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Einhorn Is Transforming BioFuel Energy Into A Profitable Real Estate Company

July 22, 2014 | About:
Chris Mydlo

Chris Mydlo

41 followers

Two of the gurus that I follow at GuruFocus are David Einhorn and Daniel Loeb. They are both considered to be activist investors and their hedge funds have experienced extraordinary results. Loeb started Third Point Capital in 1995 and Einhorn started Greenlight Capital in 1996. Third Point Capital has returned 20.4 percent annulized since its inception in 1995, and Greenlight Capital has returned 19.5 percent annualized since May of 1996.

Together they hold 52.8 percent of BioFuel Energy Corp (BIOF) with Einhorn holding 35.4 percent and Loeb holding 17.4 percent of the shares outstanding (including B Shares) according to the Form S-1 filed with the SEC on 7/16/2014. BioFuel is going through some major changes and will be reinventing itself as a real estate company. With the exceptional track record of the two hedge fund managers, Biofuel Energy is going to be a stock to keep an eye on.

Company Background

BioFuel Energy’s stock has been a loser since it started trading in June of 2007, about a year after the peak in the ethanol stock boom and just months away from the start of the recession. In 2012, the company had to do a 1 for 20 reverse split to get its price over $1.00, so it can remain listed on the NASDAQ. BioFuel’s business of producing ethanol officially came to an end in November of 2013 when it announced the sale of its ethanol plants. The company’s senior credit facility was secured by its ethanol plants and the lenders exercised their right to acquire them.

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Today, the company does not have any operations. According to their latest filing, as of March 31, 2104, what the company does have is $10.1 million in cash and cash equivalents and $179 million in a retained federal net operating loss carry forwards. At the maximum tax rate of 35 percent, the tax loss carry forward would have a value of $62.65 million if fully used within the fiscal year. It would not realize its full value if the loss was carried forward for multiple years, or used against a lower tax rate. Adding the cash balance and the tax loss carry forward results in a value of $72.75 million. The company currently has a market cap of $50.73 million. At the current valuation for the stock, the market is valuing the carry forward at $40.63 million. It could be a reasonable valuation given the uncertainty over when the carry forward will be used.

The S-1 that was previously mention is for an upcoming rights offering where the proceeds will be used in combination with a loan from Greenlight Capital to acquire the equity interests of JBGL Builder Finance LLC and certain subsidiaries of JBGL Capital, LP (collectively, “JBGL”) from Greenlight Capital and James R Brickman for $275 million. JBGL is a series of real estate entities involved in the purchase and development of land for residential purposes, construction lending and home building operations. The $275 million purchase of JBGL will be made in cash and stock.

JBGL Capital was formed in 2008 and JBGL Builder Finance in 2010 with Greenlight providing a majority of the capital and Brickman providing the remaining capital. The company currently owns approximately 4,600 home sites in prime locations in the DFW and Atlanta markets. JBGL also owns 50 percent controlling interests in several builders and provides construction financing for approximately 900 homes annually.

Financial Strength

Since JBGL was formed, the business has grown rapidly. Over the past year, the book value has grown from $137.98 million to $206.6 million, a 49.7 percent gain. For the last reported quarter (Q1 2014), revenue increased from $27.13 million to $49.64 million, an 83 percent gain. For the full years of 2012 to 2013 net income attributable to controlling interests increased from $17.19 million to $32.01 million, an 86.2 percent gain. Q1 of 2014 income was $7.35 million compared to Q1 of 2013 income of $6.03 million, a 21.89 percent increase. Projecting the gains in the first quarter of 2014 throughout the rest of the year leads to a full year income of $39.02 million.

The bottom line is that the business that will be moving into BioFuel Energy is estimated to make $39 million. BioFuel Energy currently has a market cap of $50.73 million. At first, it looks like there will be a P/E of 1.3, but that is not the case. There is still more work to be done. The rights offering and purchase of JBGL is going to increase the market cap and dilute the value of the shares. As of March 31, 2014, the net tangible book value was $10.25 million, or $1.64 per share. After the rights offering and purchase of JBGL, net tangible book value will be $138.96 million, or $4.42 per share based on the reported data of Q1 of 2014 and S-1. That also means that the expected number of shares outstanding after the rights offering will be 31.44 million. These figures do not contain the value of the $179 million loss carry forward.

Valuation

Let’s take those numbers, find comparables and come up a valuation. Getting back to the business of JBGL, it owns residential land for the use of building homes by independent homebuilders and other builders of which it has a 50% interest. The company also provides financing to the builders. With this information, I am going to compare it to other home builders.

Company

P/Tangible Book

P/S

P/E

Lennar (LEN)

1.8

1.3

17.9

DR Horton (DHI)

1.8

1.3

16

PulteGroup (PHM)

1.6

1.3

2.9

Toll Brothers (TOL)

1.7

1.98

25.4

NVR (NVR)

4

1.25

20.8

Standard Pacific (SPF)

1.5

1.2

16.2

Median

1.75

1.3

17.05

Using the median price-to-tangible book value of 1.75, BioFuel energy will be valued at $7.74 per share after the rights offering and acquisition of JBGL. With an estimated net income of $39 million, the stock would be undervalued with a P/E of 3.56. A value in line with the median P/E of 17.05 would be $21.15 per share. If the revenue of JBGL for full year 2014 increases at the same rate of its first quarter of 2014, a price-to-sales (P/S) ratio of 1.3 would price the stock at $12.76. Using the average of the three valuations gives leads to a price of $13.88 per shares.

Price at Median Valuations

 

P/Tangible Book

P/S

P/E

Average

BioFuel Energry (BIOF)

$7.74

$12.76

$21.15

$13.88

Conclusion

David Einhorn (Trades, Portfolio) and Daniel Loeb (Trades, Portfolio) have been two of the most successful gurus since the mid 1990’s and together control over half of BioFuel Energy with Einhorn having the largest stake. BioFuel Energy has struggled since it became public in 2007, and its ethanol plants were taken over by creditors last year. The company has no operations, but will be issuing rights, getting a loan from Greenlight Capital, and purchasing the very profitable business, JBGL. The current shares that are outstanding are going to be diluted during the process, and shareholders are at the risk of large short-term losses. After the process is over, the shares could have an average value of $13.88 based on comparable valuations providing an excellent opportunity.


Rating: 2.4/5 (5 votes)

Voters:

Comments

mtcutler
Mtcutler - 5 months ago

You use $39 million income projection as THE key number in your valuations to come up with the $13.88 average share price post transaction. The $39 million comes from a projected 2014 view based on the first quarter growth. But as part of the transaction to BIOF, Greenlight Capital is issuing $150 million in debt to BIOF at 10% interest. The reason they are doing this is so that the JBGL investors (those 'gurus' you follow) can cash out of their capital interests in JBGL and replace their those interests with the $150 million in high interest debt (about double market rates of about 5%) for BIOF investors to bear the interest costs going forward. JBGL investors are certainly investing gurus.

If we assume $39 million in annual income, we have to add in the changes to the business as part of the transaction from JBGL to BIOF. $150 million at 10% interest = $15 million in additional annual costs. So the $39 million now becomes $25 million. Now we are under $9/share using your averages.

The problem with the growth story and the 2014 $39 million assumption is that the growth was a direct result of increased outside capital added to the company's real estate portfolio from the 'guru' investors. It wasn't organic growth. It was just added outside capital and thereby increased investments. That kind of investment and growth won't be occuring in the new BIOF company, unless it comes with dilution to existing shareholders or increased interest costs to get the outside capital.

When we consider the 10% debt interest rate and the artificial growth, I put the post transaction share price closer to $5-$6, or 33% lower than current prices. This is actually a high price when considered along with the rights offering limit prices of $1.50 minimum and $5 maximum.

The rights offering alone as part of the transaction, at $5 maximum, will likely bring the share price near those levels as well. November timeframe.

If someone believes in the company post transaction, I strongly suggest they wait until the transaction, buy the shares when more certainty is available on timing, and participate in the rights offering then, vs. now when speculators are buying it without understanding the transaction and how the 'gurus' who are the only current investors in JBGL are making out.

jaskgolf
Jaskgolf - 4 months ago

Semi-agree with the comment above. A few additional points:

1) The 2013 income statement will reflect land sales that appreciated from 2010-2011 purchase values (held at cost on the balance sheet). 2014 could see the same activity, but eventually, that land will be sold off and you will see profit margins shrink (assuming land does not continue growing at a 20% annual clip). This is part of the reason why I think Greenlight is selling off.

2) The company has the ability to pay down the 10% debt, which I imagine they will do unless Einhorn does not allow. A 3rd party management team SHOULD pay down that debt taking the 1% penalty, or at least refinance it with better debt.

I am short this stock at these levels...(>$9 as of today).

jaskgolf
Jaskgolf - 4 months ago

Does anyone fully understand the noncontrolling interest? Is it simply the 50% of the builders that JBGL does not own? Is there any information that I may have missed in the S-1 that allows us to calculate a run-rate on this figure? Thanks very much.

1340901
1340901 - 3 months ago
BIOF Biofuel Energy Corp Significantly Undervalued Short Thesis is Wrong

This article is response to a article written by New Capital on Seeking Alpha on the 21 Jul 2014 titled "BioFuel Energy - Day Traders Pushed The Price Above Reasonable Limits" but is also relavant to the above article.

The writer of that article has taken a short position in BIOF and argues that there are a number of reasons why he thinks the price of Biofuel Corp is to high and that he thinks insiders are selling 49% of their equity stake JBGL. I show below that a number of his points are in fact incorrect and that BIOF, actually represents a very interesting long investment opportunity. (I hold a long position in BIOF)

A quick background, Biofuel Energy is a failed ethanol producer that completely exited ethanol business in Nov 2013 and remained a shell company with $10.7m in net cash and $179m in federal NOLs (expiring in 2028). In order to utilize NOLs, company's main shareholder Greenlight Capital (35.4%) and Jim Brickman (founder of JBGL) have proposed a reverse merger with JBGL Capital - unlisted residential property developer which is owned and controlled by the same Greenlight Capital and Brickman.

Firstly the New Capital states that "Insiders are selling out, so should you". This in incorrect. Yes insiders are reducing their stake in the company but to nowhere near to the extent that the New Capital claims which he says is 49% of their JBGL stake.



In actual fact what is really happening is that insiders are swapping their JBGL equity for, debt and equity, in the new entity. David Einhorn (Trades, Portfolio) currently holds 2.2 million shares in BIOF and is the majority shareholder in JBGL. Post the reverse merger Einhorn will essentially swap his stake in JBGL for BIOF debt and equity. As the capital structure of the new entity will change Mr Einhorn will swap a part of his JBGL equity for $150million of high yield debt in the new entity. Hence Mr Einhorn will continue to own a part the JBGL Enterprise, but in part will do so by being invested higher up in the capital structure. Clearly Mr Einhorn must still believe that the JBGL enterprise is a good investment for him to hold the company's debt.



Additionally through the rights offering Mr Einhorn will purchase 1.76 million shares for a consideration of $8.76 million of BIOF stock. In addition Mr Einhorn and Mr Brickman will swap part of their equity in JBGL for equity in BIOF by receiving 11.14 million shares as part of the equity issuance. What New Capital has failed to mention is that this portion of share will equate to a dollar consideration of $69.28 million meaning that for this part the insiders will be receiving their shares at a price of $6.23 per share a premium to the rights offering price. This shows that the insiders are willing to swap part of their JBGL equity for a higher price than that being offered through the rights issue. Clearly this shows that both Mr Einhorn and Mr Brickman think that the BIOF shares are worth more than 6.23 per share post transaction.



Since the cash portion of the transaction will be $205 million not $220 million as New Capital states it means that in fact the insiders will only be selling a portion of their JBGL equity being $55m ($205 million cash portion of transaction less $150 million debt =$55m) This equates to only 20% of the transaction value not 49% as the short seller mentions. It is not uncommon for insiders to take some chips of the table when they take a company public and 20% is hardly a huge amount.



What this all means is that Greenlight Capital and Mr Brickman will still own roughly 80% of the Enterprise Value post conssumation of the acquisition. To me this hardly looks like insiders are trying abandon ship and in fact shows that they are willing to continue to hold a large stake in the enterprise.



Additionally Daniel Loeb (Trades, Portfolio) of Third Point one of the best investment firms out there and a current owner of BIOF shares is not a shareholder of JBGL and hence will defiantly not be a seller. In fact third point will be increasing its stake in the company by taking up its full subscription rights and has also agreed to, fully exercise its over-subscription privileges and purchase all of the available shares not otherwise sold in the rights offering. This is something that New Capital conveniently did not mention. Furthermore Third Point will receive priority over all other holders in the allocation of shares available to fulfil over-subscription requests. Clearly we can see that Third Point is a keen buyer of BIOF and will be increasing its stake in the company from 1m shares to 5.2m shares, an increase of over 420%.



As a side note both Greenlight and Thirpoint purchased BIOF shares back in 2007 at price that I estimate ranged between $9-11. ( See their respective fillings) Hence they must believe that the shell company alone and its tax assets are worth considerably more then $9-11.



Next the New Capital mentions that the " share count will increase fivefold". This is not really a sensible statement to make without mentioning the fact that right now BIOF is just a shell company but post issuance of the new shares, will own a company with rapidly increasing future earnings 50% in FY15 as well as quality management and land assets. Hence it makes perfect sense to issue new shares if it means that in return the shareholders will take ownership of a quality asset.



So the question really becomes what is BIOF worth post the transaction. Given JBGL's historical performance and strong expected earnings growth I view the company as a growth stock. (I do not agree with New Capitals negative view of the housing market). Hence I believe the best and simplest way to value the company is to apply a PE multiple to future earnings.

To do this I first look at the companies Pro Forma financial statements in order to estimate earnings per share (eps). I make some adjustments to Pro Forma FY13 earnings (based on S1 doc) to estimate FY14 and FY15 eps. By taking FY13 net income of $4.7m and adding back the BIOF salaries expense (which I think will be eliminated once the companies merge) of $8.1m plus and the selling, general and administrative expense of $1.63m I come up with adjusted net income of $14.43m for the new entity. (this number is very similar to if we were to take the net income of JBGL for FY13 equal to $32m, subtract $15million in new debt interest payments and $3m in taxes) I then divide $14.43m by 31.4m in shares to come up with a new entity eps of 46 cents. I use the companies eps growth projections of 5% in 2014 and 50% in 2015 to come up with eps of 48 cents and 72 cents per share for 2014 and 2015 respectively.

With the forward 2015 PE on the S&P500 currently at 14.86 I argue that the new JBGL should trade at a premium to the general market due to its strong earnings growth profile (50% expected eps growth in 2015). I also argue that this premium is warranted due the fact that David Einhorn (Trades, Portfolio) has a very strong investment track record and will guiding the company in regards to its capital allocation. Additionally, to date, management has done a wonderful job of growing the business. With a significant equity stake in the new BIOF, management will have every incentive to push for further growth. This in turn should translate to increased shareholder value. Hence I apply a PE multiple of 17 to FY15 eps of 72 cents which brings the post transaction valuation of BIOF shares to $12.24 per share.

Investors that purchase the equity at current prices (last $10.95) and participate in the rights offering can create the new entity shares for $6.84 per share. (10.95 + 2.2245*5). This would mean that investors would be entering the investment at a significant discount to the $12.24 post transaction valuation.

Furthermore given that David Einhorn (Trades, Portfolio) has an excellent investing track record and a investing style that seems to follow a lot of Warren Buffets principals, he may in fact turn BIOF into a mini Berkshire Hathaway, using it to make future acquisitions. Given his investment track record such action if taken could provide significant upside to BIOF shareholders(think of early Berkshire Hathaway shareholders that invested 30 years ago and the returns they achieved), which is currently not being priced into the shares.

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