We have owned Aimia for a little while now, and I wrote a brief summary of the company in the past. The firm is sitting on a large cash pile after selling its stake in a business that operated an airlines rewards program. The company also has tax credits from losses in prior years. The firm is now putting some of that cash to work, as it announced the acquisition of Tufropes - a manufacturer of ropes and nets based in India.
The stock price of Aimia dropped 10% on the day this acquisition was announced. Maybe the rope making business didn’t sound too exciting to the market. Most of the reactions I saw from investors on Twitter seemed to be laughter toward Aimia for paying this valuation for such a boring business located in India. I have a different view from this. It will take years to know for sure if this was a good acquisition or not, but this transaction does provide a look into just how cheap Aimia’s stock is at the moment.
The Tufropes Acquisition
Aimia paid $249.6 million for Tufropes. It looks like the firm will earn $23.4 million of EBITDA on $130 million of revenues for the fiscal year ending 3/31/23. Tufropes is debt free (so far), and shouldn’t have to pay any taxes for a long time since Aimia is sitting on hundreds of millions of tax credits. This means that EBITDA happens to approximate after-tax net income for Tufropes once it is within Aimia since there would be no expense for interest or taxes. Management claims the business has minimal capital investment requirements, but it is too early for me to have any data to understand maintenance capex needs. If capital investment requirements are minimal though, then EBITDA could approximate not only net income but free cash flow as well. That is pretty rare.
Management highlights the fact that Tufropes has compounded its revenue at a rate of 20% per year since 2001, and they think they have room to improve margins. Time will tell. What interests me the most is that Aimia paid $249.6 million for Tufropes, while shareholders can buy Aimia itself for just over $300 million. This still appears to be an interesting situation from the point of view of an Aimia shareholder.
Aimia’s Valuation
Let’s take inventory of what Aimia shareholders own. The company had $521 million of cash on the balance sheet, but spent just under half of that cash pile on this recent acquisition. Aimia now fully owns Tufropes, and will have at least $271.4 million of cash remaining. They probably will use a little bit of leverage in the transaction eventually, meaning even more cash could be available in the future. It will probably spend that cash on one or two more acquisitions like Tufropes. The firm has a portfolio of publicly traded stocks worth $52.5 million. They also own stakes in private companies. Aimia owns 10.85% of Clear Media, an outdoor advertiser based in China. The stake cost $76.2 million back in May 2020. The company owns 10.8% of Trade X as well, which is a cross border car dealer platform.
At $3.60 per share, the stock price at the end of 2/1/23, Aimia had an overall valuation of $304.6 million. Aimia spent less than half of its cash pile on Tufropes. If it can find one more acquisition exactly like it, then the financials of Aimia would start to look really appealing. Since the market seemed unimpressed with the Tufropes acquisition, then maybe it won’t be too difficult to find another unimpressive candidate exactly like it.
Management expects Tufropes to earn $23.4 million of EBITDA this year. EBITDA would double to $46.8 million if they made an identical acquisition in the future. Management might add leverage, but for now interest expense is zero. They shouldn’t have to pay taxes due to the tax credits. Aimia will have to pay preferred dividends though, which amounted to $12.6 million in 2021. If we subtract the preferred dividends from this projected EBITDA figure, then this would mean after-tax net income of $34.2 million for Aimia just from wholly owned businesses. This would be an immediate earnings yield of 11.2% for the company based on the $304.6 million valuation. This is a solid yield for real cash flow that can be reinvested in many different ways, especially since it gives Aimia no credit for its other assets.
Aimia has a portfolio of stocks worth $52.5 million. The company’s stakes in Trade X and Clear Media are carried at $85.3 million and $62.3 million, respectively. This is a total of $200.1 million. If you give Aimia credit for these assets at carrying value, then the company only has a valuation of $104.5 million left to be accounted for. The $34.2 million of net income would amount to a yield of 32.7% on this $104.5 million valuation. Tufropes has a history of growth, and the holding company structure of Aimia opens the door toward additional reinvest options, so there is a chance this 32.7% yield could grow over time.
Some have argued that Aimia should have just repurchased stock or paid a dividend instead of acquiring Tufropes. I disagree. It is true that Aimia is selling for a discount, while you could argue Tufropes was purchased at a premium valuation. The stock is selling below the level of cash on hand, so in theory they could buy back all of the stock and still have some cash leftover. This might provide for a short term little bump in stock price, but I’m just not sure that stock buybacks alone would close the valuation gap forever. This means the repurchase option would benefit traders and not long term holders. I’d be less interested in owning Aimia for the long term if it just held a portfolio of stocks, and I doubt there would be much demand from other investors either. This would lead Aimia back to selling for a discount eventually. Additionally, the special dividend option would be tax inefficient. Not only would shareholders pay a tax on their dividends, but Aimia wouldn’t be able to put their tax credits to work. I’d rather Aimia own businesses that spit out free cash flow each year, reinvest their earnings, and compound over time.
The stocks that perform well with regular share buyback programs have a very good business underneath it all. There has to be constant free cash flow being generated in order to continue repurchasing shares each year. Prior to the Tufropes acquisition, Aimia didn’t have that type of cash cow. It is too early for me to judge the quality of Tufropes, but I’m happy to see Aimia own businesses that have the potential to compound earnings over time instead of trying to get a quick jump in the stock price over the short term.
Basically, what I am saying is that Aimia has a pretty low hurdle to clear due to its valuation. They had $521 million of cash on hand and are only selling for $304.6 million. If the company can earn a 10% return on that cash, then this would amount to a 17.1% return on its valuation. This is an opportunity to leverage discounted capital. This type of yield can be attractive, especially if it’s in the form of real free cash flow from wholly owned businesses with reinvestment opportunities.
Preferred Stock
The valuation figures I mentioned didn’t factor in the preferred stock that Aimia is funded with. In my view, preferred stock is like debt that never has to be repaid. You do have interest payments in the form of preferred dividends, but you have the flexibility to pause your interest payments if times get tough. The catch is that the interest rate on preferred stock tends to be higher. Aimia is currently paying 4.8% on its Series 1 Preferred and 6% on its Series 3. The payments are more comparable to debt from a cash flow perspective though, as Aimia just has to pay the preferred dividend instead of both interest payments and annual principal repayments. The preferred dividends are very real expenses, so I definitely account for that when thinking about the future earning power of Aimia. I just don’t factor in this safe form of leverage when thinking about the valuation I am paying, unless I get the feeling management will use excess cash to buyback the preferred stock.
Preferred stock is a form of financing that Lloyd Christmas would approve of. Is that not the standard that corporate finance departments strive for?
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