PAR wins exclusive POS agreement from Burger King North America, providing us increased confidence in its 20%-30% recurring revenue growth forecast (as well as it ability approach cash flow positivity/profitability in the relative near-term); on the transactional front, commentary suggests a sale of the Government business (and/or incremental M&A at Restaurants) could also emerge in the relative near-term

• Today, before the market open, PAR announced that it has been selected as the exclusive point-of-sale (POS) provider, for both software and services at the traditional Burger King restaurants in North America. The deal includes both its Brink POS system/software as well as MENU Link technology, which facilities/streamlines the customer’s omni-channel ordering and kitchen management operations.
• While we will are keen on gathering some more specifics on the financial impact of this announcement, the deal certainly increases our confidence in PAR’s ability to achieve it 20%-30% ARR growth target (as well as approach cash flow positivity/profitability in the relative near-term); more broadly, we think the win lends credibility to the management’s contention that PAR’s investments, both organic and acquisitive, in its unified commerce platform capabilities in recent years will help deepen/consolidate its relationships with existing (and increasingly new) customers.
• Fundamental catalysts aside, we note that recent management commentary seemingly suggests that several transactional-related catalysts could be on the table in the relative near-term, including: 1) a sale of the Government business; 2) accretive M&A within the Restaurant segment (that accelerates PAR’s path to profitability) as well as; 3) potential for interest in the company from either strategic and/or private equity suitors (see Exhibits #1, #2 and #3 on page 2).
• As disclosed in the 2Q 2023 10-Q, the company has formally indicated that it is evaluating strategic alternatives for its Government business; more recently, at a recent investor forum PAR’s CEO indicated that it is “a very good time to divest a business in this category (see Exhibit #1 on page 2).
• For now, our fair value estimate for PAR remains $45 per share, reflecting value of $50 per share for the Restaurants/Retail segment, based on a blended 2024E sales multiple of 4.5x and $4 per share for the Government business, based on a 12.5x 2024E EV/EBITDA multiple, and accounting for ~$290.5 million of projected net debt (see Exhibit #4 on page 3).

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

Drop Coverage of BorgWarner Inc. and PHINIA Inc. Effective Immediately

• On July 3, 2023, BorgWarner Inc. (NYSE: BWA). completed the spin-off of PHINIA Inc. (NYSE: PHIN).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of BorgWarner Inc.. and PHINIA Inc. effective immediately.
• Our prior estimates and fair values for BWA and PHIN should no longer be relied on.

LAC Completes Lithium Argentina Completes Spin-Off; Rate Lithium Argentina at NEUTRAL with $4 FVE, Rate New Lithium Americas at NEUTRAL with a $19 FVE

• On October 3, 2023, after the market close, Lithium America’s Corp. (TSX: LAC, NYSE: LAC) completed its previously announced separation into two standalone publicly traded companies.
• Under the separation agreement, LAC shareholders received one share of Lithium Argentina Corp. and one share of Lithium Americas Corp. (“New Lithium Americas”) for each LAC share owned.
• Lithium Argentina now trades on the TSX and NYSE under the ticker “LAAC”. New Lithium Americas continues to trade under the symbol “LAC” on both the TSX and NYSE.
• Lithium Americas Corp. is a pre-production lithium miner that develops (and will eventually operate) lithium projects in two main geographic regions, namely Argentina and the U.S.
• We base our fair value estimates on management’s disclosed DCF and NAV values. Given the large reserve values, projected supply demand imbalance, and current pricing of lithium, it is difficult to argue that future cash flows will not exceed the pre-spin market capitalization/enterprise value. However, given the long-time frame in which the mines will produce lithium, currently modeled at 40 years, and the differences in initial production of battery-grade lithium from the two disparate sites, investors must consider the time-value of money in considering an investment.
• In that context, LAC’s spin transaction in and of itself is likely not a significant value-creating event, in contrast to most spin-offs that fall into our coverage universe. Instead, the separation highlights the near-term production ramp up in the Argentinian assets versus the long road ahead for the American asset. In that respect, investors looking to capitalize on the increasing demand for lithium and the structural supply and demand imbalance, would likely favor investment in Lithium Argentina, while investors with a longer investment time horizon may take a closer look at post-spin Lithium Americas.
• In the short-term, we would expect the share price of LAC be highly speculative, with shares reacting to news and litigation flow prior to the eventual production of battery-grade lithium. For Lithium Argentina, we would expect much less speculation in shares given the near-term production ramp up, and therefore expect shares to trade more dependently on production and pricing of lithium.
• Given the above noted differing characteristics of the two post-spin companies, most starkly illustrated by the significantly longer time frame until production ramps up at the U.S.-based asset, we view it as appropriate to value shares using a higher discount rate versus the Argentinian assets. Thus, we value shares of Lithium Americas (NewCo) at 12% and Lithium Argentina at 10%. Based on management’s post-spin capitalizations, we assign a post-spin fair value estimate of $19 per share to New Lithium Americas Corp, and $4 per share to Lithium Argentina.
• We rate both post-spin shares at NEUTRAL, based on the above noted factors related to the time horizon to capture the upside potential in shares and our opinion that the spin transaction is not necessarily the catalyst to immediately realizing that value. In that context, investors with a longer investment time horizon may wish to consider ownings shares.
• For more details, please refer to The Spin-Off Report dated August 8, 2023.

Novartis Completes Sandoz Spin-Off

On October 4, 2023, Novartis AG (NOVN SW, NYSE: NVS) completed the previously announced spin-off of its generic drug business, Sandoz. NOVN shareholders of record received one share of Sandoz for every five shares of NOVN. Sandoz primary listing is on the SIX Swiss Exchange with an American Depositary Receipt (ADR) program in the U.S. Sandoz will trade on the SIX under the ticker “SDZ SW”.

Novartis’s spin-off of its generics business follows an industry trend where large pharmaceutical companies have shed non-core assets to focus on higher margin patent protected drug portfolios. As with other industries in recent years, investor preference has shifted from diversification to specialization, with many spin-offs resulting in a higher margin growth company and a more mature cash flow-oriented company that provides investors greater choice to fit their styles. Inherent in most of these types of spin-offs (growth vs cash flow) is an expectation that the growth company would see a valuation multiple expansion that would ideally offset any multiple contraction that would be assigned to the cash flow company.

Given that pre-spin NOVN traded at the higher end of large pharmaceutical peers, it should be expected that the parent company would not see a large degree of multiple expansion, if any at all, while the generics company would likely experience a valuation contraction to approximate peers. In this framework, any value unlocked from this transaction is likely to be earnings based versus the structural re-rating that sometimes occurs in these types of transactions.

We value shares of Sandoz at 9.0x our 2024 EBITDA estimate, in line with its generics peer group, implying a post-spin enterprise value of $18.2 billion. Accounting for expected net debt of $3.6 billion, 419 million shares outstanding (based on the one-for-five share distribution ratio), and the current USDCHF exchange rate, we assign a post-spin fair value estimate of CHF 30 per share to Sandoz. We apply an 11.5x multiple to the parent company earnings, which is roughly equivalent to the current trading multiple and at the higher end of the peer group range and estimate post-spin Novartis to be worth $218.7 billion on an enterprise basis. Accounting for estimated post-spin net debt, current shares outstanding and FX rates, we assign a fair value estimate of CHF 84 per share to post-spin NOVN.

Dismissal of class-action claims related to the 2013 spin-off/2017 sale of Straight Path Communications lifts a long-running overhang for IDT

This report was not distributed.  It was linked from the Weekly Wrap-Up on Oct. 6, 2023

Kellogg Completes North American Cereal Business Spin-Off; Rate Kellanova at BUY with a $69 FVE; Rate WK Kellogg at NEUTRAL with a $15 FVE

• On October 2, 2023, before the market open, Kellogg Co. (NYSE: K) completed the spin-off of its North American Cereal business into a stand-alone publicly traded company. The spin company has adopted the corporate moniker WK Kellogg Co. and now trades on the NYSE under the ticker “KLG”.
• Following the separation, the parent company changed its corporate name to Kellanova and continues to trade on the NYSE under the ticker “K”.
• Kellogg shareholders of record as of September 21, 2023, received one share of KLG for every four shares of K held.
• Given the market capitalization of WK Kellogg, shares will not be included in the S&P 500, and instead the company will be added to the S&P SmallCap 600 as of October 2, 2023.
• K and KLG  are scheduled to release 3Q 2023 earnings on November 8, 2023.
• We adjust our post-spin fair value estimates to reflect the latest post-spin capital structure estimates, and now fairly value Kellanova at $69 per share (previously $70 per share) and WK Kellogg at $15 per share (previously $14 per share).
• In when-issued trading, shares of Kellanova closed at $55 per share, albeit on only 800 shares traded over three days. At the closing price, shares are trading at 10.9x our 2024 EBITDA estimate of $2.3 billion. Our $55 fair value estimate is based on a 13x EV/EBITDA multiple.
• For reference peers including Mondelez, Hershey, and J&J Snack Foods, amongst others, trade on average at approximately 15x the consensus 2024 EBITDA estimate.
• While we acknowledge that Kellanova likely deserves a discounted valuation versus the peer set (due to margin and growth profile), at ~11x shares appear attractive given opportunities to widen its revenue base and margins. As such we rate post-spin Kellanova at BUY.
• We rate shares of WK Kellogg at NEUTRAL. KLG shares closed trading at $14.68 on Friday.
• We continue to expect that shares of KLG will see selling pressure in initial trading as forced index selling combined with pre-spin K shareholder preference for the global snacks company (Kellanova) will increase selling volume over the next several trading days. Approximately 11,000 shares traded in the three day “when-issued” trading period. KLG has 85.6 million shares outstanding.
• If shares of WK Kellogg trade at a significant discount to our fair value estimate, investors may see an opportunity to invest in a “classic spin-off” where an “unloved” and underinvested entity is able to significantly improve operations and offer significant out sized returns over the longer term.
• Given a separate management, focused sales force, and an independent balance sheet, if management were to successfully widen margins to approximate that of peers and delever following the investment phase, WK Kellogg could show significant earnings growth potential in the out years.
• For more details, please refer to The Spin-Off Report dated August 16, 2023, and UPDATE dated September 11, 2023.

Danaher Completes Veralto Spin-Off; Rate Post-Spin DHR at NEUTRAL with a $242 FVE; Rate VLTO at NEUTRAL with a $79 FVE

• On September 30, 2023, Danaher Corp. (NYSE: DHR) completed the separation of its Environmental & Applied Solutions segment into a standalone, publicly traded company via a tax-free spin-off.
• The spin-company adopted the corporate moniker Veralto Corp. and now trades on the NYSE under the ticker “VLTO”.
• DHR shareholders of record as of September 13, 2023, received one share of VLTO for every three shares of Danaher held.
• We maintain our post-spin fair value estimates of $242 per share for DHR and $79 per share for VLTO. Based on the closing when-issued pricings from Friday, we rate both post-spin Danaher and Veralto at NEUTRAL.
• It is worthy to note that VLTO has spurred interest from ESG focused investors, which is the likely reason for its current trading level and heavy volume through when-issued. VLTO traded 2.8 million shares over its three day when-issued trading period.
• At current levels, shares of VLTO trade at 19.1x our 2024 EBITDA estimate of $1.2 billion, whereas peers generally trade in the mid-teens based on 2024 consensus estimates. At over 19x, we struggle to rationalize awarding a larger premium than we already do to shares despite acknowledging the company’s margin and exposure to favorable end markets. We value shares of VLTO at 18x our 2024 EBITDA estimate of $1.2 billion.

For more details, please refer to The Spin-Off Report dated September 6, 2023.

ARMK Completes Uniform Services Spin-Off; Rate Post-Spin ARMK at NEUTRAL with a $28 FVE, Rate Vestis at BUY with a $27 FVE

• On September 30, 2023, Aramark (NYSE: ARMK) completed the spin-off of its Uniform Services business. The spin company has adopted the corporate moniker Vestis and now trades on the NYSE under the ticker “VSTS”.
• Aramark shareholders of record as of September 20, 2023, received one share of VSTS for every two shares of ARMK held.
• We adjust our Vestis fair value estimate to better reflect the company’s prospects versus peers. We now value shares at 12x our 2024 EBITDA estimate of $416 million (previously we valued shares at 15x). While tempering our valuation multiple expectations, shares still trade at a discount to our fair value estimate and in line with peer UniFirst Corp., which currently trades at 9.6x the 2024 consensus EBITDA estimate.
• Given VSTS’s margin profile versus UNF, 14.5% versus 13.1%, we argue a premium to UNF is warranted, and rate shares of VSTS at BUY.
• In when-issued trading, shares of post-spin ARMK closed at $25.50 on Friday, approximating our $28 fair value estimate. Given limited upside we rate shares of post-spin ARMK at NEUTRAL.
• For more details, please refer to The Spin-Off Report dated May 23, 2023, and UPDATEs dated August 8, 2023, August 16, 2023, and September 6, 2023.

Close coverage of ATRL (formerly SNC) with shares trading roughly in-line with our fair value estimate

For context, ATRL (formerly SNC) returned ~94.5% (compared with a ~9% increase in the S&P 500 and a ~5% decline in the Russell 2000) since our initial recommendation in November 2022.

That said, with shares trading roughly in-line with our fair value estimate (see Exhibit #3 on page 3), we prefer to maintain a disciplined approach and close coverage/withdraw our recommendation, as of today’s close.

We will continue to monitor the shares for an opportunity to re-recommend if valuation shifts or incremental catalysts begin to materialize.

As an aside, investors should take note that SNC-Lavalin Group is rebranding as AtkinsRéalis, hence the new ticker, although its moniker will not legally be changed until the until the measure is approved by shareholders at the company’s 2024 Annual Meeting. The move reflects the company’s significant restructuring over the last several years, namely its exiting of unprofitable business lines and increased focus on its core SNCL Services business.

The new AtkinsRéalis, headquartered in Montreal, reflects its well-known legacy brand, Atkins, as well as the French verb, Réalis, which colloquially means “to make happen“.

NCR To Complete Atleos Spin-Off on October 16, 2023; Maintain BUY Rating, and $32 FVE

• NCR Corp. (NYSE: NCR) has announced that the company intends on completing its previously announced spin-off of its ATM-focused businesses on October 16, 2023, after the market close.
• The spin company will adopt the corporate moniker NCR Atleos LLC and is expected to begin trading on the NYSE on October 17, 2023, under the ticker symbol “NATL”.
• Following the separation, the parent company will change its corporate name to NCR Voyix Corp. and will begin trading under the ticker “VYX”.
• NCR shareholders of record as of October 2, 2023, will receive one share of NATL for every share of NCR held.
• “When-issued” trading for NCR Atleos is expected to begin on or about October 11, 2023, under the ticker “NATL WI”. Shares of the parent company are expected to begin trading “ex-distribution” on October 11, 2023, under the ticker “VYX-WI”.
• We adjust our pre- and post-spin fair value estimates to account for the latest capital structures and the one-for-two share distribution ratio. We now value NCR Atleos at $16 per share and NCR Voyix at $27 per share. On a pre-spin basis, NCR Corp. is now fairly valued at $35 per share.
• We maintain our pre-spin NCR BUY rating.

For more details, please refer to The Spin-Off Report dated July 20, 2023, and UPDATE dated August 3, 2023.