Premier Exhibitions, August 2011 Update
The verdict is in. The company was just given title to assets worth 140% of its current market value. The share price soared!…. What? You thought I was writing about Premier Exhibitions? No, no, no. I was just daydreaming about efficient management and an efficient marketplace, neither of which we seem to have in the current Premier situation. When Premier was given title to $110 million in assets two weeks ago, the share price actually declined!
Yes, Premier issued a press release on August 15 announcing that it had received ownership ‘in specie’ of the ‘post 1987’ Titanic assets, some 3,000 objects retrieved from the Titanic wreck between 1993 and 2004 with a market value estimated to be $110 million. But the award was really made last year in August when the courts recognized Premier’s salvage rights to the objects, with the only thing in question being how the salvage rights were to be paid. The court would take a year to decide whether Premier would receive the objects themselves (‘in specie’) or whether there would be a judicial auction of the objects and the proceeds, estimated at $110 million, would be awarded to Premier in cash. I guess, from the price action after the press release announcing the in-specie award, there were a few hopeful souls who thought that maybe the court would sensibly opt for the judicial auction, and Premier would receive cash which could then be distributed to long-suffering shareholders. Alas, things rarely work out for the best for shareholders. Despite management and a complicit board that has succeeded in destroying significant shareholder value over the past 5 years, the court saw fit to entrust custody of the Titanic treasure to the company. Let’s take a quick look back to see what I am talking about. Five years ago Premier shares traded in the $6 range. In the subsequent year the shares traded up to $18 before plunging along with the general market selloff (not to speak of operating losses), hitting a low of around $.60 in November 2008. In August 2010, with the announcement of the court ruling on the Titanic assets, the share price rebounded from around the $1.10 level to $1.90. Since then, the shares have mostly traded in a range between $1.60 and $1.90. But Mr. Market can be a bit irrational at times, and we can’t blame management for that. However, book value of Premier has also dwindled over this period, from around $1.62 as share in 2008 to last quarter’s $.43 a share.
So what’s going on? Why do I have an investment in this seemingly mismanaged company? Simply put, the potential asset value of the company is not reflected in the book value, and, if operating losses can somehow be stemmed and a decent return on these assets realized, perhaps shareholders will make out OK. Besides, there have been changes in management, and maybe the impact of this has yet to be felt. Last year when I did a quick analysis of Premier I used the company’s numbers for the value of the Titanic assets (the same that were reiterated in the latest press release) and used Above Average Odds’ valuation of the operating business. In retrospect I may have double counted a bit as the Titanic assets were actually being used to generate revenue in the operating business. This year I’ll go about things a bit differently. Instead of computing a valuation, I’ll just lay down the gauntlet to current management.
In the latest press release Management reiterated these previous valuations for the various Titanic assets:
- “Pre 1987” Titanic assets $35 million
- “Post 1987” Titanic assets $110 million
- Digital rights (film etc) $44 million
- total $189 million (about $4.00/share)
OK So, lets take them at their word and let’s leave aside all other non-Titanic assets and investments that Premier has made up to this moment. What kind of return should management be able to generate on the above listed Titanic assets? Given their unique nature, I would hope the assets could return 10% to 20% pre-tax. That would equate to EBIT/share of $.40 to $.80. To be fair, management has been able to significantly turn around the company’s operations; in the latest quarter (1Q 2012 ending May 31, 2011) earnings per share were a positive $.02 vs. a loss of $.03 for the same period last year. But remember, 2012 is the centennial of the sinking of the Titanic. I would think the assets are at their most valuable during the next year. So if a good return can’t be made now, then when? I’ll be keeping my eye out for some further improved earnings in the 2nd and 3rd fiscal 2012 quarters.
I am, however, a bit distressed by another development. In May, Premier signed an agreement with Lincoln Park Capital to underwrite up to $10 million in new share issuance. Now, I can see how it may take some capital to realize value on the Titanic assets, but equity at current prices seems a bit of a steep price to pay. To be sure, the underwriting is at the discretion of Premier, and dilution should be a maximum of 10%, but still, I don’t like it. Mark Sellers (Sellers Capital still holds 46% of the equity and Mark is the Chairman of the Board) are you listening? I think a little more justification for this potentially expensive capital raise should have been outlined, like, for instance, why the money might be needed and what it might be used for?
I plan on holding my PRXI shares for at least another year, but if management isn’t able to produce a decent return on the Titanic assets, or goes making some crazy investment in a non-core business, I’ll know its time to move on, that is, take my capital and run to the nearest exit. Lucky for me I’m not a 46% owner and generally the share liquidity of PRXI would allow me to exit my position in a couple of days. Mark Sellers we’ll be watching you with an eagle eye! Hope you’re doing the same with Premier’s management!