Updates on status, also on BOBE, BBX, and VEC

There is no doubt that my updates had been sparse lately, and I have heard plenty of friendly nudges (perhaps not as many as I imagined, ha) to put something up more often. The truth is, a lot has happened in the past few weeks: I have now moved on to the buy-side, moved to a new apartment, made new friends, and, god forbid, started a long-overdue FT subscription. I am reading 10x more research now more than before, working 30% more hours, and am enjoying every second of it. Fortunately, this blog may continue; and unfortunately, for you, my dear readers, might have to put up with my babbling for just a bit longer.

Bob Evans (BOBE): I had been quite vocal about BOBE in the past. Bob Evans is an operator of ~580 restaurants around Central America that had been around since 1946. It happens to own > 80% of its real estate and derive ~20-25% of its EBITDA from its packaged/frozen food division. 7-8x EBITDA for this mid-western restaurant business is not very cheap, but I liked it a few months back given the somewhat compelling thesis pitched by Sandell Capital Management (See deck on SEC.gov). Their thesis can be summed up as:

- Sell all or part of its real estate, pointing to ~$900 mm in value and indicate that it has already attracted 5 unsolicited bids. ARCP comes to mind.

- Evaluate strategic initiatives for its BEF packaged food division. Given HSH's recent 13-14x bid, BOBE's 8x bid provides interesting multiples expansion opportunity.

- Evaluate its cost structured to bring SG&A in-line w/ industry peers. Sandell points to as much as 500 bp of sales in cost ot be shed.

- CapEx normalization from 10% of sales to 3-4% of sales.

By my math math, assuming BEF Food does not get sold, if BOBE can simply (1) improve sales to $1.4-1.5 Bn, (2) Lower COGS % form 33-34% to ~31-32% similar to historical, (3) sell 50% of real estate for $450 mm, buy back 9 mm shares, and keep D&A+Rent in-line, (4) cut SG&A cost by 200-250 bp, and (5) lower CapEx spend to ~$50-60 mm per annum, it is set to generate $100 mm of levered-FCF on the basis of ~14-15 mm shares, or $6.5-7.0 / share. Assuming 10% l-fcf yield, BOBE should be trading at $65-70 / share with significant improvement of ROIC from ~7-8% current to 25%+.

This thesis is predicated on Sandell winning enough seats at the Aug 20 annual meeting to drive rapid change before management dumps more good money after bad. Unfortunately (1) Steve Davis, the incumbent CEO, is still on the board and (2) Sandell only got 4 seats vs. at least 6, additional convincing is needed to swing the 2-3 board members on the fence. I feel like the time-line will be drawn out, and BOBE will continue to destroy or stall value at the interim -- thus I got out. I also feel that neither ISS nor Glass Lewis recognize the urgency of change, nor does Sandell seem to have enough swing to awake the incumbent indexing mutual funds or rally other activist funds, making the change even more difficult. It’s now a long, painful grind for these guys…Luckily I actually made a few percent since I bought low enough, and I am not beating myself up too badly because I think my process worked – it’s just that the event path played out in the opposite direction, at least I know how I lost.

As a disclosure, the story could still work and you probably make some money buying here, but it’s still a 7-8x business levering up w/ monetization no where close to completion and facing problems.

Sandell April 2014 Presentation: http://www.sec.gov/Archives/edgar/data/33769/000090266414002215/0000902664-14-002215-index.htm

BBX Capital / BFCF: Both names I meant to do more work on for the longest time but never got to. I like it quite a bit after doing some work and think I can reasonably make 50-100% on this within the next 6-12 months. At the bottom of it the thesis is quite simple – a big part of BBX’s business, the Bluegreen timeshare, is being mostly ignored by the market despite its improving business model and significant cash-flow generating ability; while the BV is being under-marked. The complex corporate structure, messed-up accounting, lack of sell-side coverage, and lack of liquidity. The SOTP can be aptly summed up by the chart below:

There is plenty of write-ups on this name upon googling; I urge you to go over them and start a conversation. Next catalyst is the November lawsuit between minority shareholders & BBX due to the BBX/BFCF merger, which I consider to be silly (do you know that these law firms even try to block the Fiat / Chrysler merger a few weeks back? Total idiots). Proforma the firm would be around $500 mm and should warrant some cover + liquidity.

Vectrus (VEC): This is a pending spin-off from Exelis that is going when-issued on Sep 16. While the spin-offs these days get pretty crowded (haven’t you heard Event-Driven funds is all the rage these days? They bid up all spin-offs like it’s hot shit without even reading the 10-12B, I kid you not), the smaller ones that big sell-side shops don’t look at (and not enough liquidity so hedge funds don’t touch) tend to do pretty well (Veritiv, lands’ End, New Media, Straight Path). It’s all about how crowded the pond at which one fishes. It’s likely that this Co prints at ~200-300 mm market cap and is about 1/10 the size of XLS with an odd-ball 18-to-1 ratio. Decent amount of debt @ 140 mm w/ 2-3x net debt / EBITDA but no legacy pension issues. I think it has a good chance of being puked.

According to their 10-12B, it “offer services in three major capability areas: “infrastructure asset management, logistics and supply chain management, and information technology and network communication services…our primary customer is the Department of Defense…[with] 92% of the total revenue from the US Army…with contracts from Afghanistan representing 34%, 34% and 27% of our overall revenue in 2013-2011”.

So VEC maintains toilets, camps, food, trucks, and headquarter stations for its single-customer Uncle Sam, About 1/3 of their Revenue base rolling off to likely 0 within the next 3 years, and EBITDA margin lingering around 4.5-5% that came down from 5-7%. Tough gig? Yes. The thing is, I think the business has a chance of settling its revenue around 900 mm to 1 Bn run-rate judging by how the US government spent its money:

And if it does settle at around 1 Bn with no decay, let’s say it does 5 % EBITDA, that’s 50 mm EBITDA subject to almost no Capex & D&A. The flow-through to unlevered-FCF is around 30-35 mm, and @ 10x FCF yield it’s worth around 325 mm w/ debt. With the debt pay-down in a few years, I could realistically see the business stabilizing at 300 mm market cap. If it prints at, let’s say, 100-150 mm, it might be worth taking a punt. But I don’t know, folks are pretty crazy these days