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FG Group Holdings: Multiple Ways to Win
The current value of the investments, cash, and real estate equals ~$81.7M-$90.7M, the book value sits at ~$42.7M and the market cap is $34M. Will the sum-of-the-parts thesis ever work?
Thank you for reading WSG Research! Here you can find the analysis, if you are interested in learning more you can download the PDF report which includes the analysis and a deep dive on FG Group Holdings. Thanks for reading and enjoy!
At the time of this writing, WSG does own FGH shares.
I wrote the following in Ballantyne Strong update on May of 2022 on the Strong Global IPO:
“This IPO is going to give BTN an inflow of cash through the sale of ownership. I hope leadership wouldn’t go out and sell a portion of the company we own for less than its intrinsic value which I would conservatively ballpark at $32 to $45 million.”
A year later Ballantyne has been renamed to FG Holdings (FGH) and Strong Global Entertainment (SGE) completed the IPO process when 14.3% of SGE was sold to the public at $4 a share giving the entire company a value of ~$27.9M. The valuation was a 9x multiple of the trailing 12-month EBIDTA and given the recent market environment for small-cap companies, I am not surprised the IPO came in below expectations. However, I think the price was close enough to intrinsic value that shareholders didn’t get a bad deal.
From a strategic standpoint, getting on the public market now offers the flexibility to respond quickly to a better environment where they could sell more of their stake faster than trying to IPO a larger piece of equity. The price to pay for gaining this flexibility was a smaller IPO that wasn’t the highest dollar. Time will tell if it was worth paying.
During the past 12 months, the company continues to act with two goals in mind. 1) Position the enterprise for the future and 2) get some recognition for the value underneath the hood. The increased investment in FGF, the growth plan for SGE, and the partial IPO of the segment give us hard evidence supporting those statements.
The current value of the investments, cash, and real estate can be ballparked between ~$81.7M-$90.7M, the book value sits at ~$42.7M and the market cap is $34M. Sum-of-the-parts story has been the stable thesis for the better part of a year and a half now and hasn’t worked yet. So, the question begs, will it ever?
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The Person Who Draws the Line
SOTP has always been an investing topic that lends itself to critics. When you have your feet planted in the idea of buying stocks for less than they are worth SOTP situations are simple to understand. You add up the values of each segment and if the total is worth more than the market cap you might be onto something.
But, having a SOTP value greater than the market cap doesn’t always equate to an increase in share price. For a SOTP thesis to work you must 1) be accurate on your forecast of value and 2) need capital allocation help from management to unlock the value.
When you invest in situations like these you need someone on the inside who is willing to go in and do the work to unlock the value. The memory of when Warren Buffett sent in Henry Bottle to draw a line on the warehouse comes to mind. For a value situation to play out, the vision and desires of the people on the inside must match those on the outside.
Kyle Cerminara is the man on the inside for FGH and since taking control of the company in 2015 has taken multiple steps to unlock value. He has traded taxi tops for equity, turned a cash shell into one of the largest lumber mills in Canada, purchased 60% of a financial business that has shown the potential to be a serious value creation flywheel, and sold 14.7% of their only operating division to the public so the entire value was no longer hidden.
On a podcast with Bobby Kraft, Kyle was asked why he goes through the effort. His answer was, “To make the share price go up”
If this answer was given by someone who had a sliver of equity, I would roll my eyes but Fundamental Global, the investment partnership behind the controlling stakes founded by Kyle and industry veteran Joe Moglia, owns a lion's share and their track record is on the line. Their reputation is on the line. If large insider ownership doesn’t solve the agency problem, then I struggle to find a better way to align shareholders with management.
Ways to Win
FGH is one of the simpler holding companies to size up because three out of the four major components are public entities. The remaining one is a private investment to which the value can only be derived from an educated guess based on the carrying cost on the balance sheet and any new information we get from the company.
With the company currently trading for ~80% of book value and ~50% of investments and cash the implied expectations of these investments are negative. This is where the market and I differ in opinion.
~85.7% of SGE valued at ~$20M
In 2022 SGE earned ~$3M in EBITDA. The company is the sole provider of IMAX screens and has exclusive contracts with large movie theater operators. They have grown their technical service offerings over the past 3 years and are capitalizing on the upgrade cycle inside theaters to laser projection systems. In addition, they have launched a content creation division titled Strong Studios where they can earn short- and long-term revenues from production fees and long-term licensing royalties on produced content sold to streaming platforms.
The industry is still recovering from a COVID environment with box office numbers on an upward trend and could retest prior levels within the next two years. Given the upgrade cycle, the growth drivers of curvilinear screens, and content creation, over the next 3-4 years we could see EBITDA grow to ~$4-5M. A 9x multiple on that gives a total market cap of around $36-45M which would translate to ~$30-38M in value for FGH.
~60% of FG Financial (FGF) valued at ~$12.6M
FG Financial was born out of 1347 Property Holdings and was renamed in 2020 to “better reflect the future of the company”. Right now, FGF has a book value of $38M and a market cap of $21M.
The company runs on a flywheel of writing loss-capped reinsurance, making investments by sponsoring SPACs and through their merchant banking division, which then leads to more capital under management, leading to more loss-capped reinsurance writing ability.
This flywheel has been spinning for two years and as of the most recent quarter they have written 7 reinsurance contracts, have had 4 successful SPAC combinations, and 2 merchant banking investments.
The game of SPAC investments and merchant banking is about slugging percentage and the people swinging the bat, Larry Swets, Kyle, and Joe have decades of industry experience. This network and know-how has led to deal flow and the more deals they do, the better a chance of hitting a home run. There will be plenty of strikeouts and singles but with enough time the flowers will make up for the weeds.
If this company trades at its current book value FGH’s share will be worth ~$22.8M, if the book value of the company grows and gets a 1x BV multiple, it’s icing for FGH.
~8.4% of GreenFirst (GFP / ICLTF) valued at ~ USD 13.7M
GreenFirst is a collection of sawmills with 510M board feet of annual production based in Ontario. Over the past year, the company has been making moves to divest non-core assets and sell some more valuable ones for the right price. During the last quarter of 2022, they did two large transactions selling 2 Quebec Sawmills for CAD 90M and sold 203K acres of forest for $49M.
For those keeping score, the acquisition was done with an all-in price of ~$300M, and in two transactions they got ~$140M back.
After selling off those assets the company is made up of the following:
4 Sawmills with 510M board feet of annual capacity with cut rights held on the balance sheet well below replacement cost
4,000 acres of property, with key developable lots in Kenora, Kapuskasing, and Timmins
An overfunded pension
~$82M in deposited duties which are being held until August when the rate is reset and will likely result in a check sent back to the company, I have seen estimates as high as 80%.
$128M in tax loss carryforwards.
Right now, FGH and Fundamental Global hold ~16.6% of the outstanding shares in GreenFirst and during the 4Q call for FGH of 2022 Kyle said, “We do expect GreenFirst Forest Products to be monetized at some point in 2023. That's our thesis.”
Now even if it takes longer than 2023, the signal here is the move to monetization. The continuing operations at GFP produced ~$49M in EBITDA in 2022 with the backdrop of a harsh environment. I won’t get into the entire lumber thesis here but it’s important to know 2 things in regards to GreenFirst.
1) If the lumber market does trend higher, the cash from operations will drown the $150M of capital left in the investment.
2) Management is looking to monetize. This could mean a sale of the entire company or even a capital return program that would prove lucrative for owners.
In either scenario, GFP should prove to be worth more, if we see a double in the share price FGH’s share would be worth ~$30M.
$13M Private Investment in FireFly.
This investment is one where the underlying value is masked by the lack of disclosure due to the private nature of the business. I frame it by thinking about the carrying amount on the books and then using any new information after the investment to give either a plus or minus. In 2021 they added 10,000 new taxi tops in an acquisition and due to the network effects of this business, it’s a plus in my mind. Since then, they have touted their data platform and the ability to better target customers making campaigns more effective.
If the result here is to have an exit for this company in the form of an IPO or maybe they get acquired, should this happen I bet the result is a larger number than the $13M. Again, if we see a double, that’s $26M.
~$15-$24M Real Estate Portfolio
In addition to its business investments, FGH owns 2 commercial properties.
Joliette Plant in Québec
An 80,000 square foot building with twin 90FT coating towers. FGH leases the building to SGE on a 15-year triple net lease. Rent for the first 5 years is $415,000 and then increases by 1.5% a year for the remainder of the lease. Using a cap rate ranging from 4-8% we can conservatively value the building between ~$5.18M-$10.3M.
Digital Ignition Building in Alpharetta, Georgia
Located 15 minutes from Atlanta, this 43,000 SGFT space on 11 acres of land was purchased by FG in May of 2022 for $8.2M and financed $5M of the purchase price with debt. Today the building is listed for $11M here: https://rb.gy/v8kes
I estimate the building is worth somewhere in a range of $10-14M based on the location, growth in the area, and the listing price above. Using this range values FGH’s equity in the building between $5-9M.
Digital Ignition is a co-working space that is specialized to serve those who are starting new businesses in the technology space. Within the building, they host Venture Summits and offer startup accelerators where 10 companies are selected to go through a 12-week hands-on program with mentors in the start-up space. This type of incubation lends well to the other offerings at Fundamental Global like merchant banking from FGF.
Digital Ignition is a call option for FGH. It could prove to be a spawning ground where FG can cultivate, mentor, and shepherd small startups into much larger enterprises that would be both a win-win for the entrepreneur and FG.
The Overarching Theme
The picture I am trying to make clear here is the simple thought experiment that shows the possible upsides to the current investment portfolio. With the market cap trading where it is, there doesn’t need to be any huge steps taken for the overall portfolio value to dwarf the current market cap of the company.
FGH is trading below book value with multiple engines pushing forward they only need 1 to go somewhat okay. When you size up each investment with a potential success rate, I like those odds.
Trust or Sell
In a recent conversation with a fellow investor, we both concluded with FGH.
Either we are going to make money, or we are getting conned.
So far, evidence points to the former instead of the latter.
With a holding company like this, it all comes down to the trust you have in management. With this name, it seems to be a topic that comes up again and again, so I began to think, how does a team build the trust of public opinion in the market?
The answer? Track record and execution.
I think book value per share is the best way to gauge the track record as most of the assets are now public and their growth or decline will be directly translated into the net worth of the company. This is where I want their focus.
I don’t want them thinking about how their judgments will be perceived by others. They could spend hours on end crafting articles and doing podcasts about their experience and why you should trust them, or they can spend time working on creating value. I think the right choice is obvious. If one has reservations, the team is on quarterly calls to answer questions and they have an annual meeting every year where you can go and ask more if you like.
FGH isn’t for everyone. They do funky things. They started an independent film studio from scratch, put together a lumber mill acquisition in the heat of COVID, and traded operating assets for a slug of equity in a startup but the theme is all the same; They are out seeking asymmetric risk to reward payoffs and only need a few to go right over a long enough time frame to drive outperformance.
I believe there has been enough evidence so far to draw your own conclusion. They have massive skin in the game and if you are not willing to trust them with patience, there are plenty of other opportunities to look at.
Over the next 12 months, I will be watching how SGE continues to fare in the upgrade cycle for theaters and watch any of the films Strong Studios publishes. It will be interesting to see how these new growth arenas translate into numbers.
It's easy to track the theater environment by looking at the box office and releases statistics here: https://www.boxofficemojo.com
FGF just announced the recent combination of their two SPACs so those will be de-SPACing over the next couple of months, and we will see how those fare. Plus, the new merchant banking division will likely continue to make deals. I expect to see maybe a few more reinsurance contracts written showing the growth of the flywheel.
GFP and ICLTF are in a challenging lumber market but should the tied turn the mill will drown in cash and could be lucrative to a potential buyer. I wouldn’t be surprised if we see a sale of the company or a capital return program in the next few years but if lumber sucks for the next decade though, it won’t be pretty.
I don’t think anything big will happen with FireFly anytime soon as they are continuing to chase scale.
All in all, FGH has transformed into an interesting little special situations / SOTP name with capital allocators at the helm. Actions so far point to a positive trend going into the next decade so all one can do is sit back and see how it plays out.
If it isn’t obvious by now, I own shares of FGH and plan to hold them for the foreseeable future. I trust that Kyle, Larry, Mike, Joe, and Mark are working in the interest of shareholders. They have large amounts of personal capital at risk, so I am positive as a shareholder we are aligned in our desires.
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At the time of this writing, WSG does own FGH shares
Please be advised, Wall St Gunslinger is not an investment adviser and does not give personal investment advice. All content is for educational and entertainment purposes only and should not be interpreted as anything other than such. Investing entails a lot of risks and should be managed appropriately. Please do your own research and consult with an investment professional before making any investment decisions. Thank you.