Post by
WeirdPhil on Aug 02, 2024 7:04am
Reitman's Value
There is a lot of deep value in this company. At the end of Q1, they held $116m of cash and over $100m of fully paid for Real Estate and that alone was worth more than the enterprise value of the company. However for this investment to work, the actual business has to be moving forward. As of year end, the company reported net income of almost $15m and ebida of $29.4m on $794m of revenue, but lower than the back to work Covid numbers of the previous year. Revenue, has been strong suggesting that their customers like what they are buying, but margins were weaker in 2024 reducing ebitda from $55m to $29.4m. (5.6% ebitda margins vs 3.7%). Those numbers are a challenge but even at these levels suggest compelling value.
Given that there are approx 49m shares (consisting of both classes) makes the company have a paltry enterprise value. However, if one took the leases out and capex - we could argue that the cash is down to $70m and the enterprise value of the company is $50m. Would you pay that for $29m of Ebitda and $15m of net income, plus the value of the real estate?
It is not unreasonable considering that both the 4th and 1st quarter were very good. In fact the 1st quarter was their best in over a decade despite being their weakest quarter of the year. It does speak to efficiences in the business that CCAA allowed them to acheive, so it stands to reason that we can see a decent 2nd quarter report in September, culminating with the all-important 4th quarter in December. Managment has taken steps to improve shareholder relations with confernce calls, hiring a IR firm and an NCIB in case the shares fall in price to lower levels.
The current weakness of the $Cdn a challenging factor as they buy goods in $US and sell in $Cdn, but they do hedge to some extent so we might get some reprieve.
Recession or weak consumer spending hasn't show up yet on the top line, but from a share price perspective, the success the shares had emerging from CCAA to $4.50/share its subequent fall to half that level has investors slowly throw in their towels. Also, its important to note that over the last decade this company has been a value trap and is now priced along that narrative.
In a more reasonable scenario, this company would be valued closer to $3.25 if we were to give it a 3x ebitda/ev valuation (does not include real estate). It is reasonable that they could achieve something closer to 5x (less than half the valuation of their peers) and would make the valuation closer to $4.50/share.
A few other notes. While alot of investors are demanding that the company do a Substantial Issuer Bid with their cash, pay a dividend, uplist to the TSX as value enhancers, I do not see these as anything other than a short term fix. The key to success IMO is for the business continue to surprise the 'street' or a potential suitor by growing rather than managing. I believe that this is occurring and we've seen two back to back signposts that they are doing a good job managing their business. While Penn might be a challenge, RW&Co is a potential growth engine and the stability of the Reitman's stores (over 50% of revenue) could follow a path to higher valuations.
Unless the business goes severly backwards, this is quite compelling. Time will tell.