Yesterday, Premier Exhibits (PRXI) reported strong earnings numbers. Then, in their conference call after market close, the company dropped a bombshell: they had signed a letter of intent (LOI) to sell their Titanic assets for $189m.
Obviously, this is the catalyst shareholders have been waiting for. The stock has responded very well to the news. It spent most of last week trading below $2.30 (I picked up some shares in the low $2.20s last week) and has popped up to the $2.80s today.
But it begs the question: what does an investor do now?
Personally, I think shares are still quite undervalued if you strongly believe the sale will go through. Remember, this is a non-binding letter of intent. The purchasers still need to secure financing and hammer out a definitive agreement that works through all the stipulations the ruling that gave PRXI control of the assets placed on them.
The reason shares are still undervalued is because the core exhibitions business is showing more and more signs of a successful turn around. I recommend reading this article for a bit more background, but remember that the Bodies franchise was, at one time, considered a “growth” franchise. While those days are long gone, it is starting to show a solid profit. Operating income came in over $3.1m for the past three months, and while management admits that there was some seasonal strength to those numbers, it’s not a huge stretch to imagine this business earnings ~$10m per year in operating income in the near future.
If it can earn that level of operating income, the business would both be very interesting as either an acquisition target (for a PE fund) or as an acquirer. They’ve already proven (with their AEI acquisition) that there are significant synergies possible from buying out smaller exhibition properties. A PE fund could buy them as part of a roll up with an eye towards an eventual IPO of a much bigger company, or PRXI could eschew that route and roll up the industry itself.
Either way, the exhibitions business, which most people I’d talked to had considered a throw in compared to the Titanic assets, is now showing that it could be worth a pretty significant amount. PRXI only owns 90% of it, but given the potential earnings discussed above I don’t think assigning a value of $60m to their ownership portion is at all unreasonable. I also think there’s a heck of a lot of upside to that number over the next year or two if management continues to execute well and find some small synergistic deals.
The company has a bit of excess cash and a non-recourse note on their balance sheet, so I’ll net those out and call them a zero. That leaves an investor today with an ownership in the exhibition business (worth $60m) and the proceeds from an eventual Titanic sale. I think fees + taxes will eat up ~30-35% of the proceeds from the Titanic sale (I can’t see it getting much higher than that, though it could be a bit lower if PRXI’s spin off proposal has some tax advantages), though I could be a bit off. If you trust me on that number, PRXI will ultimately net at least ~$123m from the Titanic sale. Put those two together and you end up with a target equity value of $183m, and a target share price of $3.67.
Of course, that assumes the sale definitely goes through. At today’s price of $2.80 per share, the market cap is just $140m. The means the market is valuing the Titanic assets at just $80m. If we are correct in our assumption that the Titanic sale will ultimately result in $123m for PRXI and account for the time value of money, the market is basically saying there’s only a 70% chance or so of PRXI selling these assets.
Personally, that seems a bit low to me. And I think it also ignores the fact that if the sale falls through, PRXI could likely still sell the assets for a pretty good chunk of change, though they’d probably take a haircut from this offer price.
So all of this was a long way of saying: investors in PRXI (including me!) have stomached quite a bit of volatility over the past few months, and the payoff today was certainly nice. But I think there’s still some upside from here. I sold some of my shares into today’s rise, but I’m a good chunk of shares.
And for those of you who missed this pop, the name has been quite volatile. Be on the lookout for a pullback, which could make for a nice entry point given that most of the uncertainty (ie will PRXI get a good price for these assets) has been removed.
Disclosure- Long PRXI
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