Salona Global published an update on their pending transaction and Q3 financials on Thursday, January 21.
Before we begin, I need to correct a few mistakes from my first Salona Global post. Thank you Chip and Jacob for pointing them out. The whole Valuation and Price section is wrong… shit. Cash After the Transaction should be $16mm, not $24.5mm. Net Assets are now roughly $22mm, not $30mm. There is also an $11mm tax credit from their previous Annual Report, but we’ll leave that aside for now. Luckily, pro forma financials are coming soon and we won’t have to guess as much.
Salona received approval from the TSX Venture exchange Wednesday, January 20th. They will hold a shareholder vote on Tuesday, March 2nd. With Mr.’s Dalsin and Greene owning roughly 1/4 of the company, and poor stock performance of BRTL, I believe shareholders will vote the deal through. But, what are the rules for these types of meetings? How many votes are required for approval? I don’t actually know, and should probably find out.
Meeting materials (management information circular and pro forma financials, among other exciting things) will be released around Tuesday, February 9th.
I’m (perhaps naively) excited about this whole situation. I bought stock as a net-net, figuring Mr. Dalsin and Greene would just do something interesting. A healthcare roll-up with a potential Nasdaq uplisting is interesting, to say the least. Time to stop patting myself on the back, though. I should get back to work.
Disclosure: Long SGMD.V (I can’t sell it! It’s halted).
I stole this idea. A lot of what I’m doing here is paraphrasing the work of my friend. OK? OK. With that out of the way… let’s dive in.
People, businesses and communities continue to increase their use and dependence of technology. More and more people shop online, stream content and make Zoom calls, every day. We know this. The story isn’t new. covid accelerated these phenomena, etc.
Interestingly, this growing use and dependence on digital stuff… results in massive changes in the physical world. More specifically, it’s having a profound effect on digital assets.
Colony Capital is undergoing significant change. It’s transforming from a diversified REIT to a digital asset-focused asset manager. During 2020, Colony hired Marc Ganzi as CEO (after acquiring his company) and shed some non-digital assets, like their hospitality and bulk industrial assets, while acquiring digital assets like data centers, fiber businesses and cellular towers.
In short, they use OPM (other people’s money) and a bit of their own, to acquire and operate digital assets.
Valuation and Price
I need to improve on this section, as I’m totally relying on my friend, but here we go…
CLNY has about a $2.5 billion market cap and is trading close to its 2021 NAV of $5.00 per share. The belief is that Colony will be worth $8.00 per share in 2023.
Margin of Safety
The stock price has come up to 2021 estimated NAV, but there’s still a pretty big redundancy with an $8.00 2023 price target.
Marc Ganzi is an absolute stud with a great track record.
I need to work hard and do more of my own work on this one, to see if I can develop conviction, otherwise the margin of safety doesn’t even matter.
Need to learn more about Marc Ganzi, digital assets, and 5G.
I kept checking under SEDAR to see if Santa left a gift. Surprise! He did.
The net-net formerly known as Brattle has… changed its name, its business model, completed an acquisition and a rollback (7.37 for 10), and completed their concurrent financing. Once the company re-lists its stock (maybe January), the Salona snowball will start to roll.
This healthcare roll-up has a long hill to roll-down. There are lots of small and profitable medical device companies that Salona could acquire. Company insiders have done a fairly successful (depends who you ask) roll-up before.
Valuation and Price
There are now 33,813,308 shares outstanding on a non-diluted basis and they raised $5,550,258 in their concurrent financing. That’s $0.164 cash per share. Management (current and acquired) participated in the latest financing. The CEO of the acquired company (South Dakota Partners) is also being paid in SGMD stock, not cash. Seems like management has big incentives to make a big snowball.
Using excerpts from their Sept 17, 2020 presser, we can do some hazy valuation work. Note their Sept 17, 2020 cash raise was advertised as $8.5mm, so we’ll adjust a few things by the $3.0mm difference (they “only” raised $5.55mm) below.
If I read that right, the company Brattle acquired has grown revenues at 150% (since 2016) to $15.9mm in 2019. Profitably? Maybe…
Further, Net Assets are now roughly $30mm ($25mm + $5.5mm financing) and Cash is $24.5mm ($19mm + $5.5mm financing).
They’ve also identified a few profitable acquisition targets.
The stock will likely get re-rated to an EPS multiple (which I think, but I’ll have to check, is what insiders Mr. Dalsin and Greene have communicated before). In the meantime, they currently have $0.71 cash per share on a non-diluted basis… it will be interesting to see where SGMD trades when the halt is lifted.
Let’s hang our valuation hat on 2019 revenue of $15.9mm, or $0.47 revenue per share. I’ll be buying around $0.50 and below (if my math is right).
Margin of Saftey
Mr. Dalsin and Greene own about 30% of the company and millions of stock options, management participated in the latest financing, and their first acquisition target CEO took SGMD shares instead of cash. Good signals and good incentives.
I think we may see selling pressure upon re-listing. It was a former net-net that’s now a healthcare roll-up story. Value guys and gals will probably sell because they got their net-net puff, while growth investors will start to buy… eventually.
The story (and promote) will take some time to be spread. It’s still early days. Mr. Dalsin and Greene have cranked a stock before. It seems likely they will succeed again.
How are roll-ups typically valued?
I’m going to study Patient Home Monitoring and Viemed. Two companies that Mr. Dalsin and Greene were involved in before. It will help place their new roll-up in context.
I own shares of SGMD (I couldn’t sell even if I tried!).