Brief coverall
ELTA has a market cap of £137m and a NAV of £195m. It is currently in wind-up but has not been successful in realising its remaining trading assets. Based on what was written at the time either no offer was forthcoming or the offers were substantially below what management deemed the assets fair value. Other assets have been sold and the cash distributed to shareholders.
At £195m v £137m, there is a Margin Of Safety in the opportunity.
The NAV is made up of
£132M – TGI Friday
£28m Hotter Shoes
£7m – SPC
£2m – Sentinel
£6m – Other
£20m – Free cash
There is no debt in the top company though the operating companies do use debt as required.
The big issues are;
- Are the valuations reasonable?
- Is management frittering away the assets?
- Will realisations occur?
Taking these in steps;
a) At the half year we are given Operating Profit and EBITDA for the two biggest subsidiaries.
TGI OP Profit £14.2m, EBITDA £25.3m. Ratios of 9.3* (NAV/OP) and 5.2* (NAV/EBITDA). Whilst these do not seem particularly conservative I also do not think they are unreasonable. Particularly if we think mid rather than short term. I also did a bit of asking around and whilst I have not been in a TGI’s for some time those that had were positive about the experience.
Hotter Shoes Op Profit £0.6m, EBITDA £3.5m. Ratios of 46.7* and 8*. So very high on an OP basis. Though over £7.5m of the NAV was invested in Q1 2019 and the new MD was appointed in March 2019. Hotter originally cost £125m v the current £28m valuation. I know some who are reasonably positive about the product but rate their e-commerce fulfilment as amongst the worst. Non availability of product, wrong product picked and delivered, damaged product shipped. Given the investment being made and the new MD presumably changes are being introduced. Whether they are sufficient is yet to be seen.
SPC cost £9m originally. And is valued on a multiple of earnings. So given it has a value there must be earnings. However these are not broken out. Which is disappointing given the £7m valuation.
Sentinel originally cost £17m and is now valued at £2m. Supported (per the accounts) by a transaction risk adjusted multiple of earnings. I have no real idea what this means. But given its size provided investment is not made into it, it has become immaterial.
Over time management has proven adept at realising value from the portfolio. However what we have left is the parts that are hardest to sell at a valuation similar to management’s. As such I think it reasonable to query the values.
I think TGI’s valuation is well supported. I am less convinced by the other parts and apply a 75% of management’s valuation to these. This however reduces the overall valuation by less than £10m. This still gives a Mos of over 30%.
b) Management have not previously frittered away assets and have been reducing costs as the business unwinds. That said management have been investing in the portfolio and there has yet to be clarity on whether this is worthwhile.
C) Management have created realisations before and still seem committed to continuing this. However there are currently minimum internal valuations that they do not seek to go below. Both restaurants and retail are currently tough markets. There has been some M&A in restaurants in the last 12 months, but this has not involved ELTA.
I think at my revised valuations there remains significant value in ELTA shares. Particularly if the dividend (which is the principal method of returning cash to shareholders) is protected by being in a tax efficient wrapper. However the 30%+ upside is only sensible if management get on and deliver the realisations. 30% over one year quickly becomes 15% over two or 10% over 3 etc.
I hold a position and added earlier today.