Compounding in Canada
Aimia (AIM.TO):
Aimia is a Canadian holding company trading on the Toronto Stock Exchange. The company has some interesting assets, and yet we were able to acquire ownership in the company at a price below liquidation value. The company is managed and controlled by Chris and Phil Mittleman. The duo founded Mittleman Brothers Investment Management at the end of 2002, and have achieved a very good track record over time. Importantly, Aimia is also sitting on major tax loss carryforwards. I expect the Mittleman Brothers to compound the earning power of Aimia at an acceptable rate in the future, which will allow Aimia to take advantage of its tax credits. Aimia will be a solid vehicle to compound our capital in the future due to the modest valuation, quality management, and existing assets in place.
Mittleman took over Aimia in 2020 after buying a large amount of stock in the open market. Aimia makes up 20% of the portfolio for clients of Mittleman Brothers Investment Management. After fees, Mittleman has compounded its portfolio for clients at a rate of 12.7% per year over its almost 19 year history. This has outperformed the S&P 500, which compounded at a rate of 11.0% over that same period. A million dollars invested with Mittleman at the end of 2002 would be worth $9.4 million today, compared to $7.1 million if invested in the S&P 500.
Currently, Aimia is selling for $358.9 million based on its stock price in early November 2021. The firm has $70.1 million in cash and short term investments on the balance sheet. The book value of Aimia is $333.8 million, and is made up of very liquid assets in the form of cash and investments. However, certain investments are on Aimia’s balance sheet at substantial discounts to their fair market value. An example of this is a company called PLM, which is on the balance sheet at $36.5 million but I believe soon will be sold for over $400 million. If that estimate is correct, then this one investment is worth more than the valuation we paid to own Aimia.
Aimia owns 48.9% of PLM, which operates a loyalty program for Aeromexico called ‘Club Premier’. Aeromexico, one of the largest airlines in Mexico, owns the rest of PLM. Airline rewards programs are the crown jewel of many airline companies, and are major profit centers for them. It is an asset light business that receives cash up front in the form of deferred revenue. It also helps airlines with customer retention. After struggling with the effects of Covid and the drop off in travel globally, Aeromexico filed for bankruptcy. PLM and Club Premier were never threatened with bankruptcy, as PLM is a separate organization from Aeromexico and has remained a very healthy business.
Prior to going bankrupt, Aeromexico and Aimia had a deal in place giving Aeromexico the option (but not the obligation) to buy the rest of PLM for $400 million or 7.5x adjusted EBITDA, whichever was greater. PLM reported an adjusted EBITDA of $14.1 million in the latest quarter, which would be an annualized figure of $56.4 million. This is impressive given the difficult position the airline travel industry has been in recently. At 7.5x adjusted EBITDA, Aeromexico would have to pay $423 million to acquire the rest of PLM. It appears likely that Aeromexico will end up buying PLM in the near future.
Aeromexico filed their plan with the courts to emerge from bankruptcy as a newly capitalized corporation. It was clear in those filings that acquiring PLM is part of that plan, as Aimia and PLM are mentioned numerous times. After the bankruptcy plans were made public, Aimia confirmed that they are in discussions with Aeromexico regarding a potential transaction, but that nothing is finalized. Aeromexico’s next court hearing is December 13th, and hopefully we will learn more at that time.
Aimia already has a pile of cash on their balance sheet ready to be put to work. After Aeromexico emerges from bankruptcy, I believe Aimia will receive even more cash. This should put Aimia’s cash pile above the price we had to pay to acquire ownership in the business. Mittleman will put that cash to work eventually, resulting in greater future earning potential for the corporation. Additionally, Aimia has significant tax credits that will be able to be used to shield the company from taxes for quite some time. These tax credits are the result of historical losses from a previous management’s tenure. In total, these tax credits amount to nearly $600 million. The majority of the tax credits have expiration dates ranging from 2030 to 2040, so Aimia has some time to spare. This makes the company an interesting vehicle for compounding capital in the future.
Aimia has further ownership in solid assets besides PLM, but I don’t really have a good idea on what their valuation should be. I am comfortable with that though because we are getting these assets for free. Aimia owns a 10.85% stake in Clear Media, which is the largest outdoor advertising company in China. It used to be publicly traded, but recently went private. Clear Media has some growth potential, and the stake could be valuable over time. Aimia paid over $60 million for the stake in Clear Media last year.
Aimia also owns 48.8% of Kognitiv Corporation, which is a business-to-business technology company. Additionally, it recently acquired a 12.3% stake in Trade X, which is an online platform for the cross border selling of automobiles. This is more of a venture capital type investment, as Trade X is still a very young company. However, it has some serious upside potential as it is growing fast and is already profitable. Aimia used to own a stake in the airlines reward program for AirAsia until the airline bought back ownership in the company. In exchange, Aimia now owns some AirAsia stock. This is a publicly traded company, and the AirAsia investment was worth $30.7 million for Aimia at the end of September.
Aimia is selling below liquidation value, but the reason I am interested in the business is because of its potential to compound over the long term. The low valuation will play a role in our rate of return though. Most importantly, the company has liquid assets, tax credits, and a management that I believe will make reasonable investment decisions for shareholders over time.
*Disclaimer:
This newsletter has been prepared for informational and educational purposes only, and solely represents our views with respect to certain securities, markets, and other financial matters. It should not be used as the sole basis of any investment or financial decision, and should be construed to render any legal, tax, or other professional advice. The statements made herein are solely based on our research, and any forward-looking statements should not be construed to guarantee any particular outcome. All investment strategies involve risk, including our strategy of seeking out a concentration of undervalued companies in the pursuit of potential long-term appreciation. Past performance of an investment is no indication of its future returns, we make no guarantees whatsoever about any future investment returns.
Investment advisory services offered by McDonough Investments, LLC, an investment adviser principally registered in the State of Michigan and registered or exempt from registration in other jurisdictions as applicable.