Avalon Holdings (AWX): An Unbelievably Cheap Controlled Company that Might Stay “Dead Money” For A Long Time
I’ll be doing write-ups on Focused Compounding more frequently now. This means that the quality of the ideas will be lower. Previously, I’d tried to focus on writing up just stocks that looked interesting enough to possibly qualify as some sort of “stock pick” from me. Now, I’m just going to write-up ideas I analyze whether or not they turn out to be anything approaching the level of an actual “stock pick”. So, keep that in mind. Some of these write-ups – and I’d say Avalon falls into this category – are going to be in more of the “not a stock pick” category. Actually, though, Avalon is a really interesting situation – just, a really interesting situation I’m not at all sure I’d actually recommend.
Avalon is a nano-cap stock. I’ve followed the company in some form for over a decade. It’s often been cheap. But, it’s rarely been as cheap as it is now. Avalon does a bunch of things. It owns some salt water injection wells. Those have been shut down and written off. There’s a ton of info about the court cases around these wells in the 10-Q, 10-K, etc. I’ll leave you to read those for yourself. I’m going to just say the wells are not worth anything positive or negative for the purposes of this write-up. Avalon has a waste management business. There are two parts to this. One is a “captive landfill” run for a customer (on that customer’s land) in Ohio. This is only about 5% of the waste management division’s revenue. And it is just one customer. There isn’t enough info given by the company to evaluate this captive landfill business in any depth. The other thing Avalon owns is a “waste brokerage” business. This is big. Revenue from this is like $45 million. It seems to be about 60% recurring revenue and 40% project revenue (in many years). This waste brokerage business is the source of Avalon’s earnings. In fact, earnings from the waste brokerage business often exceeds reported earnings of the entire company. This is due to losses in the other segments (salt-water injection wells and the “golf” business). Most of the company’s assets are in something it calls the “golf” business. This is potentially a bit of a misnomer. It should just be called “country club”. The company owns 3 golf courses and leases a fourth (Avalon has the right to exercise extensions on that leased property to keep it through 2053). The 4 golf courses are located in Northeastern Ohio and Pennsylvania. The towns they are in are: Warren, OH; Vienna, OH; Sharon, PA; and New Castle, PA. The sites at Warren and New Castle are being renovated right now. New Castle is a new acquisition and very run down. Warren is the company’s oldest location – it’s where the corporate HQ, the hotel, etc. are – and the renovations are to make the resort hotel even more impressive. To the extent Avalon is an asset play – the assets are these golf courses. Although open to the public, these courses don’t bring in meaningful revenue from the public. And, having seen the area, I doubt they ever will. Revenue in the country club business comes in the form of membership dues and food and beverage. Avalon has just under 4,900 members. Members can use all the facilities. On a per member basis, my best guess is that membership is about $1,200 a year ($100/month paid yearly on a non-refundable basis) and the average member spends about $135/month on food and beverage. This means a member is paying like $200-$250/month. Of course, some food is consumed by guests, etc. There is also a hotel that operates like a resort and thereby can be seen as sort of “renting” instead of owning country club members. Non-members stay at the resort (in Warren, Ohio) and get use of all the stuff members normally use and eat and drink and so on.
The book value of Avalon Holdings is about $9.50/share versus a stock price of $1.80/share as I write this. So, price-to-book is under 20% here. The stock would have to quintuple to reach book value. Book value is also abnormally “hard” here. Property, plant, and equipment is $50 million. Net debt is about $21 million. The company has restricted cash – which I didn’t include in the net debt calculation – of about $5.5 million. This is a “project fund” the lender required be put aside for the renovations. Once the renovations are complete, PP&E will be $55 million and net debt $21 million. So, PP&E net of debt will be $34 million. PP&E – on an original cost basis, that is before depreciation – is about 60% buildings and 20% land. It will be even more skewed to buildings after the renovations. I’d say that “hard” net PP&E (if I can coin a term) would be buildings and land less debt of around $30 million. There are two classes of stock. They have different voting rights but identical economic rights. So, total shares outstanding – counting both A and B shares – is 3.88 million. If we take “hard” net PP&E of $30 million and divide by 4 million shares out we get $7.50/share in “hard” book value. I don’t think this is an overestimate. It might be an underestimate.
Andrew and I have visited all of the company’s sites in person. However, we did not stay at the hotel. Nor did we golf at any of the courses. The buildings we did see – especially those at the Warren, OH headquarters location and resort – far exceeded my expectations in terms of the physical state of the plant. This company owns properties that are unusually highly invested in, well-kept up, etc. for the areas they are in. The New Castle, PA location is in disrepair. But, it is a new acquisition where cap-ex is currently being spent. So, that’s to be expected.
The company’s cost of capital is low. At the end of last year, it did a deal for a 15-year term loan to be repaid in equal monthly installments. The loan can bear an interest rate of 5% to 7.35% depending on interest rates. Unless interest rates rise quite a bit over the next 5 years, a rate of 5% is much more likely than 7.35%. This would mean an after-tax rate of 5% times 0.79 equals 3.95%. Something below a 4% cost of capital for the $25 million loan. The company also has a $5 million credit line it has not drawn. It gets some float from membership each year. It has like $1 million in non-restricted cash on hand. I don’t expect payments on rent payments and debt maturities plus interest to exceed something like $1 million to $2 million per year over the next 15 years. Right now, it’s very close to just $1 million. Cap-ex is the bigger item. The company has regularly plowed back way more than that into its facilities. On a cash basis, the golf business – what I call “country clubs” – has been a huge money suck. That’s how a company that was in waste management has become a stock with about a $7 million market cap and a “hard” book value of $30 million or more net of debt. Assets are about 10 times the market cap here. So, this is an extraordinarily leveraged asset play. The actual cost of capital might be more like 5% on that debt, because I am unsure if Avalon will actually produce taxable earnings sufficient to get the full benefit of the interest charges.
The waste services business seems valuable. But, SG&A at the is like $9 million. Then there are the losses in the country club business. The business – after you make money on food and beverage but before you invest in cap-ex – is probably break-even to slightly profitable on an EBITDA basis. But, I believe it is – on an after-tax, truly free cash basis – not generating any economic earnings.
So, are these golf courses the highest and best use of the assets?
Probably not. The company owns 578 acres of land. It leases – for another 33 years – a further 224 acres. If we just count the leased land, it’s held on the books at $25,000 an acre. On a micro-location basis, some of the land is well situated. The golf courses are often quite close to highways and other areas with plenty of traffic. The country club acquisitions were not made at premiums over tangible book. In fact, it’s likely these were sometimes purchases made below book. Some of the acquisitions have then been on Avalon’s books for as long as 17 years now. It varies from about 1-17 years. This hasn’t been a high inflation period. But, yes, I think that the liquidation value of Avalon is a lot higher than the stock price. Even if you could only get 50% of the “hard” book value in liquidation, that’d be $7.50 / 2 equals $3.75. The stock is now at $1.80. So, even in a really pessimistic scenario for liquidation value – you’d have a double buying this stock today and liquidating the country clubs. I’ve assigned no value to waste services. That business does close to $50 million a year in revenue. It could also be worth the entire market cap – $7 million – of this stock quite easily on its own.
I don’t know what Avalon Holdings is worth. But, if you asked if spinning out or selling waste management and liquidating the country clubs over time would generate at least $40 million in proceeds – that is at least $15 million over the $25 million in debt – I’d say that I think it would. Each of the two segments alone – the country clubs as assets to be liquidated (net of debt) and the waste brokerage as a business to be operated – are probably worth more than the company’s market cap.
So, why is the stock trading so low?
There are good reasons for this. This is a controlled company. The CEO owns enough “B” shares to ensure he will always be able to appoint up to three-quarters of the board. “A” shareholders can appoint 25% at a minimum. So, given the current board of 5 members, that means the “A” shares acting together get two board seats. There is no poison pill, etc. And market cap is just $7 million. The stock has a very high share turnover – no one holds this one for long. So, it wouldn’t be hard to make a run at the company and those board seats…
But, the reaction from the company would probably be to adopt a poison pill and either contract the board to 4 members (to make sure only one non-insider gets on the board) or expand it to 8 (to dilute down the board influence of an outside shareholder). The only thing an outsider could do here is get one representative on the board. This would never ensure the company completes any value “unlocking” actions like spinning out the waste brokerage business.
Furthermore, the company is focused on buying more country clubs. In the SEC filings, they say “several private country clubs in Northeast Ohio are experiencing economic difficulties” and they might provide good acquisition opportunities for the company. These acquisitions would probably be done below book value.
Andrew and I visited the area and think that Northeast Ohio is not a good place to assemble a collection of country clubs. The company admits it has had difficulty growing members and hasn’t hit the membership goals it had put in place when doing some of these acquisitions.
Is this a value trap?
Not exactly. As a stock, this thing might actually have a good chance of working out okay over time. There are a couple reasons for this. One, you are financing $25 million worth of land and buildings at a 5% rate on a stock with a market cap of only $7 million. The country club business doesn’t really burn cash beyond what the waste brokerage generates. So, what is really happening here is that what cash is generated by waste brokerage – which is sometimes quite a lot versus the market cap – is then leveraged up and invested in land and buildings in Northeast Ohio. If there is meaningful inflation while you own this stock – it’s going to work out well. This isn’t so much a melting ice cube as a corporation whose purpose is to siphon cash from waste brokerage into more and more country clubs in the Ohio and Pennsylvania area.
The assets are poorly located on a macro basis. This is not the right region of the country to put country clubs. It’s wrong on a present day basis. And future demographics don’t look good either.
But, you have two pillars of value here. You have cash from waste brokerage. And you have an enormous amount of buildings and land in perfectly good shape. ROC here will be bad as long as current management is in charge.
But, one day something will change. And if you finance yourself with retained cash generated internally and money borrowed long-term at a fixed rate of 5% a year, you’re not going to destroy so much value this thing goes to zero. The real value of the land and buildings will decline only moderately over time. The nominal value could grow over time.
As a $7 million stub, this thing will work out one day if someone else runs it and breaks it up and does something with it.
Till then, you’ll probably go mad owning it and watching this assembly of badly located, poor returning country clubs grow and grow and grow their acreage.
But, the asset value is solid and far exceeds the market cap.
This is one of the cheapest stocks I know of.
Still, not a recommend.
Geoff’s Initial Interest: 20%
Geoff’s Re-visit Price: Already Cheap