Pfizer Completes Upjohn Spin-Off, Merger with Mylan to Create Viatris Inc.; Rate Viatris at BUY With a $23 FVE; Maintain NEUTRAL on PFE, Adjust FVE to $40 to Reflect Spin-Off

• On November 16, 2020, before the market open, Pfizer Inc. (NYSE: PFE) completed the spin-off of its generic drug business, Upjohn, on November 16, 2020. Immediately following the separation, Upjohn merged with Mylan N.V. (formerly NASDAQ: MYL) and formed Viatris Inc. Pfizer shareholders of record as of November 13, 2020, control 57% of Viatris, with former MYL shareholders of record controlling the remaining 43%.
• Pfizer shareholders of record received 0.1241 shares of Viatris for each share of PFE owned as of the record date. Shares of Viatris will trade on the NASDAQ under the symbol “VTRS”.
• In conjunction with the spin-off, Upjohn issued $12 billion of debt, with gross debt proceeds retained by Pfizer. Following the merger, Viatris will have approximately $24.5 billion of total debt outstanding.
• For Pfizer, the decision to separate its off-patent drugs business is not surprising, given the company’s recent corporate activity around divesting its non-innovative pharmaceutical businesses and positioning itself for above-industry growth. Pfizer has focused on drugs that are expected to maintain patent protections for some time, both those it has internally developed and those added to its portfolio through acquisitions. In addition, the company has focused on divesting lower-margin businesses. Last year, Pfizer agreed to combine its consumer health care unit, whose products include Advil and Centrum multivitamins, with GlaxoSmithKline’s.
• Based on several valuation exercises, including EV/EBITDA, free cash flow, and dividend yield, we establish fair value for Viatris at $23 per share. Given that the implied upside from Mylan’s closing share price on Friday approximates 50%, it is our opinion that the market is not giving VTRS (previously MYL) credit for the many benefits it will receive from the merger with Upjohn, which include higher margins, a diversified product portfolio, improved geographic mix, and the institution of a dividend policy.
• Given the near doubling of earnings power, the current discounted trading multiple, and expected benefits, we rate the shares of Viatris at BUY following the merger with Upjohn. While shares of MYL (now VTRS) have underperformed over the last several years, we expect that the Upjohn merger will prove a catalyst for share price appreciation.
• On a post-spin basis, we value the shares of Pfizer at $40 per share (previously $43 per share) reflecting the loss of the Upjohn business. Longer term, PFE shares may provide additional upside based on new drug introductions (potential COVID-19 vaccine upside) and a stable dividend yield. While for certain investors, the upside potential to our fair value may provide sufficient investment returns, especially when incorporating the current dividend yield, in the context of this spin/merge transaction, we favor the risk/reward profile of Mylan/Viatris, and thus we rate the shares of Pfizer at NEUTRAL.
• For more details, please refer to The Spin Off Report dated September 21, 2020 and UPDATE dated August 26, 2020, and November 5, 2020.

3Q 2020 results top consensus by a penny on 32% growth in total originations; guidance for 2020 and 2021, implying growth of 15%-22% and 42%-60%, respectively, is reiterated; fair value remains C$8.50 per share

• ECN reported 3Q 2020 sales up 10% to $69.5 million (versus consensus of $71 million) with ~24% growth in adj. EBITDA to $39 million and ~20% growth in adj. EPS to $0.10 (versus consensus of $0.09).
• Total originations rose 32% to $842 million, driven by a 37% increase at Service Finance (SFC) to $640 million; the company maintained its guidance for 2021 originations, which are fully-funded, of $2.5 billion (although, anecdotally, that figure seems conservative given the impending impact of new program wins with ServiceTitan, which could garner ~$200 million in annual originations, and Panasonic as well as the broader “multibillion-dollar” market share opportunities that exist in the current environment).
• ECN ended 3Q 2020 with net debt of $513, including $47 million in cash, a net debt to equity ratio of 0.66x and a tangible leverage ratio of 3.2x (compared with 0.80x and 3.8x in 2Q 2020 and 0.49x and 2.1x at year-end 2019).
• The company reiterated its full-year 2020 adj. EPS guidance of $0.31-$0.33, which implies 15%-22% growth. As well, ECN maintained its 2021 adj. EPS guidance of $0.44-$0.53, implying growth of 42%-60%, along with its ROE target of 14.5%-17.5%. (Again, anecdotally, management indicated that deeper insight into its 2021-2022 outlook will be discussed, which we think could include an increase to both originations and EPS guidance, at its investor day on February 4^th.)
• All told, it remains our view that ECN has undergone an underappreciated transformation from a primarily “on-balance-sheet” lending business to an asset-light, fee-based operating model and that at ~7.0x 2022E EPS remains substantially undervalued, particularly relative to the growth prospects of its core originations business (as well as the potential incremental contribution from a nascent, fee-based referral business that could significantly add to ECN’s earnings power over the next several years).
• Our fair value estimate remains C$8.50 per share, reflecting a blended multiple of 9.5x on 2022E adj. EBITDA of US$220.5 million and net debt of US$525 million or a ~11x P/E multiple on 2022E EPS as well as a USD/CAD conversion rate of 1.3x.

STAY posts above consensus 3Q 2020 results and industry outperformance looks set to persist in 4Q 2020

• STAY posted 3Q 2020 sales down 14% to $286 million (compared with consensus of $274 million), as RevPAR declined 14.7% (comprised of a 13.7% decrease in ADR and a 100-basis point decline in occupancy to 79.8%). Adjusted EBITDA fell 28% to $112.7 million (compared with consensus of $105.3 million).
• For context, STAY had initially guided to a 3Q 2020 RevPAR decline of 18%-21% with adj. EBITDA of $98-$105 million.  As well, we would note that RevPAR in the broader mid-price extended stay segment was down ~35% in 3Q 2020.
• The company generated ~$60 million of FCF during 3Q 2020 and ended the quarter with net debt of ~$2.34 billion, including $396 million of cash, and a leverage ratio, by our calculation, of ~6.2x (vs. 4.3x at the end of 2019 and its 8.5x covenant, which has been waived thru 1Q 2021).
• For 4Q 2020, the company guided to comparable system RevPAR down 11%-15% (implying a 15.5%-16.5% decline for the full year) with adjusted EBITDA of $78-$88 million (compared with prior consensus of $92.5 million).  Full-year capital spending is expected to be $170-$190 million.
• On the capital allocation front, STAY expects to pay a “catch-up” dividend of $0.15-$0.20 per share in 1Q 2021.
• In terms of future unit growth, STAY will continue to work through its pipeline of 10 owned-hotels (with 1,268 rooms) but its longer-term focus will squarely be on franchise operations, where the pipeline is currently 55 franchise locations (with 6,656 rooms)
• On the M&A front, while the company is “very open to a brand acquisition” it sees a dearth of available targets and management’s focus will seemingly remain on strategically disposing of assets “that we can transact at multiples significantly above the company’s current trading level”.
• Our fair value remains $15 per share, based on a blended multiple of 9.5x 2022E EBITDA of ~$500 million (previously $ 499 million and net debt of $2.08 billion (previously $2.1 billion), albeit with incremental upside to ~$17 per share, in the event of strategic alternatives

MSGS Reports 1Q F2021 Results; Maintain BUY Rating, Adjust FVE to $191 per Share

• On November 11, 2020, before the market open, Madison Square Garden Sports Corp. (NYSE: MSGS) released 1Q F2021 results, which were impacted by the COVID-19 changes to the NBA and NHL seasons.
• MSGS reported 1Q revenue of $57.0 million and adjusted EBITDA loss of $17.8 million. 1Q F2021 results compares to 1Q F2020 revenue of $49.9 million and EBITDA loss of $40.6 million.
• 1Q results, which are seasonally the weak for MSGS given the timing of “normal” per-season and regular season games for the NHL and NBA. (NBA and NHL regular season play typically begins in mid-October.)
• 1Q revenue benefited from increased league distributions of national media rights fees from 2019-2020 NBA and NHL seasons were recognized in the period, whereas in a “normal” year those would have been recognized in F2020. This benefit was partially offset by lower suite license fees and sponsorhip revenue. Increased revenue was also offset by player compensation expense in 1Q F21 that would have been paid in 4Q 2020 under normal season timing.
• Despite the fact that the Knicks and Rangers are not playing games at home, we still see value in the owned sports franchises of MSGS. Additionally, increasingly positive vaccine related news should prove to be a catalyst for shares as investors look to beneficiaries of a post-COVID world, which we believe MSGS is one.
• MSGS’s value is primarily derived from the ownership of the NY Knicks NBA team and NY Rangers NHL team (from which we continue to see substantial value despite the recent pause). Our fair value estimate adjusts the most recently reported franchise values from Forbes magazine to account for arena value, projected annual growth, and historical premiums in NBA and NHL franchise sale transactions. Notably these adjustments result in our fair value estimate at an approximate 15% discount to the stated Forbes values, which may prove conservative in the event MSGS were to take on a minority investor in either sports team franchise.
• As of September 30, 2020, MSGS had a cash position of $23.5 million, and total debt of $350 million.
• We adjust our fair value estimate to $191 per share (previously $194 per share), based on the updated balance sheet information, and maintain our BUY rating.
• For more details, please refer to The Spin Off Report dated February 13, 2019, and UPDATEs dated August 20, 2019, November 8, 2019, December 3, 2019, March 6, 2020, March 25, 2020, April 1, 2020, May11, 2020, and August 14, 2020..

3Q 2020 results top consensus and show solid sequential improvement; strategic revenue at PC remains “ongoing”; stock still trades at less than 5.0x 2022E EV/EBITDA and a discount to tangible book value; fair value remains $37 per share 

• At UFS, 3Q 2020 consolidated sales fell 12% year over year to $1.124 billion (vs. consensus of $1.096 billion) but rose ~11% sequentially (compared with 2Q 2020 sales of $1.012 billion). Adj. EBITDA declined 20% to $118 million (vs. consensus of ~$70.5 million) while EPS were $0.33 (vs. $0.36 in the prior period and the consensus loss expectation of 0.25).
• By segment, the Pulp & Paper segment posted a 17% decline in sales to $899 million with a 23% decline in adj. EBITDA to $98 million while the Personal Care (PC) segment posted an 11% increase in sales to $243 million with a 29% rise in adj. EBITDA to $31 million.
• Adj. free cash flow (FCF) was $93 million in 3Q 2020 (vs. $52 million in the prior period and consensus of ~$78 million).  The company ended 3Q 2020, with net debt of $881 million (compared with $987 in 2Q 2020) and a net leverage ratio of ~2.3x (compared with 2.4x in 2Q 2020 and its 3.75x covenant).
• For 4Q 2020, the company anecdotally expects that paper volume will remain sequentially flat (albeit with a slightly less favorable mix, which is seasonally normal) along with a continued gradual improvement in both pulp demand and prices.  The PC segment is expected to continue to benefit from a favorable macro backdrop as well new customer wins. (Additionally, UFS reiterated its expectation that the PC business should ultimately garner a “mid to high teens” EBITDA margin profile.)  On a consolidated basis, raw material costs are expected to remain stable while planned maintenance outages are expected to be sequentially lower.
• In terms of the strategic review at PC, management simply indicated that the process remains “ongoing” while noting that it continues to evaluate a range of value creating options aimed at maximizing the value of its assets.
• Our fair value estimate remains ~$37 per share, reflecting a blended multiple of 5.7x on 2022E adj. EBITDA of ~$514 million and net debt of $875.5 million.

3Q 2020 results and new business signings remain encouraging; implied full-year sales and EBITDA guidance of $4.1-$4.15 billion and ~$460-$490 million, respectively, were modestly ahead of consensus; fair value remains $6.50 per share

• CNDT posted 3Q 2020 consolidated sales down 5% to $1.041 billion (vs. consensus of $995 million) with adj. EBITDA up 11% to $141 million (vs. consensus of ~$108.5 million).  EPS were $0.26 (vs. $0.16 in the prior period and consensus of $0.12).  Adj. FCF was $72 million (vs. an outflow of $27 million in 3Q 2019).
• Broadly, Government Services, primarily driven by payment services (e.g. CARES Act/unemployment), showed top-line strength (up 9%) while Transportation (down 13%) and Commercial (down ~10.5%) were weaker. Cost cuts helped across the portfolio and CNDT now expects to exceed the high-end of its $120-$140 million 2020 target (of which “two thirds” are permanent).
• Importantly, CNDT indicated that new business signings were $468 million in 3Q 2020, an increase of 100% year over year while annual recurring revenue signings were up 35% to $96 million.
• The net leverage ratio was 2.4x (compared with 2.6x at the end of 2Q 2020 and its 3.75x covenant), including $496 million of cash. (On the debt front, CNDT indicated that it would refinance its next significant maturity of ~$719 million due in 2022 during 2021.)
• The company indicated that it expects full-year 2020 revenue would be down 6.4%-7.4% (vs. its initial expectation of 6%-8%), implying total sales of $4.1-$4.15 billion (vs. prior consensus of $4.08 billion) with an adj. EBITDA margin of 11.25%-11.75% (vs. prior expectation of 10.0%-11.5%), implying adj. EBITDA of ~$460-$490 million (vs. prior consensus of ~$429 million).
• For 2021, CNDT anecdotally indicated the expectation that revenue trends would continue to stabilize (with a more likely return to growth seemingly in 2022) and that margins are likely to be ~11%, which compares with its prior commentary of 10.5%-11.5% (but still below its ultimate margin goal of ~15%).
• Our fair value estimate remains ~$6.50 per share, reflecting a blended multiple of ~6x on 2022E adj. EBITDA of ~$420 million and net debt of $1.086 billion.

Pfizer to Complete Upjohn Spin-Off, Merger with Mylan on November 16; Maintain BUY, $23 FVE on Mylan; Maintain NEUTRAL, $43 FVE on PFE

• On November 5, 2020, Pfizer Inc. (NYSE: PFE) announced that it will complete the spin-off of its generic drug business, Upjohn, on November 16, 2020. Immediately following the separation, Upjohn will merge with Mylan N.V. (NASDAQ: MYL) and form Viatris Inc. Pfizer shareholders of record as of November 13, 2020, will control 57% of Viatris, with MYL shareholders of record controlling the remaining 43%.
• Pfizer shareholders of record will receive 0.1241 shares of Viatris for each share of PFE owned as of the record date. Shares of Viatris are expected to trade on NASDAQ under the symbol “VTRS”.
• Beginning on November 12, 2020, it is expected that shares of Viatris will trade in the “when-issued” market under the symbol “VTRSV”. Additionally, shares of Pfizer will trade “ex-distribution” beginning on November 12, 2020, under the symbol “PFE WI”.
• In conjunction with the spin-off, Upjohn will issue $12 billion of debt, with gross debt proceeds retained by Pfizer. Following the merger, Viatris will have approximately $24.5 billion of total debt outstanding.
• For Pfizer, the decision to separate its off-patent drugs business is not surprising, given the company’s recent corporate activity around divesting its non-innovative pharmaceutical businesses and positioning itself for above-industry growth. Pfizer has focused on drugs that are expected to maintain patent protections for some time, both those it has internally developed and those added to its portfolio through acquisitions. In addition, the company has focused on divesting lower-margin businesses. Last year, Pfizer agreed to combine its consumer health care unit, whose products include Advil and Centrum multivitamins, with GlaxoSmithKline’s.
• Based on several valuation exercises, including EV/EBITDA, free cash flow, and dividend yield, we establish fair value for Viatris at $23 per share. Given that the implied upside from Mylan’s current share price exceeds 50%, it is our opinion that the market is not giving MYL credit for the many benefits it will receive from the merger with Upjohn, which include higher margins, a diversified product portfolio, improved geographic mix, and the institution of a dividend policy.
• Given the near doubling of earnings power, the current discounted trading multiple, and expected benefits, we rate the shares of Mylan at BUY ahead of the planned merger with Upjohn. While shares of MYL have underperformed over the last several years, we expect that the Upjohn merger will prove a catalyst for share price appreciation.
• On a pre-spin basis, we value the shares of Pfizer at $43 per share, which includes $40 per share in value from post-spin Pfizer and $3 per share in value from VTRS shares to be received following the spin-off of Upjohn. Longer term, PFE shares may provide additional upside based on new drug introductions (potential COVID-19 vaccine upside) and a stable dividend yield. While for certain investors, the upside potential to our fair value may provide sufficient investment returns, especially when incorporating the current dividend yield, in the context of this spin/merge transaction, we favor the risk/reward profile of Mylan/Viatris, and thus we rate the shares of Pfizer at NEUTRAL.

For more details, please refer to The Spin Off Report dated September 21, 2020 and UPDATE dated August 26, 2020.

Finally, some operating leverage! With seemingly more to come given commentary that real estate investment could take more than two years to “normalize”; fair value increased to $460 per share (from $395 per share)

• UHAL reported 2Q F2021 sales up 15% to $1.325 billion with a 60% increase in operating income to $392 million and 70% increase in EPS to $13.58 (compared with $7.97 per share in 2Q F2020).
• At the core-Moving & Storage segment, sales increased ~16.5% to $1.245 billion, reflecting a ~19% increase at Moving and a 12% rise at Storage. Operating income jumped 63% to $374 million while EBITDA, by our calculation, increased ~34.5% to $511.5 million.
• At quarter-end, UHAL had net debt of ~3.486 billion (compared with $3.95 billion  at the end of 1Q F2021 and ~$4.13 billion at the end of F2020) and a net leverage ratio of ~2.7x, by our calculation.
• As mentioned in previous notes, we think the recent, primarily pandemic-related, slowdown in spending at UHAL, particularly on real estate, augurs well for profitability (and investor sentiment); to that end, capital spending at Storage, primarily aimed at footprint expansion, has roughly halved in F2021, which has, in  part, driven a 15% increase in average occupied units in 1H F2021 as well as an improvement in average monthly occupancy, which stood at 71.9% in 2Q F2021 (vs. 69.5% in the prior year period, 66.1% at year-end F2020 and 67.6% during 1Q F2021). These improvements, coupled with increases in utilization at Moving, resulted in, by our calculation, 820 basis points of operating margin expansion to 29.3% and 490 bps of EBITDA margin expansion to 40% at the core-Moving & Storage segment in 2Q F2021. Moreover, we take commentary suggesting that it could take more than two years for spending to “normalize” (i.e. it takes time to restart the pipeline of R.E. projects) as bullish for intermediate-term profitability.
• Our fair value estimate is increased to $460 per share (from $395 per share), reflecting an ~8.5x multiple (unchanged) on F2022E Moving & Storage EBITDA of $1.425 billion (previously $1.3 billion), the insurance assets at book value and net debt of ~$3.5 billion (see Exhibit #1 on page 2).
• That said, we may make further adjustments following this morning’s conference call at 10 a.m. (ET).

SYNNEX Announces Key Dates Associated with Concentrix Spin-Off; Maintain NEUTRAL

• On November 3, 2020, before the market open, SYNNEX Corp. (NYSE: SNX) announced that its board of directors has approved the completion of its previously announced tax-free spin-off of Concentrix, as well as key dates associated with the transaction. As background, Concentrix, with annualized revenues of $4.7 billion, provides technology-enabled business process outsourcing (BPO) services focused on customer engagement, process optimization, technology innovation, front- and back-office automation, and business transformation services.
• SNX shareholders will receive one share of Concentrix common stock for each share of SNX held at close of business on November 17, 2020, the record date for the distribution. The distribution is expected to occur on December 1, 2020, at which time Concentrix will trade on the NASADQ under the ticker “CNXC”. SYNNEX will continue trading on the NYSE under the ticker “SNX”.
• Beginning on or about November 16, 2020, and continuing up to the distribution date, shares of SYNNEX and Concentrix will trade on a “when issued” basis under the symbols “SNX WI” and “CNXCV”, respectively. “Regular-way” trading of Concentrix common stock is expected to begin on December 1, 2020, the first trading day following the completion of the separation.
• The post-spin fair value estimate for Concentrix remains $75. The post-spin fair value estimate for SYNNEX remains $81 per share. On a pre-spin basis we assign a fair value estimate of $156 per share to SYNNEX. With the pre-spin sum-of-the-parts estimate suggesting 12% upside to SNX’s current consolidated share price, pre-spin shares are not recommended for purchase.
• Following the separation, SYNNEX will remain focused on IT distribution, logistics, and integration services, with annualized revenues of approximately $19 billion. The company will remain among the top three Americas and Japan IT distribution companies. We expect the company to maintain its leadership position while shifting its revenue mix toward more value-added services—which should improve margins over time. That said, in the near term, the business will remain pressured by reduced IT capital expenditures
• For more details, please refer to The Spin Off Report dated September 21, 2020 and UPDATE dated October 14, 2020.

EVRI posted above-consensus results in 3Q 2020 and expects a flat sequential comparison in 4Q 2020, which is better than seasonally normal; profitability is expected to remain at above historical levels in 2021; fair value increased to $12 per share (from $10 per share)

• In 3Q 2020, EVRI posted consolidated sales of $112.1 million (vs. consensus of ~$89.3 million and $134.6 million in 3Q 2019) with adjusted EBITDA of $59.8 million (vs. consensus of $38.3 million and $64.7 million in 3Q 2019).  Free cash flow in the quarter was ~$23 million (vs. $11.1 million in 3Q 2019 and a $27 million outflow in 2Q 2020).
• EVRI ended 3Q 2020 with net debt of $1.095 billion (vs. $1.13 billion in 2Q 2020) and a net leverage ratio of 6.1x (vs. 6.2x in 2Q 2020). Notably, EVRI’s debt covenants have been waived or modified through 3Q 2021.
• In terms of forward-looking commentary, EVRI expects that 4Q 2020 net income and adj. EBITDA will be roughly in-line with 3Q 2020 results, which is better than the seasonally normal sequential decline.  In that context, the company expects to see a modest sequential improvement in sales, offset by a slightly lower margin given increases in SG&A and R&D to support future growth as well a mix that includes more equipment sales than in 3Q 2020. Notably, the company expects above historical levels of profitability will persist in 2021. (Anecdotally, EVRI has indicated that quarterly opex is likely to range in the $35-$40 million range for both 2020 and 2021.)
• On the free cash flow front, EVRI expects to generate more FCF in 4Q 2020 than the $4.5 million it generated in 4Q 2019.  Full-year capex is still expected to be $75-$80 million for 2020.
• Our fair value estimate is increased to $12 per share (from $10 per share), reflecting an unchanged blended multiple of ~8.5x on 2022E EBITDA of $248.5 million (previously $242 million) as well as net debt of $1.1 billion (previously $1.13 billion). [Note: our adj. EBITDA forecasts do not add back stock-based compensation.]