LNDC nominates three new directors to an expanded Board of 12 members (previously 10); Legion Partners reports 9.93% stake (previously 9.82%); fair value remains $12 per share

• Today, in conjunction with a cooperation agreement with Legion Partners, which currently holds a 9.93% position (up from its initial 5.15% stake in January 2020), to nominate three new, independent directors to its Board, which following the retirement of Mr. Frederick Frank, will be expanded to 12 members (from 10), of which 8 will have been nominated over the last 14-months.
• The new nominees include Jeffery Edwards, a retired CFO of Allergan, Patrick Walsh, the former CEO of TriPharm Services, and Joshua Schechter, a former Steel Partners executive, adding, in our view, both operational and transactional expertise.
• Additionally, Landec and Legion  entered into a standstill agreement, which, among other things, prohibits the investor from accumulating more than 15% of stock (as well as includes various “non-disparagement” clauses”), for a period ending 30 days prior to the 2021 Annual Meeting’s nominating deadline.
• For context, Legion had previously publicly contended that Landec’s “odd combination of businesses” prevent the achievement of “full and fair value”, which it assesses to be “significantly” higher than current levels.
• As well, we would note that Legion is LNDC’s second largest shareholder, albeit only closely ahead of Wynnefield Capital, which, while not overtly “active”, is a longtime LNDC shareholder and a self-described value investor, specializing in U.S. small cap situations that have a company- or industry-specific catalyst. As well, Wynnefield’s CIO, Nelson Obus, is also on LNDC’s Board along with ally Andrew Powell who is currently serving as the company’s interim Chairman).
• Our fair value estimate remains $12 per share based on an ~11x blended multiple of F2022E EBITDA of ~$44 million and net debt, including the Windset investment, of $148.5 million.

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NNBR to sell its Life Sciences business for ~$825 million; transaction will reduce leverage to 1.8x (from 6.1x); fair value revised to $8.50 per share (from $10) 

• Today, NNBR agreed to sell its Life Sciences business to American Securities for $825 million, including $755 million in cash and a $70 million earnout based on 2022 performance.
• The deal implies a ~12.5x 2020E EV/EBITDA multiple, and is expected to close in 4Q 2020, at which time the business will be combined with MW Industries, a portfolio company of American Securities.
• NNBR plans to use initial net proceeds of ~$700 million (i.e. tax/transaction leakage of ~$55 million) to reduce debt, specifically its Term B loan, and its post-deal leverage and debt-to-cap ratios are expected to be reduced to 1.8x (from 6.1x) and 35% (from 75%), respectively.  NNBR expects to operate with a leverage ratio below 2.0x through 2025 (versus its revised covenant of 3.5x).
• In terms of the remaining Mobile and Power Solutions businesses, NNBR expects consolidated sales to grow to ~$600 million in 2025 (compared with 2020E sales of $400-$420 million and implying a 4.0%-4.5% CAGR off the more normalized 2019 level of ~$493 million) with an adj. EBITDA margin of 16%-18%, implying 2025E adj. EBITDA of $96-$108 million (compared with ~$55-$60 million in 2020E). Anecdotally, corporate costs at RemainCo are expected to be $15-$18 million (albeit with a longer-term goal of $11-$13 million) with D&A expense of ~$30-$31 million and capital spending of $20-$22 million (which is a framework that should allow NNBR to pre-pay the $100 million preferred investment it received from shareholders Legion & Corre Partners in December 2019).
• Fair value is reduced to $8.50 per share (from $10), based on a blended multiple of ~6x on 2023E adj. EBITDA of ~$72 million and net debt of ~$74 million. [Note: our forecasts incl. some expenses, incl. stock-based comp., that NNBR adds back in its internal calculations.]

SWBI Completes Spin Off of AOUT; Maintain BUY and $25 Fair Value Estimate on SWBI and rate AOUT at SELL; Adjust Fair Value Estimate for AOUT to $11

• Prior to today’s market open, Smith & Wesson Brands Inc. (NASDAQ: SWBI) completed the separation of American Brands Inc. (AOUT), the company’s outdoor products and accessories business. Smith & Wesson Brands stockholders received one share of AOUT common stock for every four shares of SWBI stock held. In the when-issued market on Friday, AOUT shares were trading at $15.50 (~2,000 shares traded); SWBI shares were trading at $19 (~7,300 shares traded).
• For SWBI, we maintain our post-spin fair value estimate of $25, which is based on an implied 12x estimated 2021 EBITDA, in line with the company’s closest comparable, Ruger Inc. (NYSE: RGR).
• For AOUT, we revise our fair value estimate to $11 (from $9 previously), reflecting a 11x multiple to estimated 2021 EBITDA (versus 9x previously), a discount to larger specialty retailers.
• We maintain our BUY recommendation on SWBI. Given recent demand and the expectation of continued consumer demand for firearms, SWBI has the potential for continued outperformance and further multiple expansion. SWBI shares have appreciated 140% year-to-date, from $9 levels in January, versus 5% for the S&P 500 over the same period. Following the separation of the lower-margin outdoor business, we would expect SWBI shares to benefit from a re-rating as a pure-play firearms manufacturer. Moreover, a premium multiple to RGR may be warranted given unique near term demand catalysts which could provide further upside to revenue and earnings as well as industry-wide regulatory catalysts. Note that post-spin SWBI will benefit from a leading market share position, an acceleration in domestic gun purchasing related to the COVID-19 pandemic, and growth in adjacent markets.
• We maintain a SELL recommendation on AOUT. At current levels, AOUT is implicitly trading in line with substantially larger and diversified retail peers. In the near term, post-spin AOUT ‘s should benefit from heightened consumer demand for the firearms, resulting in increased sales of handgun and long gun accessories, and related shooting, reloading, gunsmithing and gun cleaning supplies. Longer term, however, we see the potential for increased competition from larger retailers. We continue to view SWBI as the better way to invest in the firearm segment. 
• For more details, please refer to The Spin Off Report dated June 19, 2020 and UPDATEs dated August 5, 2020 and July 7, 2020.

Allgeier SE to Spin-Off Nagarro Group

On August 21, 2020, Allgeier SE (AEIN GR) announced that the company intends to spin-off its global technology consulting and software development business into a new independent standalone publicly traded company. The new company, which is to adopt the corporate moniker Nagarro Group, is expected to begin trading in December 2020. Shareholders of record will receive one share of Nagarro for each share of Allgeier held. The company plans to vote on the proposed transaction at its annual general meeting on September 24, 2020 and hold a capital markets day on September 27, 2020.

Allgeier is a full-service IT consultancy and service company based in Munich, Germany. The company reported sales of €784.2 million euros in 2019, with EBITDA of €73.4 million, representing a 9.4% EBITDA margin. Over the past five years the company has increased revenue at a 15.2% CAGR while driving wider margins resulting in a 30.1% EBITDA growth CAGR. 65% of revenue in 2019 was derived from Germany, 18% from the United States, with the remainder from mostly northern European countries.

The company reports under four business segments: Enterprise Services (€122.6 million in 2019 revenue, €7.3 million in EBIT), Experts (€261.3 million in 2019 revenue, -€0.7 million in EBIT), Technology (€402.2 million in 2019 revenue, €47.8 million in EBIT), and New Business Areas (€7.8 million in 2019 revenue, -€3.8 million in EBIT). The company has employed a growth via acquisition strategy, having completed 20 acquisitions since the beginning of 2015.

In the company’s spin-off announcement, management cited the growth of the Nagarro Group as having reached a point whereby it can operate on a standalone basis. Following the separation, Nagarro will be better positioned to be compared to a peer group of global software development and digital transformation companies. For reference, shares of AEIN currently trade at 8.9x the 2021 consensus EBITDA estimate, where a basket of IT service firms peers trade in a range of 8x-10x, while software focused peers trade 17x-19x forward EBITDA.

On a pro-forma basis, Nagarro would have generated €402 million in revenue, €61 million in EBITDA, and €40 million in operating cash flow in 2019. The remaining parent company would have generated €382 million in revenue, €10 million in EBITDA, and €19 million in operating cash flow in 2019.

Based on the 2019 pro-forma revenue and EBITDA margins, it appears reasonable to assume that Nagarro would be able to grow revenue at approximately 10% annually over the next several years, while margins will likely remain in the roughly around 15%. Forecasted growth does take into account the company’s stated “Buy and Build” growth strategy, which we expect to support the revenue growth assumptions. Based on these assumptions, it is forecast that Nagarro would generate €69.2 million in EBITDA. If Nagarro shares are rerated higher to approximate the low end of software peers, the company would be valued at €1 billion on an enterprise basis.

Post-spin, AEIN will exhibit slower growth and significantly lower margins absent the Nagarro contributions. Assuming a 5% annual revenue growth rate and a 2.6% margins, in line with pro-forma 2019, the parent company would earn €11 million in EBITDA in 2021. Assuming a modest multiple contraction to account for the loss of the higher margin business, valuing shares at 8x, results in a $88 million enterprise value.

Based on net debt of €251.4 and 11.3 million shares outstanding, on a preliminary, pre-spin sum-of-the-parts basis, shares of AEIN are fairly valued at €78 per share. Given the implied upside to this preliminary fair value estimate, it appears that the proposed transaction could unlock significant value for shareholders.

MSGS Reports 4Q and Full Year F2020 Results; Maintain BUY Rating, Adjust FVE to $194 per Share

• On August 14, 2020, before the market open, Madison Square Garden Sports Corp. (NYSE: MSGS) released 4Q and full year 2020 results, which were impacted by the COVID-19 pause in the NBA and NHL seasons.
• MSGS reported full year F2020 revenue of $603.3 million and adjusted EBITDA loss of $27.5 million. F2020 results compared to F2019 revenue of $729.4 million and EBITDA of $11.2 million.
• 4Q revenue recorded a loss of $7 million as the suspension of the NBA and NHL seasons caused an accounting reversal for a portion of national media rights fees that were recognized through 3Q F2020. It is expected that these will revert in 1Q 2020 as the NBA and NHL have resumed operations in their respective “bubbles”. 4Q F2019 revenue totaled $68.2 million.
• Despite the pause, and the Knicks and Rangers not playing at home, we still see value in the owned sports franchises of MSGS.
• 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 June 30, 2020, MSGS had a cash position of $78 million, and total debt of $350 million.
• We adjust our fair value estimate to $194 per share (previously $206 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, and May11, 2020.

MSGE Reports 4Q and Full Year F2020 Results, Which Were Significantly Impacted by COVID-19; However, We Still See Value In Its Physical Venues and Entertainment Brands at Current Share Price; Maintain BUY Rating, Revise FVE to $116

• On August 14, 2020, before the market open, Madison Square Garden Entertainment Corp. (NYSE: MSGE) released 4Q and full year F2020 results. Unsurprisingly given the COVID-19 shutdowns, which essentially halted all of MSGE’s operations, revenue and profitability were significantly impacted.
• Revenue in 4Q F2020 declined by 96%, resulting in a 27% full-year decline versus the respective F2019 periods. The company generated an EBITDA loss of $103.5 million in 4Q and a $43.3 million loss for the full year. For comparison, 4Q F2019 operated at a loss of $21.5 million while full-year F2019 generated $103.9 million in EBITDA.
• As a reminder, MSGE’s operations primarily include the renting out of owned venues, of which Madison Square Garden in NYC is the largest, for concerts and events, as well the nightlife entertainment operations associated with Tao Group Hospitality.
• In an effort to maintain balance sheet strength amid the pandemic shutdowns, MSGE has laid off all event related staff and taken cost reductions across all departments.
• Further, the company is now extending the anticipated timeline for completion of its Las Vegas Sphere project. Given construction stoppages and supply chain issues, both COVID related, combined with an eye towards slowing cash usage, the company now expects to complete the Laas Vegas Sphere in calendar 2023.
• Notably the company has $1.2 billion in cash and $33.6 million in debt, which is associated with the Tao operations.
• It is our opinion that the main underlying value of MSGE lies in the physical asset of Madison Square Garden (“The Garden”). We estimate the Garden being valued at $1.2 billion. Given MSGE’s financial position, with net cash of $1.2 billion, and the current share price ($70.59 as of this writing), the company is currently valued at $700 million on an enterprise basis. Further, it can be argued that our valuation for The Garden is conservative given it does not include any potential value for air rights, which we have previously estimated to be worth at least $600 million.
• Lastly, while the operating businesses are currently not open, their prior earnings contribution should be considered.as they used to generate close to $100 million in normalized annual EBITDA. While difficult to predict a timetable for the return to operations, or the ability to reach prior profitability given potential capacity constraints, it is worthy of consideration. Assuming 75% of prior normalized earnings, valued at 5x, the operating business would contribute $375 million in value to MSGE, or approximately $15.50 per share.
• We maintain our BUY rating on MSGE. We view the value of Madison Square Garden and net cash position as providing stability to the share price through the current COVID shutdowns. It can be expected that upon a resumption of operations the current discount to our fair value should narrow.
• We revise our fair value estimate for MSGE to $116 per share (previously $130), which includes $1.2 billion for Madison Square Garden, $375 million for the operating businesses (previously $514 million), and $1.2 billion in net cash (previously $1.4 billion).
• 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, and May11, 2020.

Maintain BUY on CARR, Revise Fair Value Estimate to $36 (from $28)

• With industrial sector valuations continuing their expansion on improving fundamentals, we re-evaluate our fair value estimate for Carrier Global Inc. (NYSE: CARR). Broad-based industrial peers with HVAC exposure, including Lennox International Inc. (NYSE: LII) and Trane Technologies plc. (NTSE: TT) have had strong runs year-to-date, and currently trade at 28x and 26x 2021E EPS, respectively, reflecting the HVAC sector’s relative stability versus other industrials, and the expectation that the current low interest rate environment may accelerate U.S. housing demand. CARR, in contrast, currently trades at 17x 2021E EPS, a meaningful discount primarily attributable to the company’s historically lower margin performance.
• CARR appears well-positioned to demonstrate expand profitability in the near term, supported by 1) improving revenue growth (increased revenue guidance for 2020); and 2) continued cost synergies (maintained guidance of $600 million in cost savings over three years, with $420 million expected in 2020).  We also note that growth in the transport and commercial refrigeration segment represents a significant upside catalyst, given recent growth among online grocery retailers.
• Given improving fundamentals and the potential for further margin expansion, we expect the valuation disparity between CARR and peers to narrow over time. We adjust our applied P/E multiple for CARR to 21x (versus 18x previously), which still represents a discount to TT and LII. These changes result in an upward adjustment to our fair value estimate to $36 (versus $28 previously). With the implied fair value estimate implying 20% upside to the CARR’s current share price, we maintain our BUY recommendation. In the near term, we expect continued restructuring to benefit profitability and cash flow. Longer term, CARRs end-markets remain robust, with growth for the company’s HVAC, Refrigeration, and Fire & Security businesses likely to be supported by favorable secular trends, including urbanization, climate change, increasing requirements for food safety driven by the food needs of the growing global population, rising standards of living, and more energy and environmental regulations. Increased urbanization in emerging market countries, especially India and China, also benefits the industry for air conditioning, cooling, and security systems.
• CARR shares have experienced a strong recent run, having more than doubled from $16 levels at the spin-off on April 3, 2020, versus an increase of 34% for the S&P 500 over the same period. For more details, please refer to The Spin Off Report dated March 10, 2020, and UPDATEs dated July 8, 2020, May 8, 2020, March 13, 2020, and March 30, 2020.

4Q F2020 results in-line with pre-announcement; F2021 EBITDA guidance of $33-$37 million implies 50%-68% growth; LNDC opts to keep (and shrink) legacy vegetable bag & tray business but continues to eye non-core asset sales. 

Potentially interesting datapoint: LNDC adopts a severance plan for the CFO and President of Lifecore and amends its agreement with the CEO in the event of a “change of control”; F2020 results due in “early-August”; fair value remains $12 per share

• In F2020, LNDC posted consolidated sales growth of almost 6% to $590.4 million with adj. EBITDA, ex-items, of $22 million; to that end, 4Q F2020 results were in-line with the metrics pre-announced in late-June. Broadly, F2020 results reflected on-going challenges/restructurings at CF and consistent results at Lifecore.
• In terms of the strategic review at CF, the company opted to retain its legacy vegetable bag & tray business, but shrink it by ~$50-$60 million to $100-$110 million in F2021, which is expected to drive a return to EBITDA profitability. As well, LNDC sold its salad dressing facility in Ontario, CA for $4.8 million and continues to explore the sale of its manufacturing facility in Hanover, PA (for which it previously indicated it expects a “high seven, low eight” figure sale price.)
• Looking into F2021, LNDC guided to consolidated sales of $530-$550 million with adj. EBITDA up 50%-68% to $33-$37 million (compared with prior consensus of $587 million and $38.5 million, respectively, and our EBITDA forecast of $34.5 million).  Cap ex is expected to be ~$34 million in F2021.
• By segment, at CF the company expects F2021 sales down 10%-13% to $437-$453 million, including a $50-$60 million reduction in its legacy vegetable business, with adj. EBITDA of $12-$14 million. At Lifecore, management forecasts an 8%-13% increase in sales to $93-$97 million with a 12%-22% increase in adj. EBITDA to $22.5-$24.5 million.
• LNDC ended F2020 with net debt of ~$221 million (compared with $154 million in F2019 and $203 million at the end of 3Q F2020), implying a year-end F2021 leverage ratio, including potential proceeds from assets sales, of ~6.0x (suggesting additional relief from lenders, who have been supportive, could be necessary).
• Our fair value estimate remains $12 per share based on an ~11x blended multiple of F2022E EBITDA of ~$44 million and net debt, incl. Windset, of $148.5 million.

1H 2020 results (and 3Q 2020 outlook) outperform industry and demonstrate the resiliency of STAY’s model; Starwood increases stake to 9.4% (from 8.5%); fair value increased to $15 per share (from $14)

• In 1H 2020, consolidated sales fell ~17% to $497 million, on an ~18% decline in RevPAR, with adj. EBITDA down 36% to $172 million. In 2Q 2020 specifically, total sales fell ~29% to $231 million as RevPAR fell 28.7%, reflecting an 18% decline in ADR and occupancy of 69.6%, with adj. EBITDA down 52% to $74 million.
• In terms of 2Q 2020 monthly RevPAR trends, after declining 34.7% in April revenue per available room (RevPAR) declines improved to 28.2% in May and 23.9% in June. (For context, management indicated that RevPAR for the broader lodging industry was estimated to be down ~70% in 2Q 2020 with the more relevant “mid-price” sub-sector seeing declines of ~50%).
• Importantly, operating trends have continued to improve in 3Q 2020 with occupancy in August exceeding ~81% and average daily rates (ADR) improving to ~$59 (compared with ~$53 in April). In fact, at current RevPAR levels STAY indicated it is generating $5-$10 million of cash per month, which prompted the repayment of the $350 million previously drawn on its ESH revolver in early-3Q 2020 (and likely portends a dividend hike in early-2021).
• At the end of 2Q 2020, STAY had net debt of ~$2.37 billion with a leverage ratio, by our calculation, of 5.4x (vs. 4.3x at the end of 2019 and its 8.5x covenant, which has been waived through 1Q 2021).
• In terms of the forward outlook, STAY did not re-institute full-year guidance but did indicate that 3Q 2020 adjusted EBITDA would be $98-$105 million (vs. $153 million in 3Q 2019) with RevPAR declines of 18%-21%.
• Our base case fair value estimate is increased to $15 per share (from $14), which is based on a blended EV/EBITDA multiple of 9.5x on 2022E EBITDA forecast of $498.9 million (previously $477.8 million) and net debt of $2.1 billion (previously $2.13 billion) albeit with incremental upside, in the event of strategic alternatives, to ~$17-$20 per share.

Drop Coverage of HD Supply Holdings Inc. Effective Immediately

• On August 11, 2020, before the market open, HD Supply Holdings Inc. (NASDAQ: HDS) announced that the company has agreed to sell its construction and industrial business, referred to as White Cap, to private equity firm Clayton, Dubilier & Rice.
• HDS had previously planned to spin-off White Cap into a standalone company.
• Clayton, Dubilier & Rice agreed to purchase White Cap for $2.9 billion in cash, with HDS expected to receive approximately $2.5 billion after taxes and transaction costs. The sale is expected to be completed in October 2020.
• HDS expects to use proceeds from the sale to return capital to shareholders, fund M&A, and reduce debt.
• Given the announcement, we DROP coverage of HDS effective immediately.

• Our prior estimates and fair values for HDS should no longer be relied on.