Opportunity Missed? (EPAX)
On July 13 Ambassador Group announced a plan to cease operations by year-end and liquidate the business, returning capital to shareholders. The day after the announcement the stock took a wild ride down to $1.50 a share from the previous day’s closing of $2.40, ending the day at $1.78. On the surface of things this kind of made sense since the book value as of the end of Q1 was $1.83 a share. But EPAX is (was?) in a very seasonal business where cash is received upfront as a deposit and recognized only when the trip takes place, so it behooved anyone interested in the underlying value of the liquidation to look a bit deeper. In fact, on July 16 the company issued another press release updating the amount of ‘cash available to shareholders’ at the end of 2Q; it had increased to $45.3 million from the $31.7 million on the balance sheet at the end of Q1. The stock rebounded the next day to the $2.20-2.40 per share level and has remained there since. What can I say? I was on ‘vacation’ at the seashore and missed the wild swing in the share price when the liquidation announcement was made. The lesson here is that you have to have done your analysis beforehand and be ready when Mr. Market acts so foolishly! Well, what now, you’re asking. Are shares still trading at a discount to liquidation value? For that, we needed some estimate of shutdown costs which the company has, as of today, kindly provided ($2.3 to $4.5 million). Still, the analysis is not straight forward; the company will be recognizing cash received as deposits over the balance of the year as well as prepaid and other expenses incurred or to be incurred. Assuming all sales & marketing efforts ceased as of the end of Q2, a quick and dirty liquidation analysis might look something like this:
|Cash on balance sheet as of 6/30/15 (millions)||$71.0|
|payment of A/P||($4.4)|
|Cash available for shareholders as of 6/30||$45.3|
|Balance of year cash expenses:|
|Est. G&A expenses 3Q & 4Q||($4.6)|
|Shutdown expense (avg of high and low)||($3.4)|
|Net cash available to shareholders after shutdown||$37.3|
|shares outstanding||17.284 million|
|per share cash available for distribution||$2.16|
Now that’s not a very enticing proposition! You can pay $2.25 to buy a share today and get back $2.16 sometime over the next two years! But, as in any liquidation, there are some upsides to company projections. Do the PP&E assets have any value? Those assets are primarily depreciated computer equipment and software so I wouldn’t hold out much hope here; the company notes that this item will be written off entirely in the 2Q financials. (Remember the company has already sold its headquarters building last year). G&A expense for the balance of the year could be lower; I was using the 1Q run rate of $2.3 million but the company announced it will begin laying off staff in August. And of course, shutdown expenses could be lower. All in all, however, I don’t see that much upside. But maybe that’s just my shortsightedness. If you see the magic bunny that could be pulled out of the hat please let me know!
Edit: Sold my entire position at $2.40 today as I think there are situations with greater upside out there.