Consensus community valuation
Feb 25:
VVA has had a busy half with a flurry of acquisitions, strategic investments and new site roll outs.
The constant activity does make it hard to get a read on exactly where things sit, however this added complexity was somewhat offset by an accounting change brought on by an amendment made to VVA’s debt facility. Equipment no longer needs to be accounted for using AASB 16 and is now represented as a fixed asset on the balance sheet, as opposed to a right of use asset. This has the effect of decreasing lease liabilities and increasing borrowings, as you can see below:
Debt looks high (net tangible assets are negligible), although ICR still looks okif you use EBIT (post AASB 16 and a few “adjustments”) as the numerator, you still get around 3x coverage. Share based comp is negligible at around $100K.
Valuation wise, it’s still hard for me to form a clear view and select a suitable metric.
The cash flow statement contains a lot of expansion capex which can mostly be added back, but the maintenance capex figures given by management in their presentations are low when compared to depreciation on non ROU assets detailed in the statutory accounts ($2.9mil vs $5.7mil), this leads me to believe the maintenance capex will gradually increase with time.
Management did say that the next half will be more about FCF generation and less about expansion, which may mean the cash flow statement improves drastically next half (but we’ve heard this before).
EBITDA as a valuation metric is garbage because they have $100 mil of PPE that needs maintaining.
If capex rolls off and we see that FCF vastly exceeds NPAT (PRE AASB 16), it would send a strong signal that NPAT is a reliable proxy for FCF over the long term, until then, I’m not comfortable that all “growth capex” is actually “growth capex” and can be turned off without any negative impacts on the financial performance of the business.
If you took an optimistic view, then this is cheap at around 4-5x FCF for a business that can maintain CFC without spending growth capex. Any growth capex that is spent, would be due to the compelling financial metrics presented by the opportunity and will lead to FCF per share growth over the long term..
If you were cynical, you might say that you’re paying 10-12x actual FCF for a business that is incapable of organic growth. VVA needs to compulsively spend capex on site rollouts and acquisitions with questionable economics in order to maintain top line and EBITDA growth. This will not lead to any sustainable FCF per share growth.
The truth is probably somewhere in between. Going to maintain my valuation for now and see what happens when growth capex rolls off.
Aug 24:
Even if you assume all capex was for maintenance and not expansion, about $4.5 mil of FCF was generated, most in the second half. Post AASB 16 NPAT of $3.25mil was flat YOY.
You could look to managements pre AASB - 16 figures, I've made notes on what the adjustments made involve. The consensus on Strawman is that managements numbers are a bit rich. Some of these numbers won't match what's in VVA's financials (particularly note 19) due to a typo in their numbers..
$43.5 = Property Rental Payments (28.4+ int component from prop leases in note 6 (approx. $15.1 mil?)
$35.7 = Dep on Office ROU Asset . ROU Dep on Leased Equipment (circa $4mil) left in.
$14.6 = Int on ROU assets ($16.2) LESS int on equip leases of (approx. $1.6)
Ignoring the normalisations I think the adjustments aren't too aggressive, although it's worth noting that expenses relating to equipment financed by a finance lease are all included below the EBITDA line. The total cost of around $5.6 mil is about $2mil below the cash outflows relating to that leased equipment.
I'm going to say that around 10X FCF is a fair price. I think once capex rolls off a bit there is around $12 mil worth of FCF sitting underneath everything for this coming year.
In the middle of a deep dive on VVA's full year financials and I came across this, which I think might be a typo/drafting error. @UlladullaDave thoughts?
First below is from HY results, Second is from FY results.
I think the property lease repayments in the FY results (Note 19) have accidentally excluded the interest component.
The $28.37 mil figure is equal to the principal payments detailed 1 page earlier, also it makes no sense that lease principal payments haven't at least doubled from HY to FY given expansions that have happened this FY. I think this figure is meant to be $43.5mil, as per their Investor Pres adjustments which I'll post on later.
In their latest monthly update, Carlos Gil talks about a new position for the fund:
That, to me, sounds awfully like Viva Leisure. IPO in 2019, check. Revenue and EBITDA figures, check.
I've always been puzzled as to why the fundies like VVA so much. Perennial and Regal also have positions which they also appear to be building. Yes the growth has been impressive, but most of it has been through acquisitions, and these have failed to hit the bottom line to date, hence the use of bullshit EBITDA.
I don't quite share Munger's entire opinion on EBITDA. I think it can make sense for some businesses in some instances, but in this case I'm not sure it's any good at all as a metric. I haven't done the work here, but I suspect the stuff getting depreciated is the gym equipment, the improvements to the leased spaces to suit their specific needs, the financing costs.. It's hard to think these things will disappear in a near future.
Anyway, thought I would post in the case of someone being able to educate me if this indeed is a bargain at 4x EBITDA.
Another Acquisition and a capital raise. I get why it makes sense to go into new geographic markets via an aquisition, but the price they're paying is nearly above their cost of capital. They're raising at 3.5X EBITDA and acquiring at around 4x EBITDA (or 3x EBITDA post synergies). There's some waffle about how some of the consideration includes a capex reimbursement but it makes little difference to the attractiveness of the acquisition IMO.
If the acquisition means it becomes easier to role out Greenfield sites and the ROI is higher than it otherwise would have been, or that the geographical reach means member growth, then I can see the logic.
The problem VVA needs to solve is:
1) Convince the market it's worth a better valuation
2) Proving it can grow using FCF without diluting shareholders.
They've failed at both so far and I think the reason they've failed at 1 might be because they've failed at number 2.
I haven't posted any commentary on the HY results as I couldn't really pin down my thoughts exactly. Despite making no acquisitions, it was still hard to determine what the actual underlying FCF was.
In regards to the below, it seems ok, but here's the emerging problem I'm starting to see:
VVA have paid approx. 1.2x Rev and 3.5x EBITDA for this acquisition (EBITDA margin expectation is much higher than usual 20%) .
VVA currently trades at approx. 0.8x Rev and 3.7x EBITDA.
There's no public to private arbitrage at the moment.
Assuming a 35% EBITDA to FCF conversion ratio (as per company presentations), a 3.5x EBITDA multiple implies a FCF yield of 10%.
VVA currently pays just under 8% on its debt facilities.
If everything goes to plan, VVA generates an additional $100,000 in FCF on its $5 in additional debt. There may be some additional synergies down the line, but I wouldn't bank on it.
