Some recent observationsHi guys,
I agree that it is strange that no insider is stepping up to the plate with the share price so undervalued. Let's hope Media is right and something is in the works.
Some observations after the third quarter release:
- Generally they should significantly improve the transparency and communication with the capital markets. Nobody knows what the transformation really means - this has to change and more details should be provided. Perhaps this could even bring in some new shareholders.
- The core business is declining as expected because of print advertising. This will continue for sure. The question with respect to the transformation will be how to get the digital business as big as to compensate print's decline? I don't see that organically in the near future (2-3 years). That's the reason why reasonable add-on acquisitions must be part of the transformation.
- I suppose that they will introduce a paywall at the Toronto Star again. Neil Oliver is now EVP of Daily News Group, which should include Waterloo Record, Hamilton Spectator and the Toronto Star. Therecord and Thespec have soft paywalls. Toronto Star scrapped its paywall because of Star Touch which was recently abandoned. The writing for a paywall could be on the wall. If you look at recent industry trends (Google News, Facebook instant articles) this looks like a logical step. But what counts in this respect is unique content. The big question will be if the Toronto Star has enough content worth paying for. Perhaps they have to invest even more in investigative journalism.
- As Media said, the sale of Wagjag was a no-brainer as Workopolis will be. Workopolis will be a hard sale because its business is shrinking rapidly (thanks to Linkedin) and it has a joint-venture structure. The price will be low, but i hope for at least 5 million for Torstar's stake.
- Eyereturn is now in a temporary state of decline, too. Let's see what happens with this subsidiary, but this should also be answered in a transformation plan.
- Blue Ant is in good shape and expanding and growing rapidly. After the merger with Racat Group in May Torstar now holds 16% of the combined entity with sales of 200-250 million. I estimate this could bring in 40-50 million to Torstar in a sale as of today. This could be used for add-on acqisitions.
-What happens to other non-core assets like the Black Press stake, minority stakes in other start-up companies or real estate like Hamilton's Frid Street building worth possibly 10 million?
- Boynton said: "Cost cutting is not a transformation in itself..." They seem to reduce the pace of cost reductions (layoffs) and instead invest in the digital business. This decision will reduce restructuring charges in the near term and reduce cash burn for the next 12 months, but also shrink adjusted Ebitda in the coming year as long as they continue shrinking. It's OK to concentrate on the cash flow side, but this could backfire if Torstar doesn't stop to shrink till the end of 2018. Then they would have to restructure even harder in order to get costs inline with revenues. It looks like a risky proposition from the outside. But they could put my mind to rest if they have good arguments which would require more insight in the transformation plan.
- The Ebitda at Verticalscope was below my expectations but is still solid and they have very good free cash flow which will be used for further acquisitions. I estimate an adjusted Ebitda of 46 million at Verticalscope. With a 12 times EV/Ebitda and the current net debt I calculate a value of at least 3 dollars per Torstar share, incredible. Torstar's strategy with respect to its Verticalscope stake gets more and more clear and Torstar wants to hold on at least in the mid-term. Verticalscope recently got a 200 million USD facility (5 years) which means they plan to accelerate the acquisition pace and not only reinvest their cash flow. As always with leverage this could increase the risk profile of Verticalscope. In the second and third quarter Verticalscope used more than 30 million USD for acqusitions which could be an omen for things to come. And from yesterday another omen:
https://techvibes.com/2017/11/07/buy-and-sell-community-varagesale-acquired-by-verticalscope
This is a very interesting, but also risky acquisition. The risk is measured by the price Verticalscope paid. I suppose Verticalscope wants to monetize the engaged userbase of Varagesale and will massively downsize the employee count of Varagesale. I can't imagine they want to further invest massive sums in app development and marketing and go head to head with facebook marketplace etc. This would compromise the lean Verticalscope business model with very high Ebitda margins.
To summarize: With no debt and the pension liabilities gone with respect to cash flow Torstar is still very interesting from a risk-reward perspective. At the current stock price it is massively undervalued, but risks remain. I hope that they finally provide much more information regarding the tranformation plan.
I'm still optimistic and believe patience will pay off.
Regards