Following United's announcement of an upgauging strategy, the market has priced in a swift liquidation for Air Wisconsin. Evidence suggests the opposite will happen, creating a 270% upside opportunity
Appreciate the update. Coming up to speed, a few questions:
- On the preferred, equity issue is capped at 16.5m shares but given the low conversion price of .15c, arent there still ~3.2m shares that need to be paid out in liquidation at issue price? Plus some incremental capped dividends?
- In your liquidation analysis, you mark the $21m in receivables as part of a "one-time" due to the amendment. But wasn't that booked in revenue in 2020 and is already in the LT receivable note? Definitely have some excess receivable (vs. the normal 5-9m per quarter) but confused by the language as one-time..
- Would be curious as to your take on this thread, specifically the earnings potential https://twitter.com/RisingAlbatross/status/1410087963313254403 and vs MESA (not me btw, just interested in getting up to speed on the name). I struggle to get above ~$30m in levered FCF in 2022 which is quite a bit below the $40m+ I see thrown around.
1. Yes good catch. $3.30 issue price x 3.2m cap excess prefs, would take down the 2 liquidation cases by ~$0.15 per FDSO.
2. No the $21m in Q4 2020 was a one time a/r for the CPA amendment due to the lower COVID capacity, and was recognized as a current asset. This is separate from the LT trade receivables (~$40m) which are LT notes (in fact bearing 4.5% interest that I didn't really include) also related to COVID capacity but a different amendment.
3. I had a conversation with the Albatross account to understand his bear case. Out of professional courtesy I won't post the full conversation. Let me just say that things he said gave away his novice and credibility. The most illustrative example was when he mentioned being a "long term investor" since HRBR was $0.90 (mind you about 3 months ago), and said management should be praised for everything they've done to raise the price from $0.90 to what it is today. At this point I stopped the conversation. Add to this his use of "big" investing terminology and ratios that don't make sense together. With this in mind, I'd suggest taking his perspectives with a grain of salt.
With that said, what's your EBITDAR to FCF walk?
2022 is the most "normal" year, and for 2022, my primary drivers to EBITDAR are payroll as % of routes, maintenance opex at run rate per jet, purchased services are constant (since jets are ~constant). From EBITDAR, I took out tax higher than run rate but less than statutory because they actually still have quite some NOLs left, no incremental NWC (which could be the difference here), and maint capex based on 2019 Q2 to 2020 Q1 run rate of ~$4m per qtr.
Given that the Company has a brand new 5-year contract announced today (August 22nd, 2022), is there any reason that the share price didn't increase significantly (i.e., the share price is still below your base case of $5.65 per share)? ManyThanks!
This is an interesting play. What is your view now as we approach Apr 22 - what is the worst case scenario regarding a special div payment for preferred's - would that cause a significant downside risk?
You state an airline liquidating within 2 years would not be adding larger aircraft to its fleet. I respectfully beg to differ. See Independence Air. Granted, they didn’t have a regional contract with United. In fact Atlantic Coast Airlines left United to go out on their own due to crippling stipulations in the new contract United had proposed with ACA. ACA also had a fleet of 50 seat CRJ’s and quickly started bringing in A319’s. Just not fast enough as United moves to undercut them in every market they could. I see no way for AW to bring on 700’s & 900’s unless it’s through A&M due to the scope clause with UAL pilots. I predict in Feb 2023, Air Whiskey will be done with United.
Thanks for these posts. Why do you think UAL will renew the contract at anywhere near similar terms? Pre-COVID, Mesa and Skywest earned returns on capital of around 10%. If you apply that against what HRBR's PP&E will be in March 2023 that would mean about $10-11m of EBIT in a new deal.
This is based on their reported PP&E, which seems high. At June it was $136m ore more than $2m per aircraft. The last 10 aircraft they acquired from lessors in 2020 went for $400k. Perhaps this was depressed by COVID, but in 2019 Bombardier agreed to sell HRBR 16 aircraft in return for the cancellation of an $8.2m note suggesting $600k per aircraft.
The 2017 UAL contract was negotiated at a time when the CRJ-200s were worth substantially more than they are today. HRBR was paying over $1m per year to lease these aircraft in 2019, but now their values seem to be less than $1m. I'd expect a similar revision to the terms of their contract with UAL.
My math is $56m of NCAV + $50m of FCF to March 2023 = $106m or $1.50 per share leaving a stub of around $35m, which may be 3-4x EBIT. Or maybe the EBIT would be even less in a new contract? Or UAL might choose not to renew?
Did anyone tune into the virtual annual meeting? I did not know about it until just now. I don't see any replay available. HRBR filed an 8k today. Just stating the election of 3 directors and stating that the company is not required to comply with certain disclosure requirements typically applicable to public reporting companies....
Wait are you saying management could just liquidate and return 0 to minority shareholders? Why is that not listed as a probability? That should bring down the risk adjusted value a lot. I also don't understand how 2022 mitigates this, aren't you a long term holder? Everyone will be screwed if that happens whether it happens in 2022 or much later (admittedly more likely as you demonstrate). The fact that they bought back stock is a good sign I guess, but maybe it's a head fake and they will issue a bunch of shares and liquidate. And if they could, why wouldn't they do it eventually?
Fred, and I asked on this site whether the controlling shareholder could return 0% to minority shareholders. The key point of this thesis is that the risk reward is very favorable, but if your bear case is a 0 not $2.17 as he says then the risk reward is not very good (also in his original thesis he assigns 40% to a liquidation, which is not "very unlikely"). Also why can't they just issue themselves more securities and dilute shareholders to oblivion?
He now has liquidation as a 5% chance. Why would they want to liquidate when they can grow the value of the business and their shares greatly buy just staying the course? They can't dilute by more than a factor of 2, roughly, unless they increase the number of authorized shares, so I don't think liquidation value goes to 0 for minority owners. It doesn't seem in their best interest to liquidate, therefore it doesn't seem likely. It is good to consider all possibilities, so thanks for posting. Love to hear anyone else's comments.
That's a 5% in 2023, in 2026 he says a 35% chance. If a company is worth 0 in 2026 without returning any capital in the meantime, it's worth 0 today. To me I just think if they're able to do it legally, why wouldn't they? It's not like they really care about their reputation? Why can't the controlling shareholder just increase shares authorized? Why can't they just never return anything to minority shareholders? I feel like this should at least be a probability to consider (I would love to hear a counterargument, I'm happy to be the fool here since I do own it)
Appreciate the follow-up to my previous comment, got distracted by other ideas but coming back around to this. Also great to see the 8/13 update (btw, isn't the liquidation of $2.17/shr still missing the remaining preferred drag of $0.15c)? A few points of follow-up:
1) The big part where I struggle is forecasting revenue. What is "normal" on a go-forward basis? Big difference between 260-265m (similar to 2019) and a return to something more like 2017-2018 (240-247m). How do you get comfortable with that?
2) On the liquidation downside scenario - the balance sheet went in the wrong direction in Q2, not entirely sure why. Take your "net assets" calculation of $64m after 12/31/21 from the #1 scenario for 2023 liquidation case. Isn't the balance sheet worse after Q2 than that original calculation (taking into account the remaining PSP that's left)? I follow a similar exercise but make some small adjustments, and on my numbers that "net asset" value went down by ~20% from Q1 to Q2...plus you have now used up another 1 quarter of CF for your "run out existing 2023 contract" - isn't the liquidation value lower today than if you calculated it a quarter or two ago?
I understand that a 2023 liquidation is a long shot for all of the reasons posted, but given the lack of info / black box / management "trust" required on this to pivot the business, I'd prefer to be VERY sure of that number so that downside is protected.
Appreciate the update. Coming up to speed, a few questions:
- On the preferred, equity issue is capped at 16.5m shares but given the low conversion price of .15c, arent there still ~3.2m shares that need to be paid out in liquidation at issue price? Plus some incremental capped dividends?
- In your liquidation analysis, you mark the $21m in receivables as part of a "one-time" due to the amendment. But wasn't that booked in revenue in 2020 and is already in the LT receivable note? Definitely have some excess receivable (vs. the normal 5-9m per quarter) but confused by the language as one-time..
- Would be curious as to your take on this thread, specifically the earnings potential https://twitter.com/RisingAlbatross/status/1410087963313254403 and vs MESA (not me btw, just interested in getting up to speed on the name). I struggle to get above ~$30m in levered FCF in 2022 which is quite a bit below the $40m+ I see thrown around.
Great work.
1. Yes good catch. $3.30 issue price x 3.2m cap excess prefs, would take down the 2 liquidation cases by ~$0.15 per FDSO.
2. No the $21m in Q4 2020 was a one time a/r for the CPA amendment due to the lower COVID capacity, and was recognized as a current asset. This is separate from the LT trade receivables (~$40m) which are LT notes (in fact bearing 4.5% interest that I didn't really include) also related to COVID capacity but a different amendment.
3. I had a conversation with the Albatross account to understand his bear case. Out of professional courtesy I won't post the full conversation. Let me just say that things he said gave away his novice and credibility. The most illustrative example was when he mentioned being a "long term investor" since HRBR was $0.90 (mind you about 3 months ago), and said management should be praised for everything they've done to raise the price from $0.90 to what it is today. At this point I stopped the conversation. Add to this his use of "big" investing terminology and ratios that don't make sense together. With this in mind, I'd suggest taking his perspectives with a grain of salt.
With that said, what's your EBITDAR to FCF walk?
2022 is the most "normal" year, and for 2022, my primary drivers to EBITDAR are payroll as % of routes, maintenance opex at run rate per jet, purchased services are constant (since jets are ~constant). From EBITDAR, I took out tax higher than run rate but less than statutory because they actually still have quite some NOLs left, no incremental NWC (which could be the difference here), and maint capex based on 2019 Q2 to 2020 Q1 run rate of ~$4m per qtr.
Looking forward to your comments on the latest earnings report which looked very good. Balance sheet nicely improved.
It's been a while Buyside, any updated thoughts?
Any new update?
Given that the Company has a brand new 5-year contract announced today (August 22nd, 2022), is there any reason that the share price didn't increase significantly (i.e., the share price is still below your base case of $5.65 per share)? ManyThanks!
Are you still following this company? Strange you haven’t posted anything this year after all the great DD you have done. Thanks for any reply
This is an interesting play. What is your view now as we approach Apr 22 - what is the worst case scenario regarding a special div payment for preferred's - would that cause a significant downside risk?
You state an airline liquidating within 2 years would not be adding larger aircraft to its fleet. I respectfully beg to differ. See Independence Air. Granted, they didn’t have a regional contract with United. In fact Atlantic Coast Airlines left United to go out on their own due to crippling stipulations in the new contract United had proposed with ACA. ACA also had a fleet of 50 seat CRJ’s and quickly started bringing in A319’s. Just not fast enough as United moves to undercut them in every market they could. I see no way for AW to bring on 700’s & 900’s unless it’s through A&M due to the scope clause with UAL pilots. I predict in Feb 2023, Air Whiskey will be done with United.
Thanks for these posts. Why do you think UAL will renew the contract at anywhere near similar terms? Pre-COVID, Mesa and Skywest earned returns on capital of around 10%. If you apply that against what HRBR's PP&E will be in March 2023 that would mean about $10-11m of EBIT in a new deal.
This is based on their reported PP&E, which seems high. At June it was $136m ore more than $2m per aircraft. The last 10 aircraft they acquired from lessors in 2020 went for $400k. Perhaps this was depressed by COVID, but in 2019 Bombardier agreed to sell HRBR 16 aircraft in return for the cancellation of an $8.2m note suggesting $600k per aircraft.
The 2017 UAL contract was negotiated at a time when the CRJ-200s were worth substantially more than they are today. HRBR was paying over $1m per year to lease these aircraft in 2019, but now their values seem to be less than $1m. I'd expect a similar revision to the terms of their contract with UAL.
My math is $56m of NCAV + $50m of FCF to March 2023 = $106m or $1.50 per share leaving a stub of around $35m, which may be 3-4x EBIT. Or maybe the EBIT would be even less in a new contract? Or UAL might choose not to renew?
Did anyone tune into the virtual annual meeting? I did not know about it until just now. I don't see any replay available. HRBR filed an 8k today. Just stating the election of 3 directors and stating that the company is not required to comply with certain disclosure requirements typically applicable to public reporting companies....
Any thoughts?
Wait are you saying management could just liquidate and return 0 to minority shareholders? Why is that not listed as a probability? That should bring down the risk adjusted value a lot. I also don't understand how 2022 mitigates this, aren't you a long term holder? Everyone will be screwed if that happens whether it happens in 2022 or much later (admittedly more likely as you demonstrate). The fact that they bought back stock is a good sign I guess, but maybe it's a head fake and they will issue a bunch of shares and liquidate. And if they could, why wouldn't they do it eventually?
Rick, BuysideBob on this site listed 7 reasons why liquidation is very unlikely.
Fred, and I asked on this site whether the controlling shareholder could return 0% to minority shareholders. The key point of this thesis is that the risk reward is very favorable, but if your bear case is a 0 not $2.17 as he says then the risk reward is not very good (also in his original thesis he assigns 40% to a liquidation, which is not "very unlikely"). Also why can't they just issue themselves more securities and dilute shareholders to oblivion?
He now has liquidation as a 5% chance. Why would they want to liquidate when they can grow the value of the business and their shares greatly buy just staying the course? They can't dilute by more than a factor of 2, roughly, unless they increase the number of authorized shares, so I don't think liquidation value goes to 0 for minority owners. It doesn't seem in their best interest to liquidate, therefore it doesn't seem likely. It is good to consider all possibilities, so thanks for posting. Love to hear anyone else's comments.
That's a 5% in 2023, in 2026 he says a 35% chance. If a company is worth 0 in 2026 without returning any capital in the meantime, it's worth 0 today. To me I just think if they're able to do it legally, why wouldn't they? It's not like they really care about their reputation? Why can't the controlling shareholder just increase shares authorized? Why can't they just never return anything to minority shareholders? I feel like this should at least be a probability to consider (I would love to hear a counterargument, I'm happy to be the fool here since I do own it)
Appreciate the follow-up to my previous comment, got distracted by other ideas but coming back around to this. Also great to see the 8/13 update (btw, isn't the liquidation of $2.17/shr still missing the remaining preferred drag of $0.15c)? A few points of follow-up:
1) The big part where I struggle is forecasting revenue. What is "normal" on a go-forward basis? Big difference between 260-265m (similar to 2019) and a return to something more like 2017-2018 (240-247m). How do you get comfortable with that?
2) On the liquidation downside scenario - the balance sheet went in the wrong direction in Q2, not entirely sure why. Take your "net assets" calculation of $64m after 12/31/21 from the #1 scenario for 2023 liquidation case. Isn't the balance sheet worse after Q2 than that original calculation (taking into account the remaining PSP that's left)? I follow a similar exercise but make some small adjustments, and on my numbers that "net asset" value went down by ~20% from Q1 to Q2...plus you have now used up another 1 quarter of CF for your "run out existing 2023 contract" - isn't the liquidation value lower today than if you calculated it a quarter or two ago?
I understand that a 2023 liquidation is a long shot for all of the reasons posted, but given the lack of info / black box / management "trust" required on this to pivot the business, I'd prefer to be VERY sure of that number so that downside is protected.
Just checking - any response to the above?