Mittleman Brothers recently published its Q3 investor letter (you can download a copy here). In the letter, the hedge fund discussed its investment thesis on Aimia Inc (TSE:AIM), a $533-million market cap data-driven marketing and loyalty analytics company based in Quebec, Canada. Let’s take a look at comments made by Mittleman Brothers in the letter about Aimia.
Aimia is a leading provider of coalition loyalty marketing programs like Aeroplan in Canada and Nectar in the UK. We initiated our position in May following a >60% one-day decline in its stock price after the company announced that Air Canada, its largest partner, would not renew its contract that is set to expire in 2020. The stock dropped an additional 25% in response to the Aimia’s mid-June announcement of a suspension of its dividend. We presumed that the dividend would be suspended upon entering the stock and believed this was a sensible course of action in order for the company to pay down its debt. Aimia produces significant free cash flow and trades at an extremely low valuation, and there is both the possibility and likelihood that Air Canada will be replaced by other airline partners.
Through its joint venture with Aeromexico (AEROMEX MM), Aimia also owns a 48.9% stake in Mexico’s leading coalition loyalty program that in MIM’s estimation is worth more than the current share price alone. The stock price decline, that we believe we took advantage of, was exacerbated by both sales of funds mandated to hold only dividend paying stocks, and index funds that were forced to sell it upon its exit from various indices, as well as panicked individual investors who fail to realized that even if Aeroplan became worthless due to Air Canada’s exit from the program in 2020, equity investments and other subsidiaries, combined should result in equity value well in excess of the current stock price. And if Aeroplan does find replacement partners for Air Canada before 2020, the fair value for the share price would be triple the current price, which we think will be the case.
These coalition loyalty programs are not popular in the U.S., although American Express is trying to build one called “Plenti,” yet they are very popular in Canada and the UK and many other countries. These are negative working capital businesses with sizable float and a very high conversion of EBITDA to FCF. Think Berkshire Hathaway’s Blue Chip Stamps, or any airline’s frequent flier program (the most lucrative part of any airline company), or American Express’ Membership Rewards program…the economics are similar. We are Aimia’s second largest shareholder now, with just over 10% of the shares outstanding. Our average cost is USD 1.53 (CAD 1.97). It closed the quarter at USD 1.98 (CAD 2.47). We think fair value based on a sum of the parts is a minimum double from current price, and likely a triple if Aeroplan survives the 2020 departure of Air Canada, as we expect it will.
Aimia Inc (TSE:AIM), formerly Groupe Aeroplan, is a data-driven marketing and loyalty analytics company headquartered in Montreal, Quebec, Canada. The company runs manages many loyalty programs including Aeroplan in Canada, Nectar in UK and Chile. It also holds stakes in loyalty programs such as Club Premier in Mexico, Air Miles Middle East and Think Big.
For the third quarter ended September 30, Aimia Inc (TSE:AIM) reported better results, exceeding market expectations. Gross billings were $496.8 million, down 10.0% on a constant currency basis including the impact of divestitures. Americas coalitions gross billings were up $3.4 million, or 1.0%, while international coalitions gross billings were down $11.6 million, or 8.9%, on a constant currency basis. Nectar saw a positive contribution from the first quarter of Daily Mail issuance but lower Sainsbury’s bonusing and the Homebase exit resulted in an overall decline. Air Miles Middle East was down on fewer promotional miles and challenging market dynamics in the region. Adjusted EBITDA was $60.3 million, or 12.1% of gross billings, including a restructuring expense of $11.1 million. That compares to adjusted EBITDA of $60.5 million, or 10.8%, last year.
Shares of Aimia have jumped more than 41% since September 30. The stock, however, is down more than 60% year-to-date.