RE:COVERAGE FROM THE U.S.Sent to the Analyst:
Hi Marco,
I just read your analysis of CIBT and am trying to make sense of the valuation. For example, in the mid point, you use an EBITDA multiple of 8x (12.5% terminal yield) and 19x (5.3% terminal yield) for 2024 estimates but then discount that number by 10%/a and 12%/a to 2020, respectively. It seems odd to penalize GEC for 2020-2024 more harshly than post 2024? Post 2024 is very unknown.
I also wonder if using REITs to value GECH is the right approach. GECH isn't really a REIT, they seem to be more of a builder. They make money through building, operationalizing, and selling managed student housing to investors. They collect fees and profit from the sale, then reinvest into other properties. They also make some money on the back end to manage the property for a term. They seem to hold onto the properties until the rents are stable. So I think we need to compare GECH's cash flow from property management to a property management firm. The construction side needs to be compared to a builder, for example Wall financial who builds condos in Vancouver. The cash flow from assets held until sale can be discounted against the REIT comps.
For example, GECH is projecting .15 eps in 2020(e), .25 2021(e), .60 2022(e), .25 2023(e). The NPV of those earnings using a heafty 20% discount rate is $0.70, not including any terminal value. Using a 0.15 steady state earnings with a 20% discount rate for the terminal value, that's another $0.36 in value today. Which are very very pessimistic assumptions if GECH reinvests all its prior earnings. That would be $1.06 value as a minimum. If you use 12% discount rates with the same earnings assumptions, you are looking at a GECH valuation of $1.82. But that is a very low terminal value assumption using 0.15.
So I guess I'm just trying to understand the valuation approach. Is GECH a builder, a REIT, a Management company, or all three? Using REIT comparisons, are we missing development fees and earnings from capital recycling, which is the primary business model CIBT is applying?
Cheers,
TickBomb