B Riley ($RILY) — 4Q20 (1/17/21)

Most of my followers on Twitter already know the news here… There were a few major announcements lately…

A few things to unpack here…

The Q4 results are great but they do include some one-timey investment gains from stock price performance on microcap holdings in their equity portfolio. Strip that out and they give you “operating EBITDA” as a proxy for performance of the core businesses. Below are sales and EBITDA performance through 9/30/20 — lots of 2020 performance driven by the “episodic” pieces of the capital markets business.

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The equity raise seems just plain smart after a huge rally this year from $20/sh to $50/sh. And it’s just enough to avoid any real dilution. The balance sheet looks mostly fine as it stands today and the NHLD deal won’t cost much, if any, cash. If you ignore securities as part of the net cash/debt calculation, as I do, then net debt is ~$740m. There’s another $410m in securities (as of 9/30) and $330m in loans receivable — but both of these balances are not readily liquid and shouldn’t be valued as part of “net cash on the balance sheet.” More importantly, if operating EBITDA is somewhere between $115-300m per year and interest expense is $65m per year then the debt position seems fine. The equity raise could be simply a well-timed move after the price rally or intended for another acquisition. What’s really incredible is that management continues to buy in at higher share prices (including the equity raise at $46!).

Last up is the National Holdings deal — this piece of news trumps all other pieces to me. I’ve followed this business since Riley initially took a controlling stake a few years ago. They released their 10-K for fiscal 2020 not long ago so let’s take a look at what Riley is getting here…

Consider the Capital Markets division within Riley as it stands today — it has been volatile as it contains some “episodic” pieces of revenue such as investment banking and trading — but generally margins have been >10% and in some cases >20-30%.

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National brings over $200m+ in annual revenue from a mix of recurring and episodic sources. The “crown jewels” as I see them are the investment advisory and tax prep/accounting businesses — these generate $40-45m in high-margin / recurring revenue and are likely worth >1-2x revenue in their own right. Banking, broker commissions, and clearing services are revenue streams that likely need optimizing under the Riley umbrella.

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Let’s say Riley decides to walk away from 10% of this revenue as low-to-no margin leaving $200m or so. At the typical 15-20% segment margin under Riley today = $30-40m in segment income from NHLD. That’s $1.10-1.50 per share to Riley! This is still a huge “if” but I’m sure there are plenty of duplicative overhead, corporate, public, etc. costs to eliminate in this merger.

National reported “adjusted” EBITDA of $5m in 2020 and $12m in 2019. There were plenty of add-backs but there’s likely plenty more to cut following the acquisition. For example, National’s CEO, CFO, and COO raked in a combined ~$5.5m in cash and stock during 2019 alone…

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The balance sheet they’ll pick up is also pretty stellar…

Plenty of cash ($27m) and securities ($5m). Book value is $46m for an acquisition price of $44m so Riley paying ~0.95x book value for the business.

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To recap…

  • Riley is buying remaining shares of National Holdings for ~$24m and in return adds $200m+ in revenue and $46m book value — 0.05x implied EV to sales acquisition multiple!
  • Riley trades at >2x EV/sales — market cap $1.4bn at $49/share — huge opportunity for value creation with NHLD if performance improvement to Riley levels (same revenue multiple = $450m EV vs. $12m implied EV at acquisition)
  • Operating EBITDA $300m in 2020 vs. $114m in 2019
  • After equity offering, Riley market cap at $1.4bn + $680m in net debt — excluding stocks and loans — $2.08bn EV / 6.9x EBITDA
  • Stocks and loans total $740m at 9/30/20 — most of these have appreciated a ton since then — this totals $26.50 per share
  • Valuation
    • At 7-8x $200-300m in operating EBITDA = $44 per share for the operating business net of debt
    • Add in $800-850m in stocks and loans = another $30 per share for investments on the balance sheet
  • Total value at ~$74 per share before any future improvements or investments from the $50 current share price is ~50% upside even after the major run…