Cambria Automobiles
a special situation!
By Manuel Maurício
May 05, 2021
Introduction
This week I’m posting earlier as I’m bringing a time sensitive opportunity – a management buyout.
A management buyout happens when the management of a company offers to buy the whole company and take it private. This usually happens when the share price is depressed. That’s exactly what’s happening right now with Cambria Automobiles.
The management team – who owns 57% of the company – has shown its intention to buy the whole company for £0,80 per share, a price which many investors consider too low (me included). The management now has until the 17th of May to make a definitive offer.
I promised myself I would be quick to act in these cases so here I am, putting my money where my mouth is.
Cambria Automobile owns and operates luxury car dealerships in the UK. It became public in 2010 with the mission of consolidating a highly fragmented industry through the acquisition of underperforming dealerships and turning them around. The company has been self funded ever since (with a little help from its suppliers).
In August 2020, these were its brands.
Yes, selling cars is a cyclical business as can be seen from the chart below…
… but the percentage of gross profit coming from the sale of new cars is just 25%. The other 75% are evenly distributed between the sale of used cars (34%) and the aftersales services (41%) which are much more resilient in an economic downturn and have higher margins (7% vs 40%).
While the profit coming from the sale of new vehicles went down by 20% in the Great Financial Crisis…
… the profit from the sale of used cars was pretty much flat…
… as was the case with the aftersale services.
* The financial year for Cambria ends in August, so the 2010 numbers account for the 2nd half of 2009 and 1st half of 2010.
The buyout
What usually happens in buyouts is that the management low-balls the first offer, then the shareholders complaint and say that they want a higher bid, and then the management may sweeten the deal by offering a higher price.
Is it going to happen? No one knows for sure, but value investing is this right here, it’s buying a business for less than what an informed buyer would pay. There’s no one else better informed than the managers themselves. After all, they own 57% of the company. And if they’re biding for £0,8 it’s because they believe the company is worth a lot more.
Let’s look at some numbers. The company has 100 million shares outstanding and it’s trading for £0,80. That means that the market capitalization is £80 million. It’s hard to say what a normalized profit would look like, but let’s take 2019 as our guide. (Note that the profits for the first half of 2021 were remarkable, but I won’t even take those into consideration).
In 2019, the operating profit was £14 million…
… and net income was £10 million.
So the company is trading at least at a normalized PE ratio of 8x. If we annualize the profits from the first half of 2021 – which came out today – the company would be trading at 5x earnings.
That appears to be cheap, especially when we take into consideration the opening of new dealerships from 2019 until today. New dealerships usually take around 3 years to mature, so we could be seeing the revenue and profits go up even without opening any new location.
Ever since the Brexit thing came about, the UK companies immediately re-rated to lower multiples. That’s understandable. How will Brexit affect Cambria? I’m still not sure. But my thesis isn’t based on a long term holding.
It’s a catalyst play. And yes, it’s important to weight the consequences in case the buyout isn’t successful. I believe that the share price will likely go down. By how much? Well, it had been trading in between £55 and £75 per share for the past 5 years before Covid-19, so I guess somewhere between those 2 numbers would be reasonable. Let’s call it £65 for a downside of 18%.
On the other hand the company now has more locations and the market has “seen” what an informed buyer would pay for the business so it might not fall back to those levels.
But this isn’t all. Here’s the icing on the cake:
The company has £88 million in Property, Plant & Equipment, most of which is land and buildings (good buildings in good locations). And equally important is the fact that this real-estate doesn’t have debt attached to it (more on this in a minute).
It’s hard to say how much the real-estate could go for, but more often than not, it sells for a higher price than its stated value due to inflation and also to the accounting rules (depreciation).
One of the ways that the management could act to unlock value is to sale-and-leaseback the real estate and issue a special dividend. Let me explain:
The fact that the real estate doesn’t have debt attached to it means that the management could be selling the real-estate for (at least) the £88 million and then pay a lease to the new owner for the use of that land and buildings. They could then issue a dividend to themselves for £88 million thus getting the operating business for free. How much would that operating business be worth?
Let’s take the 2019 results as a guide and say that the management would lease the real estate for 5% of its total value. That would amount to about £4.5 million of added lease expense per year. If we subtract those £4.5 million from the £14 million in operating profit, we’d be getting £9.5 million pre-tax or £7.6 million in net profit. If we apply a PE ratio of 7x, we’re talking about a Market Cap of £53 million, or roughly a 66% immediate upside.
The management needs 75% of the votes to execute the buyout. It looks like there are several big shareholders who are opposed to the buyout, at least at such depressed prices.
This means that the management is likely to raise their offering price. To how much, I don’t know, but I’ve got the cash parked and this appears to be a situation where the downside is fairly protected.
RECENT EVENTS
Today, the company announced its first half results. They were still affected by the lock-down, but all things considered, they were pretty good. The revenue went down by -16%, but the management was able to cut costs and with a little help from the Government subsidies, the net income grew by 55% (!).
HOW CAN THIS PLAY OUT
This story can play out in one of three ways:
1- The management is successful in taking the company private at £0.8. (unfavorable outcome)
2- The management has to bump its bid so it can take the company private. (favorable outcome)
3 – The management isn’t able to take the company private. (favorable outcome, but expect a temporary drop in the share price)
WHAT CAN GO WRONG?
As previously mentioned, if the buyout doesn’t go through, I expect the share price to come down, but the business looks undervalued and solid enough for me to be comfortable holding it.
Yes, there are several risks that I haven’t mentioned such as the UK Government plans to ban internal combustion engine sales by 2030 and several other things, but at this price, all of those seem to be discounted. After all, we’re getting the business for free.
CONCLUSION
I’ll be buying €5000 worth of shares of Cambria today at £0,8.
If you’re following me on this one, bear in mind that this is a very illiquid stock so if anything bad happens to the business, or even if the buyout doesn’t go through, it will be hard to find a buyer, which in turn will force investors to accept lower prices for their shares.
Further research material
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