Parks! America (OTC:PRKA)

Summary

Despite its tiny market capitalisation, Parks America is a surprisingly high quality, albeit niche, business. The combination of a high performing park and a loss making one, together with an unusually large number of “rainy weekends” has created an interesting investment setup. On a normalised basis (excluding the loss making site) the group should be able to generate $1.8-2.5m of EBIT which should grow nicely over time, through price increases and a fixed cost base. Therefore, at current prices it is being offered for 3-5x EBIT, which I believe is extremely attractive for a business that managed to grow revenues and profitability throughout the 2007-09 recession and requires minimal ongoing capital to be retained.

 

Market Data

Ticker:                        OTC: PRKA

Price:                          $0.14

Shares:                       74.65m

Market cap:             $10.5m

 

Net cash:                    $2m

EV:                              $8.5m

 

Business overview

Parks America, operates two Wild Life Safari theme parks located in Pine Mountain, Georgia and Strafford, Missouri. The sites offer guests the opportunity to drive through the park in their own or a rented vehicle and experience over 65 species of animals in a somewhat “natural” environment.

 

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The parks represent a great value outing and the reviews from Trip Advisor are overwhelming positive, with an average rating of 4.5 stars (from 750+ reviews). An adult pass costs $24.95 and family passes (2x adults, 2x children) are $91.95 – which compares to ~$200 to take a family of 4 to Six Flags for the day.

 

The business has proved extremely resilient and highly profitable, growing sales and profits throughout the GFC period at their Georgia site:

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School groups and tours form a material portion of the annual sales, which creates a visible and recurring base of revenues.

 

The cost of operating a site are mostly fixed – wages, animal food, insurance – which creates substantial operational leverage. Demand has also proved to be highly inelastic, with the company consistently raising prices without any impact on attendance. They are also in the enviable position of having more animals than they need – providing an additional revenue stream of selling a portion of the newborns each year to other parks or Zoo’s.

 

Finally, geographic location is critical in creating a sustainable park, with the further South the better (Texas, Southern California, etc.) as this allows the park to operate year-round.

 

The company is managed by a highly aligned team which has a long history of success in the “theme park” industry. Collectively they own around 55% of the company and no one draws a salary of more than $100k.

 

Investment case

While the Georgia site has been a resounding success, with EBIT increasing 5x over the last 10 years with zero incremental capital requirements, the firms second facility in Missouri has struggled to reach a level of sustained profitability. This site was acquired under the former management team in 2007/08, had been under-invested for many years and milked for cash flow. The new management team of PRKA (which took over in 2009/10) have invested back into this business over the years, but profitability has remained patchy. There are potentially structural issues (related to its location) that prevent this site from ever becoming a material profit centre.

 

The loss-making Missouri park has effectively “hidden” the ongoing improvements at the Georgia park and made the overall group margins and return on capital look lower than what they truly are:

prka3

 

The carrying value of the Missouri park (the majority of which is attributed to land) is around $2m – I believe if an offer came along to acquire this site, the management team would happily dispose of it and reinvest the cash into an acquisition, buybacks or distribute to shareholders.

 

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.”

 

Another issue is the age of the current majority shareholders. The CEO is nearly 77 (but appears to be in very good health and eager to continue) and other major shareholders are of a similar age (but in poorer health). Combined with the “zombie shareholders” this creates an interesting setup for a large personal investor or small institution to pursue a buyout.

 

As for the “story” to sell to new shareholders and drive future growth, the industry is largely owned by “mom & pop” owner-operators, who are quickly approaching retirement age. The management team has actively engaged with the ~800 sites across the country trying to pursue acquisitions, but to date they have not been able to justify the asking prices. Given the highly cash generative nature of the business, the excess financial resources and a well aligned management team, PRKA could potentially become a consolidator in this market. Aside from that, they would also represent an attractive acquisition for a firm like Cedar Fair.

 

Valuation

The Georgia site should be able to sustainably generate $2-3m in operating profit, which will grow over time. Missouri generates around $1m in sales and has a book value of $2m – based on the site having 255 acres within close proximity to Springfield and Branson, a $2m price tag would imply $7,800 an acre, which seems reasonable compared to similar parcels for sale in the area. After a recent refinancing, the company should have around $2m in free cash on the balance sheet.

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*8x EBIT multiple is in-line with the company’s long run average, but a 50% discount to the two listed comparable companies

 

It’s also worth considering the strategic value PRKA would present to an industry buyer. As they would already have sufficient management, HR & accounting capacity, the current corporate costs could likely be eliminated. This would add an additional $0.075 per share to the above fair value estimate.

 

Why does the opportunity exist?

PRKA shares have almost halved this year, which I believe is due to a deterioration in the reported financials. Now I’m not a fan of how companies blame poor results on the weather, however, since PRKA operates an outdoor leisure facility, occasional “bad luck” in the weather department, will create some volatility in the results. In the year to September 2018, Pine Mountain experienced 131 rainy days, compared to 123 in the prior year. More importantly, a larger proportion of these rainy days occurred on weekends.

 

A fall in profits, combined with limited investor communication, a tiny capitalisation and a very tight share register will often lead to material falls in the stock price – in this case down to a level that I believe is extremely attractive.

 

Despite being a “less than great” year, I estimate at current prices it is trading around 6-7x 2018 EBIT. Assuming rain patterns normalise in 2019, the company is likely to be trading <5x EBIT one year forward.

 

What about the potential for loss?

At current prices, I believe the company is currently selling for around replacement value:

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Given most of the value is attributed to land, the company is highly cash generative and has extremely low leverage (locked in at cheap rates), I believe the downside from current prices is extremely low.

 

Conclusion

Parks America owns one high quality asset (their Georgia Safari Park) that is likely to provide predictable, growing cash flows into the foreseeable future, with low risk of disruption. They also own a second site that provides something better than a “free option” because even if it can’t be monetised in its current form, it could likely be redeveloped or sold to generate value for shareholders.

 

At current prices, I believe PRKA share provide a low risk and potentially high return investment situation. While the stock is extremely illiquid, I believe this risk is offset by the business quality. Even for a private investor this will have similarities to a private equity investment and will likely require patience.

 

I believe a potential catalyst will result from improved capital allocation now that the company has repaired the balance sheet. One impediment to this is the ~3,000 “zombie shareholders” that remain from the former company the stock reverse IPO’d into many years ago. I believe the management team should pursue a reverse stock split and/or an odd lot tender offer where these shareholders will be forcibly bought out. Then the management team will be free to pay dividends without worrying that it will end up in the Nevada state coffers (due to unclaimed dividends).

 

Appendix

Property comparables

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Note

I hold a position in PRKA through a family investment account. This does not constitute financial advice. Consult a professional, read my disclaimer etc.

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