Drop Coverage of Albertsons Companies Inc. Effective Immediately

• On September 8, 2023, Albertsons Companies Inc. (NYSE: ACI) and The Kroger Co. (NYSE: KR) announced a definitive agreement with C&S Wholesale Grocers LLC to sell a portfolio of 413 stores
• Given the agreement, the previously planned spin-off, which was part of the ACI KR merger agreement, is no longer a necessity. As such the planned separation is no longer being pursued
• As such, we DROP coverage of Albertsons Companies Inc. effective immediately.
• Our prior estimates and fair values for ACI should no longer be relied on.

Drop Coverage of MDU Resources Group Inc. and Knife River Corp. Effective Immediately

• On May 31, 2023, MDU Resources Group Inc. (NYSE: MDU). completed the spin-off of Knife River Corp. (NYSE: KNF).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of MDU Resources Group Inc.. and Knife River Corp. effective immediately.
• Our prior estimates and fair values for MDU and KNF should no longer be relied on.

K To Complete North American Cereal Business Spin-Off on October 2, 2023; Maintain NEUTRAL Rating, and $73 FVE

• On September 11, 2023, before the market open, Kellogg Co. (NYSE: K) announced that it’s Board of Directors has approved the spin-off of its North American Cereal business. The spin company will adopt the corporate moniker WK Kellogg Co. and is expected to trade on the NYSE under the ticker “KLG”.
• The separation is expected to become effective on October 2, 2023, with shareholders of record as of September 21, 2023, receiving one share of KLG for every two shares of K held. Shares of KLG will begin trading on October 2, 2023.
• Following the separation, the parent company will change its corporate name to Kellanova and will continue to trade on the NYSE: under the ticker “K”.
• When-issued trading for WK Kellogg will begin on or about September 27, 2023, under the symbols “KLG WI”.
• We adjust our post-spin fair value estimate for WK Kellogg to $14 per share (previously $3.50 per share) to account for the one-for-four share distribution ratio.
• We maintain our pre-spin K fair value estimate of $73 per share and NEUTRAL rating.
• While we do not see a pre-spin opportunity, we do anticipate the potential for post-separation investment opportunities, depending on the ultimate initial trading range of Kellanova and WK Kellogg.
• Of primary interest would be if WK Kellogg experiences an initial sell-off of shares due to investors exiting the spin company ownership position in favor of maintaining a position in the more growth oriented, geographically diversified snacks company, which should pressure shares of WK Kellogg in initial trading.
• Additionally, given the relative estimated market capitalizations of the post-spin company’s it should be expected that WK Kellogg will not be included in the S&P 500 (K is currently a constituent and we would expect Kellanova to remain in the index), which would also create indiscriminate/forced selling by indexed investors.
• If shares of WK Kellogg trade at a significant discount, 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.

ARMK To Complete Uniform Services Spin-Off on September 30, 2023; Maintain BUY Rating, and $46 FVE

• On September 6, 2023, before the market open, Aramark (NYSE: ARMK) announced that it’s Board of Directors has approved the spin-off of its Uniform Services business. The spin company will adopt the corporate moniker Vestis and is expected to trade on the NYSE under the ticker “VSTS”.
• The separation is expected to be completed on September 30, 2023, with shareholders of record as of September 20, 2023, receiving one share of VSTS for every two shares of ARMK held. Shares of VSTS will begin trading on October 2, 2023.
• When-issued trading for Vestis and Aramark will begin on or about September 27, 2023, under the respective symbols “VSTS WI” and ARMK WI”.
• We adjust our post-spin fair value estimate for Vestis to $37 per share (previously $18 per share) to account for the one-for-two share distribution ratio.
• We maintain our pre-spin ARMK fair value estimate of $46 per share and BUY rating.
• Vestis will host an analyst day on September 13, 2023
• For more details, please refer to The Spin-Off Report dated May 23, 2023, and UPDATEs dated August 8, 2023, and August 16, 2023.

ARMK Files Form 10 for Uniform Services Business; Maintain BUY, and Adjust FVE to $46

• On August 15, 2023, after the market close, Aramark (NYSE: ARMK) announced that it had filed a Form 10 with the SEC in relation to its planned spin-off of its Aramark Uniform Services business (“AUS”). The filing was made under the temporary name of “EPIC NewCo”.
• The AUS separation is expected to be completed by ARMK’s FYE September 30, 2023.
• Details in the Form 10 include pro-forma capital structure and margins for the standalone AUS business.
• It is currently posited that the company will carry cash and equivalents of $30 million and $1.5 billion in long-term debt. AUS’ net debt of ~$1.4 billion implies post-spin net debt for the Food Services company (FSS) to total $5.8 billion based on the most recently reported quarter. We previously estimated AUS and FSS post-spin net debt levels of $1.6 billion and $4.8 billion.
• According to managements pro-forma disclosures, standalone AUS would have operated F2022 with an EBITDA margin of 13.9% and 13.4% through 3Q F2023. We previously modeled F2024 EBITDA margins of 15.5%.
• We adjust our post-spin fair value estimates for both FSS and AUS to incorporate updated post-spin capital structure, margin expectations, and current peer trading multiples. We now value shares of AUS at $18 per share, and the parent food service company at $28 per share. As a result, we slightly lower our pre-spin fair value estimate to $46 per share (previously $47 per share) and maintain our BUY rating.
• Aramark Uniform Services will host an analyst day on September 13, 2023.
• For more details, please refer to The Spin-Off Report dated May 23, 2023, and UPDATE dated August 8, 2023.

ARMK Reports 3Q F2023 Including Revenue and Profit Growth Across All Businesses; Debt Reduction Ahead of 4Q F2023 Spin-Off is Encouraging; Maintain BUY, Increase FVE to $47 (from $45)

• On August 8, 2023, before the market open, Aramark (NYSE: ARMK) reported 3Q F2023 (September FYE) results, which included 15% year-over-year revenue growth to $4.7 billion (14% organic growth) and a 34% increase in adjusted operating Income to $240 million versus 3Q F2022.
• ARMK’s revenue increased across all three business segments, with particular strength in FSS US, 44% year-over-year, while International FSS increased 14%, and Uniform Services increased by 10%. Profitability improvements were a result of maturation of new business, improvements in supply chain and fixed cost leverage, and cost management initiatives.
• ARMK management continued to prudently manage cash flow to reduce net debt ahead of the planned USS business spin-off, which management continues to target a completion by year-end F2023.
• Net debt/covenant adjusted EBITDA now stands at 4.7x versus 6.4x as of July 1, 2022. Leverage is expected to approximate 4.0x at the time of the spin-off.
• Aramark Uniform Services will host an analyst day on September 13, 2023.
• Management slightly increased its F2023 guidance to include organic revenue growth of ~15% (previously >13%), consisting of Global FSS growth of ~17% (from ~15%), and adjusted operating income growth of ~33% (from ~32%). FCF is expected to total $475 million ($300 million after deferred taxes and spin-off costs), and leverage of less than >4.0x.
• On a pre-spin, sum-of-the-parts basis, we increase our fair value estimate to $47 per share (previously $45 per share) on updated net debt as of 3Q F2023. In our view, ARMK is in the process of returning its segment margin profiles to closer approximate that of pre-pandemic levels, having already achieved that goal on a revenue basis. Through new client wins across FSS and Uniform, as well as successfully passing pricing through to counteract the inflationary environment, it appears the company is poised for above-historical earnings growth over the next several years. Absent a resurgence in inflation or a severe recession, we believe that shares of ARMK appear attractive heading into the separation of the Uniforms business. As such, we maintain our BUY rating on shares of ARMK.
• For more details, please refer to The Spin Off Report dated May 23, 2023.

YELL formally files for Chapter 11 bankruptcy protection; freight inflows to XPO (and other industry competitors) have already been showing marked acceleration since early-July (as well as into August

• Last night, Yellow Corp. (NASDAQ: YELL) formally filed for Chapter 11 bankruptcy protection, marking the end of its nearly 100-year history.
• The announcement comes with little surprise considering YELL provided legal notice to its unionized workforce, represented by the International Brotherhood of Teamsters, as well as its customers that it was “ceasing” operations and would file for bankruptcy, a week ago, on July 31^st.
• To that end, the reverberations around the LTL industry, in terms of incremental freight inflows to competitors, have been occurring for weeks with XPO seeing a 4.2% increase in tonnage and an 8.8% increase in its shipment count during July.  On a sequential basis, (i.e., June to July) tonnage rose 2.6% and the shipment count was up 3.2%; for perspective, normal seasonality would suggest tonnage and shipments would be down 4.1% and 2.8%, respectively, implying an about 6%-7% swing relative to normal seasonal trends.
• On XPO’s most recent conference call last week, management indicated that “excess capacity”, in terms of “doors and service centers”, is in the “mid-teens” but that it is prioritizing providing capacity to existing customers and being “disciplined in what freight we bring into the network” (in other words, they are focusing on pricing/yield, which we note is much more impactful to margins relative to actually moving more freight).  Anecdotally, the company acknowledged that “our customers understand that when you take 10% of capacity out of the market, its going to cost more to move freight…our base line expectation is 3% year over year growth…but this could help us move above that range”.
• All in all, the company was relatively coy on providing specifics, in terms of incremental margins, other than to say that its “would expect to outperform seasonality (of ~230 bps of deterioration) for OR (operating ratio) by at least 100 basis points” in 3Q.  As well, the company declined to give specifics about trends in August other than to say that, similar to July, they expected to outperform normal sequential seasonality (i.e., 2Q vs. 3Q), which could imply a ~4% decline in tonnage.   (Stay tuned for specifics when the company provides its regular monthly disclosure on tonnage in early-September when we will further refine our forecasts.)
• Longer-term, in response to the current market dislocation, management indicated that it was ramping its internal trailer manufacturing from 6,000 to 7,500 and that is likely to be at “the high end…or above” of its 8%-12% (of revenue) long-term cap ex range for the foreseeable future in order to “add more capacity” and capitalize on the ongoing opportunity.
• As well, again without providing specifics, the company anecdotally acknowledged that the current environment not only adds incremental confidence to its long-term target of achieving 600 basis points of margin improvement (into the low-80%’s) by 2027 but likely moves up that timetable.
• Our base case fair value for XPO remains $80 per share, based on a 10x multiple (compared LTL peers SAIA and ODFL at ~12x and 16x, respectively) applied to 2024E adj. EBITDA of $1.16 billion and projected net debt of $2.175 billion.

• This morning, before the market open, SNC reported 2Q 2023 consolidated sales up 13.9% to $2.13 billion (vs. consensus of $1.88 billion), including ~22% growth to $2.0 billion in the core SNCL Services business.  Total adjusted EBITDA increased ~39.5% to $183.9 million (vs. consensus of ~$152 million) with professional services & project management (PS&PM, which includes SNCL Services) posting ~30.5% growth to ~$167 million (compared with ~$128 million in 2Q 2022).
• Importantly, the backlog on its legacy LSTK Projects business declined ~$96 million sequentially (i.e., versus 1Q 2023) to ~$422 million and was down ~49% when compared with 2Q 2022.  The segment adjusted EBIT loss improved to $13 million in 2Q 2023 (as compared with a $37 million loss in the prior year period).  The company still expects to “hand over” 2 of the remaining 3 projects to the clients in 2023 (with the final project being completed in 2024); to that end, the company expects to generate positive free cash flow in 2H 2023.
• The company ended 2Q 2023 with net recourse & limited recourse debt of ~$1.68 billion, including $553 million in cash and $2.22 billion of debt, and a net leverage ratio of 3.1x (compared with 2.9x at the end of 1Q 2023 and 2022).  That said, as calculated by SNC’s credit agreement, the leverage ratio stood at 3.0x (compared with the company’s 3.75x covenant).
• In terms of 2023 guidance, the company increased its full-year outlook for organic revenue growth at SNCL Services to 12%-15% (from 5%-7%) while maintaining the remainder of its outlook, which calls for an adj. EBIT margin at SNCL Services of 8%-10% with adj. EBITDA margins at the Engineering Services subsegment (~60% of consolidated sales) of 14%-16%.  Corporate SG&A and amortization expense continue to be projected at ~$130 million and ~$90 million, respectively.  Based on an unchanged capital spending budget of $80-$100 million, SNC still expects to be cash flow positive in 2H 2023.
• Additionally, the company maintained its longer-term (20222-2024E) guidance .
• Our fair value for SNC is increased to $43 per share (from $38.50), which assigns value of $50 per share to SNCL Services, based on a blended multiple of ~9.5x, and $10 per share for the Capital segment, wholly comprised of the estimated value of its stake in Highway 407, while accounting for future LSTK losses, corporate overhead and net debt.

Tiptree posts top- and bottom-line growth of 19% and 20%, respectively, driven by growth of 31% and 59% in sales and net income at Fortegra; maintain our base case fair value estimate of $24.50 per share 

• Last night, after the market close, TIPT reported consolidated 2Q 2023 top-line growth of 19% to $404.5 million with 20% growth in net income to $23.8 million.  Consolidated return on equity (ROE) rose 520 basis points to 17.5%.
• At Fortegra, the company’s primary operating business, sales increased ~31% to $384.7 million with a nearly 44% jump in gross written premiums and equivalents (GWPE) while net income advanced ~59% to $30.1 million. The combined ratio improved 40 bps to 90.5% and Fortegra’s return on equity improved 790 bps to 32.4%, largely driven by continued growth in the company’s capital-light warranty business.
• The book yield on Fortegra’s $1.24 billion investment portfolio rose to 3.1% in 2Q 2023 (from 1.2% 2Q 2022) while the overall rating of its holdings improved to AA+ (from AA).  The average duration is 1.9 years (compared with 2.1 years I the previous quarter).
• Sales at Tiptree Capital fell ~57% to $19.8 million, primarily driven by the sale of the company’s shipping assets in 2022, while net income was 10K (compared with $3.9 million in 2Q 2022).  Net income at the mortgage business, Reliance, was essentially breakeven in 2Q 2023 (vs. a ~$1.2 million loss in 2Q 2022 and a ~$4.0 million profit in 2Q 2021).
• Corporate expenses fell to $9.5 million in 2Q 2023 (from $13.3 million in the prior year quarter) and the company continued to maintain no corporate level debt at quarter-end.
• The company does not provide any explicit financial guidance although management anecdotally indicated on this morning’s conference call that, based on current market trends, Fortegra’s growth will likely persist at least at historical rates (i.e., 20%-plus organic top-line growth and 25%-plus net income growth) in 2H 2023 and 2024.
• Our base case fair value for TIPT remains $24.50 per share based on a 12.5x multiple of projected 2024E net income at Fortegra (pro-rated for TIPT’s ultimate 68.6% ownership as well as a ~$41 million deferred tax liability) and a 0.5x multiple of book value, ex-NCI, at Tiptree Capital (see Exhibit #1 on page 2).

NCR Reports 2Q 2023 EPS; Margin Expansion is Encouraging; 4Q 2023 Spin-Off on Track; Maintain BUY, $32 FVE

• On August 2, 2023, after the market close, NCR Corp. (NYSE: NCR) reported 2Q 2023 results, which included a 1% year-over-year decline in revenue to $1.986 billion and a 15% increase in adjusted EBITDA to $389 million versus 2Q 2022.
• Notably, the revenue decline was largely expected as the company transfers to a subscription-based model versus an up-front perpetual license model. Margin expansion resulted from increased levels of recurring revenue (4% increase year-over-year) and cost productivity actions.
• On a year-over-year segment level, Digital Banking increased sales by 7%, Retail by 2%, while Payments & Networks was flat, and Hospitality and Self-Service Banking declined by 1% and 3% respectively.
• On a post-spin segment basis, NCR Voyix (the parent company containing Retail, Hospitality, and Digital Banking segments) increased revenue by 2% and widened EBITDA margins by 270 basis points to 24.8%. The spin company’s, which will adopt the corporate moniker NCR Atelos, revenue declined by 2% to $981 million with adjusted EBITDA increasing by 14% to $259 million (330 basis points of margin expansion).
• NCR continues to lower its leverage ahead of the planned separation, which is on track to be completed in 4Q 2023. The company generated $154 million in FCF in 2Q 2023 and has exceeded its goal of $500 million in FCF generated in 15 months prior to the separation, with approximately 4 months remaining. The company is now levered at 3.4x net-debt-to-EBITDA versus 4.0x at the end of 2Q 2022.
• On a pre-spin basis, we fairly value shares of NCR at $32 per share, consisting of approximately $11 per share in value from ATMCo. and $21 per share from the parent company. At this level, we are valuing shares at 7.6x our consolidated EBITDA estimate, which on the whole appears attractive when compared to SaaS companies, as well as considering the healthy cash flow from ATMCo., and opportunities for revenue acceleration at both post-spin companies if management can successfully implement customer shifts to the ATMaaS and SaaS platforms.
• Given the favorable business trends, combined with the implied upside to our fair value estimate, we maintain our pre-spin BUY recommendation on NCR. Post-spin, despite managements conjecture that investors appear interested in the ATMCo.’s cash flow characteristics, we would posit that NCR shareholders may rotate out of ATMCo. given the view that the ATM business is a legacy business that lacks growth, in favor of the parent company, which may initially pressure the new company’s share price.