Category: Clear Leisure


Management of Clear Leisure came to market this week to update investors on the progress made in restructuring the debts of Mediapolis. This is a key value asset that the Company owns a majority stake in and has an offer to sell it for €20m. The sale is due to trigger a 2p per share dividend, and given that shares in Clear Leisure trade around this mark, the success of the restructuring is of significant importance to shareholders of the Company.

However, Mr Villa, CEO of Clear Leisure, disappointed investors once again with yet another delay. The result of the restructuring has been postponed a remarkable four times now, and it would appear that investors should expect the following noted date of 23rd May – where a further meeting at the court will be had – shall most probably not be the last one. This is because the “Directors anticipate that additional information may be requested at this meeting”, but that the nature of the information that may (read ‘will’) be requested is unknown at this time.

We feel that these delays are hiding something untoward that perhaps management are reluctant to share with investors. We certainly do not seem to be getting the entire picture here. As a result of this, we no longer see Clear Leisure as a signficantly underpriced opportunity. Rather, the increasing uncertainty and decreasing likelihood of a successful restructuring and subsequent sale of Mediapolis has made Clear Leisure too risky even for our risk tolerant tastes.

The principle reason for this is that management have proven a number of times throughout the past few weeks that what they say investors should expect does not happen. This may genuinely be because management are only relaying the updates from the court as they receive them and therefore they will be as frustrated with and surprised by the delays as his shareholders. However, we cannot know this. The problem of asymmetric information here is too steep for our liking and thus we no longer recommend Clear Leisure as a buy.

Management have a track record of failing investors (the share price performance is testament to that) but, with the apparent structural break seen earlier this year when it was announced that Clear Leisure would seek a new CEO (news of which is well overdue), that the restaurant chain would be spun off (ditto), that Mediapolis would be sold and cash returned to shareholders, we believed that a ‘new leaf’ truly had been turned. Not so.

Leopards do not change their spots after all.

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Investors currently wait in anticipation of a favourable outcome for the restructuring of the Mediapolis asset, expected today. If it goes well, investors will see a 2p per share dividend, offering a yield of just under 100%. However, if the proposal is rejected then the Mediapolis story will end with its liquidation. Thus, we are faced with an entirely binary return schedule.

Consider that in the event of a positive outcome, the CEO will be eager to inform the market to see the share price appreciate appropriately. If we were in his shoes and time permitted, we would want to inform investors ahead of the market’s closing. Conversely, in the event of a negative outcome, the CEO may wish to hold the information until the market closes and so investors have the weekend to soak in the information, thus perhaps avoiding a gruesome over-reaction in the share price.

If the above is the case then we can use this framework to signal the outcome of the court approval. In other words, if we do not hear of the outcome before the market closes then this could be taken as a signal for a negative outcome.

Note that this assumes that the outcome is received by CLP before the market closes and they have sufficient time to produce an RNS (if one is not already prepared) to be released to the market to inform them of the good news. The last hearing was scheduled for 11am, but this is no reason for why it should also be held at this time.

This is not a investment recommendation, simply an explanation of the decision landscape according to our viewpoint. We will be using this strategy to position the PM portfolio appropriately.

With the delay of the court hearing regarding the Mediapolis asset’s debt restructure proposal, now would seem an appropriate time to thoroughly assess the value of Clear Leisure’s portfolio of assets. We find that there does appear to be a very good opportunity for upside here, with a compelling base case 100% return, conditional on a favourable court outcome.

For more information on the Mediapolis restructure, click here for a summary of the events leading up to just before the deferral of the hearing from 21st March to 11th April.

Amended Capital Structure

Clear Leisure have a fairly diverse collection of investments ranging from leisure to finance. But don’t be fooled by the glossy website which displays a host of seemingly operational and fully-functioning companies owned by CLP. Here is an annotated version of the capital structure which better reflects the current situation:

CLP Structure

Thus, realistically, all we should be concerned with are the valuations of Ondaland, SoSushi and Mediapolis. A quick look into the values of the assets in ‘Other Investments’ yields the fairly muted findings:

  • Bibop: CLP’s stake cost them €1.035m, however, the website’s domain is currently up for sale, which really doesn’t bode well. We attribute no value to this asset.
  • Geosim: Back in 2008 CLP wrote down the entire value of this investment (a 3D map simulating tech firm)
  • Ascend Capital: CLP acquired a small stake for €0.192m. The website is very rudimentary, however. It is not even clear whether it is still in operation.
  • Class Finance: This financial advisory company was involved with the ORH acquisition by CLP. Given we know how well that turned out (a large debt position was missed by the due dilligence and it directly resulted in its liquidation) it does not bode well for the company’s service quality. Again, no value attributed, despite the stake original worth being €0.250m.

There may be some upside to the liquidation of ORH, as hinted by the Company. Right now the market has wiped off all value associated with it, which means that any gains from that direction are currently not considered by the market. It is not worth speculating what may come of the liquidation though as it is sure to take a great deal of time and nothing may come of it.

Sum of the Parts Analysis

CLP 30.03.14

Our approach was as follows:

  • For Mediapolis we took the base case €20m cash offer deal and accounted for the debt post restructuring.
  • We took Ondaland and SoSushi’s most recent full year EBITDA figures (as at 31st December 2012) and applied appropriate EBITDA multiples to reach a valuation for each asset
  • Ondaland’s 13.5x multiple is drawn from Merlin Entertainments’ valuation as at IPO. Given that they share the same sector we felt this was an appropriate comparable.
  • SoSushi’s 12x multiple was drawn from the recent restaurants sale by Byron Burger Co., which transacted at this multiple. Again, we feel they are comparable due to the same sector and similar brand quality associated with each.
  • Note, the Ondaland stake % is found by taking the 51% stake that CLP has in Sipiem, which, in turn holds 66% of Ondaland. Thus, 0.51×0.66 = 0.3366.
  • We did not include the net trade receivable figure (just over €1m) as we suspect this is held within the ORH subsidiary which is in the process of liquidation.

We reiterate that this assumes that the Mediapolis asset is sold for €20m and the restructure goes ahead. However, in the event of a liquidation of Mediapolis (which will occur if the restructure is rejected by the court) then the debt associated with Mediapolis is wiped off along with the €20m value. Thus we come to a slightly lower NAV figure of £7.4m, or 3.86p per share. On the current share price (2.32p) this still offers a 40% discount to NAV.

Conclusions

If the Mediapolis asset sale goes through successfully at €20m though, we come to a very attractive NAV figure of 5.49p per share, offering 137% on the share price.

Further, if management can leverage the situation to their advantage (given the restructure passes successfully through the courts) and utilize the equity credit line for liquidity purposes then there will be no pressure for a quick sale process for the Company. Thus, CLP could engage with a number of interested parties as well as the two current bidders to attain a more competitive figure. It was valued at €35.6m independently after all. If we hypothesize that this figure is achieved and use it in our analysis above we come to a NAV of 12.23p per share, more than 5 times the current market cap.This is a tremendous proposition and is not so ludicrous to suppose that it has a chance of occurring.

A failed Mediapolis sale implies 66% upside, our base case valuation for a successful outcome implies upside of 137%, while a fair value sale for Mediapolis offers 427% upside. If we weight these outcomes on a 45%-45%-10% basis respectively, we come to an expected per share NAV value of 5.43p, or 134% expected return.

We look forward in anticipation to the 11th April’s court hearing.

CLP 02.03.14

We tipped this asset rich and cash poor company in the last quarter of 2013 (click here for historical articles) primarily because of the severe disparity between NAV (13.3p as at 30 June 2013) and the prevailing share price, currently 1.95p. Since then a number of developments have been announced, including the previously covered sale proposal for the Mediapolis asset. We provide a brief summary of subsequent events below, and conclude with the exciting potential 2p special dividend, which could see new investors realize a 100%+ return if they purchase stock at current levels:

Liquidation of ORH Group

On 12th February management informed the market of its voluntary liquidation of the hotel arm, ORH Group, after uncovering a major debt position previously unknown to CLP. Fortunately, Clear Leisure had already flagged the discovery to the market back in October 2013, which wiped off around 1p from the share price (circa £2m off the market cap). Note also that this £2m valuation of ORH is consistent with management’s view, according to the following statement: “the Company estimates that its total cash investment in ORH is approximately £2m” (this does ignore the company’s equity investment when acquiring its ORH position)(RNS, 12/02/14). Hence, the worst case scenario was already largely priced in, and so the news of liquidation had little lasting impact on the company’s share price.

Now that ORH Group’s unfortunate disposal is fully accounted for in the share price there actually remains some upside which is dependent upon the outcome of the bankruptcy proceeding. The following excerpt describes the situation: “the Company is actively seeking to extract […] any potential opportunities in the tourism sector, especially those related to the Italian hotel management market and web-based travel operations”.

“Clear Leisure is also actively seeking to swap its potential tourism assets, or potential future rights in ORH, […] with other tourism assets and activities. […] The board already believes there could be a positive outcome in this regard”. (RNS, 12/02/14)

Although this description tells of nothing definitive and is characteristically vague, it does suggest that a surprise gain could arise from the bankruptcy proceeding which should benefit the share price.

Mediapolis Court Developments

  • The Board of Clear Leisure submitted a formal proposal for the restructuring of the Mediapolis debt, which, if a favourable outcome is received, will then open the way for the sale of the asset. This occurred on 10th January 2013.
  • On 23rd January 2013 management announced that “an initial positive reply” had been received regarding the restructure proposal and that an external professional assessor had been appointed in order to “evaluate the quality and feasibility of the proposed plan submitted by the Company” (RNS 23/01/14).
  • By 27th February 2013 the Tribunal Court decided that more information is required due to the complexity of the restructuring plan, specifically in regard to the “status of the building permit and the financial coverage of the €12m debt position” (RNS, 27/02/14. This additional information is to be submitted by 21st March and a final decision will be made upon the Tribunal’s re-adjourning.

Although the court procedure has dragged on for far longer than most investors envisaged, progress does appear to be being made. However, the Company provides little detail on the two specifics of the restructuring plan. This adds uncertainty to the situation until the final decision is announced.

Conditional 2p Special Dividend Announced

Management provided a strong signal of their bullish view on the court proceeding by announcing ahead of the court’s final conclusion that the Mediapolis sale proceeds would partly fund a 2p special dividend. Either management are getting a little ahead of themselves or there is good reason to believe a favourable outcome will eventually be announced.

Consider that management are putting themselves out on a limb by voluntarily announcing that proceeds would be returned to shareholders. This is a very positive development indeed, and, if the result is not positive, will be a major disappointment for shareholders. Management therefore appear to be very sure that the court’s decision will be in their favour, otherwise they are setting themselves up for a painful fall.

Of course, we should not take this weak signal as an indication that a positive outcome is a sure thing. What we can consider is that in the worst case scenario, where the outcome is unfavourable and Mediapolis is liquidated, there are sufficient assets remaining on the company’s balance sheet which still significantly overshadow the current market cap of the Company. As it now appears to be the Board’s intention to wind down the company and distribute cash to shareholders (if recent announcements are anything to go by) then the expectation of future cash distributions from future asset disposals acts as a good margin of safety if the Mediapolis sale falls through.

From this perspective, we believe that Clear Leisure is a more attractive investment opportunity than when we initially tipped it. This is largely because it is now clear that asset disposals will translate into special dividends, whereas before this was simply a speculation of ours. We re-iterate our BUY rating.

 

This article is one of three which shall detail our top ten stock picks for the coming year. The following two articles which shall conclude the short series shall be released on the following two Sundays at 20:00.

Every stock meets the PhynixManifesto requirement for coverage. That is, all are either deep value, value or contrarian based investment ideas which should offer superior investment returns. The following are not for the faint-hearted. These recommendations are only suitable for the risk tolerant investor.

Each stock pick has a brief appraisal and highlights the key catalysts investors should look out for in the coming year.

Clear Leisure (LSE:CLP): A Sub-Zero Value Play

Clear Leisure is a leisure and real estate focused investment company with interests across Europe and based in Italy. Its stock continues to trade at a severe discount to book value (the Price-to-Book ratio stands at an eye-watering 0.14) and could offer a serious reversal thanks to a number of recent events. While its share price trades at 2.30p, its reported NAV stands at 13.3p.

Management have announced their intention to appoint a new CEO charged with selling the company’s larger assets. On this front, its majority owned Mediapolis asset, an Italian real estate and leisure park development, has been in the spotlight with two offers of €20m. Net of debt, it amounts to 2.9p per share.

Already the company are close to monetizing a fifth of NAV. Another major asset, the 51% owned Ondoland leisure park, is thought to be worth €26m. If this were sold and all outstanding debt repaid after the secured Mediapolis debt, around £9.2m cash would still remain. That’s 4.6p in per share terms.

Despite the disappointing performance to date, this break in fundamentals could offer a seriously attractive investment.

Empyrean Energy (LSE:EME): Growth at A Bargain Basement Price

Empyrean is an oil and gas company based on on-shore USA with assets in Texas and California. Its only major producing asset is the Sugarloaf Project, of which it owns 3%, and is the company’s main focus presently. And so it should be. It has been the key to the company’s success.

It is fully funded thanks to the company’s financing from Macquarie and is operated by the experts at Marathon Oil. Already, the two major risks of most oil and gas investments are not a factor here. To top it off, the number of wells drilled for 2014 is set to more than double to 100-110, from just shy of 50 for 2013. By 2014’s end, just over 200 wells will be producing. This will accelerate production significantly going forward, and should boost profits yet higher.

Year end EPS is expected to stand at 2p. With a current share price of 11.25p, we have a rather shy forward P/E of 5.6. A P/E of 10 would still be cheap, while a P/E of around 20 would be pricing in a fair amount of growth, and probably a little expensive. With these two yardsticks we have a broad range of 20p – 40p, with a 30p mid-point. Off the mid-point we have a three-bag investment right here, and for a level of risk that should only provide the returns of your average large cap.

Knightsbridge Tankers (NASDAQ:VLCCF): Pure Play On The Capesize Carrier Market

Knightsbridge is a small player in the much-hated dry bulk transport industry. It owns four young capesize carriers, the largest vessel in this sector. These huge ships carry iron ore, grain, coal and potash around the world, with the majority of destinations being along the coast of China, so this is very much a play with exposure to China’s economy and the wider world economic recovery.

The dry bulk market is showing signs of reversal from the sub-break-even prices seen in 2012 and 2013. A full recovery will leave Knightsbridge in a very healthy financial position. The management opt to pass on returns to shareholders when times are good so expect the dividend to increase with the spot charter rate.

What makes Knightsbridge particularly interesting is its four newbuild capesize carriers, due in mid 2015. This will double the company’s fleet. Now, this is expected to be at a time when the market is in full recovery, offering very attractive charter rates. If this is the case, Knightsbridge will double its cash flows in a year.

This abrupt expected increase in profits is leveraged by the fact that prior to this the market should enact a recovery. So current prices are very much deflated. This will reverse over the year and then the incoming four newbuilds add a significant kicker to the investment. Meanwhile, pick up a juicy 7.6% dividend yield while you wait.

CLP 24.11.13

Shares in Clear Leisure enjoyed their single best daily gains in many years this Friday, closing a staggering 104% higher at 2.75p. The impressive leap in value was spurred on by a surprise announcement by management detailing that a Milan based building contractor named Generali had approached the Board with an attractive offer for its 69.45% owned Mediapolis asset.

If the cash only offer of €20m is taken, it would translate into a per share consideration of 8.4p. Note though that 65% of this cash is ear-tagged for Mediapolis-related debt repayments, leaving net cash available of 2.94p per share. Regardless, this figure still stands at a modest premium to the current share price.

CLP 24.11.13 2

Fig. 1: An Artists’ illustration of Mediapolis

Mediapolis is only a patch of land (165 acres) at this present time but what makes it interesting is its valid planning permission and extensive plans for development of a theme park, shopping centre, hotel, an energy production plants and commercial property on top.

The Board also have the option to receive payment in the form of €13m in cash to repay the Mediapolis-related debts and €17m in real estate assets. This transfers into a net per share consideration in the form of assets of 7.16p. This figure is 1.4x greater than the pure cash offer but the value transfer is in fairly illiquid assets, and thus we see a premium  to the cash-only deal.

We should consider that Italy’s real estate market is certainly one only favourable to buyers thanks to the dire present economic state of affairs the country finds itself in. Therefore, if management wish to realize this €17m into cash it may a) prove to be very difficult to find a buyer at all, and b) if they do find a buyer the assets may not transact at fair value. There is also significant ambiguity surrounding whether this €17m is a good price for the goods being received or not.

Due to these reasons we suspect that the Board will opt for certainty, and therefore the lower 2.94p per share offer. If they do not then Clear Leisure shareholders will find themselves in exactly the same position as they had been in prior to the offer. They will remain owners of an asset heavy company which has historically been unable to realize value from said assets. The real estate offer would simply result in a reduction in debt and real estate assets swapped for the Mediapolis asset.

If the Board do opt for the cash-only offer then shareholders, again, will only see value if these returns are passed on via a special dividend. Clear Leisure has a track record for putting cash to work in a grossly inefficient manner, and so we would be very concerned to see yet more cash become available to management for investment purposes.

Value will only be realized for shareholders if this cash is returned to them. This stock was attractive largely due to its severe discount to NBV and a large catalyst of this discount’s erosion was expected to be driven by the Mediapolis sale. Now that this has occurred – rather sooner than expected – the fundamental risk-reward ratio seems decidedly less attractive now. Clear Leisure do have a number of other interesting assets, but the glaze has somewhat left this investment proposal now.

PhynixManifesto is pleased to announce it is initiating coverage of Clear Leisure Plc (LSE:CLP), a troubled investment company which holds varying interests in leisure sector-denominated businesses, located largely in Italy.

CLP 03.11.13

Clear Leisure, formerly known as Brainspark Plc, has led a difficult life since its IPO and, as so cruelly depicted by the above monthly chart, the journey has not been at all profitable for shareholders. The company launched at the height of the internet bubble with the following mandate:

“Brainspark aims to provide a one-stop solution for start-up and recently formed Internet companies. As well as providing cash, Brainspark offers a range of physical incubator services designed to encourage and protect growth and provides daily access to the expertise of its management team and substantial network of contacts”

In short, the company acted as a venture capitalist in the internet start-up space. Not such a good investment thesis in hindsight, but such is the nature of the beast. The company dabbled in various businesses, but the less successful ventures forever outweighed any positive results. The oppressive operating environment lent no favours to management, however.

Since its IPO over a decade ago, shares now trade at a remarkable 1.40p, a near-negligible value compared to its adjusted flotation price of around 32,000p (note that there has been at least one share splits which has warped the true IPO price in the above chart).

Mr Alfredo Villa’s Departure & Reappointment

After briefly departing the company Board in February 2009 to “pursue other business and charity interests” Mr Villa returned in August 2009. Then, in January 2010, he was appointed CEO of Brainspark. Mr Villa redirected the company towards a wider breadth of company interests and, as such, Brainspark began to describe itself as a “fast growing international investment company”. Investments began to lean towards the leisure sector, specifically Italy, where Mr Villa hails from. Again, in hindsight, having so many interests in Italy has not fared well for the company’s performance.

After the company’s interests and new strategy were no longer reflective of its name, the company was re-titled Clear Leisure.

CLP 03.11.13 3

Investment Appraisal

Fast forward to the present and we find Clear Leisure offering an exceedingly interesting value proposition. The company now has interests in the following entities:

CLP 03.11.13 2

Management have recently announced that they intend to appoint a new CEO who will be charged with the “selling of some of the larger assets”. This was announced in tandem with the appointment of Peterhouse Corporate Finance Limited, a joint broker which specializes in “innovative restructuring solutions for small-cap quoted companies seeking to restore and build long-term shareholder value”. These two important developments clearly signal to the market of a step-change in the performance of Clear Leisure.

Namely, we are interested in the monetization of these larger assets and which assets they shall be . We will be keen to learn more about where the resulting cash will be deployed – the obvious choice would be a special dividend to shareholders. Equally, sound further investment would be welcome, however, the fact that the Board intends to find a CEO specifically to sell off assets does not suggest that Clear Leisure has much of a long term strategy in place.

This asset sale  and new leadership setting becomes all the more interesting when we consider the phenomenal discount that Clear Leisure shares currently trade at. We estimate that the company’s net book value (NBV) per share ranges between 14 – 18p, with the variation depending on one’s valuation on the ORH hotel group. We wrote off its value in this NBV estimation due to the recent closure of operations. Compared to its share price of 1.4p, the company trades at a price-to-NBV of 0.100 – 0.078, a phenomenally cheap valuation.

The risk here is that management have consistently failed to generate value for shareholders, and so the market valuation has long ago trended away from intrinsic value. We would argue that this risk has now been somewhat mitigated by the recent developments and the subsequent inspection of Clear Leisure’s assets are certainly in order. Our future articles shall explore this avenue in far more detail. We expect the sale of assets should prove up the company’s value and should therefore drive the share price towards a less ludicrous NBV discount.

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