Ballantyne Strong Thesis
Here's my pitch
If you haven’t had the chance to dig deep into the research file I put together for BTN I suggest you read it before you read my thesis. You can find it here:
Disclosure: I own shares in BTN
Ballantyne Strong is a holding company that currently has a market value of ~57 million. The value of the investments and cash on the balance sheet is currently worth ~ 58 million. This price does not include the value of the operating business which sells movie screens and cinema services in the U.S. The operating segment, Strong Entertainment, has exclusive contracts with IMAX, Cinemark, and AMC theaters giving them over 65% market share in the U.S market.
I believe each of the investments on the balance sheet is undervalued and the movie screen business is worth at least $30-45 million based on operating metrics, competitive advantage, and market share.
The three investments on the balance sheet are ~10% ownership of GreenFirst Forest Products (ICLTF, GFP) which is one of the ten largest lumber producers in Canada, 20% ownership of FG Financial (FGF) a Reinsurance company that focuses on conservative underwriting and SPAC investments through their SPAC platform, and a $13 million Series A investment in Firefly, a DOOH advertiser that focuses on digital screens on top of taxis in the largest cities in the U.S. I will discuss my reasoning for undervaluation for each below.
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1/ ~10% of GreenFirst (ICLTF, GFP) valued at ~$29 million
Right now this company has a total enterprise value of ~$425-450 million. The company was formed through acquisitions in the last two years. Their most recent acquisition gave the company an additional capacity of ~750 million board feet bringing their total capacity of ~900 million. Some of the assets (~150 mil board feet) are awaiting a response from the Canadian Government to begin operations after being inoperable for some time.
The two variables driving this investment are lumber prices and utilization.
Prices are subject to demand and we have seen the age group of 30-39 years old pass the population of 20-29 years old thus putting a larger population entering the “home buying” age that the market currently does not have inventory for. We averaged around 1M housing starts from 2012-2016 and in 2020 and 2021 we averaged ~1.4M housing starts with the largest home builders forecasting stronger demand than they have ever seen for the next couple of years.
Okay, but what does that mean for GreenFirst?
The price of lumber has been on a wild ride since 2020 with the 2020 CME AVG at $500 per thousand board feet. The 2021 AVG CME contract was $884 per thousand board feet. These prices are well above the historical average of the past 8 years which averaged $344 for the years 2012-2019.
So we are entering a foreseeable future of strong housing demand looking for a sweet spot around 1.6M starts for the next couple of years to catch up to demand. What does this mean for the price? Normally, it means lumber mills like GreenFirst, would expand capacity to meet the demand, and thus the prices of the past would come back, but here is the kicker. There are fewer trees to meet demand.
Thanks to the Moutan Pine Beetle, a huge amount of capacity was harvested early to salvage the trees that were affected but still salvageable and this big harvest of “dead” trees took place for about a decade ending in 2015. But these forests will take decades to regrow.
We have less capacity than in the periods leading up to 2005 when the U.S demand for lumber peaked at~65 Billion board feet. This demand is low in ’09 at ~30 Billion and in 2019 it was barely ~50 Billion.
We are entering a demographic shift to keep homebuying demand around a healthy 1.3-1.6M starts for the foreseeable future.
Less supply, higher demand. I think it’s reasonable to think lumber will be priced at a higher than historically average, my estimate around the $600-700 range.
The assets purchased by the company have a history of underutilization and management has discussed on quarterly calls the focus of improving utilization, and the operators in place have a history of being able to do just that. With the fixed asset base any improvement to utilization rates can lower costs and these extra savings will flow to the bottom line. These utilization rates sit at about 85% now but should they get over 90% if management can work their magic.
Let’s say we get an average CME lumber contract of about $600 for 2022 and we see an average of 88% capacity (~769 M board feet) for GreenFirst we are looking at revenues ~$477 Million. Let’s use a prior operating margin for these assets of 20% which they achieved prior to they were acquired and we get ~$97 Million in OI with FCF looking higher due to adding back in deprecation.
If these conservative numbers can hold true for 2-3 years we are looking at a company throwing off ~$100 million in cash each year with a TEV of $450 million or an FCF multiple of 4.5. Should these numbers be too conservative, there would be plenty of upside. Management has massive skin in the game so there will be an incentive to use capital allocation for shareholders because they are the largest shareholders.
BTN’s stake is currently valued at ~$29 Million which could be worth ~$60-90 million in the next 3-4 years if lumber prices stay above average, utilization rates increase, and management uses capital to reward shareholders.
2/ ~20% of FG Financial (FGF) valued ~$5 million
FG Financial was created by the same owners of BTN is a specialty reinsurance company with a focus on underwriting conservative loss-capped reinsurance and investing in SPAC’s by sponsoring or co-sponsoring them. Acting as the sponsor/co-sponsor of a SPAC gives them access to “Founder Shares”. There is a big risk/reward ratio here. If they sponsor a deal and it falls through they lose their investment. If they sponsor a great company, their investment can multiply well above cost many times.
The management team of FG Financial has massive experience in the financial services field with the Chairman being Joe Moglia, who founded Ameritrade. This experience can be super useful for companies looking for guidance through the process of going public through a SPAC.
They have shown the ability to put deals together and have successfully completed two SPAC investments one in Oppfi (862K shares plus some options) and the other in Hagerty (533K shares plus options). These investments combined were done for around ~$5 million and the current equity value is ~ $10 Million. Both of them traded near all-time lows, thus showing us the power of owning founder shares.
If they are able to keep the trend up and do between 2-3 SPACs a year, with the same ROIs we are looking at a company 3 years down the road with a portfolio of investments hand-picked by individuals who have a successful track record. This “black box” has asymmetric risk/reward profiles and the ability to invest in “founder” shares gives each investment a margin of safety.
Trying to forecast the value of this is VERY HARD but I am confident saying that the value of FGF will probably increase above the current value of ~$5 million in the coming 2-3 years.
3/ ~$13 Million Private Investment In Firefly
A few years ago BTN CEO Kyle Cerminara exchanged a portion of the operating assets in Ballantyne for ~$13 million of equity in a startup company called FireFly, an Internet-connected, high res smart screen on taxis and rideshares in the most impactful markets in the US, including LA, San Fran, Chicago, Miami, and New York. It is a first-of-its-kind street-level media company. Companies are able to target their audience more effectively and drivers are able to earn more by employing the screens on top of their car, around $300-400 more per month.
Firefly has proceeded to grow revenues and raise money in later funding rounds from other venture capital investments. BTN was able to be one of the largest shareholders along with Google Ventures and NFX prior to the extra funding. They also recently acquired a large competitor giving them over 10K new screens and adding this many more nodes into a “network” business increases the value right away. See, Metcalf’s law.
This $13 million investment sits on the balance sheet at cost, unlike the equity investments which are marked to market. Based on the accelerating revenues and later funding rounds I wouldn’t be surprised if this stake is severely undervalued. By how much? I am not entirely sure because it is a private company but I don’t have to know with accuracy given the current market price of BTN.
Let’s assume the stake is worth at least the cash they put in ~ $13 million
If we add all of these investments up plus the $10 million cash on the balance sheet we get a valuation of ~$57 million. Assuming we value FireFly at cost.
What We Get for Free
Strong Entertainment, a provider of movie screens in the U.S with a >65% market share and exclusive supplier contracts with IMAX, Cinemark, and AMC.
This business has seen hard times through the 2019-2020 year. In ’19 they had a roof collapse in their manufacturing warehouse which caused supply disruptions and that year they produced a loss on operations of ~$(2.5) million, then COVID hit in 2020 which produced an operating loss of ~$(6.6) million, most of these losses came from admin expenses of ~$8.5 Mil in ’19 and ~$6.5 Mil in ’20.
But there is light at the end of the tunnel. In the most recent quarter, they showed a close breakeven operation in a harsh environment with some solid tailwinds behind the business.
There have seen massive growth in their new curvilinear screen segment which sells screens to theme parks, museums, and militaries for training. This segment is looking to double sales from the prior year.
The transition to a more services-based revenue model, think the blade and razor business. They sell the screen then the service contracts that go along with it. These services revenues have great recurring characteristics and the services revenue has increased 43% YOY with reoccurring revenue up 41% YOY.
Cinemas have been transitioning to a more outsourced services model as their projection systems become more complex with the latest laser projection technology.
There is a large backlog of movies that were not released due to COVID.
They recently (Jan ’22) inked a deal with AMC to be the exclusive provider which is a huge contract that should increase revenues and give them a larger share of the market.
Now I am aware these sales numbers come from a 2020 baseline which was severely depressed so the numbers are likely showing a return to normalcy rather than explosive growth. But let’s say they are able to get back to the operating performance of their past in ’17 and ’18 where they produced an operating income of $10 million, and based on the current market price for BTN we get this asset for FREE.
What is it worth? I think using a conservative assumption this business segment could fetch ~ $30-45 million if they are able to produce around $10 million in operating income giving them a conservative 3-4x multiple on EBITDA. I believe the stickiness of the products and the market position gives them a premium to add in as well.
Management is aware of the misalignment of price and value and has decided to move forward with an IPO of the Strong Entertainment division during fiscal 2022, which should cause the value of this asset to realize which might be hidden due to the complexity of the holding company nature.
Current Sum of the Parts Valuation
1) Strong Entertainment: ~ $30-45 million (My Estimate)
2) GreenFirst Investment: ~$29 million (Market value)
3) FG Financial Investment: ~$5 million (Market value)
4) Firefly: ~$13 million (Cost on balance sheet)
5) Cash: $10 million
Total Valuation: ~$87 million - $102 million
Diluted Shares Outstanding: ~18 million
Implied valuation per share: $4.83 - $5.66
Current Share Price: ~$3.00
These numbers are shown with a conservative bent and do not take into account where the value of these assets could be over the next 2-3 years. Should these numbers prove to be conservative the upside will take care of itself, I care more about the downside which from here I believe is limited.
Management owns around 33% of all the shares and has shown they care about the share price. In fact, on a recent podcast the chairman, Kyle Cerminara, said he makes these investments to “make the share price go up”. You have to appreciate the candor.
The IPO of Strong Entertainment in ‘22 to unlock the value of the asset
Performance of the underlying investments
Possible “exit” event for FireFly
Disclosure: I own shares in BTN
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