B Riley ($RILY) — 2Q21 (8/1/21)

Q2 results are out and the momentum continues! Quick summary:

  • Revenue grew 100% YoY — thanks to the National Holdings acquisition
  • EBITDA from operating businesses also grew 100%
  • Investment gains chipped in ~$33m during Q2
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Balance sheet…

The past few years have been mind-boggling as Riley has executed…

  • The balance sheet has ballooned in total assets from $265m to $4.1bn (65% annual growth).
  • Ratio of goodwill/intangibles has actually declined from 34% of assets to ~11% at 2Q21 — indicating they haven’t been overpaying for acquisitions or new assets.
  • Leverage isn’t out of control despite the headline ~$1.5bn in gross debt — debt/equity has been right around 2x since 2018.
  • Book value has grown ~33% per year from 2016-2Q21.
  • Securities invested on the company’s own balance sheet has grown to ~$1.3bn at 2Q21 — this is a huge portfolio for a $1.9bn company!

RILY balance sheet 2016-2Q21

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Segment performance…

Segments have been modified following the Q1 closing of National Holdings:

  • Capital markets — includes brokerage and investment banking
  • Wealth management — split out from previous capital markets segment
  • Auction and liquidation — unchanged
  • Financial consulting — includes the old appraisal segment and advisory portions of old capital markets segment
  • Principal investments
  • Brands
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The latest acquisition of National Holdings added a huge slug of revenue — $245m trailing 12-month revenue prior to closing — a lot of this was low/no margin that RILY will need to clean up.

One area in particular was the addition of the National Holdings wealth management division. Generally viewed as a good business with sticky revenue and high margins, it lost money in Q2… But management is confident they can build it up to 10% margins over the next year and perhaps better…

2Q21 earnings call comments RE: Wealth Management

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Steady state business…

When asked what the “steady” side of their portfolio looks like, here’s what Bryant had to say:

Steady business comments from 2Q21

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The “steady” businesses consist of: 1) wealth management; 2) advisory and appraisal services; 3) principal investments (magicjack and United Online); and 4) brands. Put these together, and you have ~$125m in run-rate EBITDA.

Good news is that there are likely more of these to come:

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Updated valuation…

It’s time to start thinking about B Riley using the same “2-column” valuation method applied to Berkshire Hathaway stock as popularized by Warren Buffett.

B Riley has about 28m fully diluted shares outstanding. At $70/share, it’s a $1.96bn market cap.

In calculating enterprise value, the company has a slide where they lay out all the cash and investments they own as well as outstanding debt. This gets to a “net cash” position of $568m at 2Q21.

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I don’t like this approach as plenty of these assets are not liquid and arguably represent a different “line of business.”

My approach is to take all debt — $1.47bn — and cash on hand — $297m — and combine them to get a true operating net debt balance of $1.17bn.

Then, completely separate from that, Riley happens to own stocks, bonds, LP interests, minority stakes, and loans receivable (net of shares sold short) equal to ~$1.74bn. Call this the “investment portfolio.”

When I value the company — I take a 2-column approach similar to Berkshire Hathaway — value the operating business and value the securities portfolio, then add them together.

The operating business has trailing EBITDA of $409m. A big chunk of this falls into that “episodic” income as Bryant Riley likes to describe it. Let’s ignore future improvements and focus on the business as it is today…

  • Bryant described the steady portion of the business as a $125m run-rate EBITDA segment. Using a 10x EBITDA valuation gets us $1.25bn in value for the steady business. This is lower than a market multiple so likely conservative.
  • Based on trailing EBITDA of $409m less the $125m in steady EBITDA gets ~$285m in episodic EBITDA. This is the stuff that can be up-and-down lumpy so very difficult to place a multiple on it. Let’s use a very low 4x multiple to reflect this volatility = $1.14bn in value for episodic business.
  • Take these 2 segments (steady and episodic) and you get $2.39bn in enterprise value for the operating business.
  • Back out operating net debt of $1.17bn and we get $1.22bn in value ($43.60 per share) for the operating business.
Tack on the $1.74bn ($62 per share) for the securities portfolio (net) and we have total value of $105 per share…

An alternative view is that the current share price ($70) implies the operating business is valued at ~3.4x EBITDA. [$1.96bn market cap less $1.74bn net securities + $1.17bn net debt divided by $409m trailing EBITDA.]

I’m not taking any consideration for future improvements in the National Holdings acquisition, investment gains/performance in the securities portfolio, or higher episodic earnings…