Business

Allan MacDonald Notes – 2018 Graham Value Investing Conference – Small Cap Ideas

Allan MacDonald’s notes from the 2018 Ivey Ben Graham Value Investing Conference in Canada from April 2018.

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Allan MacDonald 2018 Value Investing Conference

Allan MacDonald - Finding great investment opportunities in new business models

  • Looking at companies with no direct comps
  • Looking at companies where the business model is hard to compare or understand or something to relate to
  • Looking at business models that are new to the market
  • The way investment bankers, private equity and ways of analyzing companies using and needing comps creates a confirmation bias
  • What happens when there is not a comp? When you are on the go when you evaluate a company?
  • One of the crossroads of the investment world is private equity
  • Leverage buyouts were sort of entrepreneurial capital
  • All first year rookie analysts, will give a spectacular first recommendation which no one will pay attention to
  • First investment – looks bad, margins are non-existent, lots of interests expense
  • What possibly can make this attractive
  • Book value was bad, no tangible net worth to this company
  • ONEX was probably the first public, LBO private equity company
  • Basic premise was that the markets did not understand this business very well
  • It looked liked an unwieldy conglomerate with no direction
  • People misunderstood the structure of the company, especially the guy running it, Henry Kravitz, he was definitely not working for free
  • At the time it was 127 million market cap and 85 million liquid assets
  • Close to 80% of the company liquid, and then you have additional investments from which the company can grow from
  • You were essentially renting the companies out when you bought shares of ONEX because basically when the companies were purchased by them, they were essentially up for sale
  • It was all about the numbers
  • You were like a limited partner in a publicly traded LBO shop
  • And you could buy into it at a discount
  • So what happened to this company?
  • Bought it at 5.50, and the company value started to rise when they sold some businesses as interest grew
  • They gave out like $3.5 dividend after sale which made no sense because you are giving away permanent capital, and then they did a rights issue to reinvest which made no sense again
  • The rights issue was above intrinsic value which made no sense to buy at that price
  • Lo and behold Schwartz and Bob bought 30% company in that transaction
  • If you look at Schwartz net worth roughly 2 billion and I would argue 1 billion came from that transaction at that point in time
  • The best thing you could of done at that time is reinvest that dividend
  • If you did that, $1.5 turned into roughly $200 over 27 year period
  • They compounded capital at a discount return but the kicker was that it was trading at 75% discount
  • Now today it trades at a modest premium, net asset value and if you ask me before, I would have never believed this company trading at a slight premium today
  • Next is the travel space with Expedia
  • com was the rival
  • It was an amazing business, had monster growth, people paid 3 months in advance for hotel rooms, paid 30 days after they stayed, à 4 month float
  • 9/11 tested the thesis of the business model and whether it would work
  • Travel stocks got hit hard
  • Analysts priced Expedia as if it was a hotel company
  • Hotel owners were hit hard and would throw enormous amounts of cash flow to expedia and hotels.com, the owners had to get volume and generate sales in a tough environment
  • We bought it when it got hit because the industry was facing all types of pressures
  • The revenue number the 303%, which no one expected
  • If you look at it, the relationship between travel providers and hotels is very abnormal
  • Hotel owner, operators take all the risk and suffer thin margins where the travel providers skim off their margins
  • People become addicted to those distribution centers
  • The addiction was basically created at this moment
  • This is where the hotels smoke the crack, the owners become addicted to those distribution
  • Another one was a Canadian company that bought the 407 toll road, Cintra Infraestructuras Internacional S.L.
  • Paid 3 billion, company did not look good with financials
  • Bond market loved them
  • They were discounted 200 million
  • Then and now 407 highway
  • Trips per year 2000 – 2018 1.8x increase
  • Price per trip 2000 – 2018 2.3x increase
  • Revenue 2000 – 2018 $150 million to $1.5 billion
  • Ebitda 2000 -2018 9.5x increase
  • Madison Square Garden
  • Owns the most iconic sports and live events stadium in the world
  • The only two professional sports teams on the island of manhattan
  • MSG Network – wildly profitable regional sports network (the hidden jewel)
  • 2009 1.3 billion market cap and EV value 1.0 billion
  • The markets did not like them and they had losses at the time
  • The network was worth 250 million and their were escalators in the contract which brought it up to 350 million
  • Ballmer bought Clippers for 2.3 billion which raises the value of knicks
  • The most profitable industry ever?

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