AGILYSYS INC AGYS
June 03, 2013 - 10:51am EST by
banjo1055
2013 2014
Price: 12.00 EPS $0.00 $0.00
Shares Out. (in M): 22 P/E 0.0x 0.0x
Market Cap (in M): 269 P/FCF 0.0x 0.0x
Net Debt (in M): -110 EBIT 0 0
TEV: 159 TEV/EBIT 0.0x 0.0x

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  • Potential Sale
  • Sum Of The Parts (SOTP)
  • Technology
  • Hotels
  • Retail
  • Activism
 

Description

 

I wrote this before today’s announcement that AGYS will sell its RSG unit for $1.50 per share in cash, closing later this summer.  I have quickly updated the numbers.  I consider today’s announcement to be a catalyst for the stock to move higher, as AGYS should now be much closer to being sold to a larger strategic buyer.  The stock is only up slightly, trading below $12.00 at the time of this posting. 

Agilysys provides technology solutions for the hospitality and retail markets.  Products include property and lodging management, inventory and procurement, point-of-sale (“POS”), document management, mobile, wireless and other types of software which facilitate the relationship between a hotel property or retail outlet and its customer.  The company also provides support, maintenance, resold hardware products and software hosting services.  Customers include retailers, casinos, resorts and restaurants.  A significant portion of revenue is derived from contract support, maintenance agreements and professional services. 

AGYS operates throughout North America, with additional sales and support offices in the UK and Asia.  They report two operating segments: Hospitality Solutions Group (“HSG”) and Retail Solutions Group (“RSG”). 

My investment thesis is simple.  HSG is a terrific business, likely worth AGYS’ current market cap or more.  [I would refer readers to fiftycent501’s recent writeup of MCRS for more/better color on the attractiveness of the industry.]  There would be significant interest from competitors in this valuation range if HSG were put up for sale.  RSG is a decent business, and it is likely worth around $1.75 per share (note: they announced this morning they are selling for net proceeds of $1.50 per share), however it is not interesting to the same buyers, and therefore its presence currently impedes potential buyers of HSG from attempting to purchase AGYS for a fair price.  Finally, pro forma for the sale announced today of RSG, AGYS has $4.90 in cash per share (and no debt). 

AGYS was not always so straightforward.  When MAK Capital took a board seat in 2008, the company was attempting to fix a third division (ITG) which was struggling to compete in the broader IT services sector.  Corporate overhead totaled $47m in FY 2008 (FYE 3/31), consuming 22% of combined HSG/RSG sales, and overwhelming HSG/RSG’s combined $16m in segment-level EBITDA.  Over the past five years, AGYS has reduced corporate overhead to $25m, grown RSG/HSG segment-level EBITDA to that point where the company is profitable, sold the ITG division for cash, replaced senior management and moved the company’s headquarters to save costs.  The company continues to focus on increasing more valuable Support & Maintenance and Professional Services revenues, while de-emphasizing Products revenues.  HSG now generates over two thirds of its revenues in support and services.  AGYS also rejected a bid for the company in 2011 for $11.00 a share, which is disclosed in public filings.  They may have received other bids since then not requiring disclosure, but this is only speculation. 

This year, they became profitable on an operating profit basis, recently increasing guidance to $230-232m in sales and $6.0-$6.5m in Adj EBIT, as well as 24-26c EPS.  Based on the current stock price, the stock appears quite expensive on trailing earnings.  However, this reflects the burden of overhead which an acquirer will largely exclude from their assessment of the ongoing profitability of the HSG unit.  I believe it is more appropriate to use EV/Sales multiples, as well as EV/EBITDA based on segment-level profit, to assess the strategic value of the company’s two business units.  I believe that AGYS is currently prepared to do what it takes to maximize value for shareholders: deploy cash at an attractive rate of return to acquire profitable properties within the HSG sector; dispose of its RSG segment for a reasonable value (done, as announced today); and finally, sell the company to a competitor in the HSG sector (or a larger new entrant) who will be much more motivated to pay a full price once the corporate structure is further simplified and AGYS is put in play.  I also believe that cash may be deployed to acquire additional HSG software properties, and that this is a good thing (and not indicative of the company truly trying to go it alone over the long haul, but rather to get more credit for this cash in an ultimate sale of HSG). 

A sum of the parts analysis yields 13-55% upside from here.  Cash is $4.90 per share, after selling RSG for $34m net to AGYS, which equates to approximately 0.27x LTM Sales and 4x LTM segment-level EBITDA, contributing $1.50 per share.  I value the HSG business at 2-3x Sales, equivalent to 12-18x trailing segment-level EBITDA.  This may seem pricey, but HSG sales and profits are growing, and this is an essential software business with a very loyal customer base (high switching costs and excellent reputation for service/customization = pricing power).  MCRS is the best pure-play comparable, and it currently trades for 2.2x trailing Sales (I believe MCRS is also undervalued).  It has traded in the 2-3x range (and higher) over the past couple of years.  NCR bought competitor Radiant Systems for 3.1x Sales in August 2011.  At 2-3x Sales, HSG is worth $8.70 to $13.05 per share.  Putting it together results in a range of $13.60 to $17.95 for the company, assuming no value is created/destroyed by any cash-funded tuck-in acquisitions.  I would reiterate that given MAK’s 31% stake in this illiquid company, it is highly likely that (a) any deployment of cash is done with shareholders’ best interests in mind, and (b) the company will ultimately be sold or merged in order to gain liquidity for MAK. 

All put another way, the current stock price implies a value of 1.6x LTM Sales for HSG, or 9-10x LTM segment-level EBITDA (growing)…. this is too cheap for this high-quality software business. 

Risks include exposure to the hospitality sector, and the fact that there is little recourse for minority shareholders if they disagree with MAK Capital’s timeline or strategy (although I like what they have done so far). 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Closing of sale of RSG unit
Eventual sale of the company
    sort by   Expand   New

    Description

     

    I wrote this before today’s announcement that AGYS will sell its RSG unit for $1.50 per share in cash, closing later this summer.  I have quickly updated the numbers.  I consider today’s announcement to be a catalyst for the stock to move higher, as AGYS should now be much closer to being sold to a larger strategic buyer.  The stock is only up slightly, trading below $12.00 at the time of this posting. 

    Agilysys provides technology solutions for the hospitality and retail markets.  Products include property and lodging management, inventory and procurement, point-of-sale (“POS”), document management, mobile, wireless and other types of software which facilitate the relationship between a hotel property or retail outlet and its customer.  The company also provides support, maintenance, resold hardware products and software hosting services.  Customers include retailers, casinos, resorts and restaurants.  A significant portion of revenue is derived from contract support, maintenance agreements and professional services. 

    AGYS operates throughout North America, with additional sales and support offices in the UK and Asia.  They report two operating segments: Hospitality Solutions Group (“HSG”) and Retail Solutions Group (“RSG”). 

    My investment thesis is simple.  HSG is a terrific business, likely worth AGYS’ current market cap or more.  [I would refer readers to fiftycent501’s recent writeup of MCRS for more/better color on the attractiveness of the industry.]  There would be significant interest from competitors in this valuation range if HSG were put up for sale.  RSG is a decent business, and it is likely worth around $1.75 per share (note: they announced this morning they are selling for net proceeds of $1.50 per share), however it is not interesting to the same buyers, and therefore its presence currently impedes potential buyers of HSG from attempting to purchase AGYS for a fair price.  Finally, pro forma for the sale announced today of RSG, AGYS has $4.90 in cash per share (and no debt). 

    AGYS was not always so straightforward.  When MAK Capital took a board seat in 2008, the company was attempting to fix a third division (ITG) which was struggling to compete in the broader IT services sector.  Corporate overhead totaled $47m in FY 2008 (FYE 3/31), consuming 22% of combined HSG/RSG sales, and overwhelming HSG/RSG’s combined $16m in segment-level EBITDA.  Over the past five years, AGYS has reduced corporate overhead to $25m, grown RSG/HSG segment-level EBITDA to that point where the company is profitable, sold the ITG division for cash, replaced senior management and moved the company’s headquarters to save costs.  The company continues to focus on increasing more valuable Support & Maintenance and Professional Services revenues, while de-emphasizing Products revenues.  HSG now generates over two thirds of its revenues in support and services.  AGYS also rejected a bid for the company in 2011 for $11.00 a share, which is disclosed in public filings.  They may have received other bids since then not requiring disclosure, but this is only speculation. 

    This year, they became profitable on an operating profit basis, recently increasing guidance to $230-232m in sales and $6.0-$6.5m in Adj EBIT, as well as 24-26c EPS.  Based on the current stock price, the stock appears quite expensive on trailing earnings.  However, this reflects the burden of overhead which an acquirer will largely exclude from their assessment of the ongoing profitability of the HSG unit.  I believe it is more appropriate to use EV/Sales multiples, as well as EV/EBITDA based on segment-level profit, to assess the strategic value of the company’s two business units.  I believe that AGYS is currently prepared to do what it takes to maximize value for shareholders: deploy cash at an attractive rate of return to acquire profitable properties within the HSG sector; dispose of its RSG segment for a reasonable value (done, as announced today); and finally, sell the company to a competitor in the HSG sector (or a larger new entrant) who will be much more motivated to pay a full price once the corporate structure is further simplified and AGYS is put in play.  I also believe that cash may be deployed to acquire additional HSG software properties, and that this is a good thing (and not indicative of the company truly trying to go it alone over the long haul, but rather to get more credit for this cash in an ultimate sale of HSG). 

    A sum of the parts analysis yields 13-55% upside from here.  Cash is $4.90 per share, after selling RSG for $34m net to AGYS, which equates to approximately 0.27x LTM Sales and 4x LTM segment-level EBITDA, contributing $1.50 per share.  I value the HSG business at 2-3x Sales, equivalent to 12-18x trailing segment-level EBITDA.  This may seem pricey, but HSG sales and profits are growing, and this is an essential software business with a very loyal customer base (high switching costs and excellent reputation for service/customization = pricing power).  MCRS is the best pure-play comparable, and it currently trades for 2.2x trailing Sales (I believe MCRS is also undervalued).  It has traded in the 2-3x range (and higher) over the past couple of years.  NCR bought competitor Radiant Systems for 3.1x Sales in August 2011.  At 2-3x Sales, HSG is worth $8.70 to $13.05 per share.  Putting it together results in a range of $13.60 to $17.95 for the company, assuming no value is created/destroyed by any cash-funded tuck-in acquisitions.  I would reiterate that given MAK’s 31% stake in this illiquid company, it is highly likely that (a) any deployment of cash is done with shareholders’ best interests in mind, and (b) the company will ultimately be sold or merged in order to gain liquidity for MAK. 

    All put another way, the current stock price implies a value of 1.6x LTM Sales for HSG, or 9-10x LTM segment-level EBITDA (growing)…. this is too cheap for this high-quality software business. 

    Risks include exposure to the hospitality sector, and the fact that there is little recourse for minority shareholders if they disagree with MAK Capital’s timeline or strategy (although I like what they have done so far). 

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Closing of sale of RSG unit
    Eventual sale of the company

    Messages


    SubjectRE: Love this idea here / insider buying
    Entry09/11/2013 09:24 AM
    Membercuyler1903
     
    Continue to love this idea, the insider buying and effective control by MAK Capital, which will most surely be seeking an exit via a sale event.
     
    Cuyler

    SubjectRE: RE: Love this idea here / insider buying
    Entry09/11/2013 10:21 AM
    Memberstraw1023
    cuyler,
     
    We have been involved here for a while and I am familiar with mak capital and its involvement.
     
    We continue to "like" it but do not "love" it . . . but I am not seeing much I "love" on the long side these days.
     
    I understand your valuation and agree that simple sales multiples conflate different types of revenue and so undervalues AGYS. We get high teens as well.
     
    But the key variable here seems to be the likelihood that AGYS is a target rather than remaining a standalone company. And it seems to me that there is already a significant chance (25-33%) of a takeover priced into the stock.
     
    Perhaps a sign of the times: these event-driven ideas trade quite a bit richer today than a similar idea 12-18 months ago.
     
     

    SubjectRE: RE: RE: Love this idea here / insider buying
    Entry09/11/2013 10:31 AM
    Membercuyler1903
    Straw - yeah, reason I say I love it is that the product is so strong and recurring revenue in nature, and I see little risk for quarter to quarter risk.  This is such a large position for MAK that I see a very low probability value isn't realized here.  Mike Kaufman is under the radar investor but if you follow him you'll see he runs very concentrated and has been remarkably successful.
     
    I prefer looking at multiples of gross profit than multiples of sales, but we get to the same place.
     
    Cuyler

    SubjectRE: Love this idea here / insider buying
    Entry09/11/2013 10:50 AM
    Memberstraw1023
    cuyler + banjo,
     
    I agree with your sentiments. I know Mike very well and am also a big fan. Still doesn't seem as juicy as the stuff we were seeing last year.
     
     

    SubjectRE: RE: Love this idea here / insider buying
    Entry11/07/2013 08:21 AM
    Membercuyler1903
    AGYS posted a great quarter.  Revenues +10% y/y and Gross Margin rose 400 bps to 66% vs. 62% in prior year.  Business momentum appears strong.  Pretty obvious why there was broad insider buying of the stock during the quarter by the CEO, CFO, CTO and General Counsel.
     
    Support/maintenance/subscription revenue is now 50% of total, and new customer wins are coming in very nicely as "financial results reflect the market acceptance of several significant product releases..."
     
    At 5x TEV/Gross Profit, this is a $20 stock vs. $11.79 last trade (a very conservative 4x TEV/GP yields ~$16.35).  There could certainly be upside to this number as well given the high proportion of recurring revenue to total.
     
    We are in good hands with MAK Capital here, one of the smartest "under-the-radar" hedge funds there is.  With a 32% stake in AGYS, I see a sale of the the company to a strategic buyer (such as MCRS, which trades at 5.2x TEV/GP) as highly likely.
     
    Cuyler

    SubjectRE: RE: RE: Love this idea here / insider buying
    Entry11/07/2013 02:21 PM
    Memberstraw1023
    cuyler,
     
    we agree. we've been adding today with the sell off. we think this makes it more likely that company is sold and at a better price. This is not a double, but we see a very high chance of a +50%. They are not dealing from a position of weakness.
     
    Surprised at weak initial move and surprised by selloff. surely, this situation must be more favorable today than it was yesterday.
     

    SubjectRE: RE: RE: Love this idea here / insider buying
    Entry11/07/2013 11:19 PM
    Membernathanj
    I would add two more items to note.  First, they have a really tough comp on the product rev side next Q (Dec).  But that's because last Dec-Q had a big $4m, low margin hardware deal.  This is unlikely to repeat.  I don't know if the Sidoti analyst has factored this in his model.  So don't freak out if they show a double digit decline in product rev and single digit decline in total rev for Dec-Q. However, earnings shouldn't take much of a hit because HW is low margin.  If you strip out the $4m HW deal, you should continue to see solid growth in product and overall revenue.  Headline might look bad next Q but these guys are on the right track.

    Second, they recently added two very strong board members, one of which is a former CEO/current director at Manhattan Associates, a supply chain software company.  Take a look at the chart of MANH.  They also got rid of a long-time director who was adding little value.  This shows MAK's proactive and positive influence on the company.  So even if the acquisition thesis doesn't unfold in the near-term, I'm confident AGYS has the right guys managing the business.

    SubjectAttractive Here
    Entry05/15/2014 10:53 AM
    Memberstraw1023
    banjo/cuyler/anyone else . . .
     
    the news flow here over the past year has been definitively positive. The latest results look solid (not as solid as the headline "26% growth" but solid). 
     
    the stock has been hit in the R2K destruction, and I think this is becoming a baby-with-the-bathwater stock below $13.

    SubjectDiscovery 13D
    Entry10/01/2014 03:24 PM
    Membermaggie1002
    Filed after the close on Friday without anything specific action being communicated but presumably they will push for sale.  Their investor day didn't seem to provide any new enlightment but assume you still agree that private market value is substantially higher than current price?
     

    SubjectMAK filing change
    Entry05/14/2015 09:14 AM
    Membermaggie1002

    Banjo, it seems that there's some discontent from MAK as described below.  Given the increasing accumulation of shares recently by Discovery coupled with MAK's amended filing,  I think one might deduce that AGYS as a standalone is looking less likely.  

    On a more fundamental perspective, my research validates your last post that AGYS has indeed built a "good little franchise with strong, sticky customer relationships".  I have made several customer introductions to the company but the sales cycle is quite long.

     

    Item 4 of Schedule 13D is hereby amended as follows:

     

    With respect to the actions specified in clause (d) of Item 4 of Schedule 13D, the Reporting Persons are now considering whether to pursue various courses of action related to the Issuer’s present Board of Directors, including, without limitation, considering the election of replacement independent directors, proposing alternative nominees for director positions, and engaging in a proxy contest with respect thereto.

     

    The Reporting Persons do not currently seek to have more than one individual affiliated with the Reporting Persons elected to the Issuer’s Board of Directors. The Reporting Persons currently intend that should they nominate candidates for the Issuer’s Board of Directors, any such nominees will be independent of the Reporting Persons, other than one director affiliated with the Reporting Persons. Such director is currently Michael A. Kaufman.

     

    There can be no assurance as to whether the Reporting Persons will take any action with respect to the matters described in the immediately preceding two paragraphs or any of the items enumerated in the Schedule 13D instructions to this Item 4, nor as to the outcome of any such matters.


    SubjectRe: MAK filing change
    Entry05/14/2015 11:14 AM
    Memberstraw1023

    We have been on the sidelines after the disappointing change of course in fall of last year. Our thesis of a quick sale in the upper teens was clearly wrong and we got out without gain. 

    And MAK was on the Board (since Feb 2014) then as well and did not raise a fuss . . . why?

    This is pure speculation, but I think it indicated that they could not sell at the prices we were discussing (mid-to-high teens). So I do not know what to make of amended 13D since I did not view this as a board conflict situation.

    Aside: my sense is that we (VIC, event-driven investors) tend to focus on the willingness of mgmt/BoD to sell, but sometimes it is about the ability to find a buyer!

    At this price, it seems reasonable to get involved again, esp if MAK/Discovery are willing to sell at less than $15, if necessary.

     

     

     


    SubjectGlassdoor?
    Entry12/24/2015 08:59 AM
    Memberbanjo1055

     

    Has anyone here found this site interesting in tracking companies?  Do employees need to verify they work there (so we know the reviews are legitimate?) 

    I have been noticing a lot of hiring activity at AGYS, for what it's worth.  The employee reviews seem typical - a lot of whining - although I really liked this one from Nov 5 (which I just saw today, see below).  Seems they are gunning for top line growth, may finally be making sustainable progress, and are not worried about the long haul (they expect to be part of something bigger).  I don't think this is a great PE candidate (LBO not possible, growth equity not necessary), but I do think they are a very natural target for a broad range of strategics who will look mostly at sales and gross profit in determining valuation. 

    “Solid future, strong market potential, double digit growth ”

     
    Current Employee - Anonymous Employee
     
    Recommends
     
    Positive Outlook
     
    Approves of CEO
     
    I have been working at Agilysys full-time
     
    Pros
    - Strong market potential
    - Great opportunity in the market
    - Double digit growth and strong future growth outlook
    - Capable leadership now in place
    - Great people to work with
    - Leadership is committed to making changes
    - Long term customers who offer repeat business
    - SaaS business is taking off
    - Leadership and management is focusing on making Agilysys a great place to work

    Cons

    - Not positioned well to deliver on exponential growth

    - Too much "blame game" and lack of accountability

    - Siloed businesses and product lines

    - Long hours and possible burnout

    - Fast base of business can affect focus on employees

    Advice to Management

    Growth of the business cannot come at the expense of the employees. Invest in positive attrition to weed out low performing individuals. Invest in high potential employees, provide them training, work/life balance, encourage innovation and your employees will deliver happily

    [emphasis mine, bold]

     

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