Premier Exhibitions (PRXI) – Mr. Market A Sleep At the Wheel?

Going forward we have decided to periodically post updates regarding some of our older write-up’s/positions when for whatever reason we feel they are particularly attractive and actionable. Below is a quick update for Premier Exhibitions – as always feel free to comment/email us with any relevant thoughts and/or questions. Our original thesis can be found here

Update August 24, 2010:

We would argue that at today’s price of $1.67 PRXI is more attractive than its ever been and would advise our readers to read the recently released court opinion/letter to shareholders for some further color. Fwiw we think that Sellers and his turnaround team deserve a standing ovation for their efforts here. Anyhow, the quick and dirty “pitch” is below.

“We have to say this is the first time we have ever witnessed the intrinsic value of a company roughly triple overnight, at least where the market greeted the news with nothing more than a yawn. Sure, the stock closed up some 40% on the news and clearly there is some uncertainty regarding the monetization of the Titanic assets, but given the federal court ruling granted the company an award equal to almost three times its EV at the time of the announcement – one would think at least a double would be in order. God knows the market isn’t efficient, but still…this is ridiculous. Regardless, its clear from experience that Mr. Market can be a little slow but typically he comes to his senses given time and for this I am thankful – especially in this case as its providing investors with an absolutely incredible opportunity in our opinion to generate spectacular returns over the next year or so with very little risk.

Let’s do a quick and dirty valuation for PRXI:

Value of the Assets:

Value of original Titanic artifacts = $35m
Value of newly awarded Titanic artifacts = $110m
Value of Digital archives, etc. = $44m

Note the values above where computed on a liquidation basis by a variety of independent, company, and court appointed appraisers.

Total Value of Titanic Assets = $189m

Its important to keep in mind that the NAV above is for the first time in PRXI’s history completely solid. The Federal court has ruled, meaning their will be no appeal. It’s over, case closed. The only issue at the moment is wether the court will pay PRXI cash of $110m by next August or the company will receive the in specie award. Sure, their remains uncertainty regarding what these assets will ultimately garner when sold (or what happens to the rest of the company if they get the cash award) but with the current EV of the whole company standing at roughly $60m that’s a pretty steep haircut, no? I mean we are as skeptical as the rest, but given all of the new information that has come to light since the ruling we just can’t imagine how this company isn’t worth north of $3 (or double the current price) at an absolute minimum.

Value of the operating business (exhibitions/merchandise):

Looking out over the next couple of years, the question is how much is PRXI’s core business worth? Well, if we assume last quarters revenue run rate of roughly $45m and a 20% EBIT Margin (in line with what history would suggest is achievable post turnaround) the core business would generate roughly $8m in EBIT. At a reasonable multiple of 6x, the business is worth roughly $54m (or right around the company’s current EV). Granted it will likely be another year or two before this company’s turnaround is complete but as of today their is still no compelling reason Im aware of that would lead me to think that this business won’t be able to generate similar revenues and/or a similar level of profitability that it had pre-blow up (in fact, a significant amount of progress turnaround wise has already been made but due to various restructuring charges it remains masked). Notably with the significant costs associated with the court battle now finally behind them, our guess is that progress will only accelerate from here.

Anyhow, add the $8m in excess cash on the balance sheet that is not needed to run the business and we have everything that we need….

Value of Titanic Assets = $189m
Value of PRXI’s operating business = $54m
Value of PRXI’s excess cash = $8m

Note that the above valuation does not assign any value to any future potential recoveries (which could be sizable) nor to any improved performance ticket sales wise from the upcoming 100th anniversary of the sinking (which could certainly increase public interest and hence sales as it draws near).

Total Value = $251m or roughly $5/share vs. the current price of roughly $60m or $1.60/share.

In sum, we’re not sure exactly what PRXI is worth at the moment, although we think its pretty safe to say its worth a lot more than its current price (paraphrasing Buffett, you don’t need a scale to tell a man’s fat!). Seems like an easy lay-up that will likely generate an outsized return over the next six months with very little risk (and better yet regardless of what the general market does as a whole). That said, its possible an investment today may require some patience but given Sellers commitment to monetizing his stake in the near-term, the significant and undisputed embedded value in the titanic assets and the progress to-date regarding the company’s turnaround efforts, our guess is that good things will happen sooner rather than later.”

Below is a great question we received earlier today, so we figured we would go ahead and post it along with our answer if anyone else would like to chime in with their own thoughts:

Q – Thanks for the update. Will the company have to pay taxes on the reward from the court ruling? If yes then the NAV should be adjusted. Also, suppose they get the artifacts (not the cash). They may be “worth” $110M, but how do they get monetized or generate any cash flow for shareholders?

A – great point. We don’t know for sure, although for conservatism’s sake we should probably expect that they would (considering that any sale would likely include all of the assets, one could apply a 36% tax rate to the $189m number above, which would in turn reduce the total value by roughly $68m – not chump change, but not enough to materially change our thesis – even with the reduction Premier remains bafflingly cheap). As to how they get monetized, we wouldn’t think it would be two difficult to sell the collection (all things considered) given their archaeological, historical and cultural significance. Granted, we don’t have any unique insights into this but according to the court appointed appraiser there would be multiple bidders for the assets (at 110m) if they were to go to auction today (Fwiw this has been echoed by management and Sellers). This gives us some comfort given his independence and expertise.

Outside of an outright sale (and given they now have full rights to the assets) we could see how the ruling could also result in additional revenue streams through film expeditions, artifact retrieval, TV royalty’s from Discovery or National Geographic, etc., but thats just us thinking out loud here. We would imagine they might be able to pull some sort of sale leaseback transaction as well.

Again, any thoughts on all of the above by our readers would be greatly appreciated.

PRXI Letter to Shareholders

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