We look at 5 intriguing earnings I found during this earnings season
- Genting Singapore (SGX:G13) Getting ready for next stage of growth
- Medspace Holdings (NASDAQ:MEDP) Monster quarter
- Regis Corp (NYSE:RGS) Reported first positive operating income in 4 years, turnaround story intact
- Transocean (NYSE:RIG) On the cusp of an inflection point with day rates set to move meaningfully higher
- Activision Blizzard (NASDAQ:ATVI) Arbitrage opportunity
Genting Singapore (SGX:G13)
Genting Singapore announced their quarterly business update on 10 Nov 2022. It showed a very strong recovery of Resorts World Singapore (RWS). Revenue achieved 49% growth from the previous quarter. Net profit after tax tripled from the previous quarter.
With the bid for Japan’s integrated resort now moot, Genting Singapore has fully redeemed their Japanese Yen denominated bonds. Their management is focusing their expansion plans on RWS. Called RWS 2.0, Genting Singapore plans to improve the infrastructure in their theme park and aquarium. In addition, they will be re-opening the new Festive Hotel in 1Q2023. This will boost their inventory rooms by 389 keys.
Genting Singapore does seem to have improved its operations. Although yet to return to pre-covid numbers, they are currently awaiting the lifting of China’s Covid 19 travel restrictions. I think this will be the next catalyst for Genting Singapore to rerate its share price.
Medspace Holdings (NASDAQ:MEDP)
Medspace caught my attention when CEO August J Troendle was buying heavily into MEDP shares in September 2022.
Medpace Holdings is a clinical contract research organization. It is engaged in scientifically-driven outsourced clinical development services to the biotechnology, pharmaceutical, and medical device industries.
They have one of the better results I’ve seen this earnings season. Basically, they beat all expectations, increased backlog and raised guidance. Share price exploded upwards, gaining 40% after the results release.
CEO warned that there may be a possible impact on the company’s performance if there is a major financial downturn in 2023. However, he mentioned that it also works both ways. If it is not as bad a they expected, MEDP will be able to beat the guidance given.
With the post-earnings gap up, it may be prudent to wait for some consolidation before buying into this company. MEDP is also tremendously profitable and has continued to grow its ROE, ROA and ROIC ratios. However, its valuation picture seems frothy. This is something to consider moving forward. Buying at a premium to P/E, P/B and P/FCF increases the risk as this means the market is pricing at a high growth rate for MEDP.
Regis Corp (NYSE:RGS)
Regis Corporation is a leader in the haircare industry. They operate salons under the store banners of these brands above. In their latest earnings report, they announced their first operating income in 16 quarters.
RGS was hit hard during the pandemic. Its salons were forced to close during the lockdown and even after reopening, traffic was low as most people are working from home and people were afraid to go out for haircuts. Furthermore, many hair stylists left the business to find an alternative source of income. Due to a combination of these factors, its operating losses spiraled out of control and they found themselves in a pile of debt.
On August 2022, BofA agreed to refinance their debt which gave them much more leeway to meet their debt obligations. This is a positive as the new debt financing tells is telling me that the debt lenders are fixated on getting their capital back. They must have great confidence in RGS’ ability to survive and possibly thrive.
With time and runway to execute its turnaround plan, RGS changed their management team. Their CEO, Matt Doctor, and his team announced their strategic business plan to transition RGS into a fully franchised model. They shrunk its company owned stores from nearly 300 to 105, sold their legacy POS software and has been laser focused on reducing its balance sheet liabilities. They outsourced their wholesale products to Sally Beauty (SBH) to simplify their business and reduces balance sheet working capital required on the product side of the business.
Fast forward to today, their CEO Matt Doctor said this during their earnings call.
Over the course of the past year, we’ve made a lot of progress on this front. And I mentioned on our last call that we should start demonstrating positive EBITDA going forward and we are starting to do exactly that. We have come a long way through the hard work and resilience of the Regis team and our franchise, and that work is coming to fruition in our results.
I am pleased to share our positive start to the year with the first quarter marking key milestones as we make progress towards advancing our strategy. To this end in the first quarter, we generated more EBITDA than all of fiscal 2022, and we recorded positive operating income for the first time since the quarter ended September 30, 2018.https://seekingalpha.com/article/4551551-regis-corporation-rgs-q1-2023-earnings-call-transcript
This is probably not the best business in the world with a massive moat around it. I opined that it’s at a very interesting point in it’s turnaround story. Inflation should help with rising costs which improves their topline.
Realistically, this company lives and dies by its ability to (a) attract customers to stores for haircuts and (b) attract and retain stylists to deliver the service. To do that, they’re going to have to invest in marketing for the demand and supply side of the equation.
RGS could be worth something someday, and it’s a credit to management that they pushed off a scary debt maturity, but taking that equity today and hoping for price appreciation that gets you ahead of 8%+ headline inflation is really tough. I think it’s going to take them a while to build up the EBITDA to buy down the debt and create room for equity value.
Transocean is a offshore driller went through bankruptcy, slashed their debt and reemerged with stronger balance sheets. After their rebuilding process, they emerged as a pure play on deep-water drilling. They have the largest fleet of high spec 6-7th generation rigs that will command premium pricing.
In their latest earnings result release, they have managed to lower cost which allowed them to beat expectations on EBITA and revenue.
“We remain encouraged by the sustained strength in the offshore drilling market globally and expect demand for the increasingly scarce high-capability drilling rigs Transocean owns and operates to remain strong for the foreseeable future, resulting in higher utilization and dayrates,”
Despite the lack of private market transactions in the floater market, day rates are moving up and I think we are at the cusp of an inflection point for the industry. Take the note put out by Barclay’s on RIG.
On October 6th, Barclay’s upgraded their price target on Transocean to $5.00 per share (low in my opinion) as they are forecasting day rates to rise to $500,000 per day next year. This would be a significant move as market rates for floaters are currently in the $400,000 per day range.
In 2010-2014 day rates were in the $600,000 per day range and these companies were very profitable. Valuations for offshore drillers were in the 10-15x EBITDA range. Based on Barclay’s note, we are close to hitting these historical day rates in just one short year. Day rates in this cycle could go even higher due to the reasons below.
First, there is less supply of floaters out there. Almost 40% of the market was scraped or retired. There are less ships and demand is staring to roar back.
Secondly, countries are starting to realize the importance of energy independence due to the entire Russian and Ukraine situation. I think over the next few years there will be a large increase in capital spending, worldwide, for fossil fuels such as oil and gas.
Thirdly, there has been a lack of production in the oil and gas space for eight years. It will take a significant amount of investment to meet long-term oil and gas demand. Offshore drilling could be a very good solution.
Finally, offshore drilling companies are disciplined with their capital. No one is investing capex to bring on newbuilds. Debt is getting paid down. And eventually investors will want a return of capital, not growth. I expect most drillers will generate large amounts of free cash flow over the next 18-24 months with most of that capital being used to paydown debt or returned to shareholders.
Activision Blizzard (NASDAQ:ATVI)
In January 2022, Microsoft announced the acquisition of Activision Blizzard(ATVI) at a price of $95 per share. With ATVI trading at $74, I feel that there is a merger arbitrage opportunity here.
The reason for the merger arbitrage opportunity is that the deal is pending approval from regulatory bodies. Hence there is a probability that the deal may not be approved in its entirety or at all. Warren Buffett’s Berkshire has taken a 9.5% stake in ATVI, betting that the deal will be approved, however he has acknowledged that the investment could result in losses should the deal not proceed.
During the announcement of their 3Q results, CEO Bobby Kotick said to expect that our transaction will close in Microsoft’s current fiscal year ending June 2023.
ATVI is currently trading at $74, and was $66 when buyout was announced. This means that there is more upside to this buyout play. Of course, this is a very simplistic view. Buyout was announced in Jan when tech sector was priced quite high. Hence, there may be more downside if the deal were to fall through. This is a very risky play in my opinion and I would ask all readers to do their due diligence.
Note: The Moss Piglet is vested in all stocks mentioned in this post.