Sunday, March 26, 2023

Automotive Supplier Rollup Gone Dangerous, Pursuing a Sale

Full warning, much like Armstrong Flooring (AFI), this could possibly be a horrible concept, it has important pink flags and is extremely speculative.

LMP Automotive (LMPX) is a micro-cap (~$45MM market cap) that got here public in late 2019 with a automotive subscription mannequin the place customers may hire a automotive month-to-month, positioning itself as splitting the distinction between a short-term automotive rental and a standard automotive lease.  LMPX then put an internet seller/cellular app enterprise mannequin spin round it to market the inventory.  In 2020, LMPX grew to become a little bit of a meme inventory, briefly buying and selling up alongside different e-commerce automotive sellers like Carvana, however then crashed as they had been unable to supply automobiles economically to run their subscription mannequin.  As an alternative, the corporate pivoted to be a standard automotive dealership rollup enterprise and went on a debt fueled acquisition spree in 2021.  LMPX completed the yr with 15 new automotive dealerships and 4 used automotive dealerships throughout 4 states.  On 2/16/22, the corporate mentioned they had been unable to safe new financing for his or her beforehand introduced however not but closed acquisitions (7 of them!) and rapidly pivoted to pursuing a sale:

Sam Tawfik, LMP’s Chief Government Officer, acknowledged, “The Firm intends to terminate all of its pending acquisitions in accordance with the phrases of their respective acquisition agreements, primarily as a result of incapability to safe monetary commitments and shut inside the timeframes set forth in such agreements.”

“The Board of Administrators believes that LMP’s present inventory value doesn’t mirror the Firm’s truthful worth. Given the document M&A exercise in our sector and multiples being paid for these transactions, LMP’s Board of Administrators has directed administration to right away pursue strategic options, together with a possible sale of the Firm.”

The inventory closed at $5.25/share on 2/16, it now trades for ~$4.25/share.

Placing apart terminal worth questions (auto OEMs bypassing sellers, electrical automobiles needing much less upkeep), automotive dealerships are pretty excessive money flowing enterprise and had been large covid beneficiaries. There’s a lack of provide (nationwide, dealership stock is ~1/third of regular, going to take some time to normalize) that has raised costs and diminished the necessity for automotive salespeople (dealerships have been gradual to rehire these laid off throughout the pandemic) as extra individuals browse on-line and the low stock has all however eradicated haggling.  Automotive house owners are additionally holding onto to their automobiles longer creating extra excessive margin service income.  A few of these covid modifications could also be lasting, many sellers speak about stock being completely decrease as sellers change into extra of a distribution heart and fewer of a spot the place individuals stroll the lot to search out the automotive they need, they’ve already selected the specs on-line earlier than going to the seller.  

There are literally thousands of dealerships throughout the nation, they’re fairly liquid property that change fingers often (much like why I like REIT particular conditions, the property are fungible and there is a giant pool of consumers).  Right here, there are 7 giant publicly traded dealership teams (KMX, LAD, PAG, AN, ABG, GPI and SAH, however solely ~10% of all dealerships) and lots of different giant personal ones.  The windfall earnings of the previous couple of years has prompted the bigger public gamers to do lots of M&A, rolling up this fragmented market.  Whereas giant dealership teams are thriving, many smaller dealerships are struggling to supply stock and are vulnerable to failure, with the intention to press their scale benefits, the massive are getting greater.  Awkward great distance of claiming, I do not suppose LMPX may have hassle discovering consumers for his or her dealership property, however it’s extra a query of value.

Given the fast rollup nature of LMPX, nailing down the valuation causes a little bit of mind injury to work via the financials, this is what CEO Sam Tawfik mentioned within the Q3 earnings name:

Our third quarter annualized run charges excluding the acquisition we closed this quarter, which we count on to be instantly accretive to earnings this quarter are $565 million in income, and $47.6 million in adjusted EBITDA.

The acquisition referenced above is the White Plains Chrysler Dodge Jeep Ram Dealership that closed in October, bought for $19.2MM that was estimated to generate $2.6MM in 2022 EBITDA.

Then within the company’s annual letter on their web site, Tawfik gives:

We accomplished the acquisition of our contracted White Plains, New York Chrysler Dodge Jeep Ram within the early fourth quarter utilizing roughly $5 million in money from the corporate’s stability sheet, 55,000 shares of frequent inventory and $1.3 million in money from our present credit score facility. This acquisition will probably be instantly accretive to earnings within the fourth quarter of this yr. On account of this yr’s acquisition exercise, the corporate at the moment owns 15 new car franchises, operates 4 pre-owned shops throughout 12 rooftops in 4 states which generate over $600 million in annualized income.


 We intend to pay down our present time period debt by roughly $11 million within the fourth quarter of 2021, leading to a stability of roughly $85 million, of which the corporate allocates $53 million to its real-estate holdings and $32 million to its dealership blue sky buy debt. Primarily on the present tempo of cashflow technology, if we select, the corporate can extinguish its present blue sky debt in lower than a yr.

Including it up collectively:

The automotive enterprise does have some seasonality to it, Q1 is normally decrease than the opposite quarters, so annualizing Q3 EBITDA is not an ideal run price.  I tried to normalize that and LMPX’s deal with tier 2 dealerships (home and financial system imports manufacturers) which fetch a decrease valuation than luxurious within the 4x EBITDA a number of.  Clearly, I am not a automotive sector knowledgeable, be happy to appropriate or push again, however looks like there could possibly be one thing right here regardless of all of the dangers beneath.  I purchased a smallish place this week.

Dangers/Pink Flags:

  • Clearly, high of the checklist, LMPX went on a loopy acquisition spree in 2021 and could not increase capital to finish them (credit score situations have tightened barely this yr, however nonetheless fairly open).  Most of those offers included a mixture of debt and inventory, struck when the inventory was $15-$17, by the point it got here to shut these transactions the air was being let loose of the expansion balloon, the inventory was $7 and the window to lift capital closed on LMPX.  Shopping for dealerships at 7x EBITDA whereas the inventory trades nicely beneath that does not make a lot sense.  It could possibly be nastier than that easy clarification underneath the hood, however the Q3 numbers look pretty respectable, it is a mess however was at the least money circulation constructive over the last reported quarter.
  • Tawfik owns roughly 35% of the corporate, he seems to be the only choice maker and does not appear to have a powerful board round him.  There are a variety of associated social gathering transactions, none seem overly egregious however in complete they do not look nice, plus in October, Tawfik purchased an organization airplane for himself only some brief months earlier than all of it fell aside.  His biography consists of founding Telco Group which was offered to Leucadia again in 2007 for $160MM and likewise based PT-1 Communications which was offered to Star Communications in 1998 or $590MM.  Presumably he isn’t completely incompetent however might need simply gotten caught up available in the market hysteria final yr.
  • Tawfik has been promoting a small quantity of shares often as a part of a 10b5-1 plan, I am not an knowledgeable on these insider promoting plans, undecided if they are often cancelled midway via, however it isn’t an amazing look if you happen to suppose the inventory is materially undervalued.
  • LMPX studies EBITDA per share versus enterprise worth, that is at all times a pink flag for me as it’s deliberately evaluating apples to oranges.
  • Their present time period mortgage matures in March 2023, so they have a bit of time to get this course of carried out and fewer of a compelled sale than AFI.

Disclosure: I personal shares of LMPX

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