Aimia Stock: Trading At Less Than Half Base Case Value (OTCMKTS:AIMFF)

AntonioSolano

The following segment was excerpted from this fund letter.

Aimia is a holding company managed by value investors which is undergoing an asset conversion. Having sold its minority stake in the Aero Mexico miles loyalty program last year, the plan was to deploy the proceeds into good operating businesses at an attractive price. This would also allow the company to utilize its substantial NOLs.

This year the company announced that it has agreed to buy two businesses. Tuffropes is an Indian family-owned company which manufactures specialty ropes and netting for the marine industry. Bozzetto is a European specialty chemicals business. In both cases, management partnered with the same private equity firm which sourced the ideas and which will receive a percentage of the profits above an 8% growth rate in profits.

Many investors seem to be unhappy with these transactions. Reasons cited include the heightened risk of acquiring foreign companies, having to give up a portion of the economics to the private equity firm, the fact that multiples of profits paid for the acquired businesses weren't particularly low, insufficient disclosure about the historical economics of the acquired companies, general frustration that the stock hasn't done well and that management didn't just return its ample capital to the shareholders.

It's easy to start letting emotions drive the narrative when the stock hasn't been performing as investors had hoped. I would wager that if the stock were trading at 2x its current levels, which is closer to my estimate of its intrinsic value, there would be far fewer complaints. However, I do share some of the concerns and wanted to share my view on the company's transformation and where it leaves the shares as an investment at current prices.

I agree that the historical financial performance disclosure of the acquired businesses is insufficient, and I have shared my concerns with the management. I am also not thrilled to be sharing future business economics with a PE firm. However, in both cases the company was able to avoid an auction, so perhaps the PE firm did add some value. The ultimate measurement of success will be based on the returns the company will earn on its capital employed in these two transactions, not based on how they were found or structured.

My estimate is that the two businesses being acquired together will generate normalized operating income that will slightly exceed the sum of corporate costs, preferred dividends and the interest expense on the non-recourse subsidiary-level debt that the company intends to obtain shortly after the transactions close.

Assuming everything goes according to plan, this should leave the company with the following:

What can go wrong?

In thinking about the worst-case scenario for my intrinsic value estimate, I made the following assumptions:

The result is my worst-case value estimate in the low CAD 3s, not far from where the current stock price is trading. I am not oblivious to the risk that things might not go the way that management expects. However, given my analysis that there is limited long-term downside to my worst-case value and that the stock is trading at less than half of my base case value, I am maintaining our medium-sized position.

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