The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

HIGH-CONVICTION RECOMMENDATIONS (LONG):  Vestis Corporation (VSTS), WK Kellogg (KLG)

UPCOMING SPIN-OFFS:  Lions Gate Entertainment Corp. (LGFA/B)/Studio Business, General Electric (GE)/Renewable Energy, Baxter International Inc. (BAX)/KidneyCo, Medtronic (MDT)/Patient Monitoring & Respiratory Interventions, 3M Co. (MMM)/Health Care Business, Jacobs Solutions Inc. (J)/Critical Mission Solutions, Western Digital (WDC)/HDD Business, MDU Resources Group (MDU)/Construction Services, Edwards Lifesciences Corp.(EW)/Critical Care Business

RECENT PUBLICATIONS

ALERT:  Edwards Lifesciences to Spin-Off Critical Care Business

December 7, 2023

On December 7 Edwards Lifesciences Corp. (NYSE: EW) announced the spin-off its Critical Care business at the end of 2024. 

EW describes itself as “the global leader in patient-focused medical innovations for structural heart disease and critical care monitoring.” In 2022, the company generated revenue, EBITDA and EPS of $5.4 billion, $1.9 billion, and $2.48 per share, respectively. EW’s products are focused on four areas: Transcatheter Aortic Valve Replacement (“TAVR”) and Transcatheter Mitral & Tricuspid Therapies (“TMTT”), which combined accounted for 67.5% of revenue in 2022, Surgical Structural Heart (“Surgical”), representing 16.6% of revenue in 2022, and Critical Care, which contributed 15.9% of sales in 2022.

TAVR products are used in minimally invasive replacement surgeries for aortic heart valves and include the Edwards SAPIEN family of valves and delivery systems for catheter-based valve repair and replacement in patients. TMTT, which contributes only 2.2% of current revenue, has many products in development to treat mitral and tricuspid valve diseases. Surgical Structural Heart therapies aim to improve the quality of life for patients with aortic valve replacement. The Critical Care business provides monitoring systems for management of patient’s heart function and fluid status in surgical and intensive care settings. EW reports operating segments based on geographic regions and not by product category, as such operating performance, aside from revenue, is not disclosed.

EW itself was a spin-off from Baxter International Inc. (BAX) in April of 2000. In terms of rationale for the separation, it appears that given the differing end market growth rates between the product categories, separating out the more mature Critical Care business will result in, at least optically, a higher top line growth for the parent company, while the spin-company can focus on its core business. In conjunction with today’s announcement and investor conference, EW issued initial 2024 guidance, which included revenue growth of 8% – 10% over 2023 levels of $6.3 billion to $6.6 billion, and adjusted EPS growth of 9%-11% over 2023 levels of $2.70 to $2.80 per share. In terms of product categories, management is expecting 2024 sales growth of 8% – 10% at TAVR and mid-single digit growth at both Surgical Structural Heart and Critical Care businesses. Management is hosting its investor conference at 8:30 a.m Pacific Time today. Given a lack of disclosures on the post spin companies’ operating performance, we abstain from assigning a preliminary fair value estimate at this time. We will revisit a preliminary sum-of-the-parts fair value estimate upon further disclosures.

UPDATE:  Worthington Enterprises Inc.

December 1, 2023

WOR Completes Worthington Steel Spin-Off; Rate Worthington Enterprises at NEUTRAL with a $44 FVE; Rate Worthington Steel at NEUTRAL with a $28 FVE

On December 1, 2023, before the market open, Worthington Industries completed the previously announced spin-off of its steel businesses. WOR shareholders of record as of November 21, 2023, received one share of WS for every share of WOR held.

In terms of rationale for the separation, following the Tempel acquisition, management believes that the Steel company has sufficient scale to operate as a standalone entity. Additionally, given the volatility that is inherent in the price of steel, a standalone Worthington Enterprises should see a lower degree of volatility arising from steel price swings and the resultant impact from Steel’s unconsolidated JVs. Following the separation, both companies will be respective leaders in their dominant businesses, and investors likely will favor the reduced complexities in reporting, which may attract new investors and/or more sell-side coverage, both of which we would view as a positive.

Despite near term economic uncertainty as exhibited by 1Q F2024 results (May FYE), the post-spin companies remain a dominant player in most of its core businesses (steel processing and building products [WAVE]), have strong balance sheets, and will be positioned to weather the current macro environment and have ample liquidity to capitalize on attractive acquisitions.

Worthington Steel looks to capitalize on the decarbonization of transportation and the energy transformation through its electrical steel business, while Worthington Enterprises will participate in demand from government stimulus, environmental investment, population shifts and on- and near-shoring (moving production back to the U.S. or closer in proximity).

In terms of favorability, we believe that investors will prefer the parent company’s exposure to multiple industries and the removal of volatility from the steel market, which may result in a sell-off of WS shares. With market leadership positions in the building products segment, which derives the majority of the post-spin parent company’s earnings, we favorably view the company’s positioning to capitalize on increases in residential and non-residential new construction and remodels.

We maintain our post-spin fair value estimates of $44 per share of WOR and $28 per share for WS. Given limited upside to our fair value estimates we rate both companies at NEUTRAL. We would revisit our post-spin ratings on any sell-off of post-spin shares or changes in company or industry fundamentals.

For more details, please refer to our comprehensive note dated November 24, 2023.

Radar Screen – December 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Masimo Corp. (MASI), Matthews International Corp. (MATW), Newpark Resources (NR), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Spin-Off Report Calendar – December 2023

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – December 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – November 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – December 2023

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

HIGH-CONVICTION RECOMMENDATIONS (LONG):  Garrett Motion Inc. (GTX), Atlanta Braves Holdings (BATRK), Tiptree Inc. (TIPT), PAR Technology (PAR), IAC Corp. (IAC)

RECENT INITIATIONS:  Albany International Corp. (AIN), Masimo Corp. (MASI) 

RECENTLY CLOSED IDEAS:  SNC-Lavalin Group (ATRL)  Return: +95% from initiation (November 14, 2022) through close (September 29, 2023)

LATEST PUBLICATIONS & UPDATES:

UPDATE – RCI Hospitality Holdings (NASDAQ: RICK)

December 15, 2023

RICK reports mixed 4Q 2023 results amid economic uncertainty and tough comparisons but sees a return to more normalized growth, ex-acquisitions, in F2024; strategic alternatives are being evaluated for the Bombshell business to unlock value and provide capital to accelerate growth/strategic flexibility 

• Last night, after the market close, RICK reported 4Q 2023 sales up ~5.5% to $75.3 million (versus consensus of $74.8 million) as acquisitions offset an ~$7 million decline in same store sales while adjusted EBITDA fell ~16.5% to ~$20.2 million (compared with consensus of $20.5 million).  Free cash flow was $11.1 million (versus $14.5 million in the prior year period and consensus of $12.5 million).
• For full-year F2023, RICK posted 9.8% top-line growth, fueled by acquisitions, to $294 million (versus our $287.1 million forecast and consensus of $289.9 million) with a 2% decline in adj. EBITDA to ~$85 million (compared with our $87.9 million estimate and consensus of $88.3 million).  Free cash flow was $53.2 million (in-line with consensus but slightly below our $56 million forecast).
• The company ended F2023 with a leverage ratio of 2.8x (versus 2.7x at the end of F2022) and remains committed to its capital allocation strategy of making investments in organic and acquisitive growth that generate cash on cash returns of 25%-33% as well as repurchasing shares when the yield exceeds 10%.
• To that end, given the pipeline of investment opportunities management sees on all those fronts, RICK has begun to explore strategic options, primarily with private equity groups, for its Bombshells concept.
• Options include a full or partial sale as well as partnerships and mergers (or any strategic option that would unlock value and bring in capital to accelerate growth).
• Our fair value estimate for RCI Hospitality (RICK) remains $100 per share, based on a blended multiple of ~10x on F2025E EBITDA of ~$109.5 million and net debt of $146 million (see Exhibit #1 on page 2).

Radar Screen – December 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Masimo Corp. (MASI), Matthews International Corp. (MATW), Newpark Resources (NR), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

HIGH-CONVICTION RECOMMENDATIONS (LONG):  Garrett Motion Inc. (GTX), Atlanta Braves Holdings (BATRK), Tiptree Inc. (TIPT), PAR Technology (PAR), IAC Corp. (IAC)

RECENT INITIATIONS:  Albany International Corp. (AIN), Masimo Corp. (MASI) 

RECENTLY CLOSED IDEAS:  SNC-Lavalin Group (ATRL)  Return: +95% from initiation (November 14, 2022) through close (September 29, 2023)

LATEST PUBLICATIONS & UPDATES:

UPDATE – Matthews International Corporation (NASDAQ: MATW)

November 17, 2023

MATW reports 4Q F2023 results modestly ahead of consensus with full-year adj. EBITDA coming in at the mid-point of guidance; management sees top-and bottom-line growth in F2024 but will provide more formal guidance as visibility into the timing of large orders at Industrial Technologies improves

MATW reported 4Q F2023 consolidated sales up 5% to $480.2 million (versus consensus of $476.5 million with a ~11% increase in adjusted EBITDA to ~$61.9 million (compared with consensus of $61.1 million). Adj. EPS were $0.96 (up ~17% versus $0.82 in the prior year period and versus consensus of $0.82).

By segment, sales at the Memorialization segment were essentially flat at ~$205 million with a ~10.5% increase in adj. EBITDA to ~$37 million while sales at Industrial Technologies increased ~34.5%, most notably driven by the energy storage solutions business (including the Olbrich and R+S acquisitions), to $140.5 million while adj. EBITDA was up slightly at ~$23.5 million.  At SGK, sales fell ~8% to ~$135 million while adj. EBITDA increased ~5% to ~$17.5 million (as adverse conditions in Europe were offset by recent cost reductions).

For full-year F2023, consolidated sales rose ~7% to $1.88 billion (vs. consensus of $1.875 billion and our $1.85 billion estimate) with adj. EBITDA up ~7.5% to $225.8 million (vs. consensus of $225 million, our $219.5 million estimate and guidance of $215-$235 million). Adj. EPS were flat at $2.88.

The company ended F2023 with net debt of $748.1 million, including $42.1 million in cash and $790.2 million of debt, and a net leverage ratio of 3.3x (versus 3.5x in 2Q F2023, 3.85x in 1Q F2023 and 3.5x at the end of F2022). The company’s long-term target remains “at or below 3.0x” and management expects operating cash flow to be “strong” in F2024.  (Recall, earlier this week MATW increased its quarterly dividend by $0.01 per share or ~4.3% to $0.24 per share.)

In terms of F2024 guidance, while the company expects the company “another year of consolidated sales and adj. EBITDA” the “level of growth is more difficult to predict at this time”.  To that end, management will provide more formal annual guidance when it has “more clarity” on the timing of large orders/projects, particularly in the energy storage solutions business (which is within the Industrial Technologies segment).

Management indicated that the backlog at Industrial Technologies ended the year $190 million higher than at the beginning of F2023 and while confident that it will secure additional orders (as well as launch new warehouse automation solution) during F2024, the timing of revenue recognition on existing orders in the energy storage business as well as the timing of future orders is unclear.  At Memorialization, the company thinks it has structurally improved the earnings power of the business (via market share and pricing gains as well as productivity improvements) and it expects the business will remain a “modest” grower (on both top- and bottom-line) over the next 5 years.  In terms of capital allocation, given its cash flow expectations management expects it will be able to pursue both tuck-in M&A as well as debt reduction during F2024.

Our base case fair value estimate for MATW remains ~$51 per share, reflecting a blended multiple 9.5x multiple (unchanged) on our F2024E adjusted EBITDA of $~$247 million (essentially unchanged) and net debt of ~$689.3 million (previously $672.5 million); see Exhibit #1 on page 2).

Radar Screen – December 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Masimo Corp. (MASI), Matthews International Corp. (MATW), Newpark Resources (NR), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

HIGH-CONVICTION RECOMMENDATIONS (LONG):  Vestis Corporation (VSTS), WK Kellogg (KLG)

UPCOMING SPIN-OFFS:  Lions Gate Entertainment Corp. (LGFA/B)/Studio Business, General Electric (GE)/Renewable Energy, Baxter International Inc. (BAX)/KidneyCo, Medtronic (MDT)/Patient Monitoring & Respiratory Interventions, 3M Co. (MMM)/Health Care Business, Jacobs Solutions Inc. (J)/Critical Mission Solutions, Western Digital (WDC)/HDD Business, MDU Resources Group (MDU)/Construction Services, Edwards Lifesciences Corp.(EW)/Critical Care Business

RECENT PUBLICATIONS

ALERT:  Edwards Lifesciences to Spin-Off Critical Care Business

December 7, 2023

On December 7 Edwards Lifesciences Corp. (NYSE: EW) announced the spin-off its Critical Care business at the end of 2024. 

EW describes itself as “the global leader in patient-focused medical innovations for structural heart disease and critical care monitoring.” In 2022, the company generated revenue, EBITDA and EPS of $5.4 billion, $1.9 billion, and $2.48 per share, respectively. EW’s products are focused on four areas: Transcatheter Aortic Valve Replacement (“TAVR”) and Transcatheter Mitral & Tricuspid Therapies (“TMTT”), which combined accounted for 67.5% of revenue in 2022, Surgical Structural Heart (“Surgical”), representing 16.6% of revenue in 2022, and Critical Care, which contributed 15.9% of sales in 2022.

TAVR products are used in minimally invasive replacement surgeries for aortic heart valves and include the Edwards SAPIEN family of valves and delivery systems for catheter-based valve repair and replacement in patients. TMTT, which contributes only 2.2% of current revenue, has many products in development to treat mitral and tricuspid valve diseases. Surgical Structural Heart therapies aim to improve the quality of life for patients with aortic valve replacement. The Critical Care business provides monitoring systems for management of patient’s heart function and fluid status in surgical and intensive care settings. EW reports operating segments based on geographic regions and not by product category, as such operating performance, aside from revenue, is not disclosed.

EW itself was a spin-off from Baxter International Inc. (BAX) in April of 2000. In terms of rationale for the separation, it appears that given the differing end market growth rates between the product categories, separating out the more mature Critical Care business will result in, at least optically, a higher top line growth for the parent company, while the spin-company can focus on its core business. In conjunction with today’s announcement and investor conference, EW issued initial 2024 guidance, which included revenue growth of 8% – 10% over 2023 levels of $6.3 billion to $6.6 billion, and adjusted EPS growth of 9%-11% over 2023 levels of $2.70 to $2.80 per share. In terms of product categories, management is expecting 2024 sales growth of 8% – 10% at TAVR and mid-single digit growth at both Surgical Structural Heart and Critical Care businesses. Management is hosting its investor conference at 8:30 a.m Pacific Time today. Given a lack of disclosures on the post spin companies’ operating performance, we abstain from assigning a preliminary fair value estimate at this time. We will revisit a preliminary sum-of-the-parts fair value estimate upon further disclosures.

UPDATE:  Worthington Enterprises Inc.

December 1, 2023

WOR Completes Worthington Steel Spin-Off; Rate Worthington Enterprises at NEUTRAL with a $44 FVE; Rate Worthington Steel at NEUTRAL with a $28 FVE

On December 1, 2023, before the market open, Worthington Industries completed the previously announced spin-off of its steel businesses. WOR shareholders of record as of November 21, 2023, received one share of WS for every share of WOR held.

In terms of rationale for the separation, following the Tempel acquisition, management believes that the Steel company has sufficient scale to operate as a standalone entity. Additionally, given the volatility that is inherent in the price of steel, a standalone Worthington Enterprises should see a lower degree of volatility arising from steel price swings and the resultant impact from Steel’s unconsolidated JVs. Following the separation, both companies will be respective leaders in their dominant businesses, and investors likely will favor the reduced complexities in reporting, which may attract new investors and/or more sell-side coverage, both of which we would view as a positive.

Despite near term economic uncertainty as exhibited by 1Q F2024 results (May FYE), the post-spin companies remain a dominant player in most of its core businesses (steel processing and building products [WAVE]), have strong balance sheets, and will be positioned to weather the current macro environment and have ample liquidity to capitalize on attractive acquisitions.

Worthington Steel looks to capitalize on the decarbonization of transportation and the energy transformation through its electrical steel business, while Worthington Enterprises will participate in demand from government stimulus, environmental investment, population shifts and on- and near-shoring (moving production back to the U.S. or closer in proximity).

In terms of favorability, we believe that investors will prefer the parent company’s exposure to multiple industries and the removal of volatility from the steel market, which may result in a sell-off of WS shares. With market leadership positions in the building products segment, which derives the majority of the post-spin parent company’s earnings, we favorably view the company’s positioning to capitalize on increases in residential and non-residential new construction and remodels.

We maintain our post-spin fair value estimates of $44 per share of WOR and $28 per share for WS. Given limited upside to our fair value estimates we rate both companies at NEUTRAL. We would revisit our post-spin ratings on any sell-off of post-spin shares or changes in company or industry fundamentals.

For more details, please refer to our comprehensive note dated November 24, 2023.

Radar Screen – December 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Albany International (AIN), Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Masimo Corp. (MASI), Matthews International Corp. (MATW), Newpark Resources (NR), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Spin-Off Report Calendar – December 2023

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – October 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – November 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – November 2023

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

Newest Publications & Updates

UPDATE – Matthews Internatonal Corporation (NASDAQ: MATW)

November 17, 2023

MATW reports 4Q F2023 results modestly ahead of consensus with full-year adj. EBITDA coming in at the mid-point of guidance; management sees top-and bottom-line growth in F2024 but will provide more formal guidance as visibility into the timing of large orders at Industrial Technologies improves

• Last night, after the market close, MATW reported 4Q F2023 consolidated sales up 5% to $480.2 million (versus consensus of $476.5 million with a ~11% increase in adjusted EBITDA to ~$61.9 million (compared with consensus of $61.1 million). Adj. EPS were $0.96 (up ~17% versus $0.82 in the prior year period and versus consensus of $0.82).
• By segment, sales at the Memorialization segment were essentially flat at ~$205 million with a ~10.5% increase in adj. EBITDA to ~$37 million while sales at Industrial Technologies increased ~34.5%, most notably driven by the energy storage solutions business (including the Olbrich and R+S acquisitions), to $140.5 million while adj. EBITDA was up slightly at ~$23.5 million.  At SGK, sales fell ~8% to ~$135 million while adj. EBITDA increased ~5% to ~$17.5 million (as adverse conditions in Europe were offset by recent cost reductions).
• For full-year F2023, consolidated sales rose ~7% to $1.88 billion (vs. consensus of $1.875 billion and our $1.85 billion estimate) with adj. EBITDA up ~7.5% to $225.8 million (vs. consensus of $225 million, our $219.5 million estimate and guidance of $215-$235 million). Adj. EPS were flat at $2.88.
• The company ended F2023 with net debt of $748.1 million, including $42.1 million in cash and $790.2 million of debt, and a net leverage ratio of 3.3x (versus 3.5x in 2Q F2023, 3.85x in 1Q F2023 and 3.5x at the end of F2022). The company’s long-term target remains “at or below 3.0x” and management expects operating cash flow to be “strong” in F2024.  (Recall, earlier this week MATW increased its quarterly dividend by $0.01 per share or ~4.3% to $0.24 per share.)
• In terms of F2024 guidance, while the company expects the company “another year of consolidated sales and adj. EBITDA” the “level of growth is more difficult to predict at this time”.  To that end, management will provide more formal annual guidance when it has “more clarity” on the timing of large orders/projects, particularly in the energy storage solutions business (which is within the Industrial Technologies segment).
• Anecdotally, on this morning’s conference call, management indicated that the backlog at Industrial Technologies ended the year $190 million higher than at the beginning of F2023 and while it is confident that it will secure additional orders (as well as launch new warehouse automation solution) during F2024 the timing of revenue recognition on existing orders in the energy storage business as well as the timing of future orders is unclear.  At Memorialization, the company thinks it has structurally improved the earnings power of the business (via market share and pricing gains as well as productivity improvements) and it expects the business will remain a “modest” grower (on both top- and bottom-line) over the next 5 years.  In terms of capital allocation, given its cash flow expectations management expects it will be able to pursue both tuck-in M&A as well as debt reduction during F2024.
• Our base case fair value estimate for MATW remains ~$51 per share, reflecting a blended multiple 9.5x multiple (unchanged) on our F2024E adjusted EBITDA of $~$247 million (essentially unchanged) and net debt of ~$689.3 million (previously $672.5 million); see Exhibit #1 on page 2).

Radar Screen – November 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

UPDATE:  Worthington Enterprises Inc.

December 1, 2023

WOR Completes Worthington Steel Spin-Off; Rate Worthington Enterprises at NEUTRAL with a $44 FVE; Rate Worthington Steel at NEUTRAL with a $28 FVE

• On December 1, 2023, before the market open, Worthington Industries completed the previously announced spin-off of its steel businesses.
• The spin company has adopted the corporate moniker Worthington Steel Inc. and now trades on the NYSE under the ticker symbol “WS”. The parent company has also changed its corporate name to Worthington Enterprises Inc.. and continues to trade under the ticker “WOR”.
• WOR shareholders of record as of November 21, 2023, received one share of WS for every share of WOR held.
• For reference, in when-issued trading, shares of WOR closed yesterday at $44.20 per share and WS closed at $27.50 per share.
• In terms of rationale for the separation, following the Tempel acquisition, management believes that the Steel company has sufficient scale to operate as a standalone entity. Additionally, given the volatility that is inherent in the price of steel, a standalone Worthington Enterprises should see a lower degree of volatility arising from steel price swings and the resultant impact from Steel’s unconsolidated JVs. Following the separation, both companies will be respective leaders in their dominant businesses, and investors likely will favor the reduced complexities in reporting (i.e., less unconsolidated JVs per company), which may attract new investors and/or more sell-side coverage, both of which we would view as a positive.
• Despite near term economic uncertainty as exhibited by 1Q F2024 results (May FYE), the post-spin companies remain a dominant player in most of its core businesses (steel processing and building products [WAVE]), have strong balance sheets, and will be positioned to weather the current macro environment and have ample liquidity to capitalize on attractive acquisitions.
• Worthington Steel looks to capitalize on the decarbonization of transportation and the energy transformation through its electrical steel business, while Worthington Enterprises will participate in demand from government stimulus, environmental investment, population shifts and on- and near-shoring (moving production back to the U.S. or closer in proximity).
• In terms of favorability, we believe that investors will prefer the parent company’s exposure to multiple industries and the removal of volatility from the steel market, which may result in a sell-off of WS shares. With market leadership positions in the building products segment, which derives the majority of the post-spin parent company’s earnings, we view favorably on the company’s positioning to capitalize on increases in residential and non-residential new construction and remodels.
• We maintain our post-spin fair value estimates of $44 per share of WOR and $28 per share for WS. Given limited upside to our fair value estimates we rate both companies at NEUTRAL. We would revisit our post-spin ratings on any sell-off of post-spin shares or changes in company or industry fundamentals.
• For more details, please refer to The Spin-Off Report dated November 24, 2023.

Comprehensive Report:  Worthington Industries Inc. (WOR) / Worthington Steel (WS)

November 24, 2023

Worthington Industries Inc. (NYSE: WOR) is set to spin-off its Steel Processing business into a standalone, publicly traded company on December 1, 2023, to shareholders of record as of November 21, 2023. Shares of the new company, which will adopt the corporate moniker Worthington Steel, will trade on the NYSE under the ticker “WS.” WOR shareholders of record will receive one share of WS for each share of WOR held. The parent company will change its name to Worthington Enterprises, and will continue to trade under the symbol “WOR.” Shares of Worthington Steel are expected to begin “when-issued” trading on or about November 28, 2023, on the NYSE under the ticker “WS WI”. Worthington Enterprises is expected to begin trading on an “ex-distribution” basis on or about November 28, 2023, under the ticker “WOR WI”. Worthington Steel and Worthington Enterprises will begin trading “regular-way” on December 1, 2023.

As it currently stands, the company operates under four reportable segments: Steel Processing (~71% of revenue and ~58% of adjusted EBIT in F2023), Consumer Products (~14% of revenue and ~37% of adjusted EBIT in F2023), Building Products (~12% of revenue and ~17% of adjusted EBIT in F2023), and Sustainable Energy Solutions (~3% of revenue and a ~13% drag on adjusted EBIT in F2023).

In terms of rationale for the separation, following the Tempel acquisition, management believes that the Steel company has sufficient scale to operate as a standalone entity. Additionally, given the volatility that is inherent in the price of steel, a standalone Worthington Enterprises should see a lower degree of volatility arising from steel price swings and the resultant impact from Steel’s unconsolidated JVs. Following the separation, both companies will be respective leaders in their dominant businesses, and investors likely will favor the reduced complexities in reporting (i.e., less unconsolidated JVs per company), which may attract new investors and/or more sell-side coverage, both of which we would view as a positive.

In relation to valuation, shares of WOR currently trade at 8.5x forward EV/EBITDA, having averaged just 7x over the past five years. The trading multiple undoubtedly has historically been weighed down by the company’s exposure to the steel industry, with a basket of peers in the building products and consumer products industries currently averaging approximately 11.0x forward EV/EBITDA, while steel processing and mill peers trade at just over 7x forward EV/EBITDA. It is worthy to note that shares of AWI, which may be a fair proxy for post-spin WOR given the WAVE joint venture partnership, currently trades at 8.9x forward EV/EBITDA and has averaged a multiple of 9.5x over the past five years.

On a pre-spin, sum-of-the-parts basis, we fairly value shares of WOR at $72 per share. On a post-spin basis, we assign a $28 per share fair value estimate to Worthington Steel and $44 per share fair value estimate to Worthington Enterprises. Given the time frame to spin completion, we refrain from recommending shares ahead of the transaction completion. Instead, we look to capitalize on any irrational selling pressure that may arise following the separation.

Despite near term economic uncertainty as exhibited by 1Q F2024 results, the company remains a dominant player in most of its core businesses (steel processing and building products [WAVE]), and both post-spin companies will have strong balance sheets and will be positioned to weather the current macro environment and have ample liquidity to capitalize on attractive acquisitions. Worthington Steel looks to capitalize on the decarbonization of transportation and the energy transformation through its electrical steel business, while Worthington Enterprises will participate in demand from government stimulus, environmental investment, population shifts and on- and  near shoring (moving production back to the U.S. or closer in proximity).

In terms of favorability, we believe that investors will prefer the parent company’s exposure to multiple industries and the removal of volatility from the steel market, which may result in a sell-off of WS shares. With market leadership positions in the building products segment, which derives the majority of the post-spin parent company’s earnings, we view favorably on the company’s positioning to capitalize on increases in residential and non-residential new construction and remodels.

Radar Screen – November 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Spin-Off Report Calendar – December 2023

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – October 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – November 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – November 2023

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

Alert:  MDU Resources Group to Spin-Off Construction Services Business

November 2, 2023

MDU Resources Group Inc. (NYSE: MDU) has announced that the company’s Board of Directors has approved a plan to separate its construction services business, MDU Construction Services Group Inc., into a standalone, publicly traded company, via a spin-off. Following the separation, MDU Resources will become a pure-play regulated energy delivery company. The transaction, which is targeted to be completed in late 2024, is subject to customary closing conditions including an effectiveness declaration of a Form 10 filing with the SEC, final Board approval, and receipt of opinions or rulings as to the tax-free nature of the transaction, amongst others.

Currently, MDU operates four reportable business segments: 1) Electric, which provides retail electric service to residential, commercial, industrial, and municipal customers located in Montana, North Dakota, Wyoming, and South Dakota via a network of 15 electric generating units; 2) Natural Gas Distribution, which sells retail natural gas to residential, commercial, and industrial customers across eight northwest and northern plains states including Washington, Oregon, Idaho, Montana, Wyoming, North & South Dakota, and Minnesota; 3) Pipeline, which owns and operates regulated and non-regulated pipelines (as well as underground storage facilities) across Montana, Wyoming, North and South Dakota, and Minnesota;; and 4) Construction Services, which provides construction & maintenance services for electrical, gas and communication infrastructure in 40 states.

Notably, MDU completed the spin-off of its aggregates-based, vertically integrated construction materials and contracting provider, Knife River Corp. (NYSE: KNF), in May of 2023. To that end, throughout the process of the Knife River separation, management articulated that it was actively engaged in a strategic review of the remaining businesses and believed that ultimately creating a pure-play regulated delivery company would create value for shareholders. MDU currently retains a 10% ownership stake in KNF.

In terms of guidance, MDU projects 2023E earnings of $155-$165 million from its regulated utility business (i.e., the Electric, Natural Gas Distribution and Pipeline segments) with previous commentary suggesting a longer-term growth rate of ~5%-8%, driven by rate base and customer base increases. At Construction Services, sales are expected to be $2.8-$3.0 billion with EBITDA of $210-$230 million. [Note: management’s forecasts do not include one-time costs associated with its strategic initiatives.]  Current consolidated consensus estimates are for $4.86 billion and $720 million of revenue and adj. EBITDA in 2023 and $4.68 billion and $690 million in 2024E. To that end, based on guidance, commentary and industry trends it could be reasonably, if not conservatively, projected that MDU’s Utility and Construction Services businesses generate 2024E adj. EBITDA of $490 million, $234 million, respectively.

In terms of valuation, the broader regulated utility business (i.e., the Electric, Natural Gas Distribution and Pipeline segments) could be compared with regional electric & gas utilities, such as including Allete Inc. (NYSE: ALE), Alliant Energy (NYSE: LNT), Ameren Corp. (NYSE: AEE), CenterPoint Energy (NYSE: CNP), Consolidated Edison (NYSE: ED), NiSource (NYSE: NI), NorthWestern Corp. (NYSE: NWE), Public Service Enterprise Group (NYSE: PEG), amongst others, which trade at 10.0x 2024E EV/EBITDA while Construction Services could be imperfectly compared with peers, such as Aecon Group (ARE CN), Flour Corp. (NYSE: FLR), MasTec Inc. (NYSE: MTZ), and Primoris Services Corp. (NASDAQ: PRIM), amongst others, which trade at ~6.0x 2024E EV/EBITDA.

Applying peer multiples to each business implies segment values of ~$4.9 billion, ~$1.4 billion, respectively.  Accounting for net debt of ~$2.37 billion as well as the current value of MDU’s 10% stake in KNF, yields a total value of ~$5.4 billion or ~$26 per share (based on a share outstanding of 203.6 million).

Radar Screen – November 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Spin-Off Report Calendar – November 2023

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – October 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – November 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – November 2023

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

Newest Publications & Updates

UPDATE – Matthews Internatonal Corporation (NASDAQ: MATW)

November 17, 2023

MATW reports 4Q F2023 results modestly ahead of consensus with full-year adj. EBITDA coming in at the mid-point of guidance; management sees top-and bottom-line growth in F2024 but will provide more formal guidance as visibility into the timing of large orders at Industrial Technologies improves

• Last night, after the market close, MATW reported 4Q F2023 consolidated sales up 5% to $480.2 million (versus consensus of $476.5 million with a ~11% increase in adjusted EBITDA to ~$61.9 million (compared with consensus of $61.1 million). Adj. EPS were $0.96 (up ~17% versus $0.82 in the prior year period and versus consensus of $0.82).
• By segment, sales at the Memorialization segment were essentially flat at ~$205 million with a ~10.5% increase in adj. EBITDA to ~$37 million while sales at Industrial Technologies increased ~34.5%, most notably driven by the energy storage solutions business (including the Olbrich and R+S acquisitions), to $140.5 million while adj. EBITDA was up slightly at ~$23.5 million.  At SGK, sales fell ~8% to ~$135 million while adj. EBITDA increased ~5% to ~$17.5 million (as adverse conditions in Europe were offset by recent cost reductions).
• For full-year F2023, consolidated sales rose ~7% to $1.88 billion (vs. consensus of $1.875 billion and our $1.85 billion estimate) with adj. EBITDA up ~7.5% to $225.8 million (vs. consensus of $225 million, our $219.5 million estimate and guidance of $215-$235 million). Adj. EPS were flat at $2.88.
• The company ended F2023 with net debt of $748.1 million, including $42.1 million in cash and $790.2 million of debt, and a net leverage ratio of 3.3x (versus 3.5x in 2Q F2023, 3.85x in 1Q F2023 and 3.5x at the end of F2022). The company’s long-term target remains “at or below 3.0x” and management expects operating cash flow to be “strong” in F2024.  (Recall, earlier this week MATW increased its quarterly dividend by $0.01 per share or ~4.3% to $0.24 per share.)
• In terms of F2024 guidance, while the company expects the company “another year of consolidated sales and adj. EBITDA” the “level of growth is more difficult to predict at this time”.  To that end, management will provide more formal annual guidance when it has “more clarity” on the timing of large orders/projects, particularly in the energy storage solutions business (which is within the Industrial Technologies segment).
• Anecdotally, on this morning’s conference call, management indicated that the backlog at Industrial Technologies ended the year $190 million higher than at the beginning of F2023 and while it is confident that it will secure additional orders (as well as launch new warehouse automation solution) during F2024 the timing of revenue recognition on existing orders in the energy storage business as well as the timing of future orders is unclear.  At Memorialization, the company thinks it has structurally improved the earnings power of the business (via market share and pricing gains as well as productivity improvements) and it expects the business will remain a “modest” grower (on both top- and bottom-line) over the next 5 years.  In terms of capital allocation, given its cash flow expectations management expects it will be able to pursue both tuck-in M&A as well as debt reduction during F2024.
• Our base case fair value estimate for MATW remains ~$51 per share, reflecting a blended multiple 9.5x multiple (unchanged) on our F2024E adjusted EBITDA of $~$247 million (essentially unchanged) and net debt of ~$689.3 million (previously $672.5 million); see Exhibit #1 on page 2).

Radar Screen – November 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from Hidden Opportunities including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas. 

Newest Publications & Updates

UPDATE – Matthews Internatonal Corporation (NASDAQ: MATW)

November 17, 2023

MATW reports 4Q F2023 results modestly ahead of consensus with full-year adj. EBITDA coming in at the mid-point of guidance; management sees top-and bottom-line growth in F2024 but will provide more formal guidance as visibility into the timing of large orders at Industrial Technologies improves

• Last night, after the market close, MATW reported 4Q F2023 consolidated sales up 5% to $480.2 million (versus consensus of $476.5 million with a ~11% increase in adjusted EBITDA to ~$61.9 million (compared with consensus of $61.1 million). Adj. EPS were $0.96 (up ~17% versus $0.82 in the prior year period and versus consensus of $0.82).
• By segment, sales at the Memorialization segment were essentially flat at ~$205 million with a ~10.5% increase in adj. EBITDA to ~$37 million while sales at Industrial Technologies increased ~34.5%, most notably driven by the energy storage solutions business (including the Olbrich and R+S acquisitions), to $140.5 million while adj. EBITDA was up slightly at ~$23.5 million.  At SGK, sales fell ~8% to ~$135 million while adj. EBITDA increased ~5% to ~$17.5 million (as adverse conditions in Europe were offset by recent cost reductions).
• For full-year F2023, consolidated sales rose ~7% to $1.88 billion (vs. consensus of $1.875 billion and our $1.85 billion estimate) with adj. EBITDA up ~7.5% to $225.8 million (vs. consensus of $225 million, our $219.5 million estimate and guidance of $215-$235 million). Adj. EPS were flat at $2.88.
• The company ended F2023 with net debt of $748.1 million, including $42.1 million in cash and $790.2 million of debt, and a net leverage ratio of 3.3x (versus 3.5x in 2Q F2023, 3.85x in 1Q F2023 and 3.5x at the end of F2022). The company’s long-term target remains “at or below 3.0x” and management expects operating cash flow to be “strong” in F2024.  (Recall, earlier this week MATW increased its quarterly dividend by $0.01 per share or ~4.3% to $0.24 per share.)
• In terms of F2024 guidance, while the company expects the company “another year of consolidated sales and adj. EBITDA” the “level of growth is more difficult to predict at this time”.  To that end, management will provide more formal annual guidance when it has “more clarity” on the timing of large orders/projects, particularly in the energy storage solutions business (which is within the Industrial Technologies segment).
• Anecdotally, on this morning’s conference call, management indicated that the backlog at Industrial Technologies ended the year $190 million higher than at the beginning of F2023 and while it is confident that it will secure additional orders (as well as launch new warehouse automation solution) during F2024 the timing of revenue recognition on existing orders in the energy storage business as well as the timing of future orders is unclear.  At Memorialization, the company thinks it has structurally improved the earnings power of the business (via market share and pricing gains as well as productivity improvements) and it expects the business will remain a “modest” grower (on both top- and bottom-line) over the next 5 years.  In terms of capital allocation, given its cash flow expectations management expects it will be able to pursue both tuck-in M&A as well as debt reduction during F2024.
• Our base case fair value estimate for MATW remains ~$51 per share, reflecting a blended multiple 9.5x multiple (unchanged) on our F2024E adjusted EBITDA of $~$247 million (essentially unchanged) and net debt of ~$689.3 million (previously $672.5 million); see Exhibit #1 on page 2).

UPDATE – Masimo Corporation (NASDAQ: MASI)

November 9, 2023

MASI reports mixed 3Q 2023 results and lowers 2023E guidance, again, but sees a return to more normalized/pre-pandemic growth in 2024E; adds new Board member; lower fair value estimate to $124 per share (from $146)

• Last night, after the market close, MASI reported 3Q 2023 sales down nearly 13% to $478.9 million (compared with guidance of $475-$535 million and consensus of ~$499 million), reflecting a ~6% decline at Healthcare to ~$308 million (versus guidance of $305-$335) and a 23% decline at Non-Healthcare to ~$171 million (compared with guidance of $170-$190 million).  Adjusted net income fell ~37.5% to $33.7 million or $0.63 per share (compared with guidance of $0.50-$0.64 and consensus of $0.59).
• Results reflected lower sensor utilization and the working through of inventories amid tighter budgets on the Healthcare side and a tough macro environment for high-end speaker equipment at Non-Healthcare (although Hearables revenue rose nearly ~140% in the quarter albeit still just 10% of segment sales).
• That said, at least at the core Healthcare business, management thinks current customer trends portend a return to more normalized (i.e., pre-pandemic) purchasing behavior in 2024E (i.e., the high-single digit growth rate demonstrated in 2017-2019).  (Nevertheless, it is hard not to acknowledge the material loss of credibility that has occurred among investors over the last six months even off a relatively lower base following the widely panned Sound United acquisition in early-2022).
• In terms of its updated guidance, MASI lowered the 2023E bar for the 2nd consecutive quarter (despite having described its previous guide down as a re-set to a base level); consolidated 2023E sales are expected to be $2.025-$2.075 billion (compared with previous outlook of $2.1-$2.2 billion and its initial forecast of $2.33-$2.4 billion) with adj. EPS of $2.85-$3.05 (versus the previous guide of $3.35-$3.55 and the initial outlook of $4.25-$4.45; see Exhibit #1 on page 2).
• On the corporate governance front, the company added Mr. Rolf Classon, former Bayer Healthcare executive and former chairman at Perrigo, Tecan and Hill-Rom, among other Board-level positions in the healthcare sector.  As well, the company is still seeking to add one more additional Board member (although no sense of timing was provided).
• Our fair value estimate for MASI is lowered to $124 per share (from $146) reflecting multiples of 19.0x (previously 19.5x) and 7.0x (previously 7.5x), respectively, to our reduced 2024E forecasts for the core Healthcare and Non-Healthcare segments and incorporates projected net debt (see Exhibit #2 on page 3).
• While we were clearly early on our recommendation of MASI (and the company’s execution/performance has been frustrating/disappointing) we would note that, by our calculation, assuming the Non-Healthcare segment (i.e., Sound United), which was bought for ~$1.0575 billion in April 2022, is worth zero, the core Healthcare business is currently trading at ~13x 2024E EBITDA (compared with peers at ~21.5x forward estimates and MASI’s own forward EV/EBITDA multiple of 17.5x, 26.1x and 26.2x and 21.1x over the last 1-, 3-, 5- and 10-year periods).
• Moreover, although management commentary indicated it is trying to stick by its initial 3-year time horizon before it would consider a divestiture of the Sound United/Non-Healthcare business, it seems evident that considering the massive loss of investor confidence and shareholder value over the last 24-months more dramatic action is required and the pressure to do so will likely continue to ramp.

Radar Screen – November 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Alphabet Inc. (GOOG), Bloomin’ Brands (BLMN), APi Group Corp. (APG), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566

The Weekly Wrap-Up provides summaries of recent publications from the Spin-Off Report including links to the full-length research reports.  If you haven’t engaged with the research over the past seven days, the Weekly Wrap-Up will quickly update you on our newest and highest conviction ideas.

Alert:  MDU Resources Group to Spin-Off Construction Services Business

November 2, 2023

MDU Resources Group Inc. (NYSE: MDU) has announced that the company’s Board of Directors has approved a plan to separate its construction services business, MDU Construction Services Group Inc., into a standalone, publicly traded company, via a spin-off. Following the separation, MDU Resources will become a pure-play regulated energy delivery company. The transaction, which is targeted to be completed in late 2024, is subject to customary closing conditions including an effectiveness declaration of a Form 10 filing with the SEC, final Board approval, and receipt of opinions or rulings as to the tax-free nature of the transaction, amongst others.

Currently, MDU operates four reportable business segments: 1) Electric, which provides retail electric service to residential, commercial, industrial, and municipal customers located in Montana, North Dakota, Wyoming, and South Dakota via a network of 15 electric generating units; 2) Natural Gas Distribution, which sells retail natural gas to residential, commercial, and industrial customers across eight northwest and northern plains states including Washington, Oregon, Idaho, Montana, Wyoming, North & South Dakota, and Minnesota; 3) Pipeline, which owns and operates regulated and non-regulated pipelines (as well as underground storage facilities) across Montana, Wyoming, North and South Dakota, and Minnesota;; and 4) Construction Services, which provides construction & maintenance services for electrical, gas and communication infrastructure in 40 states.

Notably, MDU completed the spin-off of its aggregates-based, vertically integrated construction materials and contracting provider, Knife River Corp. (NYSE: KNF), in May of 2023. To that end, throughout the process of the Knife River separation, management articulated that it was actively engaged in a strategic review of the remaining businesses and believed that ultimately creating a pure-play regulated delivery company would create value for shareholders. MDU currently retains a 10% ownership stake in KNF.

In terms of guidance, MDU projects 2023E earnings of $155-$165 million from its regulated utility business (i.e., the Electric, Natural Gas Distribution and Pipeline segments) with previous commentary suggesting a longer-term growth rate of ~5%-8%, driven by rate base and customer base increases. At Construction Services, sales are expected to be $2.8-$3.0 billion with EBITDA of $210-$230 million. [Note: management’s forecasts do not include one-time costs associated with its strategic initiatives.]  Current consolidated consensus estimates are for $4.86 billion and $720 million of revenue and adj. EBITDA in 2023 and $4.68 billion and $690 million in 2024E. To that end, based on guidance, commentary and industry trends it could be reasonably, if not conservatively, projected that MDU’s Utility and Construction Services businesses generate 2024E adj. EBITDA of $490 million, $234 million, respectively.

In terms of valuation, the broader regulated utility business (i.e., the Electric, Natural Gas Distribution and Pipeline segments) could be compared with regional electric & gas utilities, such as including Allete Inc. (NYSE: ALE), Alliant Energy (NYSE: LNT), Ameren Corp. (NYSE: AEE), CenterPoint Energy (NYSE: CNP), Consolidated Edison (NYSE: ED), NiSource (NYSE: NI), NorthWestern Corp. (NYSE: NWE), Public Service Enterprise Group (NYSE: PEG), amongst others, which trade at 10.0x 2024E EV/EBITDA while Construction Services could be imperfectly compared with peers, such as Aecon Group (ARE CN), Flour Corp. (NYSE: FLR), MasTec Inc. (NYSE: MTZ), and Primoris Services Corp. (NASDAQ: PRIM), amongst others, which trade at ~6.0x 2024E EV/EBITDA.

Applying peer multiples to each business implies segment values of ~$4.9 billion, ~$1.4 billion, respectively.  Accounting for net debt of ~$2.37 billion as well as the current value of MDU’s 10% stake in KNF, yields a total value of ~$5.4 billion or ~$26 per share (based on a share outstanding of 203.6 million).

Radar Screen – November 2023

Monthly publication providing ongoing analysis on companies where we see potential for a value-unlocking event

Companies discussed this month:  Alphabet Inc. (GOOG), APi Group Corp. (APG), Bloomin’ Brands (BLMN), California Resources Corp. (CRC), Carrier Global Corp. (CARR), Crown Holdings Inc. (CCK), FLEETCOR Technologies, Inc. (FLT), Goodyear Tire & Rubber, Inc. (FLT),  Enhabit Inc. (EHAB), Hasbro, Inc. (HAS), IAC Inc. (IAC), Liberty Broadband Corp. (LBRDK), Matthews International Corp. (MATW), PAR Technology Corp. (PAR), RCI Hospitality Inc. (RICK), Stanley Black & Decker (SWK)

Spin-Off Report Calendar – November 2023

Published monthly, The Spin-Off Calendar provides one-page summaries of every spin-off under coverage from the announcement date, followed by the filing of the Form 10 and continuing 60 days post completion.

Spin-Off Report Compendium – October 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations.

European Spin-Off Compendium – August 2023

Murray Stahl’s commentary on various investing themes and single stock recommendations in Europe. 

Bits & Pieces – November 2023

Covers mispriced stub securities, tracking stocks and other arbitrage opportunities.

Product Specialist

Rich Albanese
ralbanese@pcsresearchgroup.com
+1 646-839-5566