|Shares Out. (in M):||6||P/E||0||0|
|Market Cap (in $M):||420||P/FCF||9||0|
|Net Debt (in $M):||145||EBIT||0||0|
Trade shows can be great businesses that frequently possess network effects, low capital requirements, and which offer strong business development IRRs to participants. There is often no “red ribbon” in a category vertical and dominant shows can exhibit winner take almost-all economics, with extremely high margins and pricing power after achieving “must-attend” status. Since growth frequently results from more show participants and higher prices, it is extremely value-accretive to the event organizer.
MCH Group is a trade show operator based in Basel, Switzerland. Its most important shows are Art Basel (Maimi, Basel & Hong Kong - two of which are among the world’s premier art fairs) and BaselWorld (the world’s largest watch & jewelry show). MCH also has a portfolio of smaller events which are each individually less impactful to the bottom line.
MCH currently appears to trade near a ~10-12% depressed FCF yield.
The Company does not break out financials for specific shows but I believe Art Basel and BaselWorld dominate the business economics and that art fairs represents their biggest long-term opportunity. Art Basel is a fantastic brand in the art world, should have exceptional economics, and likely has untapped pricing power.
High end art fairs are interesting businesses. Art Dealers pay to procure space and show their best art to a large group of the ultra rich. Dealer attendance signifies legitimacy in the upper echelon of the field, appeases their star artists (prestigious showcase), and enables them to court new wealthy collectors. The business is well explained by Don Thompson in “The $12 Million Stuffed Shark – The Curious Economics of Contemporary Art” which I’m liberally quoting below. While the book is dated (2008), Basel fairs have subsequently grown in both attendance and significance.
“Fairs such as Art Basel are industry trade shows where dealers come together for several days to offer specialized works. The work offered at the best contemporary fairs equals in quality and quantity that offered by auction houses in an entire selling season.
Today there are four international fairs whose branding is such that they add provenance and value to contemporary art. They are to art what Cannes is to movie festivals.
Maastricht, the two Basel fairs, and Frieze are the "must-see" fairs, where dealers match auction houses in quality and speed of sale and payment. These attract consignments that might have gone to evening sales at Christie's or Sotheby's. They feature the superstar dealers who come because the best fairs draw the best collectors. The collectors visit because superstar dealers are showing. It is what economists call a virtuous circle or network effect; it leads to a self-perpetuating oligopoly among a few top fairs.
One dealer described his thinking: ‘If I don't go, people will think the fair would not accept me.’ To ensure that collectors perceive a gallery as important, attendance at the most prestigious fairs is a necessity. It is also necessary in order to keep happy those gallery artists who insist on being featured at the best fairs.
Art Basel Miami Beach, known as Basel Miami, began in 2002 and by 2005 was the largest contemporary art fair in the world, a five-day carnival each December of partying, sports and entertainment celebrities, and conspicuous consumption, with art viewing almost secondary. Columnists call this the "all singing, all dancing art fair." It accepts 200 exhibitors from 620 applicants, galleries from 30 countries, Moscow to Los Angeles. The all-in cost of mounting an 80-square-meter booth is about $110,000.
NetJets, which sent 216 flights to Miami for the 2006 fair. That number exceeds what the company provides for American football's Super Bowl, and is second only to the 240 flights it sent to the 2006 Academy Awards.”
BaselWorld (watches) is also an excellent show but is currently suffering from a number of headwinds in that industry and some event specific issues. Exhibitor & attendee numbers at the show were down in 2017 and are unlikely to recover next year. I think these trends are cyclical but an investment thesis does not need to rely on that assumption.
Those issues and a strong Swiss Franc have negatively impacted MCH and lowered the likely 2017 EBITDA to ~65-70m CHF from over 80m in 2015 (the last comparable show calendar – odd years are weaker).
MCH recently rebuilt its owned Basel convention center and, since D&A is mostly related to new real estate, there is a large gap between depreciation and required capital expenditures. Additionally “due to a tax agreement with the Canton of Basel-Stadt, the income tax payable by MCH Swiss Exhibition (Basel) Ltd. is negligible.” Switzerland already has a pretty low tax rate and MCH Group pays way less than that (although this will sunset in 2021). The above factors and attractive business qualities lead to very good cash conversion and EBITDA in the ~65-70m CHF range should produce Free Cash Flow in the ~45-50m CHF range (I,T, and MCX are each very low at ~4m, ~3m, and ~14m respectively).
On a market cap of ~420m CHF this equates to an ~10-12% FCF yield for a largely unlevered business in a highly attractive industry with globally relevant brands. This yield seems exceptionally high compared to its peer group, where UBM, ITE, and Emerald (or Ascential if you’re willing to draw that analogy) trade at very high multiples.
Interestingly, the company also trades close to its tangible book value, most of which is comprised of their convention center in Basel that they use and rent out. Their land and buildings are carried for a depreciated ~510m CHF but have a cost of ~920m and are insured for ~1,175m. These figures are obviously all in excess of their ~420m CHF market cap (~565m EV) and this is unusual in the event space or the market in general (though this real estate is unlikely to re-purposed).
If MCH were to trade at a ~7% FCF yield (still less expensive than the broader market and significantly less expensive than peers) the stock could appreciate meaningfully. In the long term, if the investment return approximated the ~10-12% FCF yield plus ~2-3% from value accretive growth (no reinvestment required for certain growth such as pricing power or exhibitor expansion in Art Basel or recovery at BaselWorld) that would result in a pretty satisfactory outcome.
Unfortunately capital allocation is an area of weakness and MCH is controlled by the Cantons of Switzerland for legacy reasons. This isn’t ideal but is not that unusual in many types of European assets (Zurich airport is largely owned by the Canton of Zurich and that trades just fine). With the newly refurbished exhibition hall and total domination of the local industry there isn’t much remaining opportunity for new capital investment in Switzerland. Earnings will probably go towards tuck-in M&A which has pros and cons. This may modestly raise the FCF yield though since it is very cheap to borrow money in Switzerland.
The more logical M&A is in the art fair space and they have done a number of incremental deals here for regional fairs. However, MCH also wants to grow its smaller “live marketing” division that offers live event services (booth setup, event design and management, etc) and recently did a meaningful deal in this category. This is a much tougher business and I’d prefer they didn’t grow the segment acquisitively. Fortunately management is pretty conservative and is not looking for any “bet the company” deals and I think they’ll spend some time digesting this last purchase.
So MCH appears to sell for a meaningful discount versus its exhibition peers, its real estate value, and the general market despite having globally dominant category brands in a very good industry. As such, I believe MCH presents an attractive risk-reward.
As a side note: I’d like to thank Coffee for all of his thoughtful write-ups and comments over the years but especially those on exhibitions.
Have ownership interest in MCH Group at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of MCH Group without notice for any reason at any time.
Perhaps people decide they want to own part of Art Basel at ~8x FCF? Great excuse to attend…
|Subject||Maybe not worth much more than current price ?|
|Entry||09/12/2017 04:44 AM|
Thank you for the write-up.
Looking at the last 10 years, EBITDA hasn’t grown, hovering around 65mm CHF, in a band of 60-80mm CHF most of the time. And the stock trades less than $200K on a daily average. Why exactly is it worth more than a 10% yield given it doesn’t grow, is controlled by misaligned shareholders, and one is stuck in the position due to illiquidity...? what are we missing here?
|Subject||Re: Re: Maybe not worth much more than current price ?|
|Entry||09/14/2017 02:14 AM|
Do you have a sense as to why EBITDA has been range bound over the last 10 years ? and what is different in your mind going forward ?
The reason I ask this question is that often we tend as investor to believe the future is going to be better than the past. However most often when one sees a mean reverting business in terms of profitability, it tends to relate to something structural that overrides tactical adjustments made by management in the short-term. So one needs very high conviction that "this time it is different". So I'm wondering if:
a. Do we have a good sense of why the past shows no growth in EBITDA (as a prerequiste to understanding the future) ?
b. What is changing structurally in the business relative the past that will allow EBITDA to grow sustainably beyond management tweaking operations here and there?