Guy Gottfried, CEO of Rational Investment Group, is about to Present. Rational Investment Group is a value-oriented fund. Guy Gottfried was formerly an analyst at Bruce Berkowitz’s Fairholme Capital Management. At the Value Investing Congress in Omaha, Guy Gottfried pitched Trans World Entertainment Corporation (NASDAQ:TWMC) , which up approximately 55% since then.
Below are live notes:
(See our full coverage of the Value Investing Congress here).
Guy is presenting two ideas this morning, both Canadian small-caps. Both stocks are not very well followed and fairly illiquid in general:
First Idea: ClubLink Enterprises Limited: CLK.TO
On Toronto stock exchange, all financials in Canadian dollars
ClubLink is actually two high quality business segments, a golf segment and a tourist segment. Guy believes that combined they are trading at 5.5x FCF and provide a great bargain given certain under appreciated assets. According to his analysis, the golf segment is fully valued in the share price on its own offering the tourism segment to investors for free. The name is not widely followed by analysts, and with two very different business segments the true value of the stock is overlooked.
The management team has significant skin in the game, owning approximately 2/3rds of the shares outstanding. The shares are closely held, and in the past when large blocks cross management has purchased them. In additional to heavy insider ownership, the CEO has a long track record of successful capital allocation. Over time he built the business through cheap acquisitions.
Golf Business: CLK is the largest owner of golf courses in Canada, with over 51 clubs. In this business scale of operations is a real plus, because a ClubLink golf member has access to all 51 course. Many of the golf courses are high rate by golf publication, offering championship quality experiences.
Tourism segment: this includes rails and a prominent port in Alaska. Guy considers the Alaska port a hidden gem that is overshadowed by the larger golf business. Within the Alaska port, CLK owns all slips and collects fees from large cruise ships that pass through. EBIT margins in this business are ~40% and are a relatively good proxy for FCF.
Currently ClubLink is buying Florida golf clubs at distressed prices, and this present an opportunity for future growth in the golf segment. Florida has more golf courses than any other state, many of which suffered greatly in the downturn. Currently CLK’s Florida portfolio is only 11 courses, but there is huge potential to acquire more courses at firesale prices. So far they have spent ~$25mm acquiring clubs with replacement costs well over $100mm. He thinks there are many more opportunities similar to this.
Overall trailing 12 months consolidated FCF multiple is ~7.6x for CLK. The company is not cash taxable for the next few years, aiding FCF. However Guy thinks this valuation does not account for the assets that are valuable, but currently generate no FCF. For example the Florida clubs and land are currently not generating cash flow, but have huge upside given the depressed purchase prices. Factoring in all the assets and normalized cash flows, Guy believes valuation is closer to a 5.5x FCF.
Overall ClubLink offers a 4% dividend, great management, and a hidden asset in the Alaska business that an investor can get essentially for free.
Idea number two, also from Canada: Canam Group Inc. (CAM.TO)
Canam designs and manufactures construction products for commercial and industrial customers. Guy estimates CAM is ~30% undervalued. There are numerous non-core assets that make the investment confusing to some but provide additional margin of safety
During the downturn Canam made numerous acquisitions at great prices. In 2010 Canam paid 2.8x EV/EBITDA for FabSouth and paid 2.2x EV/EBITDA for United Steel Deck. With the acquisitions also came real estate assets which are not fully reflected in EBITDA
Management is opportunistic with repurchasing shares when the stock price falls. Recently retired 15% of shares outstanding at an average price of less than $6. Even with the opportunistic acquisitions and share repurchases, the balance sheet remains strong
With adjustments Guy estimates valuation at 3.8x FCF. He thinks historical FCF can be misleading and investors need to focus on cash flows over entire cycles. CAM is even cheaper than the FCF multiple implies, with non-core asset value of ~$70mm. Adjusted for these non-core assets the FCF multiple is less than 3x. Tangible BV of $7.33 per share provides additional safety. The key catalysts are a rebound in the U.S. operations, monetizing the non-core assets, or reinstating the dividend.
9:23 EST: Closing Remarks
Guy is fielding a few questions on competition for CAM, and the risks associated with the Florida golf courses. With CLK.TO and CAM.TO Guy pitched two ~$200mm market cap Canadian ideas with undervalued assets and strong management teams.