BWX is a screaming buy from here

Helloall,

Justto advise, I only started looking at the company post the -46% on Thursday20/12/2018. 

Hereare my thoughts:

1. Since listing in Nov ’15, the company has traded in the range of a 14x–22x 1-yr fwd EV/EBITDA (Street multiple). If you believe they’ll hit $27m in EBITDA for FY19, which is the lower end of the revised guidance, the stock is currently trading on a 1-yr fwd EV/EBITDA of 8.5x, which in itself is quite compelling on an absolute basis. If they hit $29.5m for FY19 EBITDA (mid-point of guidance) and re-rate to the lower bound of their historical EV/EBITDA range, it gets you to an FY19e EV of $413m, which is 79%upside from the current price. Not saying it’ll get there, but rather that the cone of uncertainty in regards to valuation is wide.

1. Given that the management team is still cleaning up after the previous idiots, and hence have their hands tied with properly integrating the three businesses acquired over FY18, I don’t expect any further M&A over the N1Y, and hence there will be further capital structure value accretion for equity holders as FCF is allocated to paying down their current FY19e 2x ND/EBITDA.

 

1. Bain Capital made an unsolicited bid for the company, valuing it at $6.60 a share (349% upside from the current price) only seven months ago. I understand that Bain walking away mid-September from the deal after 12 weeks of DD is a pretty big red flag, but I’m equally inclined to believe they were just frustrated due to Mark East’s Bennelong (20% of register and the largest holder) and NN Insurance (East’s former employer and ~19% of the register) pushing for a higher bid when Bain’s bid was a 50% premium to the last close in May. 

 

1. So anyway, this $6.60 bid implies one of three things:

 

1. 1. Bain Capital are idiots and egregiously overvalued the company in the first place (unlikely given their track record, although they could have been unduly seduced by the China growth story)

 

1. 1. The intrinsic value of the company has deteriorated -80% over the space of seven months (this is possible – perhaps BWX is doomed to become another corpse in the aggressive roll-up graveyard. Two downgrades in the space of three months doesn’t exactly inspire confidence either)

 

1. 1. The company is seriously mispriced.

 

1. If we believe option c), I believe there is immense added positive optionality in potential M&A from either a middle-market PE shop, a Chinese buyer or a strategic buyer like L’Oréal who has indicated they want to enter this space in Australia.

 

1. Additionally, there’s a new management team with a new CEO, CFO and significantly revamped middle-manager ranks. The CEO is still negotiating KPI’s for his incentive plans, which provides confidence that the revised guidance to $27 – $32m from $40m is excessive, and was implemented to effectively ‘kitchen sink’ and allow the CEO to get a good price for his options.

 

1. So in conclusion, we have a company that:

 

1. 1. That has undergone significant ‘one-off’ disruption over the L1Y (three acquisitions, a MBO attempt and a CEO & CFO change in the middle of it)

 

1. 1. Cheap on almost every metric.

 

1. 1. 13% short interest (16m shares / total of 124m) on a stock that trades on ~500k average shares a day. That is 32 days to cover. Any positive news could result in an extra-terrestrial short squeeze.

 

1. 1. Serious M&A optionality

 

1. 1. Restructuring of direct China sales team to consolidate pricing (down from 10 partners to 3). Similar to BAL’s actions in Jan ’17.

 

1. 1. No major recent insider selling suggesting CEO’s comments on recovering momentum are genuine (I would like to see some buying now though!)

 

1. Risks:

 

1. 1. They will most likely have to capital raise in the case of another downgrade.

 

1. 1. NN Insurance / Bennelong become becoming sellers and are an overhang on the stock.

Let me know your thoughts.

Thanks

Icahn