MATW reports 2Q F2023 results slightly ahead of our expectations and maintains “cautious” full-year F2023 adj. EBITDA guidance

• MATW reported 2Q F2023 consolidated sales up 7.8% (or ~10% on a constant currency basis) to $479.6 million with a ~6% increase in adjusted EBITDA to ~$58.5 million. Adj. EPS were $0.65 (down ~12% versus $0.74 in the prior year period).
• By segment, sales at the Memorialization segment rose 1.3% to $222.9 million with an 11.8% increase in adj. EBITDA to $48 million while Industrial Technologies sales increased 60.5%, most notably driven by the energy storage business (including the Olbrich and R+S acquisitions), to $125.5 million with an ~8% increase in adj. EBITDA to $15.5 million.  At SGK, sales fell ~10.5% to $131.2 million while adj. EBITDA declined 18% to $11 million (as adverse conditions in Europe as well as currency headwinds continued to negatively impact the business).
• The company ended 2Q F2023 with net debt of $736.1 million, including $41.9 million in cash and $778 million of debt, and a net leverage ratio of 3.5x (versus 3.85x in 1Q F2023 and 3.5x at the end of F2022).  Anecdotally, the company expects further debt reduction in 2H F2023 and its long-term target remains “at or below 3.0x”.
• In terms of guidance, the company maintained its full-year F2023 adjusted EBITDA guidance of $215-$235 million (compared with $210.4 million in F2022) noting that backlog in Industrial Technologies, specifically energy storage and warehouse automation, remain strong and Memorialization continues to perform well even as death rates continue to normalize off COVID-19 pandemic highs. At SGK, market conditions are expected to remain challenged, given its significant European exposure, but pricing conditions seem to be improving and the cost reduction efforts taken earlier in the year should drive margin improvement in 2H F2023 (and F2024).
• Anecdotally, management indicated on this morning’s conference call that its outlook reflects a “cautious” stance on the timing of revenue recognition of existing orders in the energy storage business as well as the timing of future orders, of which management suggests it is in multiple later-stage negotiations (e.g., “all” of the battery manufacturers in the Asia Pacific region).

Our base case fair value estimate for MATW remains ~$50 per share, reflecting a blended multiple 9.5x multiple on our F2024E adjusted EBITDA of ~$245 million and net debt of ~$704.5 million (see Exhibit #1 on page 2).

MSGE Completes Spin-Off of Live Entertainment Business; Rate MSG Sphere Co. at BUY with a $38 FVE, Rate New MSGE at NEUTRAL with a $31 FVE

• Madison Square Garden Entertainment Corp. (NYSE: MSGE) has completed the spin-off of its traditional live entertainment business. New Madison Square Garden Entertainment Corp. now trades on the NYSE under the ticker “MSGE”. The parent company has adopted the corporate moniker MSG Sphere Co. and trades on the NYSE under the ticker “SPHR”.
• Shareholders of record as of April 14, 2023, received one share of New MSGE for every share of Madison Square Garden Entertainment Corp. owned. SPHR retained a 33% ownership stake in New MSGE.
• Based on the initial trading prices, incorporating net debt as well as the implied market capitalization of New MSGE, we calculate shares of SPHR have an adjusted market capitalization of just $306 million and an enterprise value of $1.4 billion.
• Notably, the implied valuation is in stark contrast to our valuation of MSG Networks and the Sphere venue, which we value at approximately $1.8 billion on an enterprise value basis. Incorporating net debt of $1.0 billion, we fairly value shares of SPHR at $38 per share and assign a BUY rating to MSG Sphere Co.
• In terms of New MSGE, the current pricing is roughly in line with our $31 fair value estimate, as such we assign a NEUTRAL rating to MSGE.
• For more details, please refer to The Spin Off Report dated March 20, 2023, and UPDATEs dated March 30, 2022, and April 18, 2022.

MSGE Agrees to Sell its Majority Stake in TAO for Net Proceeds of $300 Million; MSGE and SPHR Have Begun When-Issued Trading;  In Our View, Current Trading Prices Indicate Minimal Value is Being Attributed to the Sphere Venue and MSG Networks

• Madison Square Garden Entertainment Corp. (NYSE: MSGE) has agreed to sell its majority stake in Tao Hospitality Group (“Tao”) to Mohari Hospitality, in a transaction valuing Tao at $550 million.
• MSGE has agreed sell it’s 66.9% majority stake in Tao and expects to receive approximately $300 million in net cash proceeds. The valuation, by our calculation, implies an 8.2x trailing EV to EBITDA multiple. (For context, our initial pre-spin, sum-of-the-parts valuation assigned a 9.0x forward multiple and a $390 million valuation to MSGE’s Tao ownership interest.)
• Additionally, on April 17, 2023, MSG Sphere Co. and New MSGE began trading in the when-issued market at $27.75 and $32.00 per share, respectively.
• Based on the initial when-issued trading prices, while noting that volumes have been extremely light, incorporating the value of the Tao sale and the resultant impact on net debt (assuming the $300 million in net proceeds is attributed to SPHR and the $69 million in Tao debt is unconsolidated from the current balance sheet) as well as the implied market capitalization of New MSGE, we calculate shares of SPHR have an adjusted market capitalization of just $414 million and an enterprise value, at a max, of $1.4 billion.
• Notably, the implied valuation is in stark contrast to our valuation of MSG Networks and the Sphere venue, which we value at approximately $1.8 billion on an enterprise value basis. If net debt at the parent company (MSG Sphere Co.) is adjusted down (at this point it is unclear where the Tao sale proceeds will be attributed), this implies a fair value of the operating Networks business and MSG venue of $1.2 billion, whereas if sale proceeds are not attributed to SPHR and net debt is not adjusted downward (i.e. Spin co. keeps the $300 million), this would imply a SPHR market capitalization of $782 million.
• If net debt at the parent company (SPHR) is adjusted down, this implies a fair value estimate of $49 per share for SPHR. Conversely, if sale proceeds are not attributed to SPHR and net debt is not adjusted downward, this would imply a $38 fair value estimate for SPHR. (These SPHR’s post-spin fair value estimate scenarios include the 33% ownership in New MSGE at the current when-issued pricing.)
• In terms of New MSGE, the current when-issued pricing implies a greater value being attributed to either the Entertainment business or the physical Madison Square Garden venue than our current fair value estimate incorporates. If we assume the higher value is ascribed to the venue (granting our assignment of $1.6 billion is likely conservative given the uniqueness of the property), this suggests a value of approximately $1.8 billion is being given to the arena. At a $1.8 billion venue valuation, with an unadjusted post-spin net debt, New MSGE’s fair value estimate would be $31 per share.
• All told, we adjust our post spin fair value estimates to $49 per share for SPHR and $31 per share for New MSGE. On a pre-spin, sum-of-the-parts basis, we adjust our fair value estimate to $80 per share and continue to recommend shares of MSGE ahead of the April 20, 2023, distribution date. Our fair value estimates are subject to change based on the allocation of the Tao sale proceeds.
• Given the light volume of when-issued trading and implied value of SPHR, we expect that before regular-way trading begins on April 21, 2023, the mispricing of SPHR-WI and MSGE-WI will somewhat correct themselves, but still expect the value opportunity will reside on the MSG Sphere Co. side of the separation.
• For more details, please refer to The Spin Off Report dated March 20, 2023, and UPDATE dated March 30, 2022.

GTX reports preliminary 1Q 2023 results and raises full-year 2023 sales, adj. EBITDA and FCF guidance

• This morning, before the market open, GTX announced preliminary 1Q 2023 results indicating net sales rose 8% (or ~13% on a constant currency basis) to $970 million with adjusted EBITDA growth of ~15% to $168 million (versus $143 million in 1Q 2022).  Net income was ~$81 million (versus $88 million in the prior quarter) while adj. free cash flow (FCF) was $88 million (compared with $38 million in the year ago period).
• The company still expects to report actual 1Q 2023 results before the market open on Monday, April 24, 2023 (with a conference call that morning at 8:30 a.m.).
• Additionally, in conjunction with the launch of its previously announced debt offering (to fund the $570 million repurchase of Series A Preferred stock), the company updated its full-year 2023 guidance; to that end, the company now expects 2023 net sales of $3.79-$3.98 billion (versus prior guidance $3.55-$3.85 billion), implying constant currency growth of ~5%-10% (previously 1%-6%).  Adjusted EBITDA and FCF are now projected to be $585-$635 million and $315-$415 million, respectively (versus prior guides of $555-$615 million and $300-$400 million).  GAAP net income is projected to be $231-$268 million (compared with the previous range of $255-$300 million; see Exhibit 1 on page 2).
• Management’s current projections assume light vehicle production of ~83 million units (up 1% year over year versus its prior commentary suggesting a flat comparison) along with a Euro/Dollar exchange rate of 1.07 (previously 1.05).  Research & Development (R&D) costs and capital expenditures are expected to be ~4.4% and 2.3% of net sales, respectively, of which 50% and 20%, respectively, will be devoted to electrical technology innovation.
• At quarter-end, the company had net debt of $902 million, including $291 million of cash and $1.19 billion of debt.  That said, following the aforementioned debt offering the company expects a pro forma net leverage ratio of ~2.7x (compared with 1.65x at the end of 2022 and 2.3x at the end of 2021).  The company’s longer-term leverage target remains ~2.0x.
• Our base case fair value estimate for GTX remains at ~$11 per share, reflecting an 8.0x multiple on our 2024E adjusted net income forecast of ~$348.5 million and a fully diluted share count of ~263.5 million (see Exhibit #2 on page 2).

GTX reaches an agreement to convert its Series A Preferred stock into common shares on or about July 3, 2023, simplifying the capital structure and eliminating ~$160 million of annual dividends

• This morning, before the market open, GTX announced an agreement with Centerbridge and Oaktree to convert all of its 11% yielding Series A Preferred stock into common stock on or about July 3, 2023. 
• In conjunction, the company will also repurchase ~$570 million of the Series A stock from the aforementioned investors (at ~$8.10 per share in a range of $7.875-$8.50 depending on the VWAP of its common shares over the next 15 days), which will reduce their combined pro forma ownership to ~30% (from ~45%).  As a result, the investors will reduce their allotted Board representation to 2 directors (down from 6).  Also, the investors have agreed to “lock-up” restrictions for 50% of their shares for six months and the remaining 50% for twelve months.
• As part of the transaction, all holders of Series A Preferred stock (NASDAQ: GTXAP) will receive a preference dividend of $0.144375 per share in cash along with additional preference and accrued dividends of ~$0.8535 (which are payable in cash or kind at the company’s discretion).
• The company expects to fund the repurchase with a new $700 million term loan B, which is anecdotally expected to result in incremental interest expense ~$50 million and a pro forma net leverage ratio of ~2.7x (compared with 1.65x at the end of 2022 and 2.3x at the end of 2021).  That said, the company is still targeting a longer-term leverage profile of ~2.0x.
• Importantly, this transaction will complete the simplification of GTX’s capital structure into a single class of equity (with a pro forma market capitalization of ~$2 billion based on current market prices), which we expect will widen its investor base, including the potential for index inclusion and increased sell-side research coverage/visibility, while also eliminating ~$160 million of annual dividends paid to the Series A Preferred holders.
• As previously indicated on April 4^th, GTX expects full-year 2023 net income and adj. EBITDA to be at the “high end” of its initial guidance of $255-$300 million and $555-$615 million (see Exhibit 1 on page 2), respectively, driven by stronger volumes, solid operational execution and favorable currency fluctuations.
• To that end, the company still expects to report actual 1Q 2023 results as well as formally update its full-year guidance before the market open on Monday, April 24, 2023 (with a conference call that morning at 8:30 a.m.).
• Our base case fair value estimate for GTX remains ~$11 per share, reflecting an 8.0x multiple on our 2024E adjusted net income forecast of ~$350 million and a fully diluted share count of ~263.5 million (see Exhibit #2 on page 2).

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Sodexo to Spin-Off Benefits and Rewards Services Businesses

On April 5, 2023, Sodexo SA (SW FP) announced the intention to spin-off its benefits and rewards services businesses (“BRS”) into a standalone, publicly traded company. The transaction, which is scheduled to be completed in 2024, is supported by SW’s founding family’s investment firm, Bellon SA, who expects to remain a long-term shareholder in both post-spin entities. Bellon SA controls 42.8% of the shares and 57.5% of the voting rights. Today, the company, which was founded in 1966 and is headquartered in Issy-les-Moulineaux, France, describes itself as “the global leader in sustainable food and valued experiences at every moment in life: learn, work, heal and play.”

In F2022 (August ending fiscal year), the company generated EURO 21 billion in revenue and EURO 1.1 billion in underlying operating profit. F2022 results benefited greatly from continued re-openings following COVID-19 lockdowns as revenue increased 21.2% (15.7% on a constant currency basis) and margins widened by 170 basis points to 5.0%. Through 1H F2023, revenue increased by 17.8% (12% on a constant currency basis) and margins increased 60 basis points versus 1H F2022 to 5.8%.

Following the separation, the parent company will control the On-site Services business (“OSS”), which provides food and facility services to a wide range of institutions, including educational, healthcare, corporate, and government entities. OSS generated EURO 20.3 billion in revenue during F2022, representing a 25.7% year-over-year increase, and EURO 926 million in underlying operating profit (a 4.6% margin versus 2.9% in the prior year). Through 1H F2023, OSS segment revenue increased 12.9% and margins widened 20 basis points to 5.1% versus 1H F2022.

BRS provides employee benefits and services diversification. The company offers tech-enabled solutions for meal plans as well as rewards, public vouchers, fuel and fleet expense, health and wellbeing benefits. The BRS business generated EURO 865 million in revenue and EURO 248 million in underlying operating profit, representing a 14.2% revenue increase and 360 basis points of margin expansion. Through 1H F2023, revenue increased by 27.5% and margins increased 530 basis points to 31.9%. Notably, BRS revenue and margins have benefited from the current rising interest rate environment.

In terms of rationale, management has cited that as separate entities, the post-separation companies will be able to attract a more focused shareholder base. It should be noted that at FYE 2022 (August fiscal year-end), the company began restructuring its OSS business by geography, which management believed would simplify the business and allow the business to return to pre-COVID sales levels, which at least by 1H F2023 results appears to be on track.

Within 1H F2023 results, which were issued in conjunction with the spin off announcement, management adjusted its F2023 guidance to include group organic revenue would increase by 11% (previously 8-10%) with group underlying operating profit margins of 5.5% (maintained). Notably, revenue growth is benefiting from 2H F2023 price increases expected to be above 5%. BRS organic revenue is now targeted at approximately 20% with margins “close to” 32% (on a constant currency basis). Guidance was not provided for OSS.

Shares of SW currently trade at 8.0x the consensus 2024 EBITDA estimate. Following the separation, OSS should be more aptly compared to the likes of Aramark (NYSE: ARMK) and Compass Group PLC (CPG LN), which trade at 9.7x and 11.4x, respectively, while BRS could be compared to WEX Inc. (NYSE: WEX), which trades at about 7.0x.

Based on management’s guidance for the group and BRS, along with the assumption that growth moderates in F2024 on less benefits from COVID re-openings, it could be projected that BRS would generate EURO 387 million in EBITDA and OSS would generate EURO 1.66 billion in F2024. Based on peer multiples, this would imply BRS and OSS enterprise values of EURO 2.7 billion and EURO 17.4 billion, respectively. Accounting for the current net debt of EURO 1.9 billion and 147.5 million shares outstanding, we assign a preliminary, pre-spin, sum-of-the-parts fair value estimate of EURO 124 to shares of SW.

GTX expects full-year 2023 adj. EBITDA results at the high-end of its initial guidance, which could precipitate the Series A Preferred Stock conversion by 2Q 2023 (assuming the stock can maintain a 75-day VWAP of $7.88 per share)

• This morning, before the market open, GTX indicated that it expects full-year 2023 net income and adj. EBITDA to be at the high end of its initial guidance of $255-$300 million and $555-$615 million (see Exhibit 1 on page 2), respectively, driven by stronger volumes, solid operational execution and favorable currency fluctuations.
• The company expects to report actual 1Q 2023 results as well as formally update its full-year guidance before the market open on Monday, April 24, 2023 (and will hold a conference call that morning at 8:30 a.m.).
• Importantly, this guidance suggests that GTX could meet the $600 million trailing 12-month (TTM) EBITDA threshold required to trigger the conversion of its Series A Preferred Stock (leaving it with a capital structure of simply debt and equity) as early as 2Q 2023 (when we expect its leverage ratio will be close to ~1.5x (compared with 1.64x at the end of 2022 and 2.33x at the end of 2021).
• That said, we note that the automatic conversion also requires the 75-day volume weighted average price (VWAP) of its common stock to be above $7.875 (compared with its current VWAP of $7.70).
• For context, recall that GTX’s initial 2023 guidance (see Exhibit #1 on page 2) called for sales of $3.55-$3.85 billion (up ~2.5% at the mid-point although on a constant currency basis revenue was expected to grow 1%-6%). Adj. EBITDA was projected to be $555-$615 million (a ~2.5% increase at the mid-point) while adj. free cash flow was projected to be $300-$400 million (up ~12% at the mid-point). GAAP net income was projected to be $255-$300 million.
• Our base case fair value estimate for GTX remains ~$11 per share, reflecting an 8.0x multiple on our 2024E adjusted net income forecast of $420 million and a fully diluted share count of ~320 million (see Exhibit #2 on page 2).

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Crane Holdings Co. Completes Spin-Off Carne Co.; Rate CXT at BUY with $58 FVE

• On April 3, 2023, after the market close, Crane Holding Co. (NYSE: CR) competed the spin-off of Crane Co.
• The spin company now trades on the NYSE under the ticker “CR”. CR shareholders of record as of March 23, 2023, received one share of New CR for every one shares of Crane Holdings Co. owned.
• Following the separation, the parent company has adopted the corporate moniker Crane NXT Co. and trades on the NYSE under the symbol “CXT”.
• CR recently held investor days for both New CR and CXT, in which the companies reaffirmed previously stated guidance for both post spin entities. In 2023, New CR is expected to generate $1.98 billion in revenue, $280 million in operating profit, $321 million in adjusted EBITDA, and EPS of $3.40-$3.70.
• For its part, CXT is guided to generate 2023 revenue, operating profit, adjusted EBITDA, and EPS of $1.36 billion, $319 million, $364 million, and $3.65-$3.95 per share, respectively.
• In terms of rationale, management clearly believes that by separating the PMT business from the AE, PFT, and EM segments, the market will more easily be able to compare both companies to their respective peer sets.
• The crux of management’s argument for separating the PMT business is rooted in its belief that CXT will attract a more focused investor base that will re-rate the stock to more accurately reflect the growth, margin, and technology attributes of the business. Management believes that Crane NXT is most comparable to SMID-cap industrial technology companies, which have historically traded in the low- to mid-double digit range on forward EV/EBITDA. Historically, sell-side coverage has looked more toward traditional payment companies that trade in the mid-single digit range as a proxy for valuing PMT within the current conglomerate structure.
• The ultimate success of the spin-off in terms of creating shareholder value will be dependent on the re-rating of Crane NXT. While it is our opinion that the business attributes of the PMT business warrant a premium multiple to traditional payment peers, it remains unclear what the actual market multiple will be. It is probable that the shares will trade lower in initial trading, as a lack of analyst coverage and shareholder rotation out of the parent company are likely to depress the shares. Following initial trading, Crane NXT will become a “show me” story, where management probably will have to more clearly articulate its business and growth strategies, along with meeting its financial targets, before a fully SMID-cap industrial technology multiple could be awarded. That said, we see value in Crane NXT and expect that over time, the market will expand the multiple awarded to the shares.
• In the when-issued market, shares of Crane Co. closed at $74.68, implying that shares of New CR are trading at ~12x our 2024 EBITDA estimate. Following the separation, Crane Co. will be compared directly to flow control and aerospace part supplier peers, which respectively trade at approximately 13.0x and 10.5x the consensus 2024 EBITDA estimate.
• Shares of CXT closed at $40.30 and are trading at slightly above 7x our 2024 EBITDA estimate, which would be slightly ahead of the aforementioned “traditional payment” peers, yet below the SMID-Cap industrial technology group.
• On a post-spin basis, we assign a fair value estimate to Crane Co. of $74 per share, and $58 per share to Crane NXT. Given the implied upside to our fair value estimate, combined with our favorable outlook on an eventual re-rating of Crane NXT, we recommend shares of Crane NXT and rate Crane Co. at NEUTRAL.
• For more details, please refer to The Spin Off Report dated February 10, 2023, and UPDATE published on March 10, 2023.

MSGE to Complete Live Entertainment Spin-Off on April 20, 2023

· Madison Square Garden Entertainment Corp. (NYSE: MSGE) has announced that it will compete the previously announced spin-off of the company’s live entertainment business after the market close on April 20, 2023.

· The spin-off will be accomplished via a pro-rata distribution, to both MSGE Class A and Class B common stockholders, of shares in the spin company, to be equivalent, in aggregate, to approximately two-thirds economic interest in the spin company.

· Following the transaction, the spin company will retain the MSG Entertainment Corp. moniker. The parent company will be renamed MSG Sphere Corp. and will retain a one-third economic interest in the spin company. The spin-off transaction will be tax-free to MSGE shareholders.

· The spin company expects to trade on the NYSE under the ticker “MSGE”. MSGE shareholders of record as of April 14, 2023, will receive one share of new MSGE for every share of Madison Square Garden Entertainment Corp. owned.

· Following the separation, the parent company will trade on the NYSE under the symbol “SPHR”.

· When-issued trading for MSG Sphere Corp. is expected to begin on or about April 17, 2023, under the symbol “SPHR WI”. Shares of Madison Square Garden Entertainment Corp. will trade ex-distribution under the ticker “MSGE WI” on or about the same date.

· The spin-off will separate the fairly stable entertainment and bookings business along with the highly valuable Madison Square Garden arena, from a business that is in transition as it looks to stabilize subscriber count at Networks and an unproven Sphere arena. (Management has indicated it is looking to sell its ownership position in Tao).

· On a pre-spin, sum-of-the-parts basis, we assign a fair value estimate of $75 per share to Madison Square Garden Entertainment Corp. Our fair value estimate includes $34 per share in value from the parent company (MSG Sphere), and $41 per share in value derived from New MSGE.

· Given the implied upside from the current share price, combined with our view that MSGE’s assets are undervalued within the current corporate structure, we recommend shares of MSGE prior to the spin-off. Following the separation, we expect investor skepticism surrounding MSG Sphere’s as yet unproven ability to drive profitable revenue at the Las Vegas Sphere will likely weigh on shares, at least initially. That said, we think longer term investors that believe in the Sphere concept could see significant returns over time if the company is able to execute on its strategy to maximize utilization at the facility.

For more details, please refer to The Spin Off Report dated March 20, 2023.