Investment thesis
Aimia Inc. TSX:AIM is undervalued based on it balance sheet by over 40%. But its future strategic direction is unclear, and there is no clear catalyst for unlocking value. At present it is a speculative buy.
Background
Aimia Inc. is a loyalty points company based in Canada, which just sold its operating asset, the “Aeroplan loyalty program,” to its former parent, Air Canada (TSX:AC), the largest Airline in Canada. The sale closed in January 2019. Aeroplan was the former loyalty program for Air Canada but was spun out in 2005 as a separate company, Groupe Aeroplan when Air Canada was in dire need of funds.
In 2009 Groupe Aeroplan acquired Carlson Marketing for $175 million, an acquisition that was value destructive in hindsight. In 2010 it invested in Club Premier, the loyalty program of Groupo Aeromexico; a sucessful investment. In 2011, Groupe Aeroplan changed its name to Aimia.
In May 2017, Air Canada pulled the rug from under Aimia by announcing that it will not renew its Aeroplan partnership in 2020 as it starts its own rewards program. Aimia shares plunged 63 per cent on the day, as Aeroplan constituted the majority of its operational business. Common shareholders sustained heavy losses. Most clearly did not appreciate the contract risk with Air Canada. Management kept speaking reassuringly till the end. Ex-CEO Rupert Duchesne conveniently went on medical leave, never to return, the same day Air Canada kicked Aimia to the curb. Here is a timeline of the events.
Soon after, it became clear that Air Canada's announcement was strategic and was intended to panic Aimia's board and shareholder base to lower the takeover price. It made a low-ball offer of $250 million to Aimia, which Aimia rejected. However, after intense negotiations, Air Canada (in a consortium with The Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM), Canadian Imperial Bank of Commerce and Visa (V)) bought Aeroplan for 481 million Canadian dollars (net of taxes) in January 2019 -- still very much a steal. (CIBC and Toronto-Dominion, with Visa, operate a lucrative credit card business that depends on Aeroplan award miles). Below is chart of Aimia and Air Canada stocks' relative performance.
After May 2017, several prominent value investors like Mittleman Brothers have bought substantial stock in Aimia. Currently, there is a boardroom battle taking place for the future direction of the company. Mittleman Brothers, the largest shareholder in the company, had a standstill agreement with Aimia, which prevented it from increasing its 23.3% stake (as of July 10, 2019). That stand-still agreement expired on July 1. Mittleman Brothers has signaled that it will be taking on a more activist role. If Mittleman Brothers succeeds, it will likely reshape Aimia as a general investment vehicle and take it out of the loyalty arena. Mittleman Brothers is opposing the current board of directors and said that it will be proposing its own slate for the board.
The company has about $400 million in unrestricted cash and about $484 million in equity investments on its balance sheet. Aimia owns 48.9% of PLM Premier, the loyalty program of Grupo Aeromexico Airlines, which is -- I estimate -- at a value of $384 million. (About 10 times net Ebitda). PLM Premier is growing by double digits. I arrived at a value of $384 by multiplying $80 million Ebitda times 10 and dividing the value by 48%. It is possible that PLM Premier may be sold back to Grupo Aeromexico in a similar fashion to what happened with Air Canada.
Aimia also owns pieces of other smaller businesses estimated at around $100 million for a total of around $484 million in equity investments (held at a book value $70 million). It owes about $322.5 million to preferred shareholders. However, the preferreds are perpetuals, and the company is under no timeline or obligation to redeem.
Source: Q1-2019 investor presentation
Valuation
Aimia's common equity value is roughly as follows:
| Millions (CAD$ Million) | Notes | |||
| Cash and investments | 632.9 | 481 net, from Aeroplan sale | ||
| Less | Value of preferred shares | -322.5 | Redemption value | |
| Less | Share buyback in May | -150 | In May 2019, Aimia bought back $150 million worth of shares at $4.30 per share. | |
| Add | Equity value of about 48% PLM stake | 384 | =80*10*0.48 | 10 x $80 million Ebitda x ownership stake |
| Add | Estimated other equity investments | 100 | (Cardlytics & others) | |
| estimated Net Asset Value | 644.4 | |||
| Market cap | 450 | The share price currently is $3.83 | ||
| Difference | 194.4 | 43% undervaluation | ||
| No of common shares (million) | 117.423 | On May 24, 2019 | ||
Aimia is also sitting on about $180 million in deferred tax loss carryforwards in the U.K. and U.S. (at the end of 2018), which can be used to shield future income in these jurisdictions. No value is being assigned to this. It has no debt, apart from preferred shares outstanding.
Summary
Based on my calculations above, it appears that Aimia common stock is over 40% undervalued at this time. But it’s unclear how and when this value gap can be closed, so this discount is likely deserved till there is further clarity on strategy. The market is concerned, if left to its current management and board, that there will be destructive allocation of capital. There is reaon to believe this. In 2005, the company was valued at 2 billion Canadian dollars, and Air Canada made out like a bandit by holding an initial public offering for Aeroplan for $2 billion. It then bought the company back 14 years later for $450 million. The management choices of Aimia's former leaders and board were suspect, while Air Canada's strategic moves have been brilliant.
Note: $ are Canadian Dollars.
Disclosure: Author is long Aimia common stock and preferred shares.
Read more here:
No Need to Panic: Sally Beauty Can Coexist With Amazon
CRH Medical Is a Speculative Buy
Titan Logix Is Recovering With the Canadian Oil Market
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
