Yet Another Value Podcast 对 $DINO 的判断变化

But you know when I say three and a half billion EBITDA 3 and a half billion EV 350 million of next year IBBA I don't say like hey super deep value. So I I'd love to for you to just lay out how you think about the valuation here.

Sure. So and I mean you mentioned value X and I know we spoke before. So you uh so the way that I'm usually trying to think about the business is a from point of view of the free cash flow yield and the kind of yield and whether the free cash flow yield that these businesses are generating and the big question is what do they do with the money and we we can definitely talk about that but to me the free cash flow yield is the northstar where I'm trying to figure out whether this company is being attractively priced or not.

And so and then one other thing not trying to get into the game of trying to figure out what this company is worth relative to its peers. I want to look at what has the market paid for historically for this type of for this company or for this type of company. What does the market pay for us usually pay for? And historically this number was quite volatile but it averages out that on average uh for D now the market was willing to pay about 5 to 6% free cash flow. you also call it I don't know 17 times free cash flow 20 times free cash flow that was the kind of multiple that the market historically said we're comfortable paying for this business yes it's volatile but as you said it's capital light um it's quite quite a bit of it's very sticky business even like if you go back to what happened with MRC they barely lost any customers right so in in the environment where they're not your customer is not delivering your distributor is not delivering to you the parts that they're supposed to if you're not leaving you're sticking and they barely lost any customers. This like if uh reading through some TGO transcripts and and talking to some of their clients, you kind of realize that they customers stay because a they were told okay we this is we'll figure it out but they will they in order for them to try to figure out an alternative that would have been too difficult. So they uh this is a sticky business. It's a it's arguably high quality business and the market historically has paid about a 6% free cash flow yield.

So if we're looking out to even if we go with the 350 million number and as you mentioned there's very very little capex uh the company with MRC they inherited some debt before that there was no debt. Uh right now they're paying I think about $30 million a year in interest on that debt on MRC. Uh they said that they will try to pay down uh they are generating cash flow and they will try to pay try to pay that down. So that will probably go down to about 20 million. But figure with with 350 million of EBITDA by 20 end of 2027, this company should be making about $300 million of free cash flow.

So you So that means on 2027 it's today you're paying you're getting about a 10% free cash yield.

Well 350 So I I'll just do in my head real quick. So 350 minus 20 capex is 330 minus 20 on your numbers of interest is 310. You know, I we can talk about if you should do that, but then they're going to pay taxes, right? So, aren't we taking 310 down to like 250 after tax? Am I thinking about that correctly?

Uh you you are, but then you can add back the uh the stockbased compensation. So, like cuz that that's a non-cash item, right? So, that from cash flow point of view, you're adding that back in. So, it's a I the way that I'm based on the numbers that I have, I think it was coming out to be about 300 million.

Okay. Okay. That's cool. And I do know they also have talked about I mean this would be one time not sustainable but they have talked about hey we've got another 50 million of inventory reductions to go and all that sort of stuff. Okay. So

but but that that will go towards paying down debt so that reduces the interest. Cool. So 30 300 million of cash flow is kind of what you're saying for 2020.

Yes. And and that is on on the EBID number that I would argue this should be relatively easy to achieve for them. Yep. So, uh, but you know, again, 300 million of free cash flow. So, that's kind of an equity number. So, this is a three billion market cap company. You know, I I look at and I say, "Okay, Steve Scott, historically, this trades 5 to 6% free cash flow yield to equity. That's, you know, 17 to 20 times free cash flow. You're buying this at 10 times 2027 cash flow." On one hand, that sounds attractive, right? That's do that math real fast. That's like a double if you get to the 20x extra free cash flow. On the other hand, you know, you look at this today. Hey, distribution business not a huge amount of growth and stuff like why isn't the right number 10 is pretty low for a steady high free cash flow business, but why isn't the right number 12? Why isn't it 14? Why why isn't it 15? Like are we It's relying a lot on multiple expansion, I guess, is what I would say.

It's a great question. I think that that's one of the key kind of the questions of what's going to happen here. And and I think what helps with this company is that the way that they have been allocating capital in the past has been relatively efficient. So where has the capital has been going to it has been going towards acquisitions which up up until MRC if you looked at the acquisitions that they have they have done they usually have been what especially like after after you include the synergies they seem to be buying companies at about four to five times a right. So if you are a company that is able to buy and through your own efforts not because it's not available for everyone if you're able to buy growth at four to five times a bid and you yourself is trading at I don't know eight or nine then through that you're actually adding you you're adding value and you uh and the price that you the price that you're paying on the the free cash yield that you're getting on those acquisitions is adding you know that so that is something I always struggle with right this is the curse of the inquisitive compounder right if you're trading take it to the super extreme if you're trading for 100 times EBITDA people are baking in like these guys are going to be able to really roll up the industry accreatively right

well it does remind me of the 70s right like oh we traded a high multiple we issue stock to go buy stuff at a cheaper multiple so we grow so we get a higher multiple like and I I do hear you there these are creative acquisitions but how much do you build in the how much do you build in the the value creation of that into the multiple? You know, it's just like a a little chicken or the egg or like you kind of run into an infinite loop paradox.

You you're right. But I think that partially explains for why this company historically has been trading at 6% free cash yield and not 10, right? Because because we because we're going from a steadystate zero growth business to a business that is growing because partially maybe because of the acquisition that could be growing at 3 to 5% per year and once you have that that does deserve a higher hold.

The the other interesting thing here and I'm just pulling it up as we speak, but they do have uh they they have a very balanced capital allocation program, right? As you said, I don't think they want to run with much debt. Uh but they do have some debt right now. They are paying back a little bit of debt, but they're also buying back stock while they're doing it. So, you kind of get the nice of you get all the worlds, right? Where they bought back 75 million of stock in the first half of the year. And again, this is a three three billion market cap company. They were actually lower when they bought it. They timed their repurchase very well. But buying 75 million in the first half of the year, 150 million of year, like that's 5% of the company. So you get the buyback, you get a little bit of the debt reduction. And the debt reduction, you know, if you're valuing on the free cash flow to equity story, decreases the interest expense, which lets you buy back more shares. So you kind of get the best of all worlds. And by the way, they can keep doing some bolt-on acquisitions with the balance sheet and the cash flow they generate. So they've kind of got all of them at that point.

And yeah, that that's exactly it, right? So, and if you look at the history of the buybacks that they have done, they're not they weren't doing buybacks when they were trading at $30 a share. They were doing buybacks that were trading at 10, 11, 12, then they leaned into it early. So they did kind of at the time this was this was interesting and bullsy to some extent is that at the time when they were going through this massive problem of ERP implement trying to figure out the ERP implementation for MRC they still had enough confidence to say okay we're going to take 50 million and and their working capital was growing they said okay we're going to we have enough confidence in this business to to buy back $50 million worth of shares in Q1 because they wanted to take advantage of the share price being at around 11 or 12 or wherever it was at the time, right? So, they've been opportunistic and historically have shown to be pretty smart about when they're buying back shares.

You know, the other thing here is David, as an Eastern European, you might be able to say his last name by the name. Chinowski. Is that it? He he owns like he owns a million shares. I think over a million shares. And you know, with the stock at 16, that's $16 million$6 million bucks of stock ownership. I think gets paid nicely, but you know, you do have a decent bit for a spin-off or a company that's kind of I don't not capital intensive, but that's grown through acquisitions spin-off like you do have a decent bit of insider ownership just through through that piece. It's not huge, but it's

No, I think we c I think we covered most of it. Uh I think there there is one question that people would have is because so once again not to get too too much into the weeds because I was trying to if you talk if you cuz obviously in the last couple of calls a lot of the questions were about okay what is the company going to be doing as far as the ERP and why did they buy the company which was installing it different uh cuz um Dow itself is on is on uh SAP ERP and what Oracle was MRC was installing Oracle so they knew They came into it knowing that it's going to be two different systems. I don't think they realized how bad it was going to be, but they came into it knowing there was two different systems. And what they're saying now is quite interesting is that they're going to move some of the centers and they already moved 17 out of the 20 that they were expecting to move to SAP while they're going to keep the others on Oracle. And it's a question like why is that? And I had and I had some qu conversations with people that like at the consulting companies that normally do these type of implementations trying to figure out okay is this normal to run uh companies side by side two different ERP systems side by side and what I was told is that like it really depends on what kind of business this is in and in some case it could be the case that the Oracle ERP is the best for a particular type of type of business and this is just another reminder that the business that they got into with MRC which is more downstream on utilities. It is a slightly different business than upstream and that's why there's going to be they they're deciding to keep that Oracle ERP for that one for now and try to make it work and this is the business that you know the MRC management uh has made a decision to improve their own business before it was being bought by Dino by implementing this. So this there's a lot of moving parts here but I think given the micro background switching from a headwind to a tailwind and the people who are involved here with David Cherishinsky being there like he's been a dino for I think over 25 years and has a pretty good history of uh prior acquisitions that they've made in the past. you're getting into a station in which you are there's a few ways to win from here and yes the stock has done a little bit uh has done a little better since uh since they reported Q1 and they showed Q2 stabilizing but you kind of you could be in a situation in which things might start going the way that the right way for the company as opposed to kind of swimming against the tide which they've been doing since they listed it

it's I mean as I was looking for the beneficial ownership it is funny because just to what you're saying they've got a little thing that says Hey, since we spun off, like US rigs were uh 197 rigs when we spun off in the US and that's 571 at the time that they were kind of writing their proxy. And you look at that, you're like, hey, as you're saying, this company has been running into headwinds and I don't think anyone's calling for 1900 rigs in the US again, but if if you just stabilize and start ticking back up, like the the financials could really shine through.

And it's still a highly fragmented industry here, right? So yes, we had a combination of the two largest players, but I don't remember the market share numbers, but I know that it's below 20%.

Do you uh do you want to talk real quickly about the your 2029 price target just so people can see why you're you're so excited about this and maybe get as excited themselves? Well, so it's really we already talked about it to some extent, but when I was looking at uh 2029, it's just a matter of what kind of companies can be earning on a free cash flow basis. And then uh if you put a 6% free cash flow yield multiple on that, you can get to about 30 easily to uh by 2028 2029, you can get to about 30 $32 per share. Do you think this company should be public?

It's a good question. And I think if the beam public lowers its cost of capital espec uh then yes uh but if it does not then maybe this is given how volatile the the business they're they're in maybe it should be private.

I I just asked because again a throughine of this conversation has been private equity loves these businesses. Yeah. They slap a lot of leverage on them and then they do the roll up that you're talking about, right? And this is a business where the management team does not want a lot of leverage. They're paying their leverage down. I I think they're paying their leverage down. You know, I correct me if I'm wrong. I think they're going to be well under 2x. They're already well under 2x, but they're going to be well under 2x leverage.

If this was a private equity portfolio company, four to six probably is where they'd be le levering this thing up. That would create a lot of tax shield on the interest rate. had really juiced the equity. And I say that because a I think there would be private equity interest and b when I you look at the shareholder roster and I won't call out any specific people, but you've got a lot of shareholders who I remember were involved in MRC and they were saying MRC belongs with either DNA or a private equity firm and they in the past quarter or two I see a lot of firms that have been adding to DNO and I have to imagine part of their thought is this would be either better as a private equity controlled company or run like a private equity company in the market.

I am guessing to some extent that for private equity to get involved in SATA is they would want to see a growth in the addressable boom market. You do not because the the flip side on what what happens when you have a highly levered company in a shrinking market when you have a melting ice cube and it got a lot of people into into trouble both in public and in private market. So I don't think people want to touch that. I I do agree with you, but I think I might push back just because again they're talking about the data center growth and that that's real and the midstream play in particular has a lot of and they're talking about the utility growth and the water growth and again those are real and those really play into the data center side. So I could see a private equity firm kind of saying hey the the rig side is our base and if we get any upside there that's the chair on top but let's lever this up and let's we're going to get growth from the midstream and the data center and all that sort of stuff. let's lever this thing up and kind of take that growth and we'll get a cherry on top. We'll get a call option on oil and gas exploration if that makes sense.