Acquisition strategy and a big swath of federal net operating tax-loss carryforwards, which could pay off for investors in Signature Group.
By David Englander
Last week, this column highlighted the opportunity present in the shares of Covanta Holding, pointing out that the waste-to-energy company (ticker: CVA) has long benefited from its association with investor Sam Zell.
Zell is well known for his success at turning around businesses, often becoming involved at the bottom. Investors usually have done well to tag along.
Another Zell-affiliated company worth mentioning is Signature Group Holdings (RELY). Signature, with a stock market value of just $205 million, is in the early stages of its growth. It traces its roots to a subprime mortgage originator, Fremont General, which filed for bankruptcy in 2008. It emerged two years later with significant federal net operating tax-loss carryforwards, or NOLs, which now total $930 million. The strategy, since Zell gained control in 2013, is to make acquisitions that will enable the company to take advantage of its NOLs.
In October, Signature struck its first major deal, paying $525 million for the aluminum-recycling business of aluminum producer Aleris. The acquisition nearly doubled Signature’s market value, and takes its annual revenue from less than $50 million to $1.5 billion, and its expected earnings before interest, taxes, depreciation, and amortization from less than $1 million to $85 million. At a recent $7.61, the stock, which was listed on Nasdaq on April 21, looks undervalued.
ACCORDING TO ESTIMATES from Mike Crawford, a B. Riley analyst, the stock trades for an enterprise value of 6.9 times estimated Ebitda. That’s a discount to the 7.5 multiple for AMAG Austria Metall (AMG.Austria), a comparable business, and doesn’t reflect the value of the NOLs. Signature will need to make more acquisitions to realize that value. Crawford is the only analyst on Wall Street who covers Signature. Increased analyst coverage could help the stock price to rise.
Zell’s Equity Group Investments firm controls 7% of Signature’s 27 million shares outstanding, and two of his longtime associates are on the board. Following a proxy contest, Craig Bouchard became CEO in 2013, after a career spent building up industrial and metals-related businesses.
Known as Real Alloy, Signature’s new aluminum-recycling business buys scrap aluminum and converts it into usable metal. The world’s largest such business, with 24 plants, Real Alloy sells most of its finished material to the auto industry. It should benefit from increased aluminum usage in cars and trucks.
In March, Aleris reported strong December results, noting favorable price spreads between scrap and finished aluminum. That’s important to Real Alloy, which acquires about 50% of its scrap on the open market. The business will generate nearly all of Signature’s revenue and Ebitda in 2016.
Signature paid 6.3 times Ebitda for the acquisition, a good price. The company plans more deals, with a target of acquiring $200 million in Ebitda, which would let it use its tax losses in the next seven to 10 years. Management favors businesses with proven managers and high profit margins, across sectors including food, energy, and transportation.
In an April shareholder letter, CEO Bouchard wrote that the “goal is to make astute long-term investment decisions. There are no quick kills.”
B. Riley’s Crawford estimates that Signature will acquire $200 million in annual Ebitda by 2016, and monetize its net operating losses by 2020. If that’s the case, shares could double over the next five years. Zell’s track record speaks for itself, and that bodes well for Signature.