450MM excess cash on books
- $250MM in inventory a.k.a. art and jewelry, sell side appoints no value to this but there is definitely value in these items
- Real estate owned by the company, approximated value of $175MM for the NYC location and $250MM for the London location
- Additional value in the loan book
- Currently $774MM in loans, $594MM in debt against these loans, currently 77% LTV with a target of 85% providing additional interest margin.
- Catalysts
- Refinancing of the NYC location should close in Q3
- $250MM share repurchase
- Approximately $1.1Bn in non-operating assets a.k.a. redundant assets that could be sold which is 40% of the market cap
- A new CEO was brought in and personally invested $2MM and has a compensation package oriented to long term stock price appreciation.
- With the redundant assets removed, the stock is trading at 4.1x EBITDA
- Mick sees the position at ~$50/share or 60% upside from today’s prices.
- LONG Virtus Investment Partners Inc (VRTS)
- Asset management with a distribution platform that primarily uses sub advisors to manage funds.
- The balance sheet is misunderstood providing upside for the stock if value can be released.
- It has a market cap of approximately $1Bn and an enterprise value of $480MM
- Trading at 6x earnings
- Has a 15% AUM CAGR (which is evenly distributed between net inflows and performance)
- VRTS seeds most of its own capital to begin with, due to accounting these are seen as cash outflows which skews the cash flows from operations
- This is called their accelerate seed program and it is funded by a $100MM issuance and FCF - They have $115MM in FCF when adjusted for this
- EV/LTM EBITDA is 3.7x
- Have a reputational concern due to a fund “AlphaSector Fund” using backtested returns for marketing. Outflows from this fund have skewed the net inflows/outflows figure to the worse causing the trend to look poorly. When adjusted the AUM has had consistent inflows. Once the AlphaSector is behind them in Q1 2016, the figures will market properly.
- Industry EV/EBITDA is closer to 8x
- Cash and investments are approximately 50% of the net assets, most sell side analysts are putting discounts on this figure for unjustified reasons.
- Currently trading at $98, sees the stock at $224/share in 2-3 years through the combination of value activation activities such as returning cash to shareholders.
Be sure to check out the rest of the presentations from the Sohn Canada Conference.
