Sunday, November 20, 2022
HomeValue InvestingAutomotive Supplier Rollup Gone Dangerous, Pursuing a Sale

Automotive Supplier Rollup Gone Dangerous, Pursuing a Sale

Full warning, just like Armstrong Flooring (AFI), this may very well be a horrible concept, it has important pink flags and is very speculative.

LMP Automotive (LMPX) is a micro-cap (~$45MM market cap) that got here public in late 2019 with a automobile subscription mannequin the place customers might hire a automobile month-to-month, positioning itself as splitting the distinction between a short-term automobile rental and a standard automobile lease.  LMPX then put a web based seller/cell app enterprise mannequin spin round it to market the inventory.  In 2020, LMPX turned a little bit of a meme inventory, briefly buying and selling up alongside different e-commerce automobile sellers like Carvana, however then crashed as they have been unable to supply vehicles economically to run their subscription mannequin.  As a substitute, the corporate pivoted to be a standard automobile dealership rollup enterprise and went on a debt fueled acquisition spree in 2021.  LMPX completed the yr with 15 new automobile dealerships and 4 used automobile dealerships throughout 4 states.  On 2/16/22, the corporate stated they have 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 because of the incapability to safe monetary commitments and shut throughout the timeframes set forth in such agreements.”

“The Board of Administrators believes that LMP’s present inventory worth doesn’t mirror the Firm’s honest 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 instantly pursue strategic alternate 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 vehicles needing much less upkeep), automobile dealerships are pretty excessive money flowing enterprise and have been huge 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 lowered the necessity for automobile salespeople (dealerships have been gradual to rehire these laid off in the course of 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 vehicles longer creating extra excessive margin service income.  A few of these covid modifications could also be lasting, many sellers discuss 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 automobile 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 moderately liquid belongings that change fingers frequently (just like why I like REIT particular conditions, the belongings are fungible and there is a massive pool of patrons).  Right here, there are 7 massive publicly traded dealership teams (KMX, LAD, PAG, AN, ABG, GPI and SAH, however solely ~10% of all dealerships) and lots of different massive personal ones.  The windfall earnings of the previous couple of years has prompted the bigger public gamers to do numerous M&A, rolling up this fragmented market.  Whereas massive dealership teams are thriving, many smaller dealerships are struggling to supply stock and are susceptible to failure, so as to press their scale benefits, the large are getting greater.  Awkward good distance of claiming, I do not assume LMPX may have bother discovering patrons for his or her dealership belongings, however it’s extra a query of worth.

Given the fast rollup nature of LMPX, nailing down the valuation causes a little bit of mind injury to work by means of the financials, here is what CEO Sam Tawfik stated 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 firm’s annual letter on their web site, Tawfik offers:

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 widespread inventory and $1.3 million in money from our current credit score facility. This acquisition will likely be instantly accretive to earnings within the fourth quarter of this yr. On account of this yr’s acquisition exercise, the corporate at present owns 15 new automobile 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 current 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. Basically on the present tempo of cashflow era, if we select, the corporate can extinguish its present blue sky debt in lower than a yr.

Including it up collectively:

The automobile enterprise does have some seasonality to it, Q1 is normally decrease than the opposite quarters, so annualizing Q3 EBITDA is not an ideal run charge.  I tried to normalize that and LMPX’s give attention to 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 professional, be at liberty to right or push again, however looks as if there may very well be one thing right here regardless of all of the dangers beneath.  I purchased a smallish place this week.

Dangers/Purple Flags:

  • Clearly, prime of the checklist, LMPX went on a loopy acquisition spree in 2021 and could not elevate capital to finish them (credit score situations have tightened barely this yr, however nonetheless fairly open).  Most of those offers included a mix 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 boost capital closed on LMPX.  Shopping for dealerships at 7x EBITDA whereas the inventory trades nicely beneath that does not make a lot sense.  It may very well be nastier than that easy rationalization underneath the hood, however the Q3 numbers look pretty respectable, it is a mess however was at the very least money movement optimistic over the past reported quarter.
  • Tawfik owns roughly 35% of the corporate, he seems to be the only real resolution maker and would not appear to have a powerful board round him.  There are a variety of associated occasion transactions, none seem overly egregious however in whole they do not look nice, plus in October, Tawfik purchased an organization aircraft for himself only some quick months earlier than all of it fell aside.  His biography contains founding Telco Group which was bought to Leucadia again in 2007 for $160MM and likewise based PT-1 Communications which was bought to Star Communications in 1998 or $590MM.  Presumably he is not completely incompetent however may need simply gotten caught up out there hysteria final yr.
  • Tawfik has been promoting a small quantity of shares frequently as a part of a 10b5-1 plan, I am not an professional on these insider promoting plans, unsure if they are often cancelled midway by means of, however it isn’t a terrific look for those who assume the inventory is materially undervalued.
  • LMPX stories EBITDA per share versus enterprise worth, that is all the time 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 slightly time to get this course of executed and fewer of a compelled sale than AFI.

Disclosure: I personal shares of LMPX



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