So, earnings came out Wednesday night and I quickly read through for a few key segments of interest to me (redemptions, card spend, cash build, PLM) and within a few minutes, I was celebrating with a bottle of tequila.
For a quick backstory, AIM has been in the dog-house ever since Air Canada decided to end it’s agreement in 2020. At first, there was a fear of a run on the bank (didn’t happen and redemptions have stabilized at a few basis points worse than card spend for a slight cash leakage), then a fear that cardholders would leave AIM for other loyalty programs (active cards and spend are both up), then a fear that they’d have to spend massively to buy AC flights at retail market prices (redemption cost is down and margins are up as the business diversifies into non-airline spend), then a fear that they’d have a liquidity crisis (cash is waaaaay up) and now I don’t know what the excuse is for the stock to be the cheapest liquid stock in the galaxy, trading at .9x EV/cash flow with half the market cap in net cash and with a seperate business not taken up into the financials that is worth more than today’s market cap on a stand-alone basis!!!
While there are a lot of moving pieces to the adjusted numbers due to rapidly down-sizing the cost structure and eliminating unprofitable divisions, the overall result was roughly inline EBITDA, better than expected margins, maintining guidance on cash flow of $220m (market cap is $425m based on Thursday’s close) and guiding to increasing EBITDA margin along with acceleration of cost cuts (sure sounds like 2018 guidance will be up from 2017 guidance when released with Q4 results). Normally, meeting guidance and guiding up slightly may lead to a shrug, but we’re at less than 2x cash flow, with 1.44 a share of net cash (shares closed 2.80 on Thursday) and .9 EV to cash flow, with cash flow now growing as revenues grow, I just don’t get it.
(in $CDN Million)
Cash and Investments 669
LT Debt 450
Net Cash 219
Net Cash/Share 1.44
Cash Flow Guidance 220
Cash Flow Per Share 1.44
TTM Cash Flow Per Share 1.40
Equally important, AIM’s 48.9% interest in AeroMExico’s loyalty program (PLM) had yet another huge quarter of member and EBITDA growth, going from USD $19m in Q2 to USD $21.2m in Q3 and the 9 mos of 2017 show USD $56.6m of EBITDA vs USD $48.1m in all of 2016. Annualizing the USD $21.2m of EBITDA gets you to USD $84.8m, slapping a 10x multiple on that (I personally think it should be much higher given the runway and growth prospects of a negative working capital business) and you’re at USD $848m and AIM’s 48.9% is worth USD $415m or CDN $525m at today’s fx rate. That’s $3.45/shr + $1.44/shr in net cash = $4.89 and you get a pile of businesses that spit out $220m a year in cash flow for free!!!
$4.89 which is roughly today’s tangible book value + $600m (3 years of cash flow) + $70m of annual run-rate savings + interest savings and net interest income from accumulated cash reserves + growth of PLM over next 3 years – whatever severance and cost reduction expenses are incurred along the way; so by 2020, you’re at roughly $10/shr in tangible book (mostly cash and PLM) and then you have a business that’s moderately impaired due to losing Air Canada’s business and maybe doing $140m of cash flow a year ($220m current run-rate – $150m hit from customers switching to AC + $70m in cost savings = $140 and I really don’t see a $150m hit from customer defections. I’m just trying to be draconian here).
If you’re at $140m/yr maybe it’s worth 10x that cash flow and you get another $9/shr in value, so put it all together and you’re at ~$19/shr in 2020?
Seems pretty damn cheap at ~$3 now, it’s mostly de-risked after earnings, management seems to be doing the right things and buyers seem to finally be waking up to the above facts.
Let’s just say it’s a VERY large position for me.
Disclosure: Long AIM CN