August 28, 2015 - 2:47pm EST by
2015 2016
Price: 22.32 EPS 0.31 0.49
Shares Out. (in M): 64 P/E 71 45
Market Cap (in $M): 1,436 P/FCF 13 11.5
Net Debt (in $M): 911 EBIT 136 156
TEV ($): 2,347 TEV/EBIT 20 18

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Clubcorp (MYCC)


Here is a secret: the golf industry has been stuck in the rough as golf courses massively grew through the 90s and 00s, yet demand hit a wall when Tiger Woods…well...y’all know the story.  It is so bad that many courses have been turned into parks or housing developments and others are struggling to stay afloat.    So what better way to play this than to buy the largest golf course operator, no?  Done laughing?  Well I am serious.  Clubcorp is the largest golf course owner that can be a potential double in 2-3 years with a long fairway to keep compounding beyond that.  Clubcorp is essentially professionalizing a non-profit industry.

Why does the opportunity exist:

1)      Industry structure

a.       The Original Premise for the Courses Were Not Profit Motivated:  When we think of golf courses, most people would say old boys clubs.  These were an escape for the wealthier subset of the population where one can play a round of golf and then grab a meal at the course.  There was a lot of prestige associated with many courses and some level exclusivity.  These courses weren’t developed for the masses and along with that weren’t very profit motivated.  During the housing boom in the 90s and 2000s, many housing developments added golf courses as a centerpiece to the community.  These courses were supported until the development was turned over to the homeowners.  Again, the courses were added without much concern for the long term profitability.

b.      Lack of Professional Management:  On a micro level, individual golf courses are small businesses.  With over 4,000 private courses in the US (and 11,500+ public courses), there isn’t much money to attract high caliber talent to manage the course and the members were not interested in the courses turning a profit as it was a generally a zero-sum game in their book (higher profit means lower the dues).  When rounds of golf peaked in 2000, it was clear most of these operators were not ready to reduce expenses to cope with the ~11% decline in demand over the next decade.

c.       Weak Capitalization: As many of these courses were built 10-25 years ago (4,500 courses added then), we are starting to see the first signs of major renovations being needed to be implemented in the last wave of golf course build outs.  The issue is many of these courses didn’t reserve enough money for future improvements or membership declines are forcing higher special assessments per individual member.  If the member is already on the fence for using their club and now they are hit with a special assessment, the likelihood is they will cancel their membership, which makes the situation even worse. 

2)      Courses are at the breaking point

a.       Membership levels are declining, only the best courses attract members: As supply increased in the 2000s by 0.3% annually and demand declined annually by -0.7%, we saw plenty of competition for new members.  The issue is that signing up for a country club is more than just signing up to use the facilities like a gym, it’s more like being a part owner of the gym due to the high membership initiation fees as well as future responsibility for special assessments.  Therefore prospective members will assess the health of the course by their current reserves and membership base as well as whether or not the course will need to make improvements in the near future.  This allows the better capitalized, more up to date country clubs win while hurting the rest of the industry

b.      Buildings are getting old and need significant capex:  As mentioned before, the last golf course building boom was in late 1980s through the mid-2000s.  This means most of these country clubs will need a major renovation in the near future, which will mean that special assessments will be coming up for the member bases.  To compete against the better facilities, Clubcorp has spent $2MM on their renovation projects for each of their newly acquired clubs.  If we spread that out between 500-1,000 members ($2,000-4,000 per member, which is on par with their initiation membership assessment).  If the members can’t get everyone on board to cough up that special assessment, they could see membership decline because current members drop their membership or the assessment per member increase.  On the flip side if they pass on the renovation, the facilities will get tired and members could potentially use the facility less as it becomes more dated.

c.       Significant transactions already have happened:  The industry has already seen a net 800  private golf courses shut down since 2000 (now just over 4,000 private courses exist).  These private courses are now conditioned to the fact they need to either fix their own courses, sell out if that is even an option or file bankruptcy and close their course.  All of the above has occurred, and most of these are occurring below replacement cost. MYCC has already purchased 72 clubs in the last 6 years.

3)      Clubcorp’s Advantage

a.       Their size vs everyone else:  Clubcorp is the 800 lbs gorilla in this industry, literally.  They are 4x+ bigger than their next biggest US competitor.  They control less than 3% of the private course industry.  Overall the industry is still very fragmented as 83% are 1 course operations and only 21 entities have 6 courses or more, representing 7.5% of private courses, excluding Clubcorp.  Clubcorp also own 49 Business, Sports and Alumni clubs which isn’t a bad business, but isn’t their future growth driver and has become a much smaller part of their business.

b.      Professional management – With this size, the organization now has 20,000 peak season employees.  The company performs metrics on a whole host of factors, but one of the most important improvements come from the Food and Beverage side.  Most of the management team has some form of a bonus structure driven by EBITDA per club.

c.       Scale efficiencies – It goes without saying when you have 160 courses, they are able to have serious purchasing power when it comes to all sorts of goods, for example golf equipment and wine.  In addition, they do not need to have every position located at each course, which gives them an inherent advantage relative to their private course competitors.

d.      Capitalization – Being one of two publically listed golf courses give Clubcorp a huge advantage when it comes to acquisitions but more importantly for maintenance capex and renovations.  Clubcorp has a policy to never do a special assessment to their membership base, which is a strong membership selling point relative to their peers. 

e.      Network effects – We think Clubcorp’s network is hard to replicate.  For 128 courses, Clubcorp offers a network product called O.N.E.  Members can sign up for this product for another $50-75/month, which allows members to use other courses in the Clubcorp family.  This is almost 100% incremental as their courses already exist and its operational costs are largely fixed.  More importantly, when they acquire any other golf course property, this allows them to improve margins almost instantly.  If Clubcorp purchases another club and gets the average penetration of 47% of O.N.E. and assume $75/month ($900/year) fee, this adds another $423 of margin per average membership to the $8,000 average membership spend.  This instantly gives them 500 bps of incremental margin that their peers can’t factor into their acquisition model.  O.N.E. penetration rate continues to increase.

Why is the $20 bill on the ground:

1)      Golf industry is still in a rough patch:  No matter where we look, it seems like the industry still has negative statistics popping up, whether it is declining memberships or courses going bankrupt and shutting down.  In a perverse way, a declining industry is more beneficial to Clubcorp.  The less demand there is for the industry, the harder it would be for the least capitalized companies (which are the thousands of private courses that are member owned) to renovate and maintain their membership base.  Those courses will head into a death spiral while the better ones can potentially add to their member base.  Clubcorp should be able to acquire more courses at very good prices as well as those member owned courses will be open to being acquired.  That said, a stronger industry is welcomed too.

2)      Acquisitions masking operational improvements:  Clubcorp has acquired 63 golf courses since going public in 2013.  The margins have improved, but as their acquisitions accelerate, the margins appear to be stagnate as legacy Clubcorp courses’ high margins blend in with an increasing pool of very low margin acquired courses.  If you strip out the acquisitions, Clubcorp’s same store margins are now 200 bps higher than their blended margins.  As long as Clubcorp continues their acquisition clip, we should expect margins to remain in check despite improving performance overall.

3)      Questions about what is maintenance capex:   LTM 2Q15, Clubcorp generated $151MM in levered cash flow.  They are using $48MM for maintenance capex, $50MM for renovation capex and $35MM for dividends in 2015, the rest will go into acquisitions.  The part that is debated is whether the renovation capex is truly growth capex is it in reality necessary to maintain their membership base.  This is really tough to dissect as maintenance capex in the truest sense is the amount of money that needs to be spent to maintain the existing business.  Naturally the company has a high 80% retention rate for their members and it does have an SG&A budget that is expensed to attract members (near 100% retention rates are not realistic as people move and situations change).  Additionally, they show their case studies on their renovation projects where the post capex spend lead to higher membership dues as well as absolute members, which clearly doesn’t sound like maintenance capex.  But in reality, the company has to continue to make their facilities better to attract and maintain their customer base, so the assumption should be that a portion of their renovation capex is truly maintenance capex otherwise the company could have a membership attraction issue if other courses improve around them and the thesis is that they are the best house in the neighborhood.  As for numbers, the company disclosed on their analyst day they spent $60MM since 2000 on reinventions and it is leading to an incremental $11MM of EBITDA.  This increase comes through higher membership counts as well as higher dues.

4)      KSL selling down their stake:  KSL partners purchased Clubcorp back in 2006.  The funds that owned Clubcorp are now 9+ years old.  Since IPOing the company for $14 back in September 2013, KSL has stepped up their selldown of the company this year as the stock is now in the low $20s.  There should be one more 8MM share slug sold at some point in the future as they have done two secondaries in the last 6 months.  Some might find it unnerving KSL is selling, but in reality the funds that house Clubcorp are now pretty old and all private equity funds eventually need to sell out regardless of price.

5)      Membership deposits:  As Clubcorp acquires certain golf courses, 20-25 golf courses had membership deposits rather than membership initiation fees.  These deposits can become payable after a period of time, say 30 years after the first deposit.  This is truly a liability, however the deposits were taken a long time ago and the average value of the deposits are $600-1,000 per member according to IR.  If you think about the constituents that put down these deposits, this amount of money is rather insignificant to them today, which is why there is only $3-4MM per year paid out despite $150MM of current liabilities.  But in the most draconian situation, they could draw on the revolver and pay all $350MM back.

6)      Orphan industry:  Clubcorp is one of two public golf course companies (TWC Enterprises in Canada is the other).  The company is the largest golf operator by several multiples yet is only $1.5Bn in market capitalization.  When sellside uses comps to compare Clubcorp, there are some loose comparisons such as Six Flags, Sea World or Vail Resorts.  None of these are direct comparisons due to the membership nature of Clubcorp but there are some similarities as all these places have leveraged their footprint and maximized the value of their land.  In general, all of them are trading at multiples higher than Clubcorp.

What could it be worth:  Investors assume the company needs to acquire golf courses for this to have any value, but in reality with the amount of courses they have already purchased and consistent operational improvements can result in ~$40 stock price in 3 years using a 13x 2018 EBITDA multiple/factoring in the dividends (my estimate is $291MM for 2018 EBITDA without acquisitions, the company’s management team believes they will get to $300MM without any more acquisitions).  Currently it is trading at 11.8x 2015 EBITDA guidance (in both cases I factor in membership deposits as a liability).  Six Flags and Vail Resorts trade roughly in that 12-13x ratio.   


If we add $50MM/$60MM/$72MM of acquisitions in 2015/2016/2017, I calculate $330MM in 2018 EBITDA, or roughly a $45 stock price.  So clearly acquisitions don’t necessarily drive this (but of course there are a lot of assumptions that can goose those numbers higher).  Either way, there is a lot of upside and a decent dividend while one waits.


This Model Shows MYCC with Acquisitions 

  2014 2015 2016 2017 2018 2019
Total Revs                 884,155             1,025,629             1,092,575             1,168,218             1,251,624             1,351,372
Pro Forma Revs if Sequoia Purchased in 2013             1,001,599          
Percentage of Revs from Golf Course Division 78.6% 81.9% 82.8% 83.8% 84.7% 85.7%
Revenue Growth 5.6% 2.4% 6.5% 6.9% 7.1% 8.0%
Overall Adjusted EBITDA                 196,772                 236,237                 263,506                 298,552                 328,281                 363,655
Adjusted EBITDA Margins 22.3% 23.0% 24.1% 25.6% 26.2% 26.9%
Operating Income                   65,985                   84,393                 104,772                 132,154                 153,300                 179,006
Incremental Margin 7% 13% 30% 36% 25% 26%
Interest and investment income 2585                      2,585                      2,585                      2,585                      2,585                      2,585
Interest Expense -65209                 (54,262)                 (55,250)                 (56,129)                 (56,775)                 (57,530)
Loss from continuing ops before income taxes                 (28,137)                   32,716                   52,107                   78,610                   99,110                 124,060
Income Tax                   41,469                 (12,432)                 (19,801)                 (29,872)                 (37,662)                 (47,143)
Income from Continuing Ops                   13,332                   20,284                   32,306                   48,738                   61,448                   76,917
Share Count                   64,318                   64,961                   65,611                   66,267                   66,930                   67,599
EPS                          0.31                        0.49                        0.74                        0.92                        1.14
Dividend Rate                        0.52                        0.54                        0.55                        0.57                        0.59                        0.60
Share Price                      22.32                      22.32                      22.32                      22.32                      22.32                      22.32
Market Cap             1,435,578             1,449,934             1,464,433             1,479,077             1,493,868             1,508,807
Debt                 986,589             1,004,551             1,020,525             1,032,273             1,046,004             1,059,763
Member Deposits                 338,645                 356,645                 374,605                 392,524                 410,402                 428,237
Cash                   75,047                   75,047                   75,047                   75,047                   75,047                   75,047
Enterprise Value             2,685,765             2,736,082             2,784,516             2,828,828             2,875,227             2,921,760
Adjusted EBITDA                 196,772                 236,237                 263,506                 298,552                 328,281                 363,655
EV/EBITDA Multiple                        13.6                        11.6                        10.6                          9.5                          8.8                          8.0
Debt/EBITDA                          5.0                          4.3                          3.9                          3.5                          3.2                          2.9
Valuation at 13.0x EBITDA                        27.48                      32.09                      38.20                      43.12                      49.03
Cumulative Dividends                          0.54                        1.09                        1.66                        2.24                        2.84
Valuation                        28.01                      33.18                      39.86                      45.37                      51.88
Upside   25.5% 48.6% 78.6% 103.2% 132.4%


Disclaimer:  We may or may not own the security currently or in the future without notice.  Please use your own judgement and work when making your own investment decisions regarding this investment

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


Continued same-store growth and operational improvements

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