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Why We Invested in Disney

May 4, 2018 in Equities, Ideas, Large Cap, Letters, North America, Wide Moat

This article by Francisco Olivera is excerpted from a letter of Arevilo Capital Management, based in San Juan, Puerto Rico.

Francisco was an instructor at Best Ideas 2018 (replay the session).

Read about the key pillars of Francisco’s investment approach.

We initiated an investment in Disney, which complements the Twenty-First Century Fox (“21CF”) investment initiated last quarter. As described in our previous letter, Disney is acquiring most of 21CF’s assets and 21CF shareholders will receive shares of Disney and “New Fox” when the deal closes. We decided to increase our exposure to Disney as the share price became more attractive and we grew more confident in Disney’s long-term business opportunities.

Disney has four (4) business segments1: Media Networks, such as ABC, ESPN and Disney Channel; Studio Entertainment, including Disney Animation, Disney Studios, Pixar, Marvel Studios, and Lucasfilm; Parks and Resorts, such as Disneyland and Disney World; and Consumer Products & Interactive Media, the licensing division for merchandise and games.

The heart of Disney

The studio business is the heart of Disney and creates momentum across most of the company’s business segments. Disney’s studios produce high-quality films and television programming, many which turn into valuable franchises. In addition to driving theatre box office sales, physical/digital video purchases and video licensing fees, these franchises also generate demand for consumer products and can be leveraged across the company’s theme parks and resorts.

As an example, Disney Animation’s Frozen, a 2013 film, generated nearly $1.3 billion in global theatre ticket sales, a very financially successful film (not to mention hundreds of millions of dollars in home video sales as well). For any other studio, Frozen would be a major hit (and it was for Disney), but only Disney – with its scale, entertainments assets, and marketing expertise – was able to further monetize the film. Disney’s Consumer Products & Interactive Media segment licensed Frozen content for dolls, toys, clothing, and other merchandise, providing high margin profits for the company (sales of Frozen dolls alone reportedly exceeded $500 million). Disney has also incorporated Frozen content in its theme parks and recently launched a Frozen Broadway show. A Frozen sequel is expected to be released next year.

Disney continuously executes this strategy: leveraging its high-quality content making capabilities with its scale, entertainments assets (including Parks and Resorts), and marketing expertise to monetize content at an unmatched level. Other examples of Disney franchises include: Pixar’s Toy Story, a new “Toy Story Land” in Disney World will open this summer and Disney will release a fourth film next year; Marvel’s Blank Panther, which has generated over $1.3 billion in global theatre ticket sales this year (in late February, the line to “meet” Black Panther at Disneyland was an hour long); and Lucasfilm’s Star Wars films, a Star Wars themed “land” and hotel will open in Disney World next year. Disney’s studio, parks and consumer products segments have continued to excel in spite of the changing media landscape.

Media Networks concerns

Concerns over Disney’s value as a company have grown over the past few years as new internet-based content creators and distributors (mainly Netflix, Amazon, Hulu and YouTube) have changed consumer behavior and disrupted the pay television content bundle, the main profit generator for Disney’s largest division, Media Networks. A decline in pay TV households in the U.S. is likely to continue, as quality content is cheaper and easier to access on Netflix (and other streaming services) versus the traditional +100 channel cable bundles. This does not mean Disney’s media networks (the largest and most important being ESPN) are doomed towards extinction.

According to 21CF’s Chief Financial Officer, 83 of the top 100 shows on television2 in 2017 were sports or news. In 2007, 90 of the top 100 shows were scripted entertainment shows, such as Lost and Two and a Half Men. Consumer habits have dramatically shifted. Consumers prefer to watch live content when tuning to linear television and turn to streaming apps to watch their favorite television shows and movies on their own schedule. Disney knows these trends will continue to accelerate and began to implement a two pronged strategy: 1) Maintain ESPN’s place in the cable bundle, as the premier destination for live sports; and 2) shift the majority of its scripted entertainment to a new Disney direct-to-consumer streaming product to be introduced next year.

ESPN

The traditional cable bundle is still the best mechanism to distribute ESPN’s live sports content rights. Live sports are very expensive and therefore ESPN needs to be distributed as widely as possible. Television advertisements for sports events are the most valuable due to the live nature of the content, and sports transmission on cable has less technical issues relative to online live streaming. Given that the most watched programming on television is live and the most valuable portfolio of live sports is licensed by ESPN3, we expect ESPN’s ability to extract value from the cable bundle to continue.

Recognizing the decline in U.S. pay television households, ESPN launched a new branded direct-to-consumer streaming service called “ESPN+.” The focus for ESPN+ is on niche sports, daily MLB and NHL games, and ESPN’s original programming, including the award-winning 30 for 30 series. We expect ESPN to acquire more significant sports rights for ESPN+ over the next few years, which could serve as a hedge to ESPN’s cable bundle risk. In our view, the risks to ESPN’s long-term business model are vastly overstated.

Disney Direct-to-Consumer

Disney’s studio business was built on movie theatres selling tickets, retailers selling home movies, and other media companies licensing Disney’s content library. These third parties mark-up Disney’s products considerably and do not provide Disney with significant data on its customers. Disney does not know who watched Frozen in theatres, purchased Frozen merchandise, or bought Frozen Blu-Ray for home viewing. To position Disney for the future, the company has announced a Disney branded direct-to-consumer streaming service that will launch next year. Disney will cease to license its content to Netflix (and other streaming providers) and go “all-in” on its new service.

We believe the larger goal of the Disney streaming service will be to create a sustained Disney experience for consumers. With the new service, Disney will know what movies and television shows consumers watch most and will be able to adjust its content spend accordingly. The service could eventually offer exclusive deals for Disney merchandise, theme park discounts, cruise line discounts, and/or exclusive Disney Broadway tickets. Shifting the content monetization from primarily third party revenue streams (individual movie tickets and home movie purchases) to a subscription model will create enormous value for Disney over the long-term. Owning the most valuable family-oriented content in the world has its perks!

Twenty-First Century Fox Transaction

The above description does not include the assets Disney is acquiring from 21CF, but it is worth commenting on, given the size of the transaction. We believe the 21CF acquisition materially enhances Disney’s long-term opportunities. On the Media Networks side, Disney will be adding a large portfolio of regional sports networks (“RSNs”) that matches well with ESPN and could provide valuable content for ESPN+. Disney will also be acquiring FX Networks and the National Geographic Channel. Both channels own noteworthy content that Disney will be able to monetize through its own streaming services, including Hulu.

The 21CF deal will raise Disney’s ownership in Hulu to a controlling 60% stake. Disney will be able to supply Hulu with quality adult-oriented content that does not fit well with the Disney branded streaming service. With over 20 million subscribers, Hulu is a growing force in content streaming and will fit perfectly with Disney.

The Twentieth Century Fox Film and Television studios add enormous content and content-making capabilities for Disney, including the Avatar, X-Men, Fantastic Four, Deadpool, and Planet of the Apes franchises. Monetizing franchises has been Disney’s “bread and butter”.

21CF’s Marvel film franchises (X-Men, Fantastic Four and Deadpool) will integrate seamlessly into Disney, but the Avatar franchise is also a great fit4. Lastly, Disney agreed to acquire 21CF’s 39% stake in Sky Plc and Fox’s international television businesses, which provide additional direct-to-consumer services and increases Disney’s international scale. Growing internationally has been one of Disney’s long-time goals; 21CF provides the perfect assets to grow Disney’s content awareness globally.

It is important to note that Comcast is trying to disrupt Disney’s 21CF deal. Comcast announced a formal bid to buy Sky Plc, and is currently outbidding 21CF5. The Wall Street Journal also reported that Comcast may be interested in publicly bidding for the 21CF assets Disney agreed to acquire. We believe Disney will still manage to close its 21CF deal with Sky Plc, however, if the deal does not happen, Disney remains an attractive investment.

Valuation

Disney currently trades at approximately 15x LTM earnings6, a very cheap multiple when considering Disney’s future growth opportunities and earnings accretion from the 21CF deal. Disney has also committed to repurchasing $10 billion worth of its own stock by the time the 21CF deal closes and an additional $10 billion within two years post-closing. At today’s cheap stock price, Disney would create additional value by repurchasing shares.

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1 Earlier this year, Disney announced a reorganization of its business segments to align the company with its future growth opportunities, such as its direct-to-consumer streaming services. Given that Disney does not yet report its financial statements under the new reorganization, we did not discuss the reorganized segments in this letter.
2 Includes both broadcast and cable television shows.
3 ESPN’s live sports portfolio includes, NFL’s Monday Night Football, NBA (including playoff games and the NBA finals), college football (including playoffs), college basketball, MLB, Grand Slam tennis and Formula 1.
4 Last year, Disney opened the Pandora – The World of Avatar “land” at Animal Kingdom.
5 21CF is in the middle of receiving regulatory approval to acquire the 61% of Sky it does not own. Upon receiving regulatory approval, 21CF is expected to raise its bid for Sky to prevent Comcast from acquiring the company.
6 LTM = last twelve months. We adjusted earnings for the impact of tax reform.

Miguel de Juan sobre Cal-Maine, DFS Furniture y Sanderson Farms

May 4, 2018 in Ideas de inversión, MOI Global en Español

NOTA DEL EDITOR: Estas ideas de inversión son obtenidas de una carta a los inversores de Argos Capital FI.

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A lo largo del mes no hemos realizado operaciones- lo que implica que no hemos incurrido en costes de compraventa. Aunque algunas empresas han recortado no ha sido lo suficiente como para animarnos a seguir incrementando posición en nuestras empresas… digamos que en “este mes, hemos estado contentos con lo que teníamos”.

Naturalmente seguimos atentos porque nunca se sabe cuando pueda el mercado ofrecernos algún chollo- como en el caso de Inditex por ejemplo- y en ese caso tendremos munición en nuestro rifle para poder disparar a gusto.

A veces da la sensación de que cuando una empresa está un 5-10% por debajo del precio al que la hemos incorporado tengamos que seguir comprando más de la empresa. En ocasiones puede ser así, evidentemente… pero no en otras. Depende de la cantidad de liquidez que tengamos, depende de las prisas que tengamos por comprarlas… en fin, que hay otras circunstancias además de sólo el precio. En mi caso, creo que en muy contadas ocasiones he comprado más con caídas del 5% o menos… generalmente siempre espero más caídas- así reducimos más el precio promedio de compra- entre otras cosas porque no nos entra dinero todos los días, por lo que hemos de ir con cuidado para no quedarnos sin liquidez, que como sabéis es una de las características del Argos.

Vayamos ahora a lo importante que no es otra cosa que las empresas; dado que en este mes no hemos realizado nuevas incorporaciones o ventas, será una visión sobre algunas de vuestras empresas. Entre ellas, ha presentado resultados trimestrales (su tercer trimestre fiscal, que no coincide con el año natural) CAL-Maine, nuestra estupenda productora de huevos en Estados Unidos. Al igual que otras empresas americanas- por ejemplo Berkshire Hathaway– sus resultados se han visto favorecidos por algo que no es achacable a ellos: la reforma fiscal del presidente Donald Trump, la Tax Cuts and Jobs Act (TCJA) actúa en dos formas… por un lado favorece a aquellas empresas que tengan beneficios que aflorar a partir de Enero de 2018 (por la reducción del tipo impositivo al 21%) y perjudica a aquellas empresas que tuvieran pérdidas fiscales que aflorar a partir de esa misma fecha. De esta forma, los beneficios a partir de Enero 2018 tributan menos- lo que favorece a las empresas- y en el otro ámbito, el “escudo fiscal” que muchas empresas tenían contabilizado por anteriores pérdidas al tipo impositivo anterior se ve reducido al poderse asignar un porcentaje menor de dichas pérdidas.

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Why We Invested in Smart Sand

May 2, 2018 in Equities, Ideas, Letters

This article by Matthew Haynes is excerpted from a letter of 1949 Value Advisors, an absolute return-oriented global value investment firm based in Mahwah, New Jersey. Matt is a valued contributor to The Zurich Project.

Matt will share his thesis on Smart Sand at Best Ideas Omaha 2018.

Smart Sand, Inc. (SND) is a leading supplier of industrial sand primarily serving customers in the oil & gas industry. Headquartered in The Woodlands, TX, Smart Sand is a pure play, low-cost producer of high-quality Northern White raw frac sand (NWS). Raw frac sand is a proppant, “designed to keep an induced hydraulic fracture open, during or following a fracturing treatment”. (Wikipedia) It is added to water to create a fracturing fluid which is then blasted down the well bore at very high pressure to “prop open” the fracture once the pumps are shut down, allowing release and capture of hydrocarbons.

Smart Sand is one of only five publicly traded pure play frac sand producers (in aggregate, representing ~50% of industry capacity). The company has one producing mine in Oakdale, WI adjacent to the Canadian Pacific railroad, well situated to supply its Northern White sand to any of the shale plays in North America. Logistics is one of the most important considerations in this industry, as transportation costs are a significant component of production costs (~40%) and contracts are typically priced on a delivered basis.

Recent plans to initiate frac sand production within the Permian basin, thus dramatically reducing the transportation cost element, has worried frac sand investors that NWS producers will be priced out of the market. Permian brown sand is considered to be of lower quality than NWS and uncompetitive without a logistical advantage.

In addition, Permian frac sand is a captive market, with no alternative homes outside the Permian basin. These imply that supply growth will likely undershoot announced nameplate capacity plans, limiting the negative impact to NWS pricing.

With a market cap of $225 million and net cash of $34 million, shares traded near $5.50 at the time of our purchase, down from $20 a year ago. Representing ~5.5x current year EPS and 4x EBIT (4.7x and 3.7x 2019 estimates, respectively), we believe that we have a margin of safety against permanent loss.

The sector has seen consolidation activity, with EV/ton of productive capacity being the most relevant metric in frac sand transactions. Deals have been in the range of $100-120/ton, versus the current valuation of Smart Sand closer to $40/ton.

We believe that SND could be an attractive target for larger frac sand companies, oil field services companies looking to vertically integrate, or a larger shale oil & gas producer looking to secure reliable supply of its higher quality NWS.

The reversion to a more appropriate trading multiple over time is likely to be our surest path, with takeover interest potentially catalyzing its higher private market value.

Disclaimer: This summary does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made to qualified investors and only by means of an approved confidential private offering memorandum or investment advisory agreement and only in those jurisdictions where permitted by law. This summary reflects select positions of the current portfolio of a managed account advised by 1949 Value Advisors. There is no guarantee that a commingled investment vehicle or another investment account managed by 1949 Value Advisors will invest in the same investments set forth in this summary. The investment approach and portfolio construction set forth herein may be modified at any time in any manner believed to be consistent with the managed account’s overall investment objectives. While all information herein is believed to be accurate, 1949 Value Advisors makes no express warranty as to the completeness or accuracy nor does it accept responsibility for errors appearing in the summary. This summary is strictly confidential and may not be distributed

Honrando al legendario Marty Whitman

May 2, 2018 in Miscelánea, MOI Global en Español

NOTA DEL EDITOR: Este artículo fue escrito por el instructor de MOI Global Jim Roumell, socio y gestor de cartera de Roumell Asset Management, con sede en Chevy Chase, Maryland.

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Marty Whitman, fundador de Third Avenue Value Funds y colosal inversor en valor iconoclasta, falleció el 16 de abril de 2018 a la edad de 93 años. El comportamiento de Marty fue una vez descrito acertadamente como una mezcla de Art Carney y Marlon Brando. Fue un niño judío de clase trabajadora que creció en el Bronx, prestó servicio en el Pacífico durante la Segunda Guerra Mundial, y luego asistió a la Universidad de Siracusa con apoyo del G.I. Bill. Desde estos humildes comienzos, se convirtió en una leyenda de Wall Street. Rápidamente aceptó las representaciones que hacían los medios sobre él, como: “Buscador de Gangas” e “Inversor Carroñero”1. Al igual que muchos de su generación que vivieron la Gran Depresión, Marty reverenciaba a Franklin D. Roosevelt. Si bien fue un capitalista comprometido, no vacilaba con la idea de que el gobierno desempeña un papel crucial en la sociedad. El concepto de pérdida nunca estuvo lejos de su mente, que probablemente fue uno de los principales contribuyentes a la filosofía de inversión deep value que llegó a ser sinónimo de su nombre.

A principios de la década de 1990, el difunto Gerry Pinkerton me presentó el libro de Marty The Aggressive Conservative Investor. Una bombilla se encendió en mi cabeza cuando Marty resumió la inversión en un profundo análisis fundamental de la empresa, realizado de manera independiente del mercado general y de los datos macroeconómicos. Marty hizo hincapié en que el análisis específico de la compañía debe centrarse en primer lugar y primordialmente en el balance de situación. Además, las consideraciones de conversión de recursos fueron primordiales en el pensamiento de Marty, ya que las fusiones y adquisiciones eran una característica perenne de las actividades corporativas. Por último, aconsejó ser súper consciente de los precios porque el precio pagado es lo que al final dicta los rendimientos. Al final, combinar los atributos de “seguridad” del balance de situación con un precio “barato” fue su salsa secreta. Al leer los prolíficos escritos de Marty, instantáneamente supe que el deep value era mi tipo de inversión: intelectualmente desafiante, cuantificable, eminentemente razonable y tacaño sobre qué precio pagar.

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Why We Invested in Dundee Corp.

April 30, 2018 in Equities, Ideas

This article is excerpted from a letter by Jim Roumell, partner and portfolio manager of Roumell Asset Management, based in Chevy Chase, Maryland.

Dundee is a public Canadian independent holding company, listed on the Toronto Stock Exchange under the symbol DCA and also trades in the US under the symbol DDEJF. Through its operating subsidiaries, Dundee is engaged in diverse business activities in the areas of investment advisory, corporate finance, energy, resources/commodities, agriculture, real estate and infrastructure. The Corporation also holds, directly and indirectly, a portfolio of investments mostly in these key areas, as well as other select investments in both publicly listed and private enterprises.

We first analyzed Dundee back in 2014. Ned Goodman, the founder, decided to step down and one of his sons, David Goodman, took the helm as CEO. Ned had an excellent track record for many years. However, in 2011, he took a view that there would be hyperinflation and the US dollar would devalue so he decided to invest heavily in commodity businesses (e.g., oil and gas, mining, etc.). Many of those investments have since been written-off or written-down. David, who already held a prominent role at Dundee since the ‘90s, worked to restructure Dundee into a mini-Brookfield Asset Management: create funds, contribute assets, and generate fee income. That strategy did not work out. He changed strategic direction to cull and derisk the investment portfolio. In January 2018, David began a medical leave of absence. His brother, Jonathan Goodman, was appointed Executive Chairman. Jonathan was also involved with Dundee since the ’90s, but left four years ago, before returning. Jonathan is currently reviewing the entire portfolio and will continue to derisk the portfolio through his lens.

In 2014, Dundee’s reported Net Asset Value (NAV) was about $29 (all figures in this section will be quoted in Canadian dollars). As of December 31, 2017, the reported NAV was $10.36. We view the valuation of Dundee as a Sum of the Parts (SOTP). Dundee has a variety of levers to pull to realize value for shareholders. In other words, it has a characteristic that RAM always looks for in its investments—multiple shots on goal. We valued a handful of investments to determine what we believe to be an extremely conservative valuation.

Of the private investments, we analyzed primarily Parq Vancouver and United Hydrocarbon. Dundee owns 41% of Parq Vancouver (Parq). Parq, which opened in 4Q17, is an entertainment destination located in downtown Vancouver featuring a state-of-the-art casino, two luxury hotels, including Vancouver’s largest hotel ballroom (for conventions), and eight restaurants and lounges. Marriott manages the flagship hotel. The company has provided EBITDA guidance of $75mm-$100mm once the facility is fully ramped up. Parq has seen month over month growth since January. Parq also has roughly $565mm in construction loans, with current interest rates of about 8% and 13%. Part of the overhang on this property will be alleviated after establishing a trend of growth that will allow Parq to refinance its debt. We are told that there are parties interested in investing in the property, which could provide Dundee with a meaningful alternative if the price is right. Applying a multiple of 10x, we arrive at a value of $126mm, a modest premium to the $111 million Dundee invested in 2016 and 2017 to build the project. Vancouver is ranked the 13th Best City in North America by Travel Magazine.

One of the poor investments made during Ned’s tenure was the purchase of an oil field in Chad, Africa through its subsidiary United Hydrocarbon, of which it is an 83% owner. Dundee spent several hundred million dollars on this asset. As part of the derisking process, last year Dundee decided to sell its interest to Delonex, which was backed by Warburg Pincus, in return for a payment of about $45mm before any escrow or holdbacks. Dundee also received a royalty that will payout starting in several years assuming Delonex is successful, as well as a $64mm payment upon finding first oil. Summing the net payments (excluding the payment upon first oil) and the estimated value of future royalties arrives at a value of about $43mm.

We also included value for private investment Blue Goose (where we assume zero value for 2016 acquisition Tender Choice, as it is currently in receivership) of $7mm and Android Industries of $24mm (company’s book value). The total of these four private investments is about $201mm.

Dundee has public investments of about $221mm, of which half is in Dundee Precious Metals, a gold mining and smelter business. Precious Metals has one mine producing nearing $400 million in annual revenue and is 60% complete on a second surface mine (expected to be in production by year-end), with an estimated all-in cost of roughly $400/oz. The company expects to generate $200 million in EBITDA when the second mine fully ramps assuming current spot gold prices versus a current enterprise value of roughly $475 million. Again, these are investments that can be sold as Dundee derisks its portfolio.

The sum of the investments we believe can be easily quantified and valued is $422mm. Subtracting net debt of $163mm gives you an NAV of $259mm, or $4.41 per share. This compares to the company’s stated NAV of $609mm, or $10.36 per share. What’s the probability that all of the additional investments, albeit more difficult to value, are worthless? This is highly unlikely and so we are getting the rest of the portfolio for free. Our average purchase price in the quarter was approximately $2.00 per share, a 55% discount to our NAV calculation. We performed various stress tests and could not bring the NAV below our purchase price.

The Goodman family owns roughly 19% of the company’s subordinate voting shares, which are the ones that are publicly-traded, and 99% of the closely-held common shares which have super-majority voting rights. Of note, the Goodman family has never sold a share. They have much at stake, not only monetarily, but also from a family reputation and legacy point of view. At the corporate level, Dundee is undergoing a process of reducing costs. In the past, we’ve spoken with David Goodman on several occasions and recently spoke with Jonathan Goodman. With all the value destruction that has occurred over the last few years, Dundee is a “show me” story. Additionally, it appears that many investors are concerned about Dundee’s liquidity when its preferred series 5 notes come due in June 2019. What may not be fully understood is that Dundee has the option to pay cash, issue common shares with a share price floor of $2.00, or a combination of the two when these preferred shares mature. It is our belief that the management team will do everything it can to ensure that it does not need to issue dilutive shares. We believe that the value of Dundee is significantly north of today’s share price and more than discounts any “hair” the investment possesses.

Disclosure: The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. The top three securities purchased in the quarter are based on the largest absolute dollar purchases made in the quarter.

Emérito Quintana sobre Amadeus IT Group

April 30, 2018 in Ideas de inversión, MOI Global en Español

NOTA DEL EDITOR: Esta idea de inversión es obtenida de una carta a los inversores de Numantia Patrimonio Global.

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Amadeus IT Group: Aunque en enero de 2018 vendimos nuestra posición, sigue estando en nuestra lista de la compra y nos gustaría resumir nuestra tesis de inversión. El principal negocio de Amadeus es ser uno de los 3 únicos sistemas globales de distribución de viajes (GDS), una plataforma de reserva a gran escala que sirve de columna vertebral para el turismo mundial.

Amadeus pone en contacto a los proveedores de servicios turísticos (aerolíneas, hoteles, cruceros, etc.) con los vendedores (agencias de viajes físicas y online, metabuscadores como Expedia, Trivago o Kayak, tour operadores, etc.) provocando un ciclo virtuoso y una red más valiosa cuanto más grande es.

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AIN: Leader in Fragmented Pharmacy Dispensing Business in Japan

April 29, 2018 in Asia, Asian Investing Summit, Asian Investing Summit 2018, Audio, Communication Services, Consumer Staples, Equities, GARP, Health Care, Jockey Stocks, Small Cap, Transcripts

Kisalaya Singh of ANYA Investment Partners presented her in-depth investment thesis on AIN Holdings (Tokyo: 9627) at Asian Investing Summit 2018.

Thesis summary:

AIN Holdings is the leader in the highly fragmented pharmacy dispensing business in Japan. Dominated by 60,000+ one-man and small-chain pharmacies, the sector appears poised for consolidation, driven by a combination of regulatory changes and ageing one-man store owners without heirs. AIN is ideally placed to be the sector consolidator with its long history of growth driven by astute organic expansion and M&A. Founder and president Kichi Otani is a disciplined capital allocator and operator who has compounded book value and earnings at 18+% annually over the past ten years, while earnings ROE of 14+%, despite a net cash balance sheet. With an equity stake of almost 9%, Otani remains invested in the continued growth of the company.

A long growth runway is available for AIN to increase revenue market share from 3% currently, by acquiring small chains and setting up more efficient large-scale pharmacies. Incremental ROI of M&A is high, driven by an ability to pay acquisition multiples as low as 5.5x EV/EBITDA and improve the operating margin of acquired businesses. Recently trading at a “fair” multiple of 8.6x EV/EBITDA, the market appears to be cognizant of AIN’s prospects for M&A growth, but not fully appreciative of recently allowed large-scale pharmacy growth. The market may also overestimate regulatory uncertainty, which injects volatility in the stock price. Primarily a revenue and earnings growth story, AIN also has the kind of high ROE, healthy cash generation, and consistent growth that have been rewarded by higher trading multiples in Japan.

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About the instructor:

Kisalaya Singh serves as managing partner of ANYA Investment Partners, a value-based investment partnership primarily focused on investment opportunities in Asian companies. Kisalaya’s previous work experience includes Segantii Capital Management, FrontPoint, The Blackstone Group, and Merrill Lynch. He holds an MBA from IIM Ahmedabad.

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