UPDATE: OSPN lowers 2021 sales and adj. EBITDA guidance

Please see the attached Hidden Opportunities Update on OneSpan Inc. (NASDAQ: OSPN).

OSPN lowers 2021 sales and adj. EBITDA guidance; announces leadership changes aimed at accelerating its “strategic evolution”; reduce fair value estimate to $32 per share (from $34.50)

Last night, after the market close, OSPN reported 2Q 2021 results, which demonstrated a 5% decline in sales to $52.3 million with adjusted EBITDA and adj. EPS losses of $1.0 million and $0.04, respectively; for context, results were essentially in-line with consensus estimates.
That said, the company reduced full-year 2021 sales and adj. EBITDA guidance to $205-$215 million (down from its initial guide of $215-$225 million) and a loss of $12.0-$15.0 million (compared with prior commentary of a “approximately breakeven). Recurring revenue is now projected to grow 17%-20% (previously 22%-26%) to $115-$120 million (previously $120-$125 million; see Exhibit #1 on page 2).
The company ended 2Q 2021 with no debt and $109 million in net cash (or roughly $2.72 per share). During 2Q 2021, OSPN repurchased 111,000 shares for ~$2.9 million.
Additionally, the company announced that Steven Worth, previously OSPN’s interim chief financial officer (CFO) as well as chief compliance officer and general counsel, would replace Scott Clements as the interim chief executive officer (CEO) and that John Bosshart, previously the chief accounting officer, would assume the CFO role (on an interim basis). As well, consistent with previously announced plans (i.e., the settlement with Legion Partners) Al Nietzel has been appointed as Chairman of the Board (replacing the retiring John Fox).
All told, our sum-of-the parts fair value estimate is reduced to $32 per share (from $34.50), which values OSPN’s Hardware business at 2.5x 2022E EBITDA, applies sales multiples of 1.0x and 8.5x to the company’s legacy/non-recurring licensing and core/recurring software & services businesses, respectively, and accounts for ~$100 million of projected net cash (see Exhibit #2 on page 2).

UPDATE: EVRI re-instates above-consensus 2021 sales, adj. EBITDA and FCF guidance

Please see the attached Hidden Opportunities Update on Everi Holdings (NYSE: EVRI).

EVRI re-instates above-consensus 2021 sales, adj. EBITDA and FCF guidance; successfully refinances debt; fair value increased to $25 per share (from $23)

Today, in connection with 2Q 2021 results, EVRI re-instated its provision of annual financial guidance, which called for full-year 2021 sales of $615-$635 million with adjusted EBITDA of $332-$342 million and free cash flow of $168-$177 million. At the mid-point (see Exhibit #1 on page 2), guidance was ahead of prior consensus estimates of $621.4 million, $326.4 million and $135 million, respectively.
Importantly, the company also successfully refinanced its debt, which simplified the capital structure into a $600 million term loan and $400 million of unsecured notes, lowered borrowing costs to 3.86% (from 5.38%) and pushed out maturities until 2028-2029. As well, The company has an undrawn $125 million revolving credit line.
The company ended 2Q 2021 with net debt of ~$803.5 million, including net cash of $196.5 million and debt of ~$1 billion; at the mid-point of 2021E guidance EVRI’s net leverage ratio is ~2.4x and management updated its long-term leverage target to 2.5x-3.0x (suggesting the company may re-engage with relatively small, tuck-in M&A).
On the conference call, in response to a query about EVRI’s long-term growth profile, management indicated that it would not be “satisfied with single-digit growth” (without providing any specific financial benchmarks). As well, the company anecdotally indicated that while it is willing to monetize either one (or both) of the two businesses “at the right price” management sees the businesses as “complementary”.
Our fair value estimate is increased to $25 per share (up from $23; see Exhibit #1 on page 2), reflecting a blended multiple of ~9.5x on 2023E EBITDA of $339.5 million (up from $304 million) as well as net debt of ~$785 million (down from ~$1.0 billion) and a diluted share count of ~100.5 million. [Note: our forecasts do not add back stock-based compensation.]

UPDATE: LB completes the spin-off of VSCO; Rate shares of post-spin BBWI at BUY with a $90 Fair Value estimate

Attached, please see The Spin-Off Report Update on L Brands Inc. (NYSE: LB).

LB completes the spin-off of VSCO; Rate shares of post-spin BBWI at BUY with a $90 Fair Value estimate and VSCO at NEUTRAL with a Fair Value of $50 per share

Last night, after the market close, L Brands completed the tax-free spin-off of Victoria’s Secret & Co., which will begin so-called “Regular-Way” trading this morning, August 3rd, on the NYSE under the ticker “VSCO”. Shareholders of record on July 22, 2021, received one share of VSCO for every three shares of L Brands held.
As of today, post-spin L Brands (formerly NYSE: LB) has formally changed its name to Bath & Body Works, Inc. and will trade under the ticker “BBWI” on the New York Stock Exchange (NYSE).
Our fair value estimate for post-spin BBWI remains $73 per share, reflecting a 12.0x multiple on 2022E adjusted EBITDA of $2.034 billion and net debt of ~$3.94 billion (see Exhibit on page 2). Given the implied upside to fair value shares of post-spin BBWI are rated BUY.
To that end, we prefer shares of the post-spin parent given the long history of consistent growth (i.e., a double-digit 10-year CAGR) and high-end profitability (i.e., 20%-plus margins) as well as its free cash flow generation potential, which we think will support increased capital returns to shareholders (via share repurchases and dividends). As well, for context, our applied valuation multiple remains a 2x-3x turn discount to peers such, as Ulta Beauty Inc. (NASDAQ: ULTA) and Natura & Co. (NTCO3 BZ), which purchased The Body Shop in 2017.
Our fair value estimate for post-spin VSCO remains $50 per share, reflecting a 4.5x multiple on 2022E of $1.1965 billion and net debt of $727 million (as well as accounting for the 1-for-3 distribution ratio). Given the implied upside to fair value shares of post-spin VSCO are rated NEUTRAL.
That said, exposure to post-spin VSCO could offer more risk-tolerant investors upside optionality if the on-going, multi-faceted turnaround, in terms of both its financial results and brand positioning, continues to gain traction in the near/medium-term and the potential for a sale in the longer-term. (On the latter point, the company indicates that before deciding on a spin-off it held “substantive” discussions with and received “significant” interest from “multiple” potential buyers.)
For more details, please refer to The Spin Off Report dated July 14, 2021.

UPDATE: Bausch Reports 2Q 2021 Results, Lowers 2021 Guidance; Announces Plan to IPO Solta

Bausch Reports 2Q 2021 Results, Lowers 2021 Guidance; Announces Plan to IPO Solta, Additional Debt Paydown Should Move Spin-Off Plan Forward; Maintain BUY, $38 per Share FVE

On August 3, 2021, Bausch Health Companies Inc. (NYSE: BHC) announced 2Q 2021 results, which included $2.1 billion in revenue, and adjusted EBITDA of $826 million, representing respective year-over-year increases of 26% (23% organic) and 33%.
Strong year-over-year comparisons were benefited by the improving COVID-19 recovery environment during the quarter, particularly at the Bausch + Lomb segment, which increased organic sales by 33% versus the prior year period.
Management adjusted the company’s 2021 full year guidance downward to revenue of $8.4 to $8.6 billion (previously $8.6 to $8.8 billion) and adjusted EBITDA of $3.35 to $3.5 billion (previously $3.4 to $3.55 billion). The reduced guidance ranges were attributable to the sale of Amount Pharmaceutical Co. S.A.E. (announced August 2, 2021, for $740 million).
Additionally, the company announced that it plans to IPO its Solta Medical business. The Solta business provides medical devices that offer aesthetic and therapeutic benefits to customers. Products provide skin rejuvenation and preventive skin care under the name Clear+ Brilliant, non-invasive skin tightening for eyes, face and body under the name Thermage, skin resurfacing branded as Fraxel, and fat reduction with VASERlipo, among others.
The Solta business generated revenue of $253 million in 2020 with adjusted segment/business EBITDA margins of 53% and has generated a three year revenue CAGR of 32%. Notably, global Solta sales totaled $73 million in 2Q 2021, which represented a 74% year over year increase.
Lastly, BHC also announced that the company plans to retire $350 million in outstanding bonds using cash flow from operations and cash on hand. When completed, this will bring BHC’s 2021 debt retirement to $1.6 billion. We note that while BHC has no maturities prior to 2025, debt reduction is a key step toward the completion of the planned B+L spin-off.
Shares of BHC traded off by approximately 5%-6% in pre-market trading, which we think is an initial reaction to the loss of Solta, which is arguably the best growth story within BHC. We note that management stated in its conference call that the IPO looks to be 20%-30% of the Solata’s total operations, which in our view allows for significant flexibility in raising more capital and optionality on potential price appreciation of the new public company. We note that in our sum-of-the-parts valuation we value Bausch Pharma at 7.5x our 2022 EBITDA estimate, which incorporates a higher multiple (12x) to the Ortho Derm segment in an attempt to capture the higher growth Solta business that is embedded within the Ortho Derm segment. Based on 2020 Solta EBITDA performance, the business could be valued at north of $2 billion on an enterprise value basis if it was assumed to generate approximately 45% margins and valued at a 20x multiple, which appears reasonable given growth rates and peer trading multiples, such as InMode Ltd. (NASDAQ: INMD).
We maintain our earnings estimates and $38 pre-spin-fair value estimate and continue to rate shares of BHC at BUY. We view the continued leverage reduction as a key milestone to the eventual spin-off of B+L, upside optionality from the Solta IPO, and continued business recovery post-pandemic as underappreciated within the current corporate structure. We expect the lower levels of leverage and eventual spin-off of B+L to result in shareholder value accretion as the more pure-play entities are appropriately valued in the public markets versus the current consolidated multiple of 9.3x the consensus 2022 EBITDA estimate
For more details, please refer to The Spin Off Report dated July 6, 2021.

UPDATE: SolarWinds Completes Reverse Stock Split; Maintain NEUTRAL

SolarWinds Completes Reverse Stock Split; Maintain NEUTRAL, Adjust Fair Value Estimate to $18 per Share (Previously $9 per Share)

On August 2, 2021, SolarWinds Corp. (NYSE: SWI) began trading on a split adjusted basis following the completion of a two for one reverse stock split.
We adjust our SWI fair value estimate to $18 per share (previously $9 per share) to reflect the new shares outstanding of 158.1 million. We maintain our NEUTRAL rating.
Following the spin-off of N-able Inc. (NYSE: NABL), SWI will continue to deal with the fallout from the cyberattack involving its Orion monitoring products between March and June 2020, which will likely result in lower new customer acquisitions and potential cancellations by existing customers. We would expect that revenue growth rates, historically in the mid- to high-single-digits, will be depressed in the near term before returning to previous levels as concerns over the impact of the cyberattack pass. Lower revenue growth and an increased focus on existing customers versus new customer acquisitions is likely to result in lower margins near term, with a return to “rule of 50” operations (revenue growth plus EBITDA margin over 50%) in 2022. Management commentary suggests that the parent company will generate initial margins of roughly 42%-43% as a standalone company while incorporating approximately $20-$24 million in incremental costs that will be phased in over the next year.
Our NEUTRAL position is based on what we believe will be residual overhang on both post-spin entities from the recent cyberattack. Although we believe that SolarWinds will be able to move past the incident, especially since it appears that minimal damage was actually incurred, we do not see the NABL spin-off as a catalyst to realize potential price appreciation.
Further, we note the ownership levels by private equity firms, meaning that shares of both post-spin entities will have a limited float, with the possibility that an eventual exit by either Thoma Bravo or Silver Lake could introduce a degree of volatility.
For more details, please refer to The Spin Off Report dated June 7, 2021 and UPDATEs dated June 28, 2021, and July 20, 2021.

UPDATE: XPO completes spin-off of GXO; post-spin fair values tweaked to $108 per share and $62 per share

Please see the attached Hidden Opportunities Update on XPO Logistics, Inc. (NYSE: XPO).

XPO completes the spin-off of GXO; post-spin fair values modestly tweaked to $108 per share and $62 per share, respectively

Today, before the market open, XPO completed the spin-off of GXO Logistics (NYSE: GXO).
Shareholders of record on July 23, 2021, received one share of GXO for every share of XPO held. GXO Logistics began so-called “Regular-Way” trading today, August 2nd, on the NYSE under the ticker “GXO”.
As a standalone, our fair values estimate for GXO is $62 per share (previously $61) reflecting an 11x multiple on 2022E adjusted EBITDA of $724 million (compared with management’s guidance of $705-$749 million) and net debt of $767 million (previously $847 million). For context, we would note that every 1x turn in GXO’s valuation multiple impacts our fair value by ~$6.00 per share; to that end, if over the longer-term GXO is able to capture the “mid-teens” multiple, which management has publicly suggested is what it feels is “attainable”/deserved, incremental upside to ~$87 per share could exist (see Exhibit #1 on page 2).
Our post-spin fair value estimate for XPO is $108 per share based on a blended multiple of 11.5x, reflecting 12x for the LTL operations and 10.5x for truck brokerage, on 2022E adj. EBITDA of $1.39 billion as well as projected net debt of ~$3.4 billion (previously $3.56 billion).
Recall, last week, XPO, in conjunction with 2Q 2021 results, increased full-year 2021 consolidated adj. EBITDA guidance to $1.875-$1.915 billion (from $1.845-$1.895 billion), which implies 34.5%-37.5% year over year growth. Excluding any spin-off impacts, the company forecasted pro forma adj. EBITDA of $1.195-$1.235 billion at Transportation and $605-$635 million at Logistics.
Additionally, the company increased its 2022E adj. EBITDA outlook for GXO to $705-$740 million (from $700-$735 million) while maintaining its organic top-line forecast of 8%-12% (off a 2021E base of $7.5-$7.7 billion). Albeit not specifically mentioned, adj. EBITDAR is ostensibly still expected to be ~$1.5 billion. In terms of the longer-term growth profile, management has indicated that it expects GXO to sustain “double-digit” sales and adj. EBITDA growth.
The company has not provided a formal 2022E outlook for post-spin XPO but has indicated the expectation that its North American LTL operation would generate at least $1 billion of adj. EBITDA.

UPDATE: XPO completes the spin-off of GXO; Rate Post-Spin XPO at BUY

XPO completes the spin-off of GXO; Rate Post-Spin XPO at BUY with a Fair Value of $108 per share and GXO at NEUTRAL with a $62 per share Fair Value

Today, before the market open, XPO completed the spin-off of GXO Logistics (NYSE: GXO).
Shareholders of record on July 23, 2021, received one share of GXO for every share of XPO held. GXO Logistics begin so-called “Regular-Way” trading today, August 2nd, on the NYSE under the ticker “GXO”.
As a standalone, GXO, which generated ~$6.2 billion of sales and $440 million of adj. EBITDA in 2020, will be the largest publicly traded pure-play contract logistics provider. Geographically, the company generated ~61% of sales in Europe and ~39% in North America, with a large majority of revenue from the U.S., U.K., France, and Spain.
For 2021E, the company expects sales of $7.5-$7.7 billion with adjusted EBITDA of $605-$635 million. For 2022E, GXO has guided to organic top-line growth of 8%-12% with adjusted EBITDA of $705-$749 million (and adj. EBITDAR of ~$1.5 billion). Longer-term, management has anecdotally suggested that GXO can sustain “double-digit” sales and adj. EBITDA growth as, at least thematically, the company sees “secular tailwinds” from E-Commerce, Automation and Outsourcing underpinning the opportunity within a large (i.e., TAM of ~$430 billion) and fragmented (i.e., top 5 players control less than 25%) market.
As a standalone, we assign an initial valuation multiple of 11x as we estimate that, after increased disclosures, the business’s high-growth and ROIC (somewhat offset by its muted near-term FCF conversion profile) will lead investors to award it a double-digit multiple (albeit still a discount to its IFRS 16 adjusted peers), on 2022E adj. EBITDA of $724 million. Given the implied upside to our fair value estimate we rate shares of GXO NEUTRAL.
For context, we would note that every 1x turn in GXO’s valuation multiple impacts our fair value estimate by ~$6.00 per share; as such, if over the long-term GXO is able to capture a “mid-teens” multiple, which management has publicly indicated that it feels is “attainable”/deserved, upside to ~$87 per share could exist.
On a post-spin basis, we fairly value XPO at $108 per share based on a blended multiple of 11.5x multiple, reflecting 12x for the LTL operations and 10.5x for truck brokerage, on 2021E adj. EBITDA of $1.39 billion. Given the implied upside from initial trading indications we rate shares of post-spin XPO BUY.
For context, peers to XPO’s LTL operations, such as Saia Inc. (NASDAQ: SAIA) and Old Dominion (NASDAQ: ODFL), trade at ~12.5x and 17.5x 2022E EV/EBITDA, respectively, while peers to its truck brokerage businesses, such as C.H. Robinson (NASDAQ: CHRW), Echo Global Logistics (NASDAQ: ECHO) and Landstar System (NASDAQ: LSTR) trade, on average, at ~11x.
As a standalone, XPO has guided to full-year 2021E pro forma adjusted EBITDA of $1.195-$1.235 billion with adj. EPS of $4.00-$4.30 and free cash flow of $400-$450 million. The company has not provided a formal outlook for 2022E but has indicated the expectation that its North American LTL operation would generate at least $1 billion of adj. EBITDA.
For more details, please refer to The Spin Off Report dated April 7, 2021.

UPDATE: GTX handily outpaces internal expectations (and the overall industry) in 2Q 2021

Please see the attached Hidden Opportunities Update on Garrett Motion Inc. (NASDAQ: GTX).

GTX handily outpaces internal expectations (and the overall industry) in 2Q 2021; management introduces full-year 2021 guidance well-above what was previously articulated (in a February 2021 lender presentation)

GTX posted 2Q 2021 net sales growth of 83% (or ~17% vs. 2Q 2019) to $935 million, driven by an 84% increase in volume to 3.4 million units, with a ~167% jump in adjusted EBITDA to $168 million, which reflects a 480-basis point improvement in the margin to 18% (and an incremental margin of ~23%). Results compare with the sales and adj. EBITDA “guidance” provided in a February 2021 presentation to lenders of $882 million and $133 million, respectively. [Note: there are currently no consensus estimates.]
The company ended 2Q 2021 with net debt of $846 million, comprised of $401 million of unrestricted cash and $1.247 of debt, and a leverage ratio of 1.37x. Including $535 million of Series B Preferred stock, the leverage ratio is 2.73x (Anecdotally, GTX expects $215 million of currently restricted cash to become fully unrestricted in late-September/early-October and that based on the midpoint of guidance HON’s put option on its Series B preferred stock will “go-live” in 4Q 2021).
To that end, management introduced full-year 2021 guidance calling for 18%-23% sales growth to $3.7-$3.9 billion (versus our initial $3.76 billion estimate and previous “guidance” of $3.485 billion) with adjusted EBITDA of $590-$640 million (compared with our $556 million estimate and GTX’s internal projection of $520 million). Adjusted free cash flow is expected to be $300-$400 million in 2021 (see Exhibit #1 on page 2). (Anecdotally, management indicated that guidance still reflects a “cautious” stance on the back-half of 2021 given chip- and pandemic-related uncertainties.)
Our fair value estimate revised to $12 per share (from $12.50), which reflects a constant 8.5x multiple on our increased 2023E net income forecast of $475 million (up from $459 million) offset by a higher diluted share count of ~333 million (up from 313 million given our updated assumption that the company will pay the 11% interest on its Series A preferred stock in-kind rather than in cash). For context, on an EV/EBITDA basis, our valuation implies an ~6.5x multiple (see Exhibit #2 on page 2).

UPDATE: Merck Reports 2Q 2021 Results; Strong Keytruda Sales, Current Share Price Keeps Us Positive

Merck Reports 2Q 2021 Results; Strong Keytruda Sales, Current Share Price Keeps Us Positive; Maintain BUY Rating, $89 Fair Value Estimate

On July 29, 2021, before the market open, Merck & Co. Inc. (NYSE: MRK) reported 2Q 2021 results, which included revenue growth of 22% versus the prior year period, and non-GAAP EPS of $1.31 per share, versus $1.02 in the prior year period. (MRK completed the spin-off of Organon & Co. [NYSE: OGN] in June 2021, whose results are excluded from non-GAAP results.)
2Q 2021 revenue totaled $11.4 billion versus $9.4 billion in 2Q 2020. The increase in year-over-year sales is primarily attributable to increased sales of KEYTRUDA, which continues to receive additional use FDA approvals for combination therapies and is moving through several additional clinical trials to expand applications of the oncology drug treatment. KEYTRUDA sales totaled $4.176 billion in 2Q 2021, a 23% increase versus the prior year period.
Additional revenue growth drivers included continued recovery from COVID-19 related sales declines in the 2020, particularly for GARDASIL (HPV vaccine) in the U.S. combined with market share gains outside of the U.S. market. Notably, Animal Health revenue increased 34% in the period to $1.4 billion.
Merck updated its financial guidance to now include revenue growth of 12% to 14% ($46.4 to $47.4 billion), and non-GAAP EPS of $5.47-$5.57, which implies net margin of 29.8% at the midpoint, assuming 2.53 billion shares outstanding. We maintain our 2022 earnings estimates, which include revenue, EBITDA, and EPS of $51.5 billion, $20.7 billion, and $5.98 per share, respectively.
Following the spin-off of OGN, Merck continues to focus on its strong growth areas of Oncology, Vaccines, Hospital and Animal Health. By separating its slower-growth businesses, Merck is now focusing on key growth areas, most notably its cancer drug Keytruda and other vaccines. The separation increased MRK sales growth by approximately 1% annually (by removing the declining portfolio of Organon), reduced Merck’s total human health products by approximately 50% and its Human Health manufacturing footprint by approximately 25%. Merck has retained its pre-spin dividend and anticipates future increases with the goal of achieving a 47% to 50% payout ratio over time. MRK’s current annual dividend is $2.60 per share.
We view the improved revenue growth, margin profile, and balance sheet of the post-spin parent as key investment themes for shares (MRK received $9 billion distribution from OGN in conjunction with the spin-off) and consider shares as attractively priced at current levels.
We continue to rate MRK at BUY with a $89 per share fair value estimate. Our fair value estimate is based on P/E and EV/EBITDA multiples of 15.0x and 11.5x our respective 2022 estimates. We acknowledge that our multiples are at the higher end of large pharma peers, however we view this as appropriate given strong pharmaceutical sales growth, and the imbedded growth of Animal Health and Vaccine businesses which typically trade at a significant premium to traditional pharmaceutical companies.
For more details, please refer to The Spin Off Report dated May 13, 2021, and UPDATE dated June 3, 2021.

UPDATE: XPO tops consensus in 2Q 2021 and raises consolidated 2021E adj. EBITDA guidance