BACK IN REAL INDUSTRY (RELY)
There is some history here with this company, so let's do a brief review. I originally released the research report on RELY (back then it was SGGH) in October 0f 2014. The company had just made its acquisition of the aluminum recycling subsidiary of Aleris Corporation. Just a short while later, in December 2014, I exited the position due to a number of reasons, including wanting to raise cash to allocate into Impac Mortgage.
On Monday, I reinitiated our position in RELY at what is roughly the same price I exited in December 2014. There have been some material improvements taking place at the company that are worthy of mention. Also, the fact that RELY escaped what was a brutal year for commodities (aluminum included) unscathed, marks an important test for management that they passed surprisingly well. For me, this is an example of the market telling a story through price that fundamentals have yet to properly capture. For all intents and purposes, given a depressed commodity market in 2015 and the newly minted, leveraged state of the company, RELY should have suffered much more than it did. The fact that it did not is a clear tell.
Here are some of the material improvements/catalysts coming into play for RELY:
- RELY generated $81 million in EBITDA in 2015. One of the best performances for the company during a terrible year for commodities.
- Issued a "CEO Challenge" in 2015 to reduce costs by 1% ($13.4 million). Managed to cut costs by $15 million. The target for cutting costs in 2016 has been raised to $17 million.
- Consumption of aluminum is slated to grow by 6% globally in 2016. Additionally, the automobile aluminum supercycle is in its infant stages, with RELY positioned to be a significant supplier in the automobile space.
- Only 30% of the companies revenues are unhedged. The remaining revenues come from either tolling or are hedged.
- Free cash flow machine that has allowed for a $50 million reduction in debt in 2015.
- The company possesses some $900 million in NOLs that haven't been tapped into as of this date. It has been stated that Aleris is not the platform to utilize the NOLs due to significant depreciation expenses. The company is looking for bolt on acquisition candidates, passing on a myriad of deals in 2015 because they did not meet the company's requirements.
- Management is committed to making accretive future acquisitions while preserving ownership for current equity holders. In other words, very little future dilution.
- A strong movement taking place in government towards import tariffs on Chinese aluminum. http://www.wsj.com/articles/itc-probe-could-pave-the-way-for-aluminum-import-tariffs-1459986530
- CEO bought 15,000 shares of stock in the open market during May.
- Sam Zell continues to own 7% of the company.
Shares seem cheap here as investors are essentially getting RELY for the same price they paid for Aleris nearly two years ago. Meanwhile, material improvements have taken place at Aleris, including numerous cost cutting measures, improved margins and a more efficient management team. Additionally, the growth estimates for the aluminum market have only increased in recent years, as aluminum content in cars is due to rise 39% to 547 pounds per vehicle by 2025. There is a great deal of optionality at play here as the incentive to utilize the NOLs effectively by a team experienced in the M&A world should drive share price markedly forward once future acquisitions are announced. Given the current valuation for shares, the market is not assigning the proper value to either Aleris or the NOLs on the balance sheet of RELY. Both Aleris and the NOLs should reinforce value in one another driven by the catalyst of a future accretive acquisition with significant taxable income.
Disclaimer
This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice.
This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website.
T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary to the laws or regulations of that jurisdiction, or which would subject T11 Capital Management LLC to any unintended registration requirements. Visitors to this site should not construe any discussion or information contained herein as personalized advice from T11 Capital Management LLC. Visitors should discuss the personal applicability of the specific products, services, strategies, or issues posted herein with a professional advisor of his or her choosing.
Information throughout this site, whether stock quotes, charts, articles, or any other statement or statements regarding capital markets or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in, the transmission thereof to the user. With respect to information regarding financial performance, nothing on this website should be interpreted as a statement or implication that past results are an indication of future performance.
