|Shares Out. (in M):||38||P/E||25.5x||10.5x|
|Market Cap (in M):||272||P/FCF||13.6x||7.5x|
|Net Debt (in M):||38||EBIT||20||37|
This idea was presented in 2005 by madmax989 who did a good job describing the basic business and its solid position in financial printing and typesetting since the days of Alexander Hamiton, so please see that writeup for background on the business. Since then, BNE has exited some businesses and acquired others. Despite the changes, BNE is still substantially leveraged to the IPO market and stands to benefit even more today than in the past based on further cost-cutting moves they have taken in the last few years. In addition, the noncapital markets-related businesses will see a new period of growth as XBRL is implemeneted across companies and financial reform is introduced the wake of last year's meltdown. Even better, the stock is at close to half the levels of 2005.
1) Leveraged to recovery in IPO market at cheap valuation
Primed to benefit from a multi-year cost reduction program
BNE is probably at the leanest cost structure it has ever been at owing to continued offshoring of employees (55% up from 25% 4 years ago) and higher productivity with current asset base. $100mm of costs have been taken out of the cost structure since 2007 by closing facilities (they have gone from 21 facilites down to 9) and eliminating positions. The previous VIC report on BNE mentioned 650 typesetters in 2005. They now have 290 in US and abroad and seasonal work is handled by a vendor in India. They have cut their billing staff down to 75 from 138 using better tools and processes. Approximately $50-60mm of those savings will be realized in 2009 with $30mm to show up in the second half which is typically a seasonally soft period for the company. Management believes they can add over $100mm in cap markets revenue without meaningfully adding to their fixed cost base.
BNE is projecting $110-140mm in cap markets revenue this year after a very slow start to the first half. In 2008 which was a subpar year for IPO's, BNE generated $190mm of cap markets revenue. Looking back at recent history, a normal year of IPO activity results in over $200mm with the cyclical 1999 peak at over $450mm during the go-go tech days. Since the incremental margins on this business are very high (40-50%), one can quickly appreciate the leverage in the model. From this year's levels to a normal year implies an incremental $30-40mm of EBITDA falling to the bottom line.
Cap Market Revenue Company EBITDA IPO's M&A
2005 $252 $52 232 225
2006 $301 $66 206 228
2007 $314 $77 264 214
2008 $203 $33 59 152
2009e $137 $48 14 (thru June) 59 (thru June)
2010e $170 $70 70 100
So, BNE trades at 4.3x my projection for 2010 EBITDA and 7.5x the associated free cash flow at those levels. I am assuing $18mm of capex, cash interest of $2.5mm and $14mm of cash taxes (cash rate slightly lower than GAAP. I do not think I am being aggressive with my revenue assumptions as signs of a pickup are upon us and weakness in the first half of this year was particularly acute. In a more normalized year BNE can do $250mm of revenue and closer to $95mm in EBITDA and $1.35 in FCF/share. This is not inconsistent with management's internal targets of a 10% EBITDA margin (i think they can do better at peak given the lean cost structure and the fact that they have approached those levels at historical peaks).
The IPO market has rebounded nicely in the third quarter with several deals pricing in recent weeks. A123, ART,GAME, SEM are just a few highlighted names that have priced recently and plenty more have filed to price. The appetite for new issues has been strong in the wake of looser credit markets and an uptick in the economy. At a recent Godman Sachs Conference, several credit panelists talked about IPO's and deals being the next step in a more drawn out deleveraging process. In fact, M&A activity has started to pickup. Within the spectrum of capital markets activity, there is a hierarchy of profitability for BNE that goes from lower to higher as deals become less boilerpate and more customized. The drawn out, cross-border hostile deals are the most profitable ones for BNE as they typically require longer hours and last minute changes to documentation that are done at higher margins (madmax pointed out tis feature in his writeup). As we move through this spectrum, BNE realizes higher margin work on the increment.
2) Noncapital markets businesses will grow nicely over next few years
The SEC has mandated the largest US filers to file in XBRL format starting in July of this year and ultimately being rolled out to the 9000 US filers over the next few years, BNE expects to gain 25% share of this market with the rest going to RR Donnelly/Edgar Online partnership and Merrill Corp (taken private few years ago). Following the initial filing season, BNE has performed well, succeeding in filing and being accepted with SEC in 90% of cases which outperfomed the Donnelly experience. Based on counted filings thus far, BNE has actually outperfomed its own projections , garnering a 28% share in the early rounds. Revenue will build from $25mm in 2010 to $55 in 2012 based on projections of # filers, market share and the pricing of these services. This revenue will show up partly in the compliance reporting and partly in the investment management segments. Basically BNE gets paid $25k annually for XBRL tagging a client on all filings during a given year. There could be upside to those numbers for later stages of implementation that would include tagging the filings for footnotes and more detailed tagging. I estimate this business is a 12% operating margin business which means it will be nicely additive next year to the tune of $3.0mm.
Marketing Communications segment poised to grow (approx 30% of revenue in 2008)
This division prints health care and 401-k enrollment kits as well as monthly statements for various industries. This business has suffered a 10% revenue decline, half of which has been volume related and the other half from losing clients (predominantly ones that were not profitable). The volume declines seem to have abated and the customer pruning has pretty much run its course. This division recently won a $60mm deal from USAA over 5 years and the pipeline is building with at least 1 deal of that size pending in customized digital color printing. The bottom line is that the second half should be a better half than the first setting up a high single digit growth story in 2010 and beyond.
3) Revenue opportunities from increased regulatory reform
Summary prospectus: SEC ruling allows mutual funds to send shareholders 3-4 page summary to replace statutory prospectus would still be available online.
Hedge fund disclosures: SEC could extend mutual fund disclosure to hedge funds
IFRS: SEC proposal would transition US companies away from GAAP to this standard
Municipal disclosures: SEC proposing rule to open all filings to public
..... All of this is harder to quantify as these trends are evolving but they will allow BNE to further leverage its infrastructure further (none of this is included in my estimates)
4) Deleveraged company with solid liquidity
Recent share offering of 10.5mm shares at $5.96 was used to pay down debt and although some shareholders were understandably displeased with the dilution, this offering meaningfully diminished financial risk
BNE still owns 6 pieces of real estate that are marked below market value even adjusting for the recent decline in real estate. I approximate there is $10-20mm in potential increased liquidity from sale-leaseback transactions
BNE has $87mm in availability on its revolver
Recent strength in the stock market has cut the pension liability down to $22mm from $42mm at year end 2008 and chances are decent for little contribution to the plan next year after contributing $6mm this year and having originally planned another $6mm next year
Stock lost some street sponsorship last year when it traded down below $2. Only Gabelli seems to cover them and writes infrequently on the name.
6) Favorable risk/reward
A 6.5x normalized multiple on my 2010 EBITDA estimate (reflects historical multiples and BNE's strong position within it's industry) translates into an $11 target. If the market really recovers and we get back to that $250mm cap market run rate, the target based on a decreased 6.0 multiple to reflect higher earnings for a cyclical company, would be more like $14, or roughly a double. In a negative scenario, my 2010 estimate is too rosy and the market once again starts to reject new offerings. Under that scenario, EBITDA may come in only slightly higher than this year, say $50mm, fueled by gains in noncapital markets growth and only a slight uptick in cap market activity from a depressed 2009. An even lower 5.5x multiple gets you to $6.25 for 13% risk to the downside.
Ipo market resurgence
Launch of XBRL
Increased regulatory reform