if deal not happen..., page-4

I am told the RTI PDS is in the final stages of proof reading and is expected to be lodged with ASIC next week. Due to the initial delay they had to complete an audit of 31 Dec 12 results, which slowed the process further. Novus are no longer involved as Sponsoring Broker because the listing already raised the required level of capital. I still believe the RTI listing makes no sense unless the RUN acquisition occurs. So listing = acquisition for me.

As for valuation:

1. Liquidation value – The industry transaction multiple range for the rent rolls assets is 2.6-3.5x rent roll revenue. Take 2.5x RUN's rent roll revenue, subtract net debt and the equity value of the RUN rent roll assets is c.26c/share. To this I add $5m (4c/share) for the AgentPlus platform, sales business, RUN foot print and RUN brand. All up this equates to 30c/share, which appears conservative given the 40c/share deposit or the 48c/share implied by the RMA acquisition attempt.

2. EV/EBITDA – Assuming RUN maintains its EBITDA at $6m per annum, the stock is trading on a multiple of 5.3x (EV of $32m). Assuming the Enterprise Valuation remains constant at $32m and RUN pay down $1m in debt each year, the Equity Value should increase by $1m per annum. This equates to a “return” of 4.8% per annum ($1m/$20.8m MC). By my calcs, RUN will have capacity to pay a 1c dividend each year, which adds another 4.8%. I should generate a return of 9.6% at the current share price whilst I wait for the market or a private equity fund to realise the value calculated in point #1.

I have always wondered if other rent rolls are more profitable than the RUN rent roll. The valuations implied by the RTI acquisition and industry transactions equate to almost 10x EV/EBITDA (v. expensive). This suggests the multiple is unsustainable or RUN mgmt are mismanaging the asset base compared to their industry peers. This leads to my next point.

Although I have completely discounted the outcome, it is possible that RUN mgmt increase profitability. The sales business is now contributing to profits and there should be other opportunities to grow revenues and decrease costs given RUN have the largest rent roll in Australia.

Management have had a year to focus on profitability instead of capital structure, and I would argue this led to growth in EBITDA to $5.9m in CY12 (vs $3.9m in CY11). Importantly, free cashflow increased to $2.8m in CY12 (vs $0.4m in CY11).

I am happy to hold at these levels even if the deal falls over. The potential returns seem reasonable given the downside risks. I wouldn’t mind hearing specific counter arguments to this view.

Given the large shareholding by RUN mgmt and lack of trading in RNC, I think they will continue seek a liquidity event priced at a decent premium to the current share price. If the RUN business really has turned the corner it will be a shame to realise the capital gain.