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Projecting SNS Cashflow


ok22
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After reviewing the 10Q for SNS 3Q and last couple of 10Ks, have the following data and questions about SNS future cashflow.  I see why people on the board are excited about SNS but I am having some trouble getting comfortable with what to use for recurring future cashflow.  Would appreciate how others are thinking about this.  All figures are from page 19 of the 10Q.

 

My take

1.  40 week cash from ops $41.1m

2.  Take out one time tax refund = $13.2m

Net Recurring Cash from ops for trailing 40 weeks = $27.9m

3.  40 week capex = $28.5m

Net free cash for trailing 40 weeks = ($0.6m) - lets call it zero$

4.  Proceeds from parcel sales, franchise transfers etc. = $9.3m (note that it is down from $11.5m) for the comparable period

 

The questions for me are:

1.  Capex for future is intimated to be maintenance capex but there are no footnotes on what that is.  Anyone has a view on what percentage/$ are maintenance?

2.  What are the likely $ from future parcel sales/transfers etc.?  Still have 400+ co. owned.  How many will transfer and likely proceeds?  Views?

 

The concerns for me are:

1.  Recurring free cash from ops is zero and even if one assumes 50% of capex is maintenance capex, it still does not yield a lot of free cash relative to the current valuation

2.  Cash on balance sheet makes up some of the difference but now post West deal, that is being reduced

3.  So one needs to believe in a certain growth rate to justify investing at todays price.  The history of growth for this sector is pretty low so even if the new team does everything perfectly, there are industry growth rates ceilings?  What do people think this can grow at once the operation is running like a clock?

4.  If one assumes growth occurs then one should also assume some growth capex;  or is there so much growth in the current stores that can be extracted without anything much being spent.  Was it that horribly managed? 

5.  West - the other co. run by Sardar and his team did not have much free cash generated from the core business.  Is that a negative indicator for SNS core business prospects or is there some huge difference in WEST vs. SNS cash generation capability?

6.  Am concerned that the current valuation is supported more by cash proceeds from the asset lite move which should diminish some day and then we will have SNS with poor core business cashflow?  If that were to happen, absent significant growth, SNS is not such a good value today?

 

Look forward to people's responses and views.

 

NOTE:  Lots of ? marks as I am looking for a discussion on the topic.  Am evaluating SNS as an investment and do not have any long or short position in it.  Apologies to anyone that finds my questions and concerns "negative."  As a conservative investor, I like to focus a lot on what can go wrong before making investments.

 

 

 

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Correct me if I'm wrong, but I think theres a slight problem to his analysis to the tune of 210.8MM. He assumes that on average they can get 1.45MM back per store based on the 11 stores they entered a lease-buyback agreement with. But I think those are exceptions. Most of their stores have already been entered into lease-buyback agreements over the last 15 years. And they probably wont realize much of a gain (maybe even a lose, but certainly not 1.45MM per buyback) if they were to enter into these agreements.

 

Considering thats approximately 40% of his total value, that $15.20 sum of parts calculation drops down to something much more humble.

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Sardar said some time ago that Maint. Cap-Ex was going to be about $6M

 

With PP&E (ex land) at a historical cost basis of $500M, that's turning over the fixed asset base every 90 years.  Does that seem reasonable? 

 

wabuffo

 

I'm not really sure about figuring out maintenance capex based on historical cost basis of PP&E, but it could very well be that Biglari mentioned $6 M as the magic number.

 

If you do an SNS conference call transcript search on Seeking Alpha for "capex," you'll pull up an SNS call from May 2008 where prior management -- a guy named Jefferey A. Blade -- describes annual maintenance capex as between $6 M and $8 M.

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Correct me if I'm wrong, but I think theres a slight problem to his analysis to the tune of 210.8MM. He assumes that on average they can get 1.45MM back per store based on the 11 stores they entered a lease-buyback agreement with. But I think those are exceptions. Most of their stores have already been entered into lease-buyback agreements over the last 15 years. And they probably wont realize much of a gain (maybe even a lose, but certainly not 1.45MM per buyback) if they were to enter into these agreements.

 

Considering thats approximately 40% of his total value, that $15.20 sum of parts calculation drops down to something much more humble.

 

These are 2008 figures - 146 company owned stores and 1.45MM per store, right ? Why would you expect them to be any different ?

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I suspect the property they sold and bought back in 2008 were the few left that the company had bought a long time ago and there was a huge discrepency between book and fair market. However, most of the property that they bought decades ago they sold and bought back over the last 10-15 years, which means book and fair are much closer. I suspect the 1.45 MM they got from their 2008 properties is not reflective of the rest of their properties.

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Sardar said some time ago that Maint. Cap-Ex was going to be about $6M

 

With PP&E (ex land) at a historical cost basis of $500M, that's turning over the fixed asset base every 90 years.  Does that seem reasonable? 

 

wabuffo

 

Good question.  This was addressed specifically at the April AGM.  Sardar explained that ongoing building/equipment maintenance & repairs are reflected in operating costs, and that maintence capex was reserved for improvements such as framed pictures/posters, new paint, colors, etc.

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