Professional Documents
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www.ValueInvestingCongress.com
Investing in Change
Value Investing Congress Las Vegas April 2014
ENGINE CAPITAL LP 1370 Broadway, 5th Floor New York, NY 10018 (212) 321 0048 aajdler@enginecap.com
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Disclaimer
The analyses and conclusions of Engine Capital, L.P. (Engine Capital") contained in this presentation are based on publicly available information. Engine recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with Engines conclusions. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies, access to capital markets and the values of assets and liabilities. Such statements, estimates, and projections reflect various assumptions by Engine concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. Funds managed by Engine and its affiliates have invested in common stock of Hill International Inc. (HIL). Engine manages funds that are in the business of trading buying and selling securities and financial instruments. It is possible that there will be developments in the future that cause Engine to change its position regarding HIL. Engine may buy, sell, cover or otherwise change the form of its investment in HIL for any reason. Engine hereby disclaims any duty to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of any Engine investment.
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Executive Summary
Engine Capital is a value-oriented special situations fund that invests both actively and passively (long and short) in companies undergoing change.
DIFFERENTIATED INVESTMENT STRATEGY Focus on change as the mechanism to close the value gap and lower risk of value traps Proactive through Engines activism - private or public communications with boards and/or board representation. Activism is a tool in select situations. Particular experience in US & Canadian activism Anticipatory situations where changes are likely to happen (13D filings, hidden assets, consolidation, new management incentives) Reactive situations where changes have been announced but not yet priced in Special situations search process focused on situations prone to market dislocations important to understand why the security is mispriced Time arbitrage willing to take a longer term perspective than most market participants not looking for the obvious (and most likely priced) short-term catalyst
PORTFOLIO MANAGER 10 years of investment experience in this strategy including significant board and operating experience. Adjunct professor at Columbia Business School (value investing program)
RISK MANAGEMENT - portfolio of diversified high conviction, well-researched ideas with attractive risk-reward profiles, limited leverage, short positions, & cash if no attractive investments
ALIGNMENT OF INCENTIVES - majority of liquid net-worth invested along with limited partners
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STRATEGIC AND OPERATIONAL EXPERIENCE Significant experience working with portfolio companies on strategic and operational initiatives Significant M&A involvement (entire companies & non-core assets)
Involved with 2 large cost cutting initiatives leading to cumulative $150 million+ of cost savings Former management consultant at Mercer Management Consulting and Boston Consulting Group
CORPORATE GOVERNANCE EXPERIENCE Chairman of Destination Maternity, a Nasdaq-listed company since January 2011 Prior board experience includes Charming Shoppes (Nasdaq: CHRS) (sold to Ascena Retail Group in 2012), OCharleys (Nasdaq: CHUX) (sold to Fidelity National Financial in 2012), Topps Corp. (Nasdaq: TOPP) (sold to Madison Dearborn Partners in 2008), Hill International (NYSE: HIL), Primoris (Nasdaq: PRIM) and Computer Horizons (Nasdaq: CHRZ)
EDUCATION Harvard Business School, MBA, 2003 Massachusetts Institute of Technology, Masters Degree, Aeronautics & Astronautics, 2000 Free University of Brussels, B.S., Mechanical Engineering, 1998
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CHANGE
CRITICAL FOR ENGINE TO UNDERSTAND HOW THE VALUE GAP WILL CLOSE SIGNIFICANTLY INCREASE THE ODDS OF AVOIDING VALUE TRAPS ABILITY TO BE OUR OWN CATALYST THROUGH ACTIVISM
Engines unique activist and board experience Varying level of involvement ranging from behind the scene
PROACTIVE
communications with board and management, public communications, board representation to proxy contest Accelerate value realization and lower odds of value traps Focus on adding strategic, operational, financial or governance expertise
ANTICIPATORY
Market trends / capital allocation / M&A landscape Management incentives Third-party activism (13D filing) Analyzing situations where changes have been announced but
REACTIVE
may not yet be priced in Examples include significant cost cutting initiative, strategic review process, REIT conversion, dividend initiation
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Separating assets with different financial characteristics Sale of entire company / sale of non-core assets Changes in industry competitive dynamics
Adding experienced directors Separating role of CEO and Chairman Executive compensation (alignment of interests)
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Proxy fight
Negotiated settlement
Public letters
Private letters
Informal communication
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Security selection
High free cash flow yield
Multiple ways to win Operating margins are too low Poor capital allocation Lazy balance sheet Conglomerate discount Takeout candidate
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CAGR 14%
$399 million
$418 million
Project Management
Construction Claims
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Backlog
$1,027 million $923 million $795 million $675 million $620 million
CAGR 13.4%
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Valuation
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Financials
Revenue
Growth rate
2012 417.6
4.7%
2013 512.1
22.6%
2014E 587.5
14.7%
2015E 620.0
5.5%
EBITDA
EBITDA margin
17.7
4.2%
39.6
7.7%
50.3
8.6%
58.0
9.4%
EBIT
EBIT margin
5.2
1.2%
28.9
5.6%
40.1
6.8%
48.5
7.8%
EV/EBITDA EV/EBIT
6.2 7.8
5.4 6.4
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Peers
Company Stantec WSP Global Arcadis NV WS Atkins Tetra Tech Ticker STN.TO WSP.TO ARCAD.NA ATK.LN TTEK Market Cap ($ millions) 3,181 1,877 2,023 1,368 1,957 EV ($ millions) 3,254 1,986 2,233 1,250 2,004 Median Average Hill International HIL 217.08 312.28 EV/ 2014 EBITDA 11.0x 10.3x 9.8x 8.1x 8.1x 9.8x 9.5x 6.2x EV/2014 EV/ 2015 2012-2015 EBIT EBITDA Rev CAGR 13.1x 9.8x 13.9% 13.5x 9.2x 14.4% 12.3x 8.8x 2.7% 10.0x 7.8x 2.8% 10.8x 7.3x 4.0% 12.3x 11.9x 7.8x 8.8x 8.6x 5.4x 14.1%
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Multiple
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Source: CapitalIQ
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If this happens how much free cash flow maintenance would HIL generate?
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The negative
Company is not being sold anytime soon would fetch a very high price given the quality of the business and the scarcity value of the asset. Management team too focused on acquisitions. We wish they would be more focused on closing the profitability gap with peers and achieve their 10% EBIT margin goal.
The negative
Insiders (especially the Richters) are regularly selling some of their shares, although we dont believe it is for reasons related to the outlook of the business or its valuation and the amounts are small compared to total holdings.
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Idea Generation
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Idea generation
Typical multiple based search low EV to EBITDA, FCF multiples Special situations spinoff, management change, restructuring announcement Contested situations / 13D filings Public letters and presentations from activists 13D from private equity firms or strategic buyers Companies delaying their annual meetings
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$10.0
$9.0
$8.0
$7.0
$6.0
$5.0
$4.0 Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
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$35.00
Nov 8, 2012: BKR announces Q3 results, $20 million cost reduction program, focus on organic growth and initiates a dividend
$30.00
$20.00
Mr. Ajdler sends public letter to the Board requesting the initiation of a sale process
$15.00 Aug-11
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$14.00
$12.00
$10.00
$8.00
$6.00
Privet Fund files a 13D/A with a letter to JAX board regarding timing of the annual meeting
May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12
$4.00 Apr-12
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Should the Company endeavor to schedule its 2012 Annual Meeting for a date subsequent to June 30, 2012, by amending its bylaws or otherwise, Privet would interpret this action as yet another entrenchment tactic employed by the Companys Board and management team to further disenfranchise Company shareholders. We believe that such action would also constitute an unreasonable response to the possibility of a contested election with respect to less than a majority of the seats on the Companys Board of Directors.
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LTM EBITDA 11 11 11
EV 77 88 99
Equity value 68 79 90
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Assumptions Sale of 12 owned units for $37.5 million cap rate of 7.5% Implied EBITDA reduction (rents) 2.8125 EBITDA margin pre S&L at 10% Trading multiple 6 to 7
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Third-party activism
(hidden real estate assets, restructuring candidate, takeout optionality) J. Alexanders (Nasdaq: JAX) operates high-end casual dining restaurants in the South East.
Idea Generation 13D filing and letter from another activist fund
$16.00
Investment Thesis Based on a review of JAX historical performance and shareholder base, we became convinced that the activist would win board control JAX was delaying filing its proxy statement and could not have its annual meeting within the legally required timeframe leading us to suspect JAX was shopping itself Significant operational improvement potential as evidenced by depressed EBITDA margins compared to peers Hidden real estate assets Low valuation Multiple ways to win (takeout, change in board composition, sale and leaseback, operational improvement) Exit/Results JAX was sold to Fidelity National for $14.50 per share
$14.00
$12.00
$10.00
$8.00
Average purchase price of $8.3 per share
$6.00
$4.00 Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
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