Jeffrey Bronchick, Principal
Reed Conner & Birdwell
$850 million in assets under management
Firm owns about 115,000 shares at an average cost of 5 7/8, purchased steadily over the past six months.
is currently our best idea in our small-cap value portfolios. The stock has the three crucial elements that have historically led to investment success: It trades at a significant discount to very conservative estimates of private market value; it is generally ignored by the sell side of Wall Street; and it has a catalyst for near-term change and/or has had a painful restructuring or turnaround mostly behind it.
Unitel appears tiny, with 2.7 million shares outstanding and a surface market cap of $14 million, but due to the borrowability of its assets, it has $35 million in debt. So the enterprise value is closer to $49 million.
Unitel has three businesses: a fleet of 10 mobile video-production trucks that account for 30% of revenue and operate as a standalone business; a group of leased and owned production studios in New York that account for about 40% of revenue; and post-production facilities in New York and Los Angeles that account for the balance of UNV's sales. The company has been around for more than 30 years and is very well-known in production circles.
To make a long story short, the prior CEO of Unitel, without too much discouragement from the board, bought an advertising/special effects-based post-production business called
in the early 1990s. UNV grossly overpaid, levered up the balance sheet and basically ran the business into the ground. The mishap was partly due to the commodity nature of the business and heavy capital requirements, but also due to some good, old-fashioned mismanagement.
But here's where the turnaround comes in. The CFO at the time, Barry Knepper, was anointed CEO, and he has spent the last two years writing off, selling off and closing down the entire Editel division, as well as cutting costs at the core Unitel divisions. So at the current writing, the company is on the verge of generating significant cash flow and earnings.
We see the stock as exceedingly undervalued on several fronts:
On a bottom-up basis, we estimate the trucks are worth at least six times EBITDA, or $42 million. That's fair considering that the value of the business is far more than the actual replacement value, given the long-term relationships in the entertainment business that Unitel has developed over the past 20-plus years. A number of recent entries into the mobile business have not succeeded at dislodging Unitel's lock on high-end entertainment events. The $42 million figure basically knocks out the debt of $35 million and leaves about $2 of shareholder equity.
Unitel owns two buildings in New York at a low cost basis, one of which is involved in a sale/leaseback for an estimated net $3 million. The other building is corporate headquarters and is three times as large as the sale/leaseback building. The result is a total of $12 million in real estate, which is $4.40 per share. These two valuations more than pay for the price of the stock at 5 1/2, which leaves $40 million of revenue from the studio business and post-production for nothing. We think this pool of assets and revenue can command 60% to 80% of revenue, or $9 to $12 per share. That brings our private market value for Unitel to at least $15 per share.
The post-production and studio business has historically been a giant zero of shareholder value creation no matter what company you have had the misfortune to invest in. However, at least two public companies,
(FOUR:Nasdaq), as well as a number of private companies, now operate on a more palatable business model. The post-production business is changing from an analog, mom-and-pop format to one offering broadcasters and movie studios a digital, one-stop-shopping model. There has been a spate of consolidation in the industry. With both New York and L.A. locations, plus a well-known name, we believe that Unitel has extremely attractive properties.
Unitel will probably break even in its fiscal year ending Aug. 31, admittedly an annoying step backward versus our expectations three months ago. Then we had expected 60 cents per share for the year, but UNV announced it is combining two L.A. facilities into one, which will cost the company about that over the last two quarters of the year.
Unitel has earned more than $1 per share in the recent past. Without a lot of difficulty it should be able to earn $1.25 to $1.50 within two years, and generate $15 to $18 million in EBITDA, which is free cash flow of $7 million to $10 million after maintenance capital expenditures.
We think there is substantial pressure on management and the board to deliver, given the problems of the past few years and the fact that there are probably no living shareholders with a profit. About 16% of the stock is held by the two founders of the company, and 21.5% is held by three major institutions. For the record, we own about 4.3%. At current prices and based upon our internally generated research, we think the stock is a triple within two years, either on an imminent improvement in reported results or as a benefit of a consolidating industry.
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