|Shares Out. (in M):||129||P/E||0.0x||0.0x|
|Market Cap (in $M):||295||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||132||EBIT||80||85|
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The Brick ("BRK" or the "Company") presents a very compelling long opportunity as it trades at a severely depressed valuation (22% FCF yield, 4.5x EV/ EBITDA-capex) yet is a growing, industry leader with low 40s ROIC. There is significant upside to equity of +75% even in a flat growth scenario with sound downside protection.
Reasons for Mispricing
A number of non-fundamental factors have obscured BRKs underlying performance and have led to a significant disparity between market price and business value. (All prices C$.)
Near-term catalysts to value realization include: 1) broader market awareness for the removal of warrant overhang - FD shares from 171M to 129M; 2) continued share repurchases - another 5% to be repurchased starting this month; 3) refinancing of 12% senior notes; and 4) reinstatement of dividend - with $136M in excess cash, both refinancing and dividend to be addressed at August BOD meeting per management. Prospective medium-term catalysts include: 1) additional analyst coverage; 2) appreciation for the quality of the business, its management and the fact that BRK is now a demonstrated industry leader; and 3) improved corporate communication.
BRK, primarily operating under The Brick and The Brick Mattress brands, is one of the largest household furniture retailers in Canada by sales and the largest if you exclude the lower end (eg. Walmart). The Company has 238 owned stores and 54 franchise locations.
Leading up to 2008, The Brick pursued an aggressive sales growth strategy to gain market share. Management at the time was less focused on product mix, lacked effected inventory and overall demonstrated poor fiscal discipline. Weak management compounded by the economic downturn caused BRKs performance to suffer severely. Facing an imminent covenant breach on its senior notes, tightened vendor terms and likely insolvency, the Company was recapitalized in May 2009. This transaction resulted in the assumption of $120M in12% notes and the issuance of 121M warrants to Fairfax Financial and BRKs former CEO and Chairman, Bill Comrie. From a peak of $9 in 2007, the stock incrementally sank to its present $2.30 as the warrants have remained an overhang on the stock price.
To support a turnaround and refocus the business, BRK overhauled its management team. This included the addition of Bill Gregson as CEO (formerly Reebok) in July 2009, Violet Konkle as COO (the former CEO of Walmart Canada) in February 2010 and Dave Merkley (the former CFO of Sears Canada) in June 2010. Konkle will become the CEO in January 2012. This was a huge upgrade to the management team, as evidenced by the subsequent financial performance and operational improvements.
In December 2010, the Company converted to a c-corp to more appropriately match its financial profile as a retailer, improve operating flexibility and remove the punitive tax consequences of being a unit trust not making distributions.
On both an absolute and relative basis, BRK is trading at a substantial discount. The Company trades at an EV/ 2011E EBITDA multiple of 4.2x (assuming 129M FD S/O) versus comps at 6.5-8x despite BRK being an industry leader with the strongest growth profile of the group. If BRK were to trade in-line with its peers at 7x EBITDA, the implied price per share would be $4.50, a +90% premium to current. The Company is trading at an LTM, 2011E and 2012E FCF yield of 23.4%, 26.1% and 25%, respectively. This assumes 2% sales growth, 100bps of improvement in EBITDA margins and annual maintenance capex of $7M. This seems like a very appealing price for a growing business generating 40% ROIC with a high quality management team and a stable source of income from its financial services segment.
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