Description

Thesis

We believe Emerald Holding (NYSE: EEX) represents an attractive long at current levels. Emerald is a US-focused exhibitions company, majority owned by Onex. At its current price of ~$3.94, you are creating the business at a ~$970m TEV, which represents a 9.7x multiple on 2023E EBITDA of $100m and a low double digit multiple on unlevered FCF. Rolling forward to 2025 forward EBITDA of ~$130m, your create comes down to low 7x. We think this is cheap on both a relative and absolute basis. Relative to the business quality, we think the create is attractive as there is solid pricing power which, combined with growth from new/expansion events and tuck-in M&A, leads to a potential double digit growth path for EBITDA going forward. Two recent transactions took place in the industry at low teens EBITDA multiples (Providence / Hyve and Informa / Tarsus), and historically these assets have traded at double digit multiples (with activity from both strategics and sponsors). Given Onex has been in this investment since 2013, we would not be surprised to see an exit soon.

Running forward two years to YE 2024, we think the company can have visibility to achieve ~$130m of EBITDA in 2025; combined with >$100m levered FCF post M&A (in 2023 and 2024) and a 12x multiple, would translate to a ~$6.8 stock. This would only represent a ~1.7x from here, but importantly, we think these numbers are achievable in the near term / will have forward visibility through end of 2024, so on an IRR basis, it is mid 30% through YE ’24 or low 20% through YE ’25. Combined with the backdrop on consolidation / sponsor M&A, leads us to like the trade set up (reminds us a lot of alli718’s timely write-up of Hyve last December…hopefully works out just as well!)

We think this opportunity exists because (1) this is a niche company/industry with a small float and little sell side coverage, and (2) the events industry has only recently come out of covid last year / into this year, leading to uncertainty on the post-covid normalized revenue/earnings as well as the trajectory.

Business Overview and Current Industry Update

There have been numerous write-ups and discussions on the event/exhibition industry in the past on VIC, so we would recommend members who are new to the space to read up on those for a more comprehensive background on the company/industry. We will try to keep our discussion here brief, focusing on why we like the business and get to the points that we think are additive/more recent relative to the previous write-ups.

First, we really like this business (and don’t think we are alone!), for 3 primary reasons:

1. Attractive competitive set-up, as there tend to be 1-2 dominant events in each specific industry (which can be quite narrow/niche), and exhibition organizers like Emerald, Informa, Hyve, etc don’t really compete on each other’s turf
   1. M&A tends to be the main route to expanding your base of events (which could be to an up and coming industry like cannabis, which is what Emerald recently did with MJ Biz Con)
   2. Companies will also expand an existing event brand to a sister event in a new geography, if there is enough demand
2. Relatively recurring set of exhibitors and great booking visibility. Across the industry, ~70-80% of exhibitors tend to return to the next year event, leaving a pretty manageable “go-get” for the sales/marketing team. In addition, there is a favorable forward bookings curve (~25% at end of event for the next year’s event, another 50% throughout the year and then the final 25% within the final month before the event). This not only leads to favorable WC dynamics, but is also helpful to manage the costs of individual events, which are semi variable/fixed in nature up until a certain point in time before the event where they become more fully fixed
3. Overall cost of exhibitors attending an event can be in the $30-50k range, with the cost of just the exhibition space being ~1/3 of that (obviously varies a lot by exhibitor and event though). Now, most of the exhibitors are SMBs, so this isn’t merely a drop in the bucket for a large corporate. But for a once a year expenditure, where you can connect with a large amount of peers in your industry and/or actively market your product to customers or connect with a large number of your vendors, you can understand the value proposition. And that value proposition is consistently cited by exhibitors and I think evidenced by the relatively consistent historical performance of exhibition companies

All 3 of these characteristics combine to give the events business pretty good pricing power, which historically were in the LSD-MSD range. Essentially, you have a strong network effect where your overall change in pricing is not that meaningful relative to the overall spend of your customers and the value they receive.

To bring it back to where we are today…Emerald hit a revenue recovery level of ~70-75% of pre-covid levels in 2022. This was slightly below the industry overall, which broadly was in the 70-85% range. What is notable about Emerald is that their revenue recovery was more weighted towards pricing, as volume recovery on a sq ft basis was only ~65%. While Emerald took price post-covid as events came back online, others in the industry waited (but will start taking price next year). It is unclear if this more proactive pricing approach is the reason why Emerald’s volume recovery is lagging peers…mgmt denies this fwiw, and claims that factors like supply chain have impacted some of their events (as an example, for their CEDIA Expo on the connected home, some exhibitors did not show up because they couldn’t get shipments of their product for 12-18 months). But in 2022, ~25% of their events were already back to pre-covid levels, and mgmt expects the majority to be back in 2023, so while this is certainly a risk, I am not overly concerned about it.

What I found more interesting is the industry’s planned action on pricing this year – seems like everyone will take price (through public commentary and my own diligence on private names) and the ones that didn’t take price post-covid will be aggressive in making up the delta. For Emerald, it seems like they will continue to be aggressive on pricing, targeting mid to high single digit increases on a sq ft basis.

On volume, the industry is also consistent in messaging, with an expectation that 2023 will be pretty close to pre-covid levels (with the exception of some int’l Chinese/Asian events that might be running for the first time post-covid this year).

So overall, the set up going forward for Emerald and the industry seems encouraging.

Financials / Valuation

Emerald is guiding to $400m of revenue and $100m of EBITDA in 2023. Taking their commentary of 70-75% recovered on pro forma pre-covid revenue in 2022 (higher than actual due to 8 acquisitions post-covid), we can imply ~$450m PF revenue, so the guide does not assume a full recovery. On EBITDA, can do some simple math to see it probably implies flat gross margin % at 65% and a bit of a bump in SG&A.

Going forward, mgmt is guiding to mid to high single digit organic revenue growth (largely from price, but also a couple points from new start up / expansion events), with M&A taking topline growth to low double digits. Here we just assume 7.5% revenue growth all in, which would represent LSD-MSD pricing, some volume recovery to pre-covid, maybe ~1 pt from new events and ~1 pt from M&A. Keeping GM % constant and assuming some inflationary increase in SG&A, we view ~$130m of EBITDA as achievable and implies high 20% margins, which is pretty standard for the industry that ranges from 25-35% (although mgmt sees 30-35% as attainable going forward, which might reflect an expectation for more operating leverage on the contribution margin side).

On cash flow, guide for levered FCF pre-WC this year is $60m, which is basically $100m EBITDA less $5-10m capex less $30-35m interest and small amount for tax (note that the company has a ~$60m annual tax shield on federal taxes due to the way they structured acquisitions as asset sales). Next year, get the $15m EBITDA bump, maybe give some back if need to refi the TL at a higher rate. And over 2024/25 I assume $25m spent on M&A, which if used to acquire businesses at 7.5x synergized EBITDA and 40% margins, contributes ~1pt per year in topline growth. So overall, we expect the company to generate ~$100-110m total (and that assumes no WC contribution, which should be a benefit going forward, assuming the company is growing)

Finally on valuation, we would mention a couple things. On an absolute basis, we think a LDD EBITDA multiple is reasonable given the high cash conversion and stable growth profile of the business. Precedent transactions have consistently traded in the LDD range, with the two recent notable ones being Providence / Hyve and Informa / Tarsus both at LDD. On a public comp basis, Informa trades at ~12x. So overall, we feel comfortable in this context (and given you can bring down the create to ~7x in a couple years, have some room to be off by a couple turns on multiple and the investment still being okay)

Risks

Aggressive pricing action impacting volumes: discussed above, don’t think a huge risk, my diligence so far aligns with mgmt view that pricing actions have not hurt volumes / bookings

TL maturity: company paid down $100m this past December and still has sizeable amount of cash on balance sheet. May ’24 maturity so would expect them to be in market soon. Feels like they have options, potential to tap private credit if need be (like Hyve did with HPS and now more recently what Providence/Hyve doing with Hayfin)

Recession: seems like 10-20% volume hit for the industry in GFC. Taking a 15% hit to $400m sales at 80% GM would be a ~$50m contribution margin hit, bringing EBITDA down to $50m (not accounting for any additional cost saves). You would still be FCF positive and have decent liquidity between cash on hand + RCF, so don’t think risk of getting zeroed, but definitely would be an elongation of the path back to pre-covid EBITDA and likely lead to sub-par equity returns

Catalyst

Sale of business; continued post covid recovery