On Friday PRKA released their FY18 earnings, which were a very welcome positive after the first 3 quarters disappointed on what management described as “higher precipitation levels, as well as unplanned park closures due to several significant weather events”. I tweeted this on Friday:
I debated writing a post on PRKA on Friday, but I figured there were enough good blogs covering the background and story so no point to recreate the wheel. Check them out here: hiddenvalueblog and otc adventures.
I had accumulated a small position in late summer as I thought this could be an interesting situation given the strong operating track record, cash generation (>10% FCF yield), and the debt refinancing/partial repayment that was disclosed in the 3Q18 10-Q. I was waiting for an indication that the first 3 quarters of 2018 were indeed a weather related event before increasing the position size.
Enter Marlton LLC, who has accumulated a 5% stake and released a letter to the PRKA board after market close on 12/17. Marlton PRKA Letter
The letter raises some valid points around capital allocation and succession issues. I have two takeaways:
1) This comes from information in one of the blogs listed above. ‘An interesting quirk in the capital structure is the large number of “zombie shareholders.” The company came to market via a reverse IPO, where a former mining company was turned into a shell corporation which subsequently acquired the assets of the Georgia site. This has resulted in 3,000 shareholders in PRKA, which cannot be located. I believe this has been a key impediment to capital allocation policies as the management team does not want to “pay dividends to nobody.”’ This can be easily(?) fixed through a reverse split, to ensure all cash is going into interested shareholders pockets.
2) I don’t think this should be seen as an indictment on current management. Not only have they proven themselves excellent operators but they also don’t draw outrageous salaries and are properly aligned with shareholders; insiders hold ~52% of outstanding shares. Both a more transparent capital allocation policy and clarity around CEO succesion will favor all shareholders (including management) while ensuring smooth operations for PRKA going forward.
What’s Next?
The fact that the company is incorporated in Nevada (favors incumbent management) and that insiders own 52% makes it tough to believe this goes to a proxy battle. At the end of the day, the demands/suggestions aren’t outrageous at all. The dividend/tender offer proposed would leave PRKA still with $0 net debt while the company generates >$1mm of FCF annually. PRKA has been searching for another deal since 2008 the rights right deal and/or price hasn’t appeared. If you need a reminder of the execution risk ANY deal will bring just check out the performance of the Missouri park compared to the Georgia park.
Valuation
As my tweet inferred last Friday, I thought PRKA’s valuation looked attractive. Fast forward to Monday, December 17th and we have a possible catalyst. If nothing else, more eyeballs will be on the company and stock, making it more likely the gap between market valuation and intrinsic value is narrowed. At ~6.0x operating earnings, ~10% FCF yield, and net cash on the balance sheet equal to almost 10% of market cap, I really like how 2019 is setting up for PRKA.
I own shares of PRKA. This is not a recommendation to buy or sell.
Mesaba Range Value 