Alico (ALCO): A Florida Orange Grower Selling Land, Paying Down Debt, and Focusing on its Core Business

Alico (ALCO) is a landowner in Florida. The company is – or is quickly becoming – basically just an owner of citrus groves that produce oranges for use in Tropicana orange juice. The majority of the land Alico owns is still ranch land. The company has about 100,000 acres in Florida. Of this about 55,000 acres are ranch land and 45,000 acres are orange groves. The book value consists almost entirely of the actual capitalized cost of the orange trees on the land. The land itself – with a few exceptions caused by recent purchases – is held at unrealistic values on the balance sheet. For example, the company has sold ranch land at more than $2,500 per acre that was carried on the books at less than $150 an acre. So, the situation here is similar to two other stocks I’ve written up in the past: Keweenaw Land Association (KEWL) and Maui Land & Pineapple (MLP).

There is one write-up of the stock over at Value Investors Club. You can go over to VIC and read that write-up. It gives background on the history of the company that Alico itself doesn’t really talk about in either its 10-Ks or its investor presentation. The company has recently tried to get its story out to investors. There is now an investor presentation. There have also been a couple quarters of earnings calls.

The investor presentation has a slide that includes the company’s estimate of the fair value of the land it owns versus the enterprise value. On this basis, the stock looks cheap. However, it doesn’t look incredibly cheap. And I’m somewhat unsure whether a value investor should look at the stock as just a matter of enterprise value versus likely market value of the land. But, I’ll start there, because other write-ups of the stock will almost certainly be focused around that investor presentation slide that lays out the company’s enterprise value versus the likely fair market value of the land.

ALICO owns 55,000 acres of ranch land. (For the purposes of this write-up, I’m using some out of date numbers not updated for land sales and cash receipts – however, they basically would just net out: less land, more cash / less debt). The company puts an estimate for fair value of that land at $2,000 to $3,000 an acre. Ranch land I’ve known of in other places goes for similar amounts to that. About $1,000 to $3,000 an acre. The company has sold plenty of ranch land recently. And much of it has been sold in the $2,000 to $3,000 range. So, that implies a pre-tax value of $110 million to $165 million for the ranch land. However, almost all of any land sales not put into a “like kind” asset to defer taxation will end up taxed at very, very high amounts because nearly 100% of the sale will be a capital gain. Also, some of this land seems to me to be encumbered with debt. Alico …

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BAB (BABB): This Nano-Cap Franchisor of “Big Apple Bagel” Stores is the Smallest Stock I Know of That’s a Consistent Free Cash Flow Generator

This might turn out to be a shorter initial interest write-up than some, because there isn’t as much to talk about with this company. It’s pretty simple. The company is BAB (BABB). The “BAB” stands for Big Apple Bagel. This is the entity that franchises the actual stores (there are no company owned stores). Big Apple Bagel is a chain of bagel stores – mostly in the Midwest – that compete (generally unfavorably) with companies like Einstein Bros Bagels, Panera Bread, and Dunkin’ Donuts. The company owns certain other intellectual properties like: a brand of coffee (Brewster’s) served in its stores (which Andrew tells me is terrible, I haven’t had a chance to taste the coffee myself), “My Favorite Muffin” (a muffin concept similar to Big Apple Bagel), etc. But, the cash flows seem to come mainly from royalties paid to BABB by franchisees in proportion to the sales they make. Like other franchised businesses, the company also maintains a marketing fund that is paid for by franchisee contributions.

Why am I writing about this business? Because I think it may be literally the smallest stock I’m aware of that is a legitimate and decent business. The market cap is closer to $4 million than $5 million. Insiders own some stock. So, the float is even less. And the investment opportunity is limited no matter how willing you are to accumulate shares because there is a poison pill. No one can acquire more than 15% of the company’s shares no matter how patient they are. So, as of the time I’m writing this, that would mean that the biggest potential investment any outsider could make in this company would be about $650,000. Realistically, it’s unlikely any fund or outside investor could manage to put much more than half a million dollars into this stock. And it’s entirely possible management would not be happy to see even that much being put into this stock (since that’d be more than 10% of the share count).

So, this is a very, very limited investment opportunity. And yet: it is a real investment opportunity. This is a real business. You can travel the country eating at each of these franchised locations. You can call up the owners of the franchised stores and talk with them about the business. You can read 10-Ks on this company going back a couple decades. The company is an “over-the-counter” stock. But, it isn’t dark. It files with the SEC. That’s very unusual for a company with a market cap of less than $5 million. Public company costs are significant. This company would be making more money if it was private. Management costs are also significant here too. The CEO, general counsel, and CFO were paid: $250,000, $175,000, and $120,000 (respectively) last year. That adds up to $550,000.

They own 33% of the stock. I mention this because if we compare the value of the stock they own to the value of the salaries they draw – it’s true …

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GAN Plc – A Player Account Management Software providers for Casinos and Sports Gaming

GAN PLC

GAN is a supplier of internet gambling solutions to the US land-based casino industry. GAN has developed an internet gambling enterprise software system, which it licenses to land-based US casino operators as a turnkey technology solution to launch an online and mobile presence.

 

GAN has developed a Player Account Management (PAM) system where highly sensitive customer and player activity is stored and processed. A PAM, among other things houses all customer data within the state, bears responsibility for identity verification, processing payments, determining that the user is located in a place where gambling is legal, produces regulatory reports and is licensed by each states regulators, provides a dashboard to operators for monitoring purposes and integrates with third party online casino games and sports book, effectively serving as the accounting platform for the casino operator. In a way, the Player Account Management system is to an online casino what the core

processor is to a bank: An operating and accounting system that keeps track of all transactions. In addition to the PAM, GAN also sometimes develops the front-end interface for Online Casino, Sports Betting and Simulated Gaming websites and apps.

Other add-on elements of a platform can include a sportsbook transaction engine, gaming content, payment services, marketing services, trading services and other activities. Outside of the sportsbook, GAN supplies some of these services to some of its customers.

GAN primarily supplies this software in the US where an increasing number of states are legalizing online sports betting due to the Supreme Court of the United States issuing a ruling that struck down the Professional and Amateur Sports Protection Act (PASPA), the 1992 federal law that had prevented states from regulating sports betting. The passage of PASPA in 2018 left it to states to legalize online gambling activity, rather than gambling being regulated federally. After the passage New Jersey quickly legalized online gambling, followed by Pennsylvania, Indiana and Michigan. Other states are expected to follow suite.

GAN received a patent in 2014 for linking a US casino clients’ loyalty account to an online gambling account. The patent covers integration of both social casino gaming and real money gambling with casino loyalty programs and has licensed this patent to FanDuel for a five-year term in return for a Patent license fee.

GAN has several distinct revenue streams:

1. Real Money Gaming Revenue Share (38% of revenues). This consists mainly of revenue share agreements with local casinos for running their online platform. This segment grew 103% YoY.
2. License Revenue (27% of revenues). One-off licensing revenue mostly for licensing to Flutter plc. This licensing revenue derives from GAN plc’s technology and patents integrating loyalty programs with online gambling. Instead of subscribing to the entire GAN platform, these customers just license this specific part. While it is one off revenue , there are large casino groups that could benefit from licensing GAN plc’s technologies and patent.
3. Platform development revenue (8% of revenues). These are one-off software development revenues that GAN receives for developing its online

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Ark Restaurants: Lots Of Hidden Value + Low Liquidity + No Near-Term Catalyst = Excellent Opportunity For Patient Investors

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AdvanSource Biomaterials Corp. (OTC: ASNB) – An Attractive Microcap Arbitrage Opportunity With Limited Risk

17 Jan 2020

Quote: $0.18/share    

AdvanSource Biomaterials designs and manufacturers materials used in medical applications. They primarily make polyurethane materials that are used in long and short-term implants and disposable products (plastics).  The business has been around for 20 years but neither the history of the business nor what they do make much difference to the investment case.

On November 25, 2019, AdvanSource announced that they had entered into an agreement to sell all of their assets to a subsidiary of Mitsubishi Chemical Corporation for $7.25 million in cash- which AdvanSource stated should translate into approximately $0.20/share. If the deal closes and management’s calculations prove to be accurate, it will provide an absolute return of ~11% (or higher if you can get in below $0.18/share). The company expects the transaction to close in Q1 2020. This is not a long holding period and obviously produces a much higher annualized return. (https://www.otcmarkets.com/stock/ASNB/news/AdvanSource-Biomaterials-Corporation-Enters-Into-a-Definitive-Agreement-to-Sell-Substantially-All-of-Its-Assets-to-a-Sub?id=247497)

I stay away from most arbitrage situation. However, I like this one for a few reasons:

1. It provides a 10%+ return on an absolute basis (most arbitrage situations I read about provide a low absolute return, but the author is always promoting the high figure on an annualized basis).
2. It’s a nice “tuck-in” acquisition of a tiny company by a much larger corporation and therefore, has much lower (virtually none) risks of government intervention due to antitrust laws in the US or abroad, push-back from acquirer shareholders, etc.
3. It has already been unanimously approved by the Board and insiders own ~30% of shares outstanding. The company’s largest shareholder is the CEO who owns ~13%.

What’s the downside?

On January 21, 2020 (this coming Tuesday), shareholders will vote on the deal (only shareholders of record Dec. 10, 2019 can vote). Prior to the deal announcement, the stock was trading at around $0.12/share (33% lower than current price) and if for some reason the deal is not approved, it’s likely it will trade lower. On a valuation basis, paying the current price of $0.18/share is paying a ~6x EBIT (based on their last 10Q from Sept. 30 2019 and using TTM numbers) but please note these figures are cherry picked and 2019 was their most profitable year in the last several.   

Why does the opportunity exist?

Most arbitrage opportunities have smaller spreads. I think the ASNB spread exists for two reasons.
1) the average daily volume is only $8,800 (however, the last three days the volume has been much higher- 24K, 16K, 51K, so there is some variability) and so it is only suitable for small, private investors.
2) Related to reason #1, this is an OTC stock that trades for less than a quarter and has very few eyes on it. It’s extremely unknown and undiscovered compared to most deals.

Disclosure: I own shares of ASNB…

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Familiarity Breeds Success: Why Members of Congress Do Best When Buying Local Stocks

From 12/21/2010

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Suria Capital Holdings Bhd (KLSE:Suria): A Cheap, Conservatively FInanced Port Concession Operator

Writeup by Warwick Bagnall

www.oceaniavalue.com

Suria has some sell-side analyst coverage so I wouldn’t say it is a totally overlooked stock.  But it has several features which make it a quick pass for many investors: top line revenue is up and down by >50% in many years (the company reluctantly books some capex as revenue), it is small (~116 MM USD market cap) and it is illiquid (~4% annual share turnover).  You can’t buy more than a few thousand USD per day of stock without moving the price. Half of the float is owned by a controlling shareholder.  Its shares are listed in a small country which isn’t covered by the more popular discount brokerages. Suria is not worth the hassle for most investors, even those that haven’t been turned off Malaysian businesses by Billion Dollar Whale.

For those who are not put off by Suria’s obscurity, this is a very robust business with reasonable growth prospects at a cheap price.  Suria’s main business is operating the port concession for the eight ports in Sabah (the northern part of Borneo, part of Malaysia). And the controlling shareholder I mentioned above is the Sabah state government, who also happens to set the concession tariffs.

Main Business – Port Operations

Port operations provide the majority of Suria’s revenue and are the most predictable part of the business.  The port operations concession was granted in 2003 for a period of 30 years with an option of a second 30 years. The concession allows Suria to charge tariffs on all ships loading or unloading cargo or passengers in Sabah waters based on various factors such as the tonnage handled, length of the ship, number of passengers etc.  

In return, Suria pays the government a percentage of some of the tariffs charged and lease fees for land use.  Suria originally paid MYR 210 MM to buy the concession and has also paid for long term leases of parcels of port land (more on that later).  

Suria is obliged to spend MYR 1.363 billion in capital on upgrading port facilities over the duration of the concession.  All bar about MYR 300 MM of this has been spent at the time of writing (December 2019). Government loans with interest rates around 4% and generous terms such as 10-year repayment holidays have formed much of the funding for the capital projects.  The balance has been funded through Islamic debt with profit margins of 5.15 to 5.85%.

The tariffs and lease costs are set by the Sabah Ports Authority, a division of the government and are supposed to be reviewed every five years.  They are under review at the time of writing. Strangely, it looks like the existing tariffs were set in the 1970s and this is the first time they have been escalated since then.  This means employees (Suria’s main cash expense) consume about 5 percentage points more of revenue than they did 10 years ago. Despite that, Suria’s cash operating margins from port operations are …

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Bank of N.T. Butterfield: A great wealth franchise and interest rate derivative

Bank of N.T. Butterfield (NTB)

Overview

N.T. Butterfield (NTB) is a Bermuda-based bank whose shares trade on the New York stock exchange. Bermuda’s corporate taxfree status, together with a conservative culture helps Butterfield generate a superior return on equity with limited risk. That’s right, Butterfield doesn’t pay taxes!

History

After English explorer George Somers crashed into the island in 1609, N.T. Butterfield first opened its doors as a trading firm in 1758 and later received its banking license in 1858. For a long stretch of time, NTB grew in-line with Bermuda’s insurance industry. When in 1956 American International Group, Inc. (AIG) became the first insurer to move its captive unit to Bermuda, an influx of other captive insurers followed in the 1960s and 1970s, and by the 1980s, some of the mutual insurers such as Excel and Ace also came to the island. Now, Bermuda is a global hub for reinsurance. In 2009, NTB required a recapitalization due to investing in CMO, ABS and CRE lending that went bad. Since then, the bank has become extremely conservative in its asset allocation, holding exclusively GSE insured RMBS and treasuries in its securities portfolio.

Business

NTB is a full-service community bank and wealth manager, operating in Bermuda, the Cayman Islands, Guernsey, Switzerland, and the United Kingdom. NTB’s community banking operations provide retail and corporate banking products to individuals, local businesses, captive insurers, reinsurance companies, trust companies, and hedge funds. NTB has seven Bermuda branches and 49 ATMs and a 39% and 35% deposit market share in Bermuda and the Cayman Island.

In Bermuda, the Cayman Islands, Guernsey, and Switzerland, NTB offers wealth management to high-net-worth and ultra-high-net-worth individuals, family offices, and institutional and corporate clients. In practice, the wealth business can be further segmented into trust, private banking and asset management divisions. The trust business has over $92 billion in assets under administration while the custody business has another $29 billion in assets.

The asset management business had $5.6 billion in assets under management as of September as well. This business targets clients, including institutions such as pension funds and captive insurance companies, with investable assets over $10 million, and private clients such as high-net-worth individuals, families, and trusts with investable assets of more than $1 million.

These businesses generate both a stable fee stream as well as a low-cost deposit base that NTB invests in mortgages and low-risk bonds.

Balance Sheet

NTB is extremely asset sensitive, with every -100bp change in interest rates having a -11% impact on net income according to their disclosures. This is because NTB holds about 40% of its assets in agency MBS and Treasuries and another 26% percent in cash and equivalents. The remainder of NTB’s balance sheet consists of loans. This has specific historic reasons: The cash and equivalents are higher than at most banks because Bermuda does not have a central bank or monetary authority. Instead, Butterfield is the lender and liquidity provider of last resort. As such, Butterfield’s liquidity portfolio is much larger …

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Qurate Retail: The Perfect Candidate for a Leveraged Turnaround?

Qurate Retail

 

 

Prelude

 

This is the year 2019. And shopping has never been easier. Browse for a product on Amazon, and tens of thousands of options show up; with just one click, your chosen product will be by your doorstep in 1 to 2 days. Shopping online offers the broadest range of products and the convenience to receive your purchased item without even leaving your room. And while Amazon has close to half of the US e-commerce market, most retailers now have an online offering.

 

Of course, if you insist on your desire to get the product in your hands immediately, the option to purchase the item at physical stores is still very much in place. Or you might look for a social gathering, in which you spend time with family and friends in shopping malls, picking a few things up along the way.  Even though the world is inevitably moving more and more toward e-commerce, the majority of retail spending is still conducted at physical stores.

 

To most people, the retail landscape seems to be divided between the above two options. That is unless you belong to a small group of mostly female baby boomers. They are typically home-owners, married, college educated, aged 35 to 64, and shopping for themselves. They shop without leaving their home. Yet, they shop “with their friends” as well. They do so by devouring live TV shows that are hosted by “lifestyle influencers” whom they have grown to be “close to”. Almost every day, the hosts, through a dialogue among themselves, will introduce and recommend quality items that are being sold at a discount. As a viewer, if these female baby boomers are interested in the product being discussed, they can place their orders through a call, using the TV remote control, or via the retailer’s website. They may not have an item to purchase in mind at the beginning. But after watching the demonstration and receiving recommendation from the TV hosts, many of them would make the decision to give the item a try.

 

The above, in essence, describes the business of QVC and HSN, the two TV shopping businesses that serve as the core of Qurate Retail.

 

 

Business Overview

 

Corporate History

 

Qurate Retail was formerly Liberty Interactive. Being a Malone company, Liberty Interactive has a convoluted corporate history. What matter to our understanding of the current Qurate are the following:

 

1. QVC came under the control of the predecessor of Qurate Retail in 2003.

 

2. In 2008, HSN was spun off from IAC/InteractiveCorp, and Liberty Interactive established a stake in HSN. Liberty Interactive completely acquired the remaining 62% of HSN that it didn’t already own in July 2017 for USD 2.1 billion. Included in the HSN deal is a group of catalog businesses in the home and apparel space, collectively referred to as Cornerstone group.

 

3. In August 2015, Liberty Interactive paid USD 2.4 billion for zuilily, an online flash retailer.

 

4. Finally, during the reorganization in March 2018, QVC Group received assets, including stakes

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Ardent Leisure Group Ltd (ASX:ALG): Follow-up Post

Post by Warwick Bagnall

This is a brief follow-up to my earlier post regarding ALG.  In that post I wrote that I would write the company up in full if I found that it was robust.  I didn’t find that ALG was robust but decided to summarise why anyway.  Again, for the reasons mentioned in that post, I’m going to focus mostly on ALG’s chain of entertainment centres, Main Event (ME).

What I found was that there are few constraints to growth for ME to grow in the next few years.  There are plenty of vacant buildings or spaces in malls which are likely to be suitable for ME stores.  Unfortunately, the same can be said for Main Event’s competitor, Dave & Buster’s (NYSE:PLAY) or for any other chain or individual store which wishes to compete.  

Competition is the big worry here. ME and PLAY have no customer stickiness or supplier advantages that couldn’t be replicated by a competitor.  There’s little likelyhood that customers will prefer to keep visiting the same location if a competitor opens up nearby with and tries to lure them away with cheaper prices or a newer, nicer facility.  I’ve been told that PLAY has better games than ME. That might help create stickiness with a small cohort of customers that are dedicated gamers but not for the majority of customers. 

There is a theoretical argument that scale matters here because this is a high fixed cost business and many locations only have enough population for one site to be viable.  In order to survive, a market entrant would need to take a high percentage of the existing store’s customers in order to cover their fixed costs. Because that is unlikely to happen quickly a potential entrant would decide not to enter the market.

That theory tends to work if the capex and degree of difficulty (e.g. permitting, finding competent staff) required to build a new location is high compared to the size of the company and where management of both the existing company and any potential entrants are somewhat rational.  Usually I’d expect this to happen in very unsexy industries with conservative management teams. Anti-knock additive plants, galvanising works and the oilseed crush/refining industry in some locations are examples that come to mind.

In reality, the financial and emotional cost to develop a new site for ME or PLAY is low compared to the size of these two companies.  Management in the entertainment industry doesn’t tend to be conservative when it comes to growth capex. I’m basing this opinion on the movie theater industry in the US and Australia.  This suffered from oversupply in the 1990s, consolidated slightly in the 2000s but more recently has started to add screens on a per-capita basis. That’s in an industry where some of the players have a scale advantage in that they own both cinemas and movie distribution and can somewhat restrict distribution in order to give their cinemas an advantage over competitors.  This is a good example …

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