POWW Spinoff to Unlock Value

POWW Spinoff to Unlock Value ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ POWW: Spinoff to Unlock Value; Maintain Buy AMMO, Inc. is a manufacturer of ammunition and owns Gunbroker.com, a marketplace where third-party sellers sell firearm and firearm-related products directly to customers. The company reported its F1Q23 results after the close on August 15 and also announced that it plans to spin off its Gunbroker.com marketplace business in calendar 2023 in order to unlock value for shareholders. Revenues increased 36.6% Y/Y during the quarter, while gross margin declined to 25.8%, versus 42.7% produced in F1Q22. We rate AMMO a Buy and believe that shares are attractive ahead of the spinoff. Key Points - Top Line. Total revenue during the quarter grew 36.6% Y/Y, driven by a 37.4% increase in revenue from the ammunition manufacturing business and a 34.5% increase in marketplace revenue. We note that Gunbroker.com was purchased on April 30, 2021, roughly 1/3 of the way into F1Q22. - Proprietary ammunition revenue grew 157.2% Y/Y and represented 6.5% of ammunition segment sales, up from 3.4% in F1Q22. The company expects sales of proprietary ammunition to greatly outpace the sales of its standard ammunition. - Standard ammunition revenue grew 39% Y/Y and represented 86.1% of ammunition segment sales, up from 84.7% in F1Q22. - Casing sales declined 14.8% Y/Y and represented 7.4% of ammunition segment revenue, down from 11.9% in F1Q22. - Gunbroker.com generated user growth of 38K users per month (1.6% growth from F4Q22) and increased its take rate during the quarter to 5.3%, up from 4.5% generated in F1Q22. The company seems to be increasing its efforts to accelerate organic growth in the segment, as it recently hired five in-house marketing personnel, more customer service representatives, three additional engineers, and two software engineers. Additionally, its suite of payment services (e.g., ACH loyalty program, credit cards, gift cards) that we mentioned in our last note will be fully functional by October. - While the company posted strong Y/Y growth, revenue declined 13% sequentially from F4Q22, with ammunition revenue and marketplace revenue declining by 15.1% and 8.1%, respectively. The company noted that some of its production came off-line during the quarter due to equipment being moved to the new facility and that the decline in marketplace revenue was attributable to seasonality. We continue to believe demand is strong: - While July adjusted NICS firearm checks fell 4.5% Y/Y, the print came in 48.5% higher than July 2019. Adjusted background checks are up 32.4% YTD versus the same period in 2019. - We believe production outages explain the sequential decrease in revenue during the quarter, as peers witnessed sequential revenue growth during the quarter ending June 2022 versus the quarter ending in March 2022. - Gross Margin. Gross margin decreased to 29.8%, versus 42.7% in F1Q22 and 30% in F4Q22. Ammo cited an increase in the cost of materials, additional labor for its new Manitowoc facility, and increased overhead costs related to the opening of the Manitowoc facility in July to explain the decrease in gross margin. Aside from increased commodity prices: - Shipping costs decreased gross margin by 2%; - Hiring and training new employees prior to the opening in the Manitowoc facility decreased gross margin by 2% - hiring and training takes three to six months depending on the position; and - Production outages led to a decline in utilization rate due to the transport of equipment into the new facility, leading to lower gross margin. Ammo expects all of its equipment to be installed at the new facility by the end of August, where its production capabilities will experience a significant uptick. The company views the cost increases as temporary and expects a recovery in gross margins by the end of F2Q23, when the new facility is expected to become fully operational and when its higher cost inventory is sold. - Manitowoc Facility. Ammo opened up its 185K-square-foot manufacturing facility in Manitowoc, WI, last month. The facility will increase the company's production capacity to roughly 1B loaded rounds per year and will also support the manufacturing of its STREAK Visual Ammunition, subsonic munition, and specialty rounds for military and law enforcement. The increased production will allow Ammo to strengthen its relationship with commercial market vendors, U.S. law enforcement, U.S. military, and companies in international markets. - The Spinoff. Ammo is separating its marketplace business, now known as Outdoor Online, from its ammunition manufacturing business, now known as Action Sports Outdoors, in what is expected to be a tax-free spinoff in calendar 2023. - Outdoor Online will own Gunbroker.com and its strategy will be to pursue organic growth by repositioning its website to more of a store-based user interface to enable more sellers and attract more buyers to the platform. The company may also pursue acquisitions within the outdoor sports marketplace. Fred Wagenhals will become the Chairman and CEO of the spun-off unit. - Action Outdoor Sports will own Ammo's manufacturing facilities and its standard and premium ammunition brands, such as Streak Visual Ammunition and StelTH Subsonic Ammunition. Fred Wagenhals will remain Chairman, while the executive management team will be announced at a later date. The big question surrounding the spin-off revolves around its timing, as Ammo closed on the Gunbroker.com acquisition on April 30, 2021, and its Manitowoc facility is in the initial stages of production. That said, the timing does not change the fact that Gunbroker.com is not being valued correctly. We believe the spin-off, slated to take place in 2023, will unlock the value of Gunbroker.com and also believe that the transaction speaks to management's confidence in its ability to ramp up production at its new facility in Manitowoc. In our opinion, the positives of unlocking the value of Gunbroker.com on a stand-alone basis, having refined capital allocation decisions for two distinct business models, and enhanced investor choice, outweigh the negatives of increased public company costs and the absence of a vertically integrated/DTC business model, which we believe was limited due to the fact that buyers on Gunbroker.com either need to carry a Federal Firearms License (FFL) or use an FFL dealer as an intermediary to purchase ammunition. - Reasons for the Spinoff. - Enhance shareholder value: With distinct investment opportunities, the two companies will have the ability to be valued at their appropriate multiples by the market upon separation. - Enhancement of brand strength. - Prioritize and refine capital allocation based on separate business models. - Expand strategic opportunities. - Action Outdoor Sports will build upon Ammo Inc.'s track record as an attractive acquirer by pursuing acquisition opportunities in the outdoor recreational industry. - Outdoor Online will be positioned to focus on organic growth, leveraging its leading marketplace capabilities, in addition to accretive acquisition opportunities specific to its space and market. - Attract and retain top talent. Through the separation, each company will be able to set long-term and short-term objectives relating to its distinct business model. We believe the separated companies will define short-term and long-term objectives for performance-related equity or cash bonus incentives. Guidance. Ammo broke down its FY23 guidance by business segment in accordance with the spinoff as follows: - Action Outdoor Sports (Ammunition Manufacturing Co'): - Revenue: $230M - $240M - EBITDA: $35M - $38M - Outdoor Online (Gunbroker.com Marketplace) - Revenue: $70M - EBITDA: $47M - Consolidated: - Revenue: $300M - $310M - EBITDA: $82M - $85M F1Q23 Results and Estimate Changes. Ammo reported total revenue/adj. EBITDA of $60.8M/$14.3 vs. our estimates of $71.1M/$19.7M in F1Q23. Our estimates adjust for the reported results as follows: FY23 revenue/adj. EBITDA to $293.2M/$81.5M from $299.2M/$85.2; FY24 revenue/adj. EBITDA to $389.1M/$131.2M from $397.9M/$141M. Valuation. We arrived at our $9 price target using a free cash flow to the firm model. Our valuation implies an EV/FY24 EBITDA multiple of 8.2x. Risks. Risk factors include cyclicality of the ammunition industry, softening in prices for more popular rounds of ammunition, negative government policies surrounding firearm regulation, competition from major producers with greater scale, and risks associated with inputs to discounted cash flow valuation models. In addition, we strongly encourage investors to review regulatory filings for additional risk factors. [Read More]( Analyst Edward Reilly, CFA ereilly@efhuttongroup.com NO INVESTMENT ADVICE TraDigital IR is a publisher. You understand and agree that no content published on this site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is.. 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