~10% Historical yearly outperformance by Spinoffs

📊 Investing
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Following on from a post from @HRD on this forum querying the spin-off payment (on T212) of Sylvano Corporation by International Paper, I did some searching online and realised that there is little information out there on this spin-off.

As such, I had a quick dive into the SEC filings to see what was going on. Little news and publicity could signify a hidden opportunity.

Looking into the company it can be somewhat understood as it produces paper in an increasing electronic world and with additional falling revenues due to the pandemic (and also it’s boost for digital use). I think most of their paper is uncoated free sheet which is used for printing.

So, these are the documents and key values that I have found.

8-K Report with info on the transaction:
https://www.sec.gov/Archives/edgar/data/0001856485/000119312521288889/d237619d8k.htm

Investor presentation:
https://www.sec.gov/Archives/edgar/data/0001856485/000119312521268373/d227022dex991.htm

List of SEC filings in case you want to search for yourself:
https://www.sec.gov/edgar/search/#/ciks=0001856485&entityName=Sylvamo%20Corp%20(SLVM)%20(CIK%200001856485)

Summary of spin-off indicating 44.1m shares outstanding:

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Which at a price of 32.67 USD per share (according to Yahoo, checked after close today 04/10/2021) means it has a market capitalisation of 1.44B USD.

Note: Marketwatch, Yahoo and the Nasdaq websites show very different prices at close today, hence the highest value from Yahoo is used.

From the investor presentation:

  • Debt is 1250 million USD
  • Free Cash Flow of last 12 months, including the pandemic is 364 million USD

Based on this, the company has produced a free cash flow equivalent to 25% of its market cap, just in the last 12 months.
Looking at it from an Enterprise Value perspective, it seems to be currently priced such that its Enterprise Value is 7.4 times its Free Cash Flow.

Note: I have not subtracted the cash from the Enterprise Value because I have not been able to find a balance sheet statement (which would provide more useful information).
Also, not being able to see the complete financial statements means that I cannot verify whether the cash flow statement makes sense and is in line with the income statement.

Also, if it is true that it is among the lowest cost producers then even if paper demand or its price falls they are more likely to stay in business and avoid making a loss than other competitors. Nonetheless, it is hard to tell if the numbers/figures they provide in this regard are accurate.

All in all, it seems like it could be a company worth looking into. A sector clearly in distress, but is it maybe priced for failure and yet may it survive many years more with maybe flat-ish revenues and stable profits/cash flows?
If so, that could make it quite interesting with a 25% free cash flow on market capitalisation…

Please let me know your thoughts and if you do find any more information.

P.S. Some screenshots of slides in case anyone doesn’t want to go through the whole presentation:

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22

Although I’m not aware of the company in your post, thanks for taking the time to go into a lot of detail.

Very insightful for people with my level of experience :ok_hand:

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23

What kind of paper - I would think :roll_of_toilet_paper: will always be needed in increasing numbers with population growth, unless people switch to using Bidet’s more.

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They provide “uncoated free sheet” which when I searched online seemed to be for printing.

They also had this in their presentation:
image

So, likely that it’s mainly printing paper, the type of paper most affected by digitalisation and the pandemic. I guess that is the main reason for the low EV and market cap to Free Cash Flow.

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You are welcome :slight_smile:
Some metrics can be useful for context and for a broad idea for if it may be cheap or not, however I definitely think that the best way to evaluate a company is by carrying out is a discounted cash flow on it.
See Etypsyno’s example above for UMG:

Note: Unfortunately carrying out a discounted cash flow takes out quite a bit of time as it requires quite good understanding of the company to forecast its cash flows and determine discount rates. So it’s not easy to do on the back of an envelope, like some of the ratios are.

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Saw that it’s on the platform now, will take a deeper in a couple of weeks as it seems quite interesting.

The real question though is what technical support would be offered by Hammermill to physical sheets of paper? Mental support for papercuts? And why only in the US? Asking the real question.

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Overwhelming majority of shareholders in favour of spin-off of Daimler Truck and renaming of Daimler AG.

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Having said this and as we don’t have a lot of information, we might just want to estimate some kind of internal rate of return (IRR) for Sylvamo based on the terminal value of a discounted cash flow and the current share price. As we don´t have a weighted average cost of capital, I will just adjust the formula to calculate the implied internal rate of return at the current market price.
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Screenshot source

Internal rate of return:
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Screenshot source

Looking at sales and free cash flow it seems like 2021 will be better than 2020 (more movement of people, return to offices, etc). So I think it would be fair to take 364 and assume that will be this years free cash flow.

Considering the possibility that paper will be used even less in subsequent years due to the digitisation of the economy and society being more aware of sustainability impacts, I think the assumption that free cash flows are going to fall long term, makes sense. The question is, how much? 1% a year? 5%?
It’s not going to happen overnight, but the exact percentage might be hard to pinpoint. It is also worth keeping in mind that even during a year in which lots of their markets world-wide were in lockdown for probably around half the year, they still made a significant free cash flow of 284 million USD.

So, for the purpose of this back of the envelope calculation, I will assume a 5% decline, but not from the first year but from subsequent years onwards (hence I will only apply to the denominator in the fraction, not numerator).

Also, I think that from the terminal value we should subtract part of the debt of the company. It seems to be 1520 million (m) USD, however the company is also likely to have some assets sot we can probably assume that their tangible assets will cover a significant part of their debt and that we only need to take care of about half of it. So, for the purpose of subtracting debt to the equation I will use half of 1520, which is 760m USD.

I’d really like to see their annual statements for 2020 and the first half of 2021, I think that would make things clearer.

Current market capitalisation is 26.61 USD per share (according to the price for yesterday’s close - 08/10/2021 - on T212) x 44.1m shares = 1174m USD.

So, the equation now is:
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Where debt is the debt considered to not be covered easily by their own assets (assumed to be half of total debt), the investment is the market capitalisation and the growth is the negative 5% (-0.05 in the equation).

Putting the numbers in and trying out for different values of “IRR”, we find that the IRR is nearly 14% (13.8%):
image

If we consider that the actual returns of the market long term is under 10% (depending which market you look it it can be much lower than 10% long-term, more like 3-7%) then it would seem like a reasonable IRR.

Obviously there are lots of assumptions in this and we are lacking data and assuming a lot, but I thought I’d share this rough calculation in case anyone else wants to comment.
If there is anything wrong with my methodology, please let me know.

Note: The calculation does not end in zero, it ends in around 2m, but that was the closest I could get to zero for a 3 digit number. Considering how rough this equation is and the very large assumptions, going anything beyond a 2 digit number (eg. 14%) is probably meaningless.

Obviously none of this is investment advice. This is just to comment on ideas and spark conversation :slight_smile: .

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Here’s an initial spin-off pie of recent (haven’t clearly defined boundaries there yet) spin offs as I have not seen such a pie exist yet:
www.trading212.com/pies/l7aghYnR7zBChX4rlsnLYXA2PNzG

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Nice work and very interesting, will be holding GSK for sure.

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Realty Income spinoff company ‘Orion’ share price set at $25 a share
Source: ONL.WI | Orion Office REIT Inc. Wi Stock Price & News - WSJ

Am looking forward to seeing it on the platform

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Just read about the spinoff 2Seventy Bio which was spun off from Bluebird.
The company is a risky biopharma with only 1 product generating revenue but it has an interesting pipeline. While I personally would have to look further into this as I’m generally very wary of small biopharmas this one seems interesting at a glance.

Products

  • ABECMA is approved in the US for the treatment of adult patients with relapsed or refractory multiple myeloma (MM) after four or more prior lines of therapy. ABECMA generated $67 million in U.S. sales in 3Q21, its first full quarter of launch and 2seventy bio and BMS are pursuing additional clinical studies in earlier lines of treatment for patients with MM. ABECMA is commercialized together with BMY on a 50/50 basis.

Pipeline
MM:

  • bb21217 (phase 1):
    a BCMA-directed CAR T cell therapy in patients with relapsed and refractory MM that uses the ide-cel CAR molecule and is cultured with a PI3 kinase inhibitor (bb007) to enrich for T cells displaying a memory-like phenotype with the intention to increase the in vivo persistence of CAR T cells, to be presented by the end of 2021.

Acute Myeloid Leukemia (AML)

  • SC-DARIC33 (Phase 1): first-in-human investigation of 2seventy bio’s proprietary Dimerizing Agent Regulated Immunoreceptor Complex (DARIC) T cell platform.

B-cell non-Hodgkins Lymphoma (bNHL)

  • bbT369 (Phase 1): a dose-escalation study in patients with relapsed and refractory bNHL will be a proof-of-concept study of 2seventy bio’s proprietary gene-editing platform, dual-targeting strategies and split co-stimulation signalling technology.

Solid Tumors:

  • Pre-clinical studies are underway utilizing 2seventy bio’s diversified and innovative toolbox, including a program targeting MAGEA4, a surface antigen that is highly expressed across multiple solid tumours.

BoD seems highly educated and even includes someone previously from JNJ but aside from that nobody from bigger pharmas.

This company launched with $442 million in cash which is expected to last into 2023 while ABECMA generates cash and other therapies might generate cash sometime soon as well.

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(ABM FN-Dow Jones) The American pharmaceutical company Johnson & Johnson wants to spin off the Consumer Health division. The company announced this on Friday.

The company expects to have completed the demerger within one and a half and two years. Goldman Sachs and JPMorgan Securities act as advisors.

The transaction has no impact on the dividend.

Consumer Health’s third-quarter revenue grew year-over-year from $3.5 billion to $3.7 billion. Johnson & Johnson’s total quarterly revenue was $23.3 billion.

On an annual basis, the division to be divested accounts for an annual turnover of approximately USD 15 billion.

We’ll let’s go another to add eventually

34

Mirroring GSK then?

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yes, although Pfizer also holds a small share in that. We’ll see how it plays out

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I did some searching online a couple of weeks ago and found two good websites for USA spin-offs (both upcoming and completed):

There have been quite a few spin-offs in the USA in the last 12 months.

I also found another website that was quite interesting, including analyses of the stocks, however most of them required payment, so not very useful.

A few interesting recent spin-offs:

  • Loyalty Ventures, a brand reward company (eg. airline points): net income of around 75-100m USD on a market cap of 800m USD and with the worst having probably passed, with some growth, say around 5% a year expected over the next couple of years.
  • Kyndryl Holdings, a hardware spin-offf from IBM: an “adjusted” free cash flow of 800m USD on an Enterprise Value of 5.7B USD but with falling revenues (-5% over the last couple of years)… However, they have plans to grow. If they can deliver some growth, even if very low, then they will probably do well. Nonetheless, will they be able to deliver?
  • VMWare, although not a full spin-off, just spinned off the Dell holding as I understand, this and a potential dividend seems to have lead to a large fall in the share price (but also less cash on balance sheet, I assume).
  • Jackson Financial, provides retirement products such as annuities: I need to look into this one. At first site it seems to have a price to earnings of less than 2! With analyst estimates of a slightly lower forward P/E in 2022, but also below 2, and currently at a price of around 30% of book value. Sounds very interesting but would require further research as it seems too good to be true based on those two metrics as well as an ROE of over 20% over the last 3 years.

Feel free to comment if you have any thoughts on any them :slight_smile: .

I’m also looking forward to some spin-offs of european companies, like the GSK, Bol.com (from Ahold Delhaize), Sanofi and Daimler spin-offs in 2022.
I haven’t been able to find the latest european spin-offs or upcoming ones, not websites seem to show this. If anyone knows of one please let me know :smiley: , I guess it’s also because Europe is more fragmented in different countries and exchanges.

There are a few other interesting upcoming spin-offs such as the Telecomms Towers from America Movil and Douglas Elliman, both depending on the price at which they start trading though.

P.S. Check the Llists, I’ve indicated the ones that sounded most interesting to me. Others are likely to have a different opinion :smiley: .

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As a shareholder of Unilever I am happy this has gone through, I expect the proceeds either to go on investing in their faster growing parts of company and/or initiate more buybacks at this depressed share price.

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I’m looking closely at Daimler for some time now and it only continues to go up. :frowning_face:

Daimler Trucks might also be a great play for autonomous trucks when everything is said and done since they own Torc Robotics.

2019:

https://www.daimler.com/company/business-units/daimler-trucks/torc-robotics.html

2021:

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Daimler trucks spinoff thread and info:

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Daimler have made very good acquisitions actually. Mercedes have bought Yasa who are leaders in emotors.

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