re: $ENZ selling pressure, worth noting that some investors hold shares in a Prime Brokerage account. Post NYSE delisting, their margin requirements jump from GC to 100%. That's also created technical selling.
Also think a sale of the LS business was difficult while a Class Action suit was pending. A large settlement could conceivably have claim on the asset, leading to fraudulent conveyance issues. Don't think its coincidence the strategic alternatives language in their March press release showed up AFTER the suit settlement.
I think you should reread your concerns about the acquisition and consider motif in sort of a similar light
when they bought motif, it fulfilled their “goal” of having number one market share. It seems to me their problems lie with having the wrong goals or the wrong incentives? I think this is different from a lot of other small companies in Canadian cannabis, that didn’t have a big balance sheets or cash infusions from BAT and were forced to target the customer with products that were commercially successful, and profitable
OGI hasn’t really done this
Every other company can create their own vape brand. Why did OGI have to buy one for so much money? (I imagine part of the answer has to do with the lack of a brand to leverage off. I have a notion that a great flower brand ‘earns’ the right to add other categories and that’s how a brand gets credibility in the business to be in pre-rolls, vape, edible, etc..)
I’m not sure if you’re a consumer, but I I think it’s quite helpful in understanding the industry. Every company I talk to is focused on post harvest and trim, and the look and the feel of the bud.
I’m not in Canada. I don’t fully understand the consumer perspective there, but I’d like to understand why their biggest product is *milled* flower when they supposedly have this great expensive grow facility.
They should be able to sell great high-end bud at low cost out of Moncton, but that doesn’t seem to be what’s happening there.
These are all questions worth understanding. I don’t have the answers, but the questions and my interactions with a lot of other little Canadian cannabis companies give me conviction that while OGI may be a great stock from here because I think the industry dynamics are fantastic, there are much much much better opportunities in terms of risk/reward as well as 10 bagger plus opportunities in companies with big inside ownership and people who have risked everything and paid in blood sweat and tears to get to this point where the cycle is turning
Mark, all good questions and concerns. A couple thoughts:
- On Motif and why not build your own vape biz. One of the troubles with the large legacy LPs (OGI, Cron, CGC, etc.) was that they went public with way too much capital and unrealistic assumptions. They've struggled with profitability compared to smaller, younger producers, and the path to getting profitable has been a long process of taking capital out of the business to right size the opex line (you can see non-cash assets declining consistently over the recent years in companies like CRON and OGI). Of course, another way to solve for broken cost structure is to leverage it with more revenue. Assuming you think OGI can achieve synergies from the deal (and we can debate that, I know you are skeptical, I am more optimistic here), it therefore makes a lot of sense to me to acquire those sales, rather than building out a new product, which would only hurt the PnL more (last thing the market wants). Further, it's more than just acquiring a vape brand and synergies; the ontario facility, e.g., will help save costs and improve distribution, and OGI was previously sourcing ingredients from Motif, so bringing that in house should improve margins.
I've spent a lot of time in Canada and have consumed the products. I think you probably discount a little too much the OGI brands and product quality. Last month, anecdotally, I went to a dispensary in Toronto and they noted that OGI's new fast edibles were the "hottest" product at the moment. As it relates to flower, I don't think OGI has any real edge, but i tend to view the company much more as a CPG branded product company (you can see the BAT influence) than a great flower company, and you do see their brands tend to be more visible and ubiquitous in the retail setting. For premium flower, your LOVE.V's and Rubicons (I own both) are certainly better, but I think they are playing a different game.
And on your final point about better opportunities. I do think there are better run, profitable businesses in the space (e.g. LOVE), but I disagree that any have nearly the right-tail potential that OGI does. The Canadian market isn't big enough to see niche, premium producers grow into large companies and while the international opportunity is attractive, my sense is flower markets in Europe, for example, will soon get oversaturated the same way other nascent cannabis markets have been. Further, I am not really sure what 'moats' these smaller quality producers have. In truth, most cannabis consumers, imo, don't care about organics or high quality flower, or different strains - there is a market for that, sure, as there is for craft beer (historically not where the money has been made in that industry) but the masses simply want convenience and consistency, and the mainstream is surely heading away from combusting and towards edibles, vapes, drinks, etc. So to me the major money in this sector will come from the ability to mass produce branded derivative products at scale. Moreover, with capital markets shut, these smaller companies lack the balance sheets to capture those right tails (look at Rubicon, needing to do an expensive equity raise for a mere C$3m simply to expand production capacity - how is a company like that going to have the same opportunity set as OGI (which trades at a similar multiple, but has multiples of Rubicon's market cap just in cash)?) For me, the risk with OGI is no doubt poor alignment and the consequent risk that they are poor allocators of that money, but if done right, I struggle to think of any investment that has as much upside from here. Big if, yes, but we are deeply below liquidation value and at rock bottom sentiment - even if they make some mistakes, an improved sector outlook likely lifts the stock higher. Welcome your thoughts.
Thanks for the thoughtful reply. I really appreciate how seriously you’re thinking about this space — it’s clear that you understand the industry well.
I wrote you a reply back, but I spent enough time I thought I'd post it more broadly:
Thanks, I will have a look at your piece tonight. Edison branded SONIC edibles (with FAST tech). What's notable with this product is that it actually gets you high, which is unique given the regulatory limit of 10mg THC per package, which makes the current commercial offering quite 'weak'. The nanoemulsion tech increases the bioavailability of the THC, increasing the psychoactive impact of the edibles while working within the limit. It's a new SKU (maybe 3-4 months) and still taking time for the consumer to develop awareness, but I view this as a very high quality product. Personally, I've switched over to this from Spinach, which used to be my default. Link here. https://www.edisoncannabis.com/fast/. How accurate is this headset data? Any view as to how it is sourced/compiled? Thanks.
The Headset data is extrapolated from POS data and triangulated with government data. It’s not necessarily that accurate, but it usually is a pretty good guide to what’s going on and a helpful way to better understand all the brands and their SKUs. in this case the Edison sonic SKUs are not even in Headset yet, but I will ask them to add them and likely it won’t take too long for the data to populate once they’ve entered the SKUs .
I understand your concern around some of the smaller players and perhaps an in ability to call. Also, understand the concern around companies like Tilray or Canopy and their proxy for burning cash. However, a company like Auxly seems to be growing, have scale, and doing it profitably. There are some rightful concerns about their debt and balance sheet, but curious if you seek them in a similar risk/reward profile as OGI.
Auxley is probably the one I have done the least work on, so I don't have much intelligent to say other than I think we see a broad change of sentiment in the sector imminently and that change should be the rising tide that lifts all boats. I do think you want to be extra careful about balance sheets; not just from a solvency/liquidity perspective, but also recognizing that a high cost of capital makes growth capex extremely challenging, and longer run, I think it will be hard to compete in this sector without scale.
Thanks for the update, I'm still very bullish on CPH.TO and kicking myself I didn't put money into Zegona when I read it Dave Waters' quarterly letter to share holders. $OGI seems like an excellent opportunity but the bear point you mentioned above on the management's egregious rem structure (tied to revenue? what???) and the lack of skin in the game puts me off. I get from their perspective why would they own shares if their rem is linked to hitting revenue numbers but it just makes me uncomfortable.
You'd be surprised how common that is. What a lot of comp committees do is simply look to how other companies in the industry have set their comp and do something similar. PSUs tied to revenue and adj. ebitda are abundant. What makes it stickier in this case is that there aren't any shareholders on the board, and its impossible for an activist or large shareholder to get involved due to the BAT, so you're taking a leap of faith.
Oh I'm aware it's rampant but it doesn't make it any easier to swallow, from my perspective (in much the same way as the ludicrous use of adjusted EBITDA by well...pretty much everybody, bleurgh).
If I saw execs buying in the open market, I'd be buying OGI.TO hand over fist
So, I dug into this a bit and just wanted to pick your brains, if you don’t mind.
Based on my estimates, I get a present value for CPH between C13–$15/share.
This assumes Netroba grows topline at 20% over the next three years, with gross margins roughly in line with current levels. I’ve taken a conservative approach by assuming no growth in Epuris and zero licensing revenue from Absorica. Why so conservative on Epuris and Absorica? Mainly to balance out the hefty assumptions on Netroba.
This all lands me at about $36M in EBITDA and a 10x multiple three years out.
If you throw in an additional ~$6M in EBITDA from Canadian commercialization of Netroba and pure royalty income from out-licensing Netroba outside of North America, I get to C$15/share in present value.
Now, for this to really work, we’d need in-housing of Absorica but that introduces a lot of operational risk, and the company would no longer be as asset-light. Plus, with the Netroba acquisition, I’d argue the company already isn’t as asset-light as it once was.
How likely is it that Absorica in-housing will happen and that they’d actually generate $10M in EBITDA from it? Maybe I haven’t dug deep enough yet, but the market seems super competitive. Seeing a major player like Sun Pharma exit isn’t exactly encouraging.
So, that feels like a low-probability success event. If that’s the case and the base case already assumes 20% Netroba growth in the U.S. for three years it starts to feel like a stretch. Based on disclosures, Netroba grew 15% in 2023, but was flat in 2024 (granted, integration could’ve played a role). Still, I don’t see a clear path to those growth targets.
Bottom line: While CPH might look attractive at 8–10x normalized EBITDA today, several things would need to go just right for this to generate meaningful returns. So the question becomes, is an upside of 20–40% to fair value worth all this uncertainty? Of course, this assumes no inhousing Absorica again.
Anyway, maybe I’ve rambled a bit here but I’d really appreciate your thoughts on the points above.
Are you forgetting to convert ebitda to CAD? Otherwise I’m not sure I’m following the math on how $40m usd of ebitda translates to $15/share cad at a 10x multiple. That puts me over $20.
I did not clarify that, I guess, in my calcs. I get a similar valuation three years out, I discounted that further to today. I am just not sure we get to 20/share three out that easily, thus 15/share in today's terms does not seem like a huge upside.
I’m not sure how discounting it back three years leads to that much compression unless you are using a very punitive discount rate. It’s also not going to take three years for this upside. You could be right by my strong sense is you are overcomplicating this. It’s an asset light cash machine with a lot of growth avenues that require no material investment. People at going to value this by simply slapping a multiple on it. Need to also consider all the cash this company will generate at the present yield, effectively shrinking the EV if the stock doesn’t rerate. Also need to consider how big the global opp is for Natroba, which is basically 100% margin revenue. Fair point on John Mull, but he isn’t Craig and I get the sense he lost focus on cipher, which was a spin off of their other main business. Entirely different c-suite today that clearly really cares and has done the right thing.
And this also doesn’t factor in the possibility of additional acquisitions, which could further complicate things going forward. While I hear the arguments about management quality and alignment, these are the same people who were effectively in charge prior to 2019, with John Mull being on the board and owning 40% back then as well. They clearly gave the green light to acquisitions made by the previous management team, so I can't entirely exclude their responsibility for those decisions.
But to be fair, I also don't see a meaningful downside here and I am just trying to poke the thesis as much as possible. At zero growth of Epuris and Natroba, no out-licensing revenue and no inhousing of Absorica over 3 year holding period downside is only about 20% (that's mostly time value of money). All of these happening together does not seem very likely. And, then the key overhang is messing up m&a, which is probably not very likely either, given the Natroba acquisition success.
On acquisitions, it’s just not true that this is the same team. Craig wasn’t the CEO, and that’s I think a pretty tough thing to pretend doesn’t matter. But the more important question is how do they screw it up with a premium multiple, very low leverage and an underutilized cost structure to drive synergies. Not something that worries me much.
he was not the CEO, but his father was on the board before 2019, and they owned 40% of the stock all this time. So, I doubt any of the decisions prior to 2019 were made without their involvement in some way at least. So, this is a bit concerning but the recent track record is certainly reassuring.
Still waiting for the authorization. It’s a bit odd for it to take this long. I wonder if there’s some extra compliance/paperwork involved given a buyback might cross Mull’s ownership over 50%
Agree on broad points, playing devils advocate a bit: Asset sales aren't free, as they gave up something, including 2m of NOI from leasing.
And now shifting mix of EBITDA towards lower multiple cinema assets rather than R/E.
The impled cap rate on Cannon Park was also quite high (~10%) which is probably well above what most people thought cap rate would be on the real estate, including the remaining properties.
Wellington sale was a bit disappointing on amount as well, and I'm not sure Union Park is worth anywhere near the huge cost over-run book value given whats happened with NYC real estate..
Agree with broad points on deleveraging -> accruing to equity holders, but trying to monetize asset sales into a *really* tough environment while G&A and interest gobbles up huge chunk of cash flow.
Let's say they monetize enough to pay off the debt, what do you think steady state EBIT is in that scenario (cinema plus whatever is left from R/E less corp G&A)?
I mean, yes they gave up some NOI, but Wellington was sucking money, and interest expense has come down, so it's cash flow positive on net, and it's not like the EV is implying value for these assets. On the cap-rate, I would think implied cap rate is better 10% on the assumption that some of that NOI will be retained by RDI through the lease back. I'd have to check; remember, you also have an Aussie dollar that's weakened a ton against the USD, which doesn't help the asset side of the balance sheet
Wellington is no doubt worth more than what it was sold for, but they were in quite a bind there - not exactly a secret they needed those proceeds to pay off the Westpac loan - and the new owner will have to put a ton of capital into it. Again, leaseback rights.
What has happened with NYC real estate? Has been quite strong from my view.
I don't see why this business cannot do 20m of EBITDA normalized, net of G&A. Also, remember they have the Newmarket Village asset in Australia is worth a ton and has no debt on it; that and Belmont largely cancel out the remaining corporate debt, giving you the cinemas and whatever equity is in the NYC real estate/Philly for the market cap.
Zooming out, I suppose one question to ask is whether this deserves to be trading at an all time low. The situation looked worse in every way at basically every moment since COVID, and yet for much of that period shares were in the $3-4 range. That's not asking much of the equity from here given the leverage, and that's what I am playing for at the moment.
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re: $ENZ selling pressure, worth noting that some investors hold shares in a Prime Brokerage account. Post NYSE delisting, their margin requirements jump from GC to 100%. That's also created technical selling.
Also think a sale of the LS business was difficult while a Class Action suit was pending. A large settlement could conceivably have claim on the asset, leading to fraudulent conveyance issues. Don't think its coincidence the strategic alternatives language in their March press release showed up AFTER the suit settlement.
Agree entirely.
🙏 for the great thoughts and write-ups.
I have a different take on OGI FWIW
I think you should reread your concerns about the acquisition and consider motif in sort of a similar light
when they bought motif, it fulfilled their “goal” of having number one market share. It seems to me their problems lie with having the wrong goals or the wrong incentives? I think this is different from a lot of other small companies in Canadian cannabis, that didn’t have a big balance sheets or cash infusions from BAT and were forced to target the customer with products that were commercially successful, and profitable
OGI hasn’t really done this
Every other company can create their own vape brand. Why did OGI have to buy one for so much money? (I imagine part of the answer has to do with the lack of a brand to leverage off. I have a notion that a great flower brand ‘earns’ the right to add other categories and that’s how a brand gets credibility in the business to be in pre-rolls, vape, edible, etc..)
I’m not sure if you’re a consumer, but I I think it’s quite helpful in understanding the industry. Every company I talk to is focused on post harvest and trim, and the look and the feel of the bud.
I’m not in Canada. I don’t fully understand the consumer perspective there, but I’d like to understand why their biggest product is *milled* flower when they supposedly have this great expensive grow facility.
They should be able to sell great high-end bud at low cost out of Moncton, but that doesn’t seem to be what’s happening there.
These are all questions worth understanding. I don’t have the answers, but the questions and my interactions with a lot of other little Canadian cannabis companies give me conviction that while OGI may be a great stock from here because I think the industry dynamics are fantastic, there are much much much better opportunities in terms of risk/reward as well as 10 bagger plus opportunities in companies with big inside ownership and people who have risked everything and paid in blood sweat and tears to get to this point where the cycle is turning
Mark, all good questions and concerns. A couple thoughts:
- On Motif and why not build your own vape biz. One of the troubles with the large legacy LPs (OGI, Cron, CGC, etc.) was that they went public with way too much capital and unrealistic assumptions. They've struggled with profitability compared to smaller, younger producers, and the path to getting profitable has been a long process of taking capital out of the business to right size the opex line (you can see non-cash assets declining consistently over the recent years in companies like CRON and OGI). Of course, another way to solve for broken cost structure is to leverage it with more revenue. Assuming you think OGI can achieve synergies from the deal (and we can debate that, I know you are skeptical, I am more optimistic here), it therefore makes a lot of sense to me to acquire those sales, rather than building out a new product, which would only hurt the PnL more (last thing the market wants). Further, it's more than just acquiring a vape brand and synergies; the ontario facility, e.g., will help save costs and improve distribution, and OGI was previously sourcing ingredients from Motif, so bringing that in house should improve margins.
I've spent a lot of time in Canada and have consumed the products. I think you probably discount a little too much the OGI brands and product quality. Last month, anecdotally, I went to a dispensary in Toronto and they noted that OGI's new fast edibles were the "hottest" product at the moment. As it relates to flower, I don't think OGI has any real edge, but i tend to view the company much more as a CPG branded product company (you can see the BAT influence) than a great flower company, and you do see their brands tend to be more visible and ubiquitous in the retail setting. For premium flower, your LOVE.V's and Rubicons (I own both) are certainly better, but I think they are playing a different game.
And on your final point about better opportunities. I do think there are better run, profitable businesses in the space (e.g. LOVE), but I disagree that any have nearly the right-tail potential that OGI does. The Canadian market isn't big enough to see niche, premium producers grow into large companies and while the international opportunity is attractive, my sense is flower markets in Europe, for example, will soon get oversaturated the same way other nascent cannabis markets have been. Further, I am not really sure what 'moats' these smaller quality producers have. In truth, most cannabis consumers, imo, don't care about organics or high quality flower, or different strains - there is a market for that, sure, as there is for craft beer (historically not where the money has been made in that industry) but the masses simply want convenience and consistency, and the mainstream is surely heading away from combusting and towards edibles, vapes, drinks, etc. So to me the major money in this sector will come from the ability to mass produce branded derivative products at scale. Moreover, with capital markets shut, these smaller companies lack the balance sheets to capture those right tails (look at Rubicon, needing to do an expensive equity raise for a mere C$3m simply to expand production capacity - how is a company like that going to have the same opportunity set as OGI (which trades at a similar multiple, but has multiples of Rubicon's market cap just in cash)?) For me, the risk with OGI is no doubt poor alignment and the consequent risk that they are poor allocators of that money, but if done right, I struggle to think of any investment that has as much upside from here. Big if, yes, but we are deeply below liquidation value and at rock bottom sentiment - even if they make some mistakes, an improved sector outlook likely lifts the stock higher. Welcome your thoughts.
Thanks for the thoughtful reply. I really appreciate how seriously you’re thinking about this space — it’s clear that you understand the industry well.
I wrote you a reply back, but I spent enough time I thought I'd post it more broadly:
https://open.substack.com/pub/markemerritt/p/cannabis-w-my-evolutionary-lens?utm_source=share&utm_medium=android&r=7jibt
Also, please tell me the names of the new edible skus and I will take a look at headset to show you how they are doing (if you are curious)
Thanks, I will have a look at your piece tonight. Edison branded SONIC edibles (with FAST tech). What's notable with this product is that it actually gets you high, which is unique given the regulatory limit of 10mg THC per package, which makes the current commercial offering quite 'weak'. The nanoemulsion tech increases the bioavailability of the THC, increasing the psychoactive impact of the edibles while working within the limit. It's a new SKU (maybe 3-4 months) and still taking time for the consumer to develop awareness, but I view this as a very high quality product. Personally, I've switched over to this from Spinach, which used to be my default. Link here. https://www.edisoncannabis.com/fast/. How accurate is this headset data? Any view as to how it is sourced/compiled? Thanks.
The Headset data is extrapolated from POS data and triangulated with government data. It’s not necessarily that accurate, but it usually is a pretty good guide to what’s going on and a helpful way to better understand all the brands and their SKUs. in this case the Edison sonic SKUs are not even in Headset yet, but I will ask them to add them and likely it won’t take too long for the data to populate once they’ve entered the SKUs .
I understand your concern around some of the smaller players and perhaps an in ability to call. Also, understand the concern around companies like Tilray or Canopy and their proxy for burning cash. However, a company like Auxly seems to be growing, have scale, and doing it profitably. There are some rightful concerns about their debt and balance sheet, but curious if you seek them in a similar risk/reward profile as OGI.
Auxley is probably the one I have done the least work on, so I don't have much intelligent to say other than I think we see a broad change of sentiment in the sector imminently and that change should be the rising tide that lifts all boats. I do think you want to be extra careful about balance sheets; not just from a solvency/liquidity perspective, but also recognizing that a high cost of capital makes growth capex extremely challenging, and longer run, I think it will be hard to compete in this sector without scale.
Thank you for response. All valid points
Thanks for the update, I'm still very bullish on CPH.TO and kicking myself I didn't put money into Zegona when I read it Dave Waters' quarterly letter to share holders. $OGI seems like an excellent opportunity but the bear point you mentioned above on the management's egregious rem structure (tied to revenue? what???) and the lack of skin in the game puts me off. I get from their perspective why would they own shares if their rem is linked to hitting revenue numbers but it just makes me uncomfortable.
You'd be surprised how common that is. What a lot of comp committees do is simply look to how other companies in the industry have set their comp and do something similar. PSUs tied to revenue and adj. ebitda are abundant. What makes it stickier in this case is that there aren't any shareholders on the board, and its impossible for an activist or large shareholder to get involved due to the BAT, so you're taking a leap of faith.
Oh I'm aware it's rampant but it doesn't make it any easier to swallow, from my perspective (in much the same way as the ludicrous use of adjusted EBITDA by well...pretty much everybody, bleurgh).
If I saw execs buying in the open market, I'd be buying OGI.TO hand over fist
Thanks for the great article as always.
So, I dug into this a bit and just wanted to pick your brains, if you don’t mind.
Based on my estimates, I get a present value for CPH between C13–$15/share.
This assumes Netroba grows topline at 20% over the next three years, with gross margins roughly in line with current levels. I’ve taken a conservative approach by assuming no growth in Epuris and zero licensing revenue from Absorica. Why so conservative on Epuris and Absorica? Mainly to balance out the hefty assumptions on Netroba.
This all lands me at about $36M in EBITDA and a 10x multiple three years out.
If you throw in an additional ~$6M in EBITDA from Canadian commercialization of Netroba and pure royalty income from out-licensing Netroba outside of North America, I get to C$15/share in present value.
Now, for this to really work, we’d need in-housing of Absorica but that introduces a lot of operational risk, and the company would no longer be as asset-light. Plus, with the Netroba acquisition, I’d argue the company already isn’t as asset-light as it once was.
How likely is it that Absorica in-housing will happen and that they’d actually generate $10M in EBITDA from it? Maybe I haven’t dug deep enough yet, but the market seems super competitive. Seeing a major player like Sun Pharma exit isn’t exactly encouraging.
So, that feels like a low-probability success event. If that’s the case and the base case already assumes 20% Netroba growth in the U.S. for three years it starts to feel like a stretch. Based on disclosures, Netroba grew 15% in 2023, but was flat in 2024 (granted, integration could’ve played a role). Still, I don’t see a clear path to those growth targets.
Bottom line: While CPH might look attractive at 8–10x normalized EBITDA today, several things would need to go just right for this to generate meaningful returns. So the question becomes, is an upside of 20–40% to fair value worth all this uncertainty? Of course, this assumes no inhousing Absorica again.
Anyway, maybe I’ve rambled a bit here but I’d really appreciate your thoughts on the points above.
Are you forgetting to convert ebitda to CAD? Otherwise I’m not sure I’m following the math on how $40m usd of ebitda translates to $15/share cad at a 10x multiple. That puts me over $20.
I did not clarify that, I guess, in my calcs. I get a similar valuation three years out, I discounted that further to today. I am just not sure we get to 20/share three out that easily, thus 15/share in today's terms does not seem like a huge upside.
I’m not sure how discounting it back three years leads to that much compression unless you are using a very punitive discount rate. It’s also not going to take three years for this upside. You could be right by my strong sense is you are overcomplicating this. It’s an asset light cash machine with a lot of growth avenues that require no material investment. People at going to value this by simply slapping a multiple on it. Need to also consider all the cash this company will generate at the present yield, effectively shrinking the EV if the stock doesn’t rerate. Also need to consider how big the global opp is for Natroba, which is basically 100% margin revenue. Fair point on John Mull, but he isn’t Craig and I get the sense he lost focus on cipher, which was a spin off of their other main business. Entirely different c-suite today that clearly really cares and has done the right thing.
And this also doesn’t factor in the possibility of additional acquisitions, which could further complicate things going forward. While I hear the arguments about management quality and alignment, these are the same people who were effectively in charge prior to 2019, with John Mull being on the board and owning 40% back then as well. They clearly gave the green light to acquisitions made by the previous management team, so I can't entirely exclude their responsibility for those decisions.
But to be fair, I also don't see a meaningful downside here and I am just trying to poke the thesis as much as possible. At zero growth of Epuris and Natroba, no out-licensing revenue and no inhousing of Absorica over 3 year holding period downside is only about 20% (that's mostly time value of money). All of these happening together does not seem very likely. And, then the key overhang is messing up m&a, which is probably not very likely either, given the Natroba acquisition success.
On acquisitions, it’s just not true that this is the same team. Craig wasn’t the CEO, and that’s I think a pretty tough thing to pretend doesn’t matter. But the more important question is how do they screw it up with a premium multiple, very low leverage and an underutilized cost structure to drive synergies. Not something that worries me much.
he was not the CEO, but his father was on the board before 2019, and they owned 40% of the stock all this time. So, I doubt any of the decisions prior to 2019 were made without their involvement in some way at least. So, this is a bit concerning but the recent track record is certainly reassuring.
great write up for Cipher ! have their share purchases meanwhile fully kicked off as they said ?
Still waiting for the authorization. It’s a bit odd for it to take this long. I wonder if there’s some extra compliance/paperwork involved given a buyback might cross Mull’s ownership over 50%
Agree on broad points, playing devils advocate a bit: Asset sales aren't free, as they gave up something, including 2m of NOI from leasing.
And now shifting mix of EBITDA towards lower multiple cinema assets rather than R/E.
The impled cap rate on Cannon Park was also quite high (~10%) which is probably well above what most people thought cap rate would be on the real estate, including the remaining properties.
Wellington sale was a bit disappointing on amount as well, and I'm not sure Union Park is worth anywhere near the huge cost over-run book value given whats happened with NYC real estate..
Agree with broad points on deleveraging -> accruing to equity holders, but trying to monetize asset sales into a *really* tough environment while G&A and interest gobbles up huge chunk of cash flow.
Let's say they monetize enough to pay off the debt, what do you think steady state EBIT is in that scenario (cinema plus whatever is left from R/E less corp G&A)?
I mean, yes they gave up some NOI, but Wellington was sucking money, and interest expense has come down, so it's cash flow positive on net, and it's not like the EV is implying value for these assets. On the cap-rate, I would think implied cap rate is better 10% on the assumption that some of that NOI will be retained by RDI through the lease back. I'd have to check; remember, you also have an Aussie dollar that's weakened a ton against the USD, which doesn't help the asset side of the balance sheet
Wellington is no doubt worth more than what it was sold for, but they were in quite a bind there - not exactly a secret they needed those proceeds to pay off the Westpac loan - and the new owner will have to put a ton of capital into it. Again, leaseback rights.
What has happened with NYC real estate? Has been quite strong from my view.
I don't see why this business cannot do 20m of EBITDA normalized, net of G&A. Also, remember they have the Newmarket Village asset in Australia is worth a ton and has no debt on it; that and Belmont largely cancel out the remaining corporate debt, giving you the cinemas and whatever equity is in the NYC real estate/Philly for the market cap.
Zooming out, I suppose one question to ask is whether this deserves to be trading at an all time low. The situation looked worse in every way at basically every moment since COVID, and yet for much of that period shares were in the $3-4 range. That's not asking much of the equity from here given the leverage, and that's what I am playing for at the moment.
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