RICK acquires its 51^st nightclub in Odessa, TX for $1.8 million; full 3Q F2022 results expected Aug. 9^th; maintain $74 per share fair value estimate

• This morning, RICK announced it had acquired a nightclub, which will be re-branded as a PT’s Showclub, in Odessa, TX for $1.8 million in cash and seller financing. The transaction includes all necessary licenses and a 5,200 sq. ft. facility on one acre of land at 3306 NW Loop 338 (in Ector County).
• In our estimation, the new club, which is expected to begin contributing to results by the end-of September, likely generates ~$0.5-$0.6 million of annual EBITDA, suggesting a purchase price at the low-end of management’s 3x-5x target. For context, the addition expands RICK’s nightclub portfolio to 51 in 13 states (and management thinks this new location will complement its two other brands, Rick’s Cabaret and Jaguars, in the wider Odessa-area).
• Recall, last week, RICK preliminarily reported 3Q F2022 consolidated sales up ~24% to $70.1 million, suggesting full-year results at the high-end of management’s anecdotal guidance of ~$260-$280 million.
• As well, the company disclosed that it repurchased ~168,000 shares (roughly 1.8% of the total) for $9.2 million or an average price of ~$54.80 per share in 3Q F2022, which represented a notable acceleration from the ~45,650 shares that were repurchased (at an average price of $62.35 per share) in the first six months of F2022. At the time, we estimated that RICK still had ~$19.5 million remaining on its repurchase authorization (and we highlight management commentary suggesting RICK will continue to be active at current stock prices and be “aggressive” if stock ever falls under $50 per share.)
• Despite the increased repurchase activity (and a ~$5 million club acquisition) during the quarter, RICK ended 3Q F2022 with cash of ~$37.5 million (compared with ~$38 million in 2Q F2022 and ~$36 million at the end of F2021). We project RICK will end F2022 with leverage and interest coverage ratios of ~1.8x and ~6.0x, respectively.
• RICK expects to release its full/audited quarterly results on August 9^th.  Management did not give any sense for segment margins in 3Q F2022 but did indicate that top-line trends had continued to show increases in July and that the acquisition pipeline remained strong.
• Our fair value estimate remains $74 per share, reflecting a blended multiple of ~9.5x F2024E EV/EBITDA multiple, and accounting for ~$128 million of projected net debt (see Exhibit #1 on page 2).

ABB Ltd to Spin-Off Turbochargers Business 

On July 20, 2022, after the Swiss market close, ABB Ltd. (ABBN SW) (“ABB”) announced that the company intends to spin-off its turbocharging business into a standalone, publicly traded company. Accelleron Industries Ltd is expected to list on the SIX Swiss Exchange in Zurich on October 3, 2022, subject to customary conditions including approval by ABB shareholders at an Extraordinary General Meeting scheduled for September 7, 2022. The tax status of the transaction was not disclosed in the company’s press release.

As the company currently stands, ABB reports results under four operating segments: Electrification (44% of revenue and 48% of EBITA), Motion (23% of revenue and 27% of EBITA), Process Automation (21$ of revenue and 18% of EBITA), and Robotics & Discrete Automation (11% of revenue and 8% of EBITA).

Electrification: “manufactures and sells electrical products and solutions which are designed to provide safe, smart and sustainable electrical flow from the substation to the socket.” The product portfolio, which is increasingly focused on digital and “connected solutions”, includes EV charging infrastructure, distribution automation products, switchboard and panelboards, circuit breakers and UPS solutions, wiring accessories, and intelligent home solutions (smart HVAC, security, etc.), amongst others. Electrification generated $13.2 billion in revenue and $2.1 billion in EBITA in 2021 (17.1% margin). Notably, ABBN reports results in U.S. dollars despite being a Swiss listed company.

Motion: “manufactures and sells drives, motors, generators, traction converters and mechanical power transmission products that are driving the low-carbon future for industries, cities, infrastructure and transportation.” Products include “digital technology and related services enable industrial customers to increase energy efficiency, improve safety and reliability, and achieve precise control of their processes.” Products are classified by categories of Large Motors & Generators, IEC LV Motors, NEMA Motors, Drive Products, System Drives, Service, Traction and, until October 2021, Mechanical Power Transmission. Motion generated $6.9 billion in revenue and $1.2 billion in EBITA in 2021 (16.1% margin)

Process Automation: “develops and sells a broad range of industry-specific, integrated automation and electrification and digital systems and solutions, as well as digital solutions, lifecycle services, advanced industrial analytics and artificial intelligence applications and suites for the process, marine and hybrid industries.” Products include control technology for manufacturing, sensing, measurement, analytical instrumentation, marine propulsion systems, and large turbo chargers. Process Automation generated $6.3 billion in revenue and $801 million in EBITA in 2021 (12.8% margin).

Robotics & Discrete Automation: “delivers its products, solutions and services through two operating Divisions: Robotics and Machine Automation.” Products include industrial robots, software, robotic solutions and systems, field services, spare parts, and digital services. Machine Automation specializes in solutions based on its programmable logic controllers (PLC), industrial PCs (IPC), servo motion, transport systems and machine vision. Robotics & Discrete Automation generated $3.3 billion in revenue and $355 million in EBITA in 2021 (10.8% margin).

The announcement to spin off the Turbochargers business does not come as a surprise, as the company has been focused on simplifying its business and “focus on the megatrends of electrification and automation.” In addition to the spin-off, the company also announced that it will conduct a partial IPO of its E-mobility business, which is in the business of electric vehicle charging infrastructure.

“The Turbocharging Division manufactures and services turbochargers for diesel and gas engines with power levels ranging from 500 kilowatts to over 80 megawatts. Key end sectors are marine and land-based power generation.” Management disclosed that Accelleron generated $756 million in revenue and had an operating margin of 25% in 2021.

Despite the Accelleron’s focus on the marine, energy, rail, and off highway sectors, following the transaction the company will likely be compared to auto parts suppliers that manufacture turbochargers. In that view, peers such as Garrett Motion Inc. (NASDAQ: GTX), which trades at 2.7x trialing EBITDA, and BorgWarner Inc. (NYSE: BWA), which trades at 5.2x trailing EBITDA. Based on disclosed revenue and operating margins, while incorporating proportionate depreciation and amortization from the Process Motion segment on revenue contribution basis, we estimate that Accelleron generated $202 million in EBITDA in 2021. Applying a 5.0x multiple and based on the current CHF/USD exchange rate of 1.0284, we estimate that the spin company would be valued at CHF 983 million on an enterprise basis.

The parent company is not likely to receive a multiple rerating benefit given the relatively small contribution that the turbochargers business had on the overall conglomerate. As such we assume a steady valuation multiple post spin. Accounting for the lost revenue and a post-separation estimated EBITDA margin of 16%, the parent company would have generated $4.5 billion in EBITDA in 2021. Applying the current multiple of 12.5x and the current exchange rate, ABB would be fairly valued at CHF 54.8 billion on an enterprise basis.

On a preliminary, sum-of-the-parts basis, we fairly value shares of ABB at CHF 26.30 per share, which is roughly in line with the current share price

ALERT: Jefferies to Spin-Off Vitesse Energy Business

On July 19, 2022, before the market open, Jefferies Financial Group Inc. (NYSE: JEF) announced that the company plans to separate its E&P business, Vitesse Energy, into a standalone, publicly traded company via a tax-free spin-off. The separation is expected to be completed prior to year end 2022. Additionally, JEF announced that it has agreed to sell its Idaho Timber business in two transactions with a combined sale price of $239 million, which is expected to result in a pre-tax gain of $140 million. The Timberland sales are expected to close in August 2022.

Jefferies Financial Group is primarily known for its investment banking, capital markets, and asset management businesses, however as a result of a merger with Leucadia National Corp. in 2013, the company has a legacy portfolio of merchant banking businesses that includes Vitesse Energy, the Idaho Timber businesses, as well as various businesses involved in fixed wireless broadband, real estate, and online foreign exchange trading services.

Over the past four plus years, JEF has been strategically liquidating its Merchant Banking portfolio’s businesses by either selling to third parties, distributing to shareholders, or transferring assets from Merchant Banking into the Asset Management segment. The planned spin-off and sale, along with managements plans to merge Jefferies Group LLC into Jefferies Financial Group Inc, reducing duplicate SEC filing requirements, and eliminate the need to report Merchant Banking as a separate reportable segment. Post spin and sale, the legacy Merchant Banking portfolio’s net book value to under $1 billion (from approximately $1.6 billion).

As it stands today, JEF reports under three segments: Investment Banking and Capital Markets (83% of revenue and EBITDA), Asset Management (41% of revenue and 6.5% of EBITDA), and Merchant Banking (13% of revenue and 10.5% of EBITDA).

PRELIMINARY VALUATION

Given limited disclosures on the profitability of the businesses held within the Merchant Banking segment, we approach our preliminary valuation of the spin company based on disclosed net book value and barrels of oil equivalent per day generated from the business. As of year-end F2021 (November year-end) Vitesse was reported to be producing 10,000 barrels of oil equivalent per day (oil represented 80% of production), and had a net book value of $501.5 million. As of May 31, 2022, Vitesse had a net book value of $427 million. In early January 2021, JEF released a presentation titled “Merchant Banking Fair Value Perspective”, in which the company attempted to estimate public fair values of the Merchant Banking businesses. Notably, the company valued its oil and gas assets at 1x book value. Keeping with this methodology we fairly value the spin company at approximately $2 per share in value. We note that a sampling of peer E&P companies currently trade between 2x and 3x book value, which does provide upside optionality to our preliminary fair value estimate.

As for the remaining parent company, we base our initial fair value estimate based on reported trailing pre-tax income for the Asset Management business and the Investment Banking divisions and apply low end peer multiples. Post-tax we estimate that Asset Management would earn $120.5 million, which, valued at 7x results in a segment valuation of $843 million, or roughly $4 per share. We value Investment Banking at 5x post-tax earnings of $1.5 billion, or $7.5 billion for the business. Thus, on a per share basis, we value Investment Banking at approximately $32.50.

On a preliminary, sum-of-the-parts basis we assign a fair value estimate of $38 per share to JEF

GlaxoSmithKline plc Completes Share Consolidation; Update GSK Fair Value to $40 per Share, Maintain NEUTRAL

• On July 18, 2022, after the market close, GlaxoSmithKline plc (GSK LN, NYSE: GSK) announced that the company had completed its previously announced share consolidation in the ratio of four shares for every five shares owned.
• We adjust our GSK LN and GSK fair value estimates to reflect the revised share count.
• We now fairly value shares of GSK LN at GBP 16.52 and shares of GSK at $39.69 per share.
• For more details, please refer to The Spin Off Report dated June 7, 2022, and UPDATE dated July 18, 2022.

GlaxoSmithKline plc Completes Share Consolidation;

Update GSK LN Fair Value to GBP 16.52 per Share, Maintain NEUTRAL
 

• On July 18, 2022, after the market close, GlaxoSmithKline plc (GSK LN, NYSE: GSK) announced that the company had completed its previously announced share consolidation in the ratio of four shares for every five shares owned.
• We adjust our GSK LN and GSK fair value estimates to reflect the revised share count.
• We now fairly value shares of GSK LN at GBP 16.52 and shares of GSK at $39.69 per share.
• For more details, please refer to The European Spin Off Report dated June 7, 2022, and UPDATE dated July 18, 2022.

GlaxoSmithKline plc Completes Haleon Spin-Off; Rate Post-Spin GSK at NEUTRAL with a $32 FVE; Rate HLN at NEUTRAL with a $8 FVE

• On July 18, 2022, before the market open, GlaxoSmithKline plc (GSK LN, NYSE: GSK) announced that the company had completed the spin-off of its Consumer Healthcare business into the Haleon Group (HLN LN, NYSE: HLN).
• GSK Shareholders received one share of Haleon for every share of GSK owned.
• HLN began trading on the LSE on July 18, 2022.
• Haleon American Depositary Shares (“Haleon ADS”) are expected to begin when-issued trading today and regular-way trading on July 22, 2022. Each Haleon ADS represents two Haleon ordinary shares.
• We maintain our post-spin fair value estimates for GSK LN of GBP 13.22 and HLN LN of GBP 3.39.
• We adjust our post spin fair value estimates for GSK and HLN ADS’s to $31.62 and $8.11 to account for the change in the GBP/USD exchange rate since out initial publication.
• Notably, GSK will complete a share consolidation (aka reverse stock split) on July 18, 2022, after the market close. The final consolidation ratio will be determined post-closing on July 18, 2022, and our fair value estimates for GSK LN and GSK will be adjusted to reflect the revised shares outstanding.
• Given the current lack of upside to our fair value we rate shares of GSK LN and GSK at NEUTRAL.
• We rate shares of HLN LN and HLN at NEUTRAL as a significant percentage of Haleon shares are expected to be sold, which we expect to present an overhang on the share price. As a reminder GSK retained 13.6% of HLN shares and Pfizer Inc. (NYSE: PFE) owns 32% of HLN shares. Both GSK and PFE have stated their intentions to exit the ownership positions in Haleon.
• While the timing of PFE and GSK’s share sale is not certain, we expect the overhang to persist on HLN shares over the short to medium term preventing any meaningful upside to the share price in the interim.
• We would revisit our post-spin recommendations if either GSK or HLN would decline in value and present a more attractive risk reward scenario.
• For more details, please refer to The Spin Off Report dated June 7, 2022.

FTAI to Complete Infrastructure Spin-Off on August 1, 2022; Maintain BUY, Adjust Pre-Spin Fair Value Estimate to $32 per share  

• Fortress Transportation and Infrastructure Investors LLC (NASDAQ: FTAI) has announced that the company’s Board of Directors has declared that the distribution of shares in its Infrastructure business will be completed on August 1, 2022.
• FTAI shareholders of record as of July 21, 2022, will receive one share of “FTAI Infrastructure” for every share of FTAI owned.
• FTAI Infrastructure. is expected to trade on the NASDAQ under the ticker “FIP” beginning on August 2, 2022, the first trading day following the distribution.
• Beginning on or about July 20, shares of FTAI Infrastructure will begin trading on a “when-issued” basis on the NASDAQ under the ticker “FIPWV”, and Fortress Transportation and Infrastructure Investors LLC will trade “ex-distribution” under the ticker “FTAIV”.
• We adjust our pre- and post-spin fair value estimates to account for updated management commentary, industry trading multiples, and our expectations for 2022 earnings.
• We now value the parent company Aviation business at 12x a reduced 2022 EBITDA estimate of $430 million (including corporate costs) and incorporate projected net debt of $1.4 billion. Notably the net debt projection accounts for the debt transferred to FTAI Infrastructure ($1.5 billion) and proceeds from asset sales and insurance adjustments ($500 million), which are expected over the next 6 months. Our post-spin fair value estimate for FTAI Aviation is now $25 per share.
• The Infrastructure spin company is now fairly valued at $7 per share. We arrive at our fair value estimate by applying 9.0x multiple to Jefferson, LRET, and Repano operations, and a 12.0x multiple to the Transtar business. Our 9.0x multiple on ports and terminals businesses is roughly inline with current trading of peers Cheniere Energy Inc. (NYSE: LNG), Plains GP Holdings LP (NASDAQ: PAGP), and Energy Transfer LP (NYSE: ET). The 12x applied to the rail business is inline with Class I rail operators, and a slight discount to the approximate 13x multiple paid for pure short line operator Genesee & Wyoming Inc. in 2019.
• On a pre-spin basis, we fairly value shares of FTAI at $32 per share per share and maintain our pre-spin BUY rating.
• We view positively the Aviation company’s ability, post-separation, to receive a rerating to a higher multiple to more closely approximate those of other aircraft leasing companies, while noting that a growing services business could provide incremental upside. For Infrastructure, the company’s terminal assets appear to be uniquely positioned to capitalize on increased demand for NGLs in addition to oil-by-rail distribution. Further, the Transtar acquisition provides a sizeable and stable earnings base for an independent infrastructure company to grow from, given its relationship with and proximity to U.S. Steel production facilities.
• For more details, please refer to The Spin Off Report dated April 14, 2022.

Please see the attached Hidden Opportunities Update on RCI Hospitality Holdings, Inc. (NASDAQ: RICK).

RICK preliminarily reports 3Q F2022 sales up ~24% to $70.1 million suggesting full-year results at the high-end of its $260-$280 million target; share repurchases were accelerated during 3Q F2022 while RICK’s cash balance remained relatively steady at ~$37.5 million; full 3Q F2022 results expected Aug. 9th

This morning, before the market open, RICK preliminarily reported 3Q F2022 consolidated sales up 23.7% to $70.1 million (versus consensus of $70.6 million), suggesting full-year results at the high-end of management’s anecdotal guidance of ~$260-$280 million (versus current consensus of $266 million).
By segment, revenue at the Nightclubs segment rose ~34%, including same store sales growth of ~5%, to $54.3 million while Bombshells segment sales declined ~2%, reflecting a difficult year-over-year comparison versus a period when the concept was among the only bar & restaurants open in the state of Texas, to $15.8 million. (Anecdotally, the Arlington, TX Bombshells location, opened in December 2021, generated ~$1.7 million of revenue in 3Q F2022, suggesting a full year-run rate of ~$6-$7 million.)
During 3Q F2022, the company repurchased ~168,000 shares (roughly 1.8% of the outstanding shares) for $9.2 million or an average price of ~$54.80 per share, which, we note, represented a marked step up from the ~45,650 shares that were purchased at an average price of ~$62.35 per share in the first six months of F2022. We estimate RICK still has $19.5 million remaining on its current $25 million repurchase authorization and management notes it intends to be “aggressive” under $50 per share.
Despite the increased repurchase activity (and a ~$5 million club acquisition) during the quarter, RICK indicates the company ended 3Q F2022 with cash of ~$37.5 million (compared with ~$38 million in 2Q F2022 and ~$36 million at the end of F2021). For our part, we expect RICK will end F2022 with leverage and interest coverage ratios of ~1.8x and more than 6.0x, respectively.
The company expects to release its full/audited quarterly results on August 9th. RICK did not give any sense for segment margins in 3Q F2022 but did anecdotally indicate that top-line trends have continued to show increases in July and the acquisition pipeline remains strong (in fact noting that ‘we would probably see some news by mid-August’).
Our fair value estimate remains $74 per share, reflecting a blended multiple of ~9.5x F2024E EV/EBITDA multiple, and accounting for ~$128 million of projected net debt (see Exhibit #1 on page 2).

Encompass Completes Enhabit Spin-Off; Rate Post-Spin EHC at BUY with a $54 FVE; Rate EHAB at BUY with a $41 FVE

• On July 1, 2022, before the market open, Encompass Health Corp. (NYSE: EHC) completed the spin-off of its Home Health & Hospice (“HH&H”) business into Enhabit Inc (NYSE: EHAB). EHC maintained its Inpatient Rehabilitation (“IR”) business.
• Shareholders of record as of June 24, 2022, received one share of Enhabit Inc. for every two shares of Encompass owned.
• EHC and EHAB most recently traded in the “when-issued” market at $44.40 and $22.97 per share, respectively
• Encompass and Enhabit’s businesses, which are focused on growth via a three-pronged strategy comprised of (1) internal bed expansions at existing locations, (2) the organic development of new locations (so-called “de novos”), and (3) acquisitions, is currently being pressured by increased labor costs that are primarily related to the COVID-19 pandemic. These labor issues have left the company paying more to staff its facilities and forced to reduce admissions due to staff shortages, resulting in margin pressure at both HH&H and IR.
• It is our opinion that over time, these pressures will abate via volume and pricing increases, allowing for a return to historical margins. Further, the secular tailwinds both businesses enjoy (aging and more active populations), along with highly fragmented competitive landscapes, should allow for earnings growth ahead, which can be viewed positively in the current volatile market environment. Notably, both businesses enjoy cost advantages and score highly versus peers on service metrics, per patient surveys.
• We adjust our EHAB fair value estimate to $41 per share as we moderate our valuation multiple to more accurately reflect the current trading environment while noting the optionality for multiple expansion to occur on a reversion to historic average multiples for the HH&H industry. We now value EHAB at 14.0x our unrevised 2023 EBITDA estimate of $182 million and 20.0x our unrevised 2023 EPS estimate of $2.00 per share.
• We maintain our post-spin EHC fair value estimate of $54 per share.
• Notably, our 2023 EHAB and EHC EBITDA and EPS estimates are at the high end of managements guidance for 2022, implying a degree of conservatism based on the current staffing cost pressures the company is encountering. If the company (and industry) were to right-size staffing costs, our 2023 earnings estimates would likely be revised upwards.
• It is our thesis that the current operating environment, with high labor costs affecting margins, will normalize over time, resulting in margin expansion beyond our near-term estimates, and that trading multiples will revert to historical norms for both the Home Health & Hospice business and the Inpatient Rehabilitation business. As such, we see value in EHC and EHAB shares, especially considering the recent sell-off (on management’s updated 2022 guidance). As such, we rate post-spin shares of EHC and EHAB at BUY.
• For more details, please refer to The Spin Off Report dated June 13, 2022, and UPDATE dated June 15, 2022.

Drop Coverage of Exelon Corp. and Constellation Energy Corp. Effective Immediately

• On February 1, 2022, after the market close, Exelon Corp (NASDAQ: EXC) completed the spin off of its competitive energy generation business, Constellation Energy Corp. (NASDAQ:  CEG).
• Given the transactions have now passed our coverage mandate of 90 days post-spin, we DROP coverage of Exelon Corp. and Constellation Energy Corp. effective immediately.
• Our prior estimates and fair values for EXC, and CEG should no longer be relied on.