About Madison Sq. Backyard Leisure Corp.
Madison Sq. Backyard Leisure (NYSE: MSGE) (“MSGE” or “the Firm”) is a world chief in reside experiences with a portfolio of iconic venues that features: New York’s Madison Sq. Backyard, Hulu Theater at Madison Sq. Backyard, Radio Metropolis Music Corridor and Beacon Theatre; and The Chicago Theatre. As well as, MSG Leisure is constructing a brand new state-of-the-art venue in Las Vegas, MSG Sphere at The Venetian, and has additionally introduced plans to construct a second MSG Sphere in London, pending mandatory approvals.
The Firm produces, presents, or hosts varied reside leisure occasions, together with live shows, household exhibits, and particular occasions, in addition to sporting occasions, similar to skilled boxing, faculty basketball, skilled bull using, blended martial arts, and esports in its venues. Madison Sq. Backyard serves as dwelling to the New York Knicks and New York Rangers skilled sports activities franchises.
MSG Leisure additionally options the Radio Metropolis Rockettes, the legendary New York dance firm that serves because the star of the Christmas Spectacular at Radio Metropolis Music Corridor, which has been a vacation custom for 87 years. MSGE’s different properties embody Boston Calling Occasions, which produces New England’s premier Boston Calling Music Competition, and Tao Group Hospitality with fashionable eating and nightlife manufacturers in New York Metropolis, Las Vegas, Los Angeles, Chicago, Singapore, and Australia that embody: Tao, Marquee, Lavo, Avenue, Magnificence & Essex and Cathédrale. (Sources: MSGE, FINVIZ)
Whereas MSGE has a comparatively sturdy stability sheet with first-class belongings it suffers from comparatively bloated price construction and can incur vital capital expenditures for no less than the subsequent 3 years. The enterprise will nonetheless flip round sharply as soon as a restoration takes maintain, making MSGE fairly an opportunistic momentum commerce in (early) 2021 than a buy-and-hold funding.
What We Like
Sturdy Stability Sheet
As of September 30, 2020, MSGE had tangible fairness of practically $2.5 billion ($104/share). Many of the belongings had been in money ($926 million) and property/tools ($1.7 billion). The Firm had no long-term debt to talk of and a present ratio of two.6.
|Property & Gear ($000)||Sep 30, 2020|
|Furnishings and fixtures||41,891|
|Building in progress||797,827|
|Whole Property & Gear||2,530,712|
|Much less collected depreciation and amortization||(790,957)|
|Internet Property & Gear||1,739,755|
(Supply: MSGE Quarterly Report Fiscal Q1 2021)
The buildings embody the beforehand talked about ones – first-class venues which might be “assured” to attract occasions and attendance, and allow incomes energy. “Building in progress” refers back to the improvement of MSG Sphere.
Presently, MSGE is buying and selling at a 25% low cost to tangible e book worth – present market value is round $78/share in comparison with tangible e book worth of $104/share.
On April 17, 2020, the Firm grew to become an unbiased publicly traded firm after being spun off from Madison Sq. Backyard Sports activities Corp. Whereas the timing could have been unlucky, it’s typically a constructive transfer because the Firm (and the now separate corporations) at the moment are extra centered – one on leisure/hospitality and the opposite on sports activities. This makes it simpler for traders to judge the Firm and will allow workers and administration to focus on one operational space with extra vigour than earlier than, and thereby hopefully main to higher outcomes.
MSGE’s companies – each the leisure phase and hospitality (Tao Group) division – have suffered severely because of the pandemic. For instance, for Q1 fiscal 2021 (quarter ending September 30, 2020), the Firm reported income that was 92% beneath prior yr quarter.
With information of a vaccine and certain financial reversal coming quickly, we view MSGE’s prospects as shiny. Enterprise will decide up quick as soon as social life will change into extra regular with revenues steadily going again to pre-pandemic ranges.
What We Do not Like
Because of the constructing of MSG Sphere in Las Vegas, and certain in London, the Firm faces vital capital expenditures. For the reason that Las Vegas venue is not going to open till at first in 2023 these expenditures are more likely to stay excessive for the subsequent years and even additional, relying on when (and if) the London venue will full.
This results in very adverse free money flows and limits all capacity to pay dividends or interact in share repurchases. It might additionally result in additional indebtedness with potential hurt to the stability sheet. (Within the quarterly report for the quarter ended September 30, 2020, the Firm introduced that it had entered right into a five-year $650 million senior secured time period mortgage facility in November 2020.)
General, this vital money outlay makes the inventory fairly unattractive within the close to time period (3-5 years) since shareholders is not going to obtain any money circulate earnings and would possibly threat comparatively low payouts additional out sooner or later if debt turns into a difficulty or upkeep expenditures rise.
MSGE has two lessons of widespread inventory; Class A (1 vote/share; 19.493 million shares excellent of which the Dolan household owns roughly 4.2%) and Class B (10 votes/share; 4.530 million shares excellent which the household owns solely). Successfully the Dolan household owns round 22% (economically) of MSGE however holds roughly 70% voting energy.
Labeled as an “rising progress firm” and “managed firm” MSGE could elect to not adjust to sure necessities, e.g. disclosing sure obligations relating to govt compensation in periodic reviews, have a majority of unbiased administrators on the board, have an unbiased company governance and nominating committee, and an unbiased compensation committee. (Source)
It’s also value mentioning that some executives/administrators of MSGE additionally function executives/administrators at MSG Sports activities, MSG Networks and AMC Networks. This partially lowers the helpful worth that ought to have come from the spinoff.
Having one controlling shareholder can generally be good (e.g. a family-owned firm with long-standing historical past and conservative insurance policies) however it could additionally considerably restrict the flexibility of different shareholders to affect the methods and governance of MSGE – total, a adverse for the inventory.
Bloated Value Construction/Inventory Compensation
Though the Firm has nice belongings, similar to Madison Sq. Backyard, it would not appear to translate into sturdy earnings energy. Gross margins have been over 30% however vital working bills have eaten that away, leading to working losses for the final 4 years (partially based mostly on estimates for pre-spinoff years) (Tao Group Hospitality delivered working earnings in 2018 and 2019, however it is just 24% of MSGE).
Promoting, common and administrative bills (SG&A) have typically been over 25%. And whereas a few of it contains non-capitalized expenditures associated to the event of MSG Sphere, a major a part of it (~10%) comes within the type of stock-based compensation.
Nonetheless, the Firm has delivered constructive working money flows (years 2017-2020), averaging roughly $107 million. Nonetheless, when contemplating “regular” capital expenditures (utilizing depreciation as an estimate, avg. $106 million, source) MSGE generates no free money circulate. This isn’t excellent for shareholders – getting subsequent to no earnings (when it comes to free money circulate) however persistently having their holdings diluted resulting from new issuance of shares for stock-based compensation. In consequence, tangible e book worth could present the perfect proxy for the Firm’s valuation (roughly $100/share).
MSGE owns a Gulfstream Aerospace G550 plane valued at $38 million (booked worth earlier than depreciation). The Firm has varied time-sharing/dry-lease preparations with a number of events (largely people and entities managed by members of the Dolan household, see annual report for fiscal 2020).
A company plane has typically been a sign of extreme spending and a straightforward goal for activist traders. Since MSGE has a controlling shareholder it’s unlikely to be confronted with any sort of activist strain. And whereas purchasers are required to pay any bills incurred resulting from their use of the plane, the Firm nonetheless has the plane in its books, doubtless incurring some upkeep/depreciation expenditures over time. General, we do not see proof of extra referring to the plane (since purchasers pay charges), however it’s nonetheless value mentioning.
General, MSGE has good belongings and robust stability sheet. The current spinoff from MSG Sports activities Corp. brings extra focus to operations. And certain pandemic restoration in early 2021 will enhance the enterprise considerably.
Important capital expenditures, excessive working bills and a controlling shareholder will nonetheless be a disadvantage over the subsequent years, making the inventory unattractive as a buy-and-hold funding.
Suggestion: Quick-term BUY to make the most of pandemic restoration.
Goal Worth: $100/share.
Timeframe: Q1 2021 (approx.).
Catalyst(s): Pandemic restoration.
Disclosure: I/we now have no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.