StreetInsider, TRS may have received a takeover overture from American Industrial Products (amid renewed activist pressure from Barington Capital); fair value remains $32 per share   

Yesterday afternoon, StreetInsider reported TriMas may have been approached about a potential takeover by privately held American Industrial Products, which is a producer of filtration solutions, including extrusion packs, gaskets & seals, laser filters, cylinders, auto screens as well as the related-spare parts.

Per the report, TRS does not respond to rumors or speculation while American Industrial Products did not respond for comment.

For our part, considering American Industrial Product’s focus we would not be surprised by their interest in TRS’s Aerospace business (where products include fasteners, bolts, rivets, screws, & machine parts) but are somewhat skeptical on interest in the company’s entire portfolio, which includes a sizeable Packaging business (i.e., more than 50% of TRS’s consolidated sales and adj. EBITDA).

For some broader context, recall, on July 28^th, just prior to TRS reporting disappointing 2Q 2024 results, which precipitated a guidance reduction, Barington Capital, currently a ~1.5% holder (up from an initial 1.0% disclosed in December 2023), renewed its public calls for TriMas to either sell its Aerospace division and/or the entire company in an effort to remedy what the investor contends is TRS’s “long-term share price underperformance”. (Recall, in February 2024, following Barington’s public suggestion in December 2023, TRS disclosed efforts to sell its relatively small Arrow Engine business, which, if successful, will mark the company’s exit from the oil & gas sector.)

On the aforementioned guidance front, on the back of pronounced weakness at the Specialty Products segment, which was only modestly profitable in 2Q 2024 (on ~$30 million of sales), TRS lowered its full year 2024E adj. EPS outlook to $1.70-$1.90 (from $1.95-$2.15) on a consolidated sales growth outlook of 4%-6% (previously 5%-8%; see Exhibit 1 on page 2).

By segment, management forecasted top-line growth of 9%-10% and 18%-22% at Packaging & Aerospace, respectively (versus prior commentary of 5%-9% and 14%-18%) with adj. EBITDA margins of 21%-23% and 18%-19% (compared with prior commentary calling for margins of 21.5%-23.5% and 16%-18%).  Specialty Product segment sales are now expected to be down 25%-30% (compared with prior guidance of down 4% to up 1%) with a segment adj. EBITDA margin profile of 10%-14% (versus prior outlook of 17%-19%; see Exhibit 2 on page 2). 

Our base case fair value estimate for TRS remains $32 per share, reflecting a blended multiple of ~9.0x on 2025E adj. EBITDA of ~$173 million, projected net debt of ~$319 million and a fully diluted share count of ~40.1 million (see Exhibit #3 on page 3).

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SKF Plans to Separate and List its Automotive Business in 1H 2026

On September 17, 2024, SKF AB (SKFB SS) announced its intent to separate (in 4Q 2025) and subsequently list its Automotive Business on the Stockholm NASDAQ in 1H 2026.  The separation, which will be put to a shareholder vote at the 2026 Annual Meeting, is expected to meet Lex Asea requirements, precipitating the transaction being exempt from Swedish tax. For some broader context on this announcement, it is noteworthy to recall that roughly 8 years ago, under a prior leadership team, the company explored a similar separation but decided against it given the potential dis-synergies from, among other things, the overlap of research & development, production and supply chain capabilities.  Subsquently, in January 2021, Rickard Gustafson assumed the role of chief executive (replacing Alrik Danielson who had served in that role since 2015) who in early-2022 announced a “new strategic framework” for the company aimed at achieving a more de-centralized operating model and increasing the autonomy of its Automotive business. Later that year, in August 2022, activist-investor Cevian Capital disclosed a ~5% stake (currently ~8.4%) reportedly seeking a simplification of SKF’s organizational structure (akin to its prior efforts at ABB and CRH).  Upon today’s conference call, management indicated its current thinking is that any potential dis-synergies will be overwhelmed by the value created by establishing two independent standalone companies (ostensibly though the potential re-rating of its higher margin Industrial business) as well as the potential for greater management focus and more specific capital allocation to accelerate growth and margins. 

Currently, SKF reports two segments: 1) Industrial (71% of consolidated sales and ~88% of adj. EBITDA), which supplies a range of ball bearings, seals and lubrication systems to customers in, among others, the railroad, heavy industry and industrial distribution markets; and 2) Automotive (~29% of consolidated sales and 12% of adj. EBITDA), which provides bearings and seals to electrical and commercial vehicle manufacturers.  In terms of financial guidance, for full year 2024, management expects, on a consolidated basis, a low single-digit organic sales decline, year over year, with a tax rate of 26% and capital expenditures of ~SEK 5 billion.  (For 3Q 2024 specifically, the company pr12.5% in 2023ojects organic sales will be roughly flat year over year with currency fluctuations negatively impacting operating profit by ~SEK 150 million.)  Longer term, SKF targets a consolidated sales growth of ~5% (versus ~4% in 2023), an operating margin of 14% (versus 12.5% in 2023), a net debt to equity ratio of less than 40% (compared with ~14% in 2023), ROCE of ~16% (versus 15.4% in 2023), and a dividend pay-out ratio of ~50%.

In terms of valuation, SKF could be compared with Schaeffler AG (SHA GY), NSK Ltd. (6471 JT), Applied Industrial Technologies (NYSE: AIT), The Timken Co. (NYSE: TKR), Trellborg (TRELB SS), NN, Inc. (NASDAQ: NNBR) and RBC Bearings (NYSE: RBC), which trade at  ~10x 2025E EV/EBITDA (albeit in a broad range, seemingly based on market focus, of ~3.5x-18.5x).  Considering management’s guidance, long-term targets, consensus estimates and our sense of industry trends, applying a ~10x multiple to projected 2025E Industrial segment EBITDA implies value of ~ SEK 122 billion while applying a low-end multiple of 3.5x to 2025E Auto segment EBITDA implies value of nearly SEK 7 billion.  Accounting for net debt and minority interest yields a preliminary fair value estimate of ~SEK 98.5 billion or ~SEK 216 per share (based on a diluted share count of ~455.5 million).

NR completes the sale of its Fluid Systems business, which should help focus investors on its high margin/growth specialty rental business; fair value estimate remains $10 per share

On Friday, September 14th, after the market close, Newpark Resources announced it had completed the sale of its Fluid System (FS) business to private-equity investor SCF Partners.

The base sale price for the FS business was $127.5 million, reduced by $43 million of lower conveyed working capital (compared to the 2023 average), accrued taxes & liabilities, and $10 million of outstanding debt.

Net transaction consideration was $56 million, reflecting $70 million of cash received at closing, net of $19 million of foreign cash conveyed and a $5 million seller note.

Based on the above, NR expects the transaction will generate ~$7-$10 million of U.S. federal net operating losses (NOLs) and carryforwards, which will add to its existing tax-benefit base of ~$20 million.

In conjunction with the transaction, NR reduced the size of its U.S. asset-based loan (ABL) facility to $100 million (from $175 million), of which ~$45 million is outstanding (offset by $40 million of domestically housed cash, as of September 13th).

In terms of capital allocation priorities, NR will be focused on organic growth investments in its composite matting rental fleet (which, we note, has historically generated 25%-plus cash-on-cash returns), opportunistic/complementary acquisitions (in adjacent worksite access markets), and buybacks through its $50 million share repurchase authorization, which at current prices represents ~8% of the common stock. (Notably, while the company did not repurchase any shares on 1H 2024 prior to the commencement of its strategic review NR repurchased nearly 12% of its stock in 2022-2023.)

In terms of guidance, recall that on its 2Q 2024 earnings call NR maintained its initial full-year guidance for the Industrial Solutions segment, which called for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%. Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E (of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet, which again historically generates 25%-plus cash on cash returns). While we see guidance as achievable, we would simply note the September-quarter is historically NR’s seasonally weakest (as utility maintenance projects tend to slow during the hotter months.]

For our part, the initial thesis was that aside from the incremental financial flexibility/opportunity for capital returns provided by a successful transaction for Fluid Systems we estimated a deal (even despite its somewhat underwhelming purchase price) could precipitate a significant re-rating of NR shares toward a valuation more in-line with specialty rental & services peers as opposed to a legacy oilfield services provider (i.e., high single-digit to low double-digit multiples versus low- to mid-single digit-type valuations). To the latter point, we note that NR intends to re-brand itself in the coming months and pursue an industry reclassification that better reflects its new status as a pure-play specialty rental business.

Our base case fair value for NR remains ~$10 per share based on a 10.5x multiple on 2025E adjusted EBITDA, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).

PCS Research Group welcomes and encourages your feedback. Please feel free to call us if we can be of service.

Jacobs Sets September 27^th Distribution Date for the Amentum Spin-Off/Merger

• On September 13, 2024, Jacobs Solutions Inc. (NYSE: J) announced that the spin-off of its Critical Mission Solutions (CMS) & Cyber Intelligence (CI) businesses, which will simultaneously merge with privately held Amentum (AMTM) in a Reverse Morris Trust (RMT) transaction, will be completed after the market close on Friday, September 27, 2024. Shareholders of record on September 23^rd are set to receive one share of AMTM for every one share owned of J. 
• So-called “when-issued” (WI) trading for Amentum, which will trade on the New York Stock Exchange (NYSE), is expected to begin on (or about) September 24, 2024 (under the ticker AMTM WI) with “regular-way” trading beginning on Monday, September 30, 2024.  Following completion, post-spin J will continue to trade “regular-way” under the NYSE ticker J although on (or about) September 24^th it is expected that there will be two avenues to trade Jacbos common stock (J and J WI); to that end, shareholders that sell shares of J from the record date through the distribution date will relinquish their right to receive shares of Amentum while shareholders selling shares in the so-called “ex-distribution” market, under the ticker J WI, will be selling their Jacobs stock while retaining the right to receive shares of AMTM.  (Additionally, shareholders selling in the “when issued” AMTM WI shares will be selling their right to receive the distribution of AMTM shares while retaining their Jacobs shares.)
• As previously announced, immediately upon completion of the transaction, Jacob’s shareholders will own ~51% of Amentum with Jacobs’ owning 7.5% and an additional 4.5% of Amentum shares being placed in escrow as a continent consideration (to be released to shareholders depending on the achievement of certain F2024 operating profit targets with the first 0.5% being delivered to Jacobs and the remainder, to the extent required/earned, being earmarked for the company and its shareholders).  All told, Jacobs shareholders are ultimately expected to own 58.5%-63% of Amentum.   
• Our Sum-of-the-Parts (SOTP) valuation for Jacobs Solutions is based on the derived valuations for both RemainCo (J) and CombineCo (AMTM). This includes the midpoint ownership in CombineCo and the retained equity stake within RemainCo. The Exhibit below shows that the midpoint of the SOTP valuation—14x EV/2025E EBITDA for RemainCo and 11x EV/2025E EBITDA for CombineCo—comes out to $143. This is roughly where Jacobs Solutions has recently been trading, in the mid-to-high $140s. In other words, the current market valuation for Jacobs aligns with the assumed valuation ranges for the two companies, post-separation.
• Broadly, we think the upcoming spin-off of Jacobs Solutions into two focused companies mirrors many characteristics of successful past spin-offs.  To that end, the high-growth, higher-margin business will be listed independently and is expected to achieve a higher valuation over time as it establishes itself as a leader in the infrastructure engineering and technical solutions sectors, bolstered by strong secular tailwinds in its markets. Meanwhile, the lower-growth, lower-margin government services business will benefit from increased scale, diversification, and a renewed focus on higher-margin, value-added projects, positioning it to potentially catch up to its better-valued peers. That said, our current sum-of-the-parts (SOTP) valuation for Jacobs Solutions does not suggest a significant upside, in and of itself, ahead of the impending separation. However, with the usual shareholder turnover that could be expected post-spin-off, we think investment opportunities are likely to arise post-spin for both short-term and long-term investors.  Please see the Spin-Off Report dated September 6, 2024, for more information.

Fortive to Spin-Off its Precision Technologies Business

On September 4, 2024, after the market close, Fortive Corporation (NYSE: FTV) announced its Board of Directors would pursue a tax-free spin-off of its Precision Technologies (PT) business from its Intelligent Operating Solutions (IOS) and Advanced Healthcare Solutions (AHS) businesses. The company expects the transaction will be competed in 4Q 2025, subject to customary closing conditions, including the receipt of a private letter from the Internal Revenue Service (IRS), an effectiveness declaration for its Form 10 filing by Securities & Exchange Commissions (SEC) as well as final approval from the Board.

FTV, which was itself spun-off from Danaher Corp. (NYSE: DHR) in 2016 and subsequently completed the spin-off of Vontier Corp. (NYSE: VNT) in October 2020, currently operates three business segments: 1) Intelligent Operating Solutions (43% of consolidated sales in 2023 and ~49% of adjusted EBITDA); 2) Precision Technologies (35% of 2023 sales and 33% of adj. EBITDA); and 3) Advanced Healthcare Solutions (22% of consolidated sales in 2023 and ~18% of adj. EBITDA). In conjunction with the spin-off announcement, FTV reaffirmed both its 3Q 2024 and full-year 2024 guidance, which we note it had narrowed following 2Q 2024 results. Specifically, for 3Q 2024, FTV expects consolidated sales of ~$1.55 billion with net and adjusted earnings per share of $0.63-$0.66 and $0.92-$0.95, respectively, while for the full-year the company projects consolidated sales of $6.25-$6.3 billion with net and adjusted diluted EPS of $2.68-$2.74 and $3.80-$3.86, respectively. (For context, following 1Q 2024 results FTV increased its full-year outlook to $6.35-$6.43 billion in sales with adj. EPS of $3.77-$3.86 from its initial outlook of $6.4-$6.5 billion and $3.73-$3.85 per share, respectively.) Anecdotally, management expects to outline more segment specific guidance at separate investor days tentatively planned for early/mid-2025.

In terms of leverage and capital allocation, management indicated that it intends to use ~75% if the free cash flow generated between now and the spin toward share repurchases and while not finalized the current plan is to set both companies up with similar, investment-grade credit ratings and leverage ratios in the ~1.4x-1.7x.

In terms of post-spin leadership, upon completion of the transaction, James Lico will retire as president & chief executive (CEO) and the current head of the IOS business, Olumide Soroye, will take the helm at Fortive while Tami Newcomb, the current head of PT, will assume the chief executive role at SpinCo.

Aside from the standard rationale of increasing strategic focus, reducing complexity, improving capital allocation and allowing investors to better focus their investment dollars, management indicates its thinking that the transaction will highlight RemainCo’s ~50% recurring revenue base (and ability to growth through M&A) as well as SpinCo’s leverage to key end-markets with long-term secular/organic growth prospects (i.e., mission critical technologies in test & measurement, specialty sensors and aerospace & defense subsystems).

In terms of valuation, Intelligent Operating Solutions (IOS) could be compared with Ametek, Inc. (NYSE: AME), Keysight Technologies (NYSE: KEYS) and Rockwell Automation (NYSE: ROK), which trade at nearly 17.5x 2025E EV/EBITDA while Advanced Healthcare Solutions (AHS) could be compared with Steris PLC (NYSE: STE), which trades at ~15.5x. Applying peer multiples to each segment’s respective 2025E EBITDA forecasts yields a combined (i.e., IOS & AHS) value of ~$22 billion. Precision Technologies (PT) could be compared with Keysight Technologies and Zebra Technologies (NASDAQ: ZBRA), which trade at nearly 17x 2025E EV/EBITDA (although we would note that when Emerson acquired National Instruments in October 2023 the purchase price represented ~20.4x and 18.7x 2023E and 2024E consensus estimates, respectively). Applying a 16.5x multiple to our 2025E segment EBITDA forecast implies segment value of nearly $5.5 billion. Accounting for corporate costs, capitalized at the weighted segment average, as well as net debt yields an initial, pre-spin, sum-of-the-parts value of ~$26.65 billion or ~$77.50 per share (based on a diluted share count of ~345 million).

Topgolf Callaway to Separate its Equipment & Entertainment Businesses

On September 4, 2024, after the market close, Topgolf Callaway Brands Corp. (NYSE: MODG) announced its Board of Directors intended to pursue a separation of its Callaway and Topgolf businesses into two publicly traded entities. At least initially, the company is envisioning the transaction as a tax-free spin-off although management will continue to evaluate a range of options to maximize shareholder value (i.e., a sale). In pursuit of the contemplated transaction, MODG will look to spin off at least 80.1% of Topgolf, a key threshold in qualifying for tax-free status, but is considering retaining a “limited ownership for a “period of time”.) Subject to myriad closing conditions, including a private letter from the Internal Revenue Service (IRS), an effectiveness declaration for its Form 10 filing by the Securities & Exchange Commissions (SEC) as well as final approval from the Board, MODG expects the transaction will be completed in 2H 2025.

MODG’s Callaway business, which primarily provides golf equipment (i.e., clubs, where it is the #1 player, balls, where it is #2, & accessories), generated ~$2.45 billion in trailing 12-month (TTM) sales with adjusted EBITDA of ~$268 million while Topgolf, which was acquired in March 2021, operates golf-related entertainment venues (i.e., gamified driving ranges), comprised ~$1.8 billion of TTM sales with adj. EBITDA of ~$333 million (or $245 million, excluding VFCI or cash venue financing interest). For 2024E, management has guided Callaway segment sales of $2.4-$2.5 billion with adj. segment EBITDA of $260-$280 million while Topgolf is projected to generate segment sales of ~$1.8 billion with adj. EBITDA of $310 million (or $210 excluding VFCI). [Note: 2024E guidance does not include $25 million and $50 million of expected net dis-synergies and transaction expenses, respectively.]

Beyond the traditional rationale for a spin of increasing strategic focus, reducing complexity and improving capital allocation, among others, we would highlight that this announcement comes in the broader context of MODG’s stock having been under significant pressure in recent months (off a high around $16 per share), partly driven (as evidenced by analyst commentary on recent quarterly conference calls) by declining/disappointing same store sales (SSS) trends at Topgolf (i.e., SSS was up 7% in full-year 2022, 11% in 1Q 2023 and 1% in 2Q 2023 before turning negative in 3Q 2023 and 4Q 2023 with declines of 3% before accelerating to 7% and 8% declines in 1Q 2024 and 2Q 2024, respectively). To that end, the company announced a strategic review on its 2Q 2024 earnings conference call (in early-August) to evaluate “both organic and inorganic”, including a potential spin, to improve performance and maximize shareholder value. At the time, management indicated that “we have been disappointed in our stock performance for some time, as well as the more recent same venue sales performance. As a result, we are in the process of conducting a full strategic review of Topgolf”. (Anecdotally, the company thinks that recent trends are largely driven by cyclicality as well as a “post-Covid reversion” and that it sees the long-term sales store sales trends for the business as being positive. That said, management acknowledges that a return to consistent positive comparisons will likely “take some time.)

Upon separation, Chip Brewer and Artie Starrs, are expected to continue leading Callaway and Topgolf, respectively. (As well, the two companies will maintain an on-going commercial relationship with Callaway remaining the exclusive provider of equipment to Topgolf venues.) While not finalized, commentary on management’s conference call was that Callaway would likely retain all company debt and that Topgolf will be spun out debt-free (other than its venue-related financing obligations) with roughly ~$200 million in cash. Despite the lopsided allocation of debt, management plans, via a combination of free cash flow and the monetization of its retained stake in Topgolf, to reduce parent-company leverage to 3.0x or lower within 12-months following the separation transaction (which it thinks will mitigate the risk of any potential downgrades to its investment grade by the rating agencies).

In terms of valuation, as mentioned earlier Calloway is the #1 player in clubs and #2 in balls (behind Acushnet), could be compared with golf-focused public-players, such as Acushnet (NYSE: GOLF) and Mizuno (8022 JT), as well as, to a lesser degree, a broader set of sporting good peers, such as Thule Group (THULE SS), Yeti Holdings (NYSE: YETI) and Amer Sports (NYSE: AS), which, on average trade at ~11x 2025E EV/EBITDA (in a range of 8.5x-12x). Applying a slightly discounted peer multiple of ~10.0x, reflecting the post-spin entities leverage profile, to forecasted 2025E Calloway segment EBITDA implies a valuation of $2.7 billion. Standalone Topgolf, for its part, could be imperfectly compared with a range of entertainment/leisure concerns, including Six Flags, which is in the process of being acquired by Cedar Fair (NYSE: FUN), Life Time Group (NYSE: LTH), MSG Entertainment (NYSE: MSGE), and Vail Resorts (NYSE: MTN), which trade at ~9.0x 2025E EV/EBITDA (in a range of ~6.0x-12x). Applying a lower-end multiple of ~6.5x, which we think is warranted awaiting more clarity of the resiliency on same store trends, implies Topgolf segment value of ~$1.95 billion. Accounting for projected net debt of ~$2.35 billion yields an initial, pre-spin, sum-of-the-parts value of ~$2.3 billion or ~$12.50 per share (based on a diluted share count of ~185 million, based on management’s guidance).

BAX Agrees to Sell its Vantive Kidney Care Business to Carlyle for $3.8 billion; Drop Coverage Effective Immediately

• On August 13, 2024, before the market open, Baxter International (NYSE: BAX) announced a definitive agreement to sell (rather than spin) its Vantive Kidney Care business to Carlyle (NASDAQ: CG) for $3.8 billion (of which ~$3.5 billion will be paid in cash).
• Upon closing, which is expected in “late 2024 or early 2025”, BAX expects to receive net after tax proceeds of ~$3.0 billion.
• Following the transaction, standalone Baxter is targeting operational sales growth of 4%-5% annually and an operating margin of ~16.5% in 2025.  Additionally, the company expects to achieve its investment grade leverage target of less than 3.0x by the end of 2025.
• For context, in January 2023 Baxter announced that it would spin-off its Kidney Care business into a standalone publicly traded company; subsequently, in March 2024, following reports in the business press, management disclosed in an 8-K filing that “it has been in recent discussions with select private equity investors to explore a potential sale of the Kidney Care asset in lieu of the proposed spin-off of the business.”
• Given the sale announcement, we DROP coverage of Baxter International (BAX) effective immediately. Our prior estimates and fair value for BAX should no longer be relied upon.

NR beats across the board in 2Q 2024 as strength at the higher-margin Industrial Solutions (IS) segment offset weakness at Fluid Systems (FS); full-year IS segment guidance maintained and the FS strategic review is now expected to be completed in 3Q 2024 (vs. the prior mid-year 2024 target); fair value estimate remains $10 per share

Last night, after the market close, Newpark Resources posted 2Q 2024 consolidated sales down 2.35% to $179 million (compared with consensus of $169.25 million) with adj. EBITDA up ~18% to $23.4 million (compared with consensus of $18.5 million) on 230 basis points of margin improvement to 13.1%. Adjusted EPS increased ~50% to $0.12 (compared $0.08 in the prior year period and consensus of $0.08) while free cash flow (FCF) was ~$21.9 million (versus ~$0.6 million in 2Q 2023 and consensus of $5.2 million).

By segment, Fluid Systems posted 2Q 2024 sales down ~17% to $112.2 million (in-line with previous commentary suggesting a 15%-20% decline) with adj. segment EBITDA of ~$5.2 million (compared with $8.6 million in the year ago period), implying ~200 bps of margin deterioration to 4.6% (in-line with commentary suggesting a low-to-mid single digit margin), while Industrial Solutions posted 2Q 2024 sales up ~39% to $66.8 million, driven by strength in both product sales and specialty rentals, with adj. segment EBITDA growth of ~$36.5% to ~$24.8 million, implying 60 bps of margin contraction to 37.1%.

NR ended 2Q 2024 with net debt of $22.9 million, including debt of ~$58 million and cash of ~$35.1 million, and a net leverage ratio of 0.3x (compared with 1.4x at the end of 2022, 0.4x at the end of 2023 and 0.5x at the end of 1Q 2024). Notably, the company’s $50 million share repurchase authorization, representing ~8% of the total at current prices, has remained fallow in 2024 given the on-going strategic review at FS. (In 2023, the company repurchased $30 million of stock, representing ~7% of the outstanding shares.)

The company maintained its initial guidance for the Industrial Solutions segment, which calls for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%. Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E (of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet). [Note: the September-quarter is historically NR’s seasonally weakest (as utility maintenance projects tend to slow during the hotter months.]

On the transactional front, management indicated that while taking longer than expected given the global nature of the due diligence process it is optimistic that the on-going strategic review of its Fluid Systems business (managed by Lazard) will be completed by the end of 3Q 2024 (versus its previous commentary targeting a resolution by mid-year 2024). Anecdotally, net working capital at Fluid Systems was ~$160 million at the end of 3Q 2024.

For our part, aside from the incremental financial flexibility/opportunity for capital returns provided by a successful transaction for Fluid Systems we estimate a deal would precipitate a significant re-rating of NR shares toward a valuation more in-line with specialty rental & services peers as opposed to a legacy oilfield services provider (i.e., high single-digit to low double-digit multiples versus low- to mid-single digit-type valuations).

Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $99.2 million (previously $98.1 million), reflecting a 5.0x multiple at Fluid Systems (previously 5.5x) and 9.5x (unchanged) at Industrial Solutions, while accounting for corporate costs and projected net debt/cash (see Exhibit #1 on page 2).

PCS Research Group welcomes and encourages your feedback. Please feel free to call us if we can be of service.

HHH completes the spin-off of Seaport Entertainment; Considering the price appreciation following our pre-spin BUY recommendation and pre-market indications that the stocks will trade roughly in-line with our FVEs we initially rate both post-spin HHH & SEG at NEUTRAL

On July 31, 2024, at 11:59 pm (ET), Howard Hughes (NYSE: HHH) completed the separation of Seaport Entertainment (NYSE American: SEG), which primarily owns real estate assets centered in and around New York City’s South Street Seaport (along with a 25% stake in Jean-Georges Restaurants, air rights above the Las Vegas Fashion Mall as well as ownership of The Las Vegas Aviators, a Triple-A minor league baseball team, into a separate, publicly traded company via a tax-free spin-off.

Shareholders of record, on July 29th, received one share of SEG for every nine shares of HHH owned. (Cash will be paid in lieu of fractional shares, which, while the overall transaction was tax free could trigger a taxable gain/loss for some shareholders.)

For context, pre-spin HHH, which closed last night at $74.17 per share, appreciated roughly 15% since our pre-spin BUY recommendation (with a $78 pre-spin FVE) on July 8th.

Additionally, in “when-issued” trading, which began July 29th, SEG shares were initially priced at ~$31 per share (versus our ~$33 per share FVE), before hitting a high ~$34 per share (on trading volume of 35K shares) and closing last night at ~$31.50 (on volume of ~44K shares during the session). Shares of HHH were initially priced at ~$71 per share (compared with our $70 FVE) where they remained (on virtually no volume).

Pre-market indications suggest a relatively orderly open with the bid/ask for SEG at $32-$34 per share and post-spin HHH at $70-$72.50. As such, with shares of post-spin entities trading roughly in-line with our fair value estimates (FVE) of $33 and $70, respectively, we initially assign both a NEUTRAL rating.

More broadly, while noting that we think a fair degree of value has seemingly been pulled forward ahead of the separation, we do think the transaction better positions post-spin HHH (i.e., the parent) both from a simplification and cash flow perspective, which should make it more attractive to investors and benefit its valuation over time. To those ends, the separation of SEG positions post-spin HHH as a pure-play real estate company (i.e., MPCs, landbank and development) and removes the “cash drag” of the money losing Seaport business (i.e., it generated an ~$18 million NOI loss in 1H 2024 and ~$32.5 million when including the losses from unconsolidated joint ventures, such as The Tin Building by Jean-Georges), which should facilitate incremental capital allocation options (e.g., buybacks and/or investments in its MPCs).

As for the Seaport, low occupancy, negative cash flow, and the need to fund the 250 Water Street project will likely remain a concern for those outside of deep value real estate-focused investors.

Overall, in approaching valuation, we acknowledge the majority of value in both the parent and post spin entities is largely derived from the future value of land along with the earnings potential of its operating assets (versus HHH’s current earnings profile). As highlighted in management’s estimated NAV, the largest ascribed value is placed on future MPC land sales, some of which are forecasted to persist into 2086, which obviously requires myriad assumptions to be made (of which, all are subject to challenge but ultimately it seems objectively true, in our view, that the assets clearly have some value).

For more details, please refer to The Spin-Off Report dated July 8, 2024.

LXFR increases full year 2024E adj. EBITDA, EPS and FCF guidance, driven wholly by the recovery of some prior period legal expenses; suggests timing for Graphics Arts sale has been pulled forward into 3Q 2024; fair value remains $16.50 per share

Last night, after the market close, LXFR reported 2Q 2024 consolidated sales down 9.7% year-over-year (albeit up 11.5% sequentially) to $99.7 million with adj. EBITDA and EPS of $17.3 million and $0.39, respectively (or $13.4 million and $0.24, excluding legal/insurance recoveries of litigation costs related to the so-called U.S. Ecology case).

By segment, sales at the Gas Cylinders segment improved 2.7% to $49.8 million while adj. segment EBITDA was flat at $4.9 million. Elektron segment sales were down ~21% to $42 million with adjusted segment EBITDA $12.4 million (or $8.5 million, ex-legal recoveries). [The discontinued Graphic Arts segment posted sales of $7.9 million and generated positive EBITDA of $0.1 million, which, we note, is a marked improvement relative to the losses incurred in 2H 2023.]

Free cash flow (FCF) was $6.2 million in 2Q 2024, and the company ended the June quarter with net debt of $69.9 million, including $4.3 million of cash and debt of $74.2 million. LXFR’s net leverage ratio at quarter-end was 1.8x (or 1.6x, excluding the Graphic Arts segment), which was consistent versus the end of 2023 but improved compared with the 2.0x and 1.7x metrics posted in 1Q 2024.

In terms of guidance, solely driven by the aforementioned recovery of prior period legal costs as management remains “cautious on short-term revenue trends”, LXFR increased adj. EBITDA, EPS and FCF guidance to $47-$50 million, $0.90-$1.00 and $24-$27 million (compared with previous guidance of $44-$48 million, $0.75-$0.90 and $21-$25 million and initial guidance of $42-$46 million, $0.70-$0.85, and $20-24 million; see Exhibit #1 on page 2).

In terms of the Graphic Arts sale process, on this morning’s conference call management indicated that it is in the last stages of a competitive bid process (that included ~100 prospective buyers) and has entered exclusive discussions with a single (but unnamed) counterparty. To that end, LXFR now expects to announce a transaction in 3Q 2024 (versus its previous commentary targeting completion by year-end. (That said, management anecdotally tempered expectations on the ultimate sale price/proceeds versus initial expectations).

Our base case fair value estimate for LXFR remains $16.50 per share, reflecting values of ~$8 per share, ~$10 per share, and ~$0.50 per share for the Gas Cylinders, Elektron and Graphic Arts businesses, respectively. Accounting for projected net debt of ~$2 per share yields a base case sum-of-the-parts fair value of ~$16.50 per share (with bull and bear cases of ~$19 per share and ~$14 per share, respectively; see Exhibit #2 on page 2).

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