Aug. 22, 2016 12:32 PM • rely
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Loss of a Capital Allocator
I have no doubt that the rest of RELY’s management team is capable; however, a large part of my thesis around the company was that the presence of a skilled capital allocator and investor at its head would be something that added “platform value” to the company. Mr. Bouchard illustrated throughout his career an impressive aptitude for capital allocation and investing, and the lack of his presence at the company is a severe loss.
Mr. Bouchard’s most important job, and the job he spent the most time at (at his own admission) was thinking about new acquisitions and how to allocate capital. In this respect, his role was very similar Warren Buffet’s, and the loss of Mr. Bouchard is a loss similar to if Mr. Buffett was to step down from Berkshire. It would not cripple the company, as both Mr. Buffett and Mr. Bouchard have skilled people in place to continue after they leave, but it does change the picture significantly.
I did not explicitly account for this platform value in my valuation; however, my expectations around the company’s ability to execute, and its long run value proposition hinged on Mr. Bouchard being at the company. I fail to understand the board’s reasoning for this decision: they claim that, because the Real Alloy integration was “finished”, it was time for Mr. Bouchard to step away from the company. My understanding was that he would lead the company’s growth into a diversified industrial conglomerate.
Additionally, Mr. Bouchard illustrated he was very adept at using innovative financing methods to get deals done. I think the board and management certainly learned from him, and can probably execute in a similar fashion, but I have less confidence in them than I do in Mr. Bouchard.
Another core part of my thesis for RELY was that they would be able to bring together a number of different industrial companies to create a diversified conglomerate. Indeed, this was a core part of RELY’s own strategic goals.
Thus far, the company has underperformed my expectations. I have been following them for almost a year now, and they have failed to make any real progress, beyond bidding for some things, towards this goal. I attribute some of this to the fact the company is extraordinarily disciplined when it comes to paying for acquisitions, and some of this to maybe some conservatism on management’s part.
Unfortunately, this ultimately wastes one of the key assets the company has. Real Alloy does not have the earnings power, nor will it ever, to fully utilize the NOL’s the company possesses. It is then critical for the company to grow its earnings base through acquisitions, and with a skilled capital allocator at the head, I had faith this would happen.
The remaining team will, of course, be qualified and able to integrate an acquisition. However, I have less faith in their abilities than I do in Mr. Bouchard’s.
My initial valuation for the company was $13.92 per share, without taking into account the platform value of the company. I think this development warrants an adjustment to the valuation of the company.
1) I valued the NOL’s at around $1.50-$2/share. Because of the loss of Mr. Bouchard, I now view these as impaired, and will reduce their value by 50% to $0.75/share. These are incorporated in the normal valuation, and I’m just outlining them here for informational purposes.
2) After a few quarters of Real Alloy’s results, I have a less favorable view of the business than I did. I think the business should still trade in line with comparables though, which would value the business at 8.0x EV/LTM EBITDA or $9.32 per share.
3) I think there is still option value in the Cosmedicine subsidiary (which nobody tends to talk about), of
Based on this change, I’m reducing my target to $10.50 per share, inclusive of the option value of Cosmedicine.
Going forward, I will be watching how the company goes about acquisitions, and how new management operates the business. Similarly, who they choose as a new CEO and what exactly his role will be are of key importance.