Hillenbrand should get rid of their casket business. That means a 50% upside for shareholders.

As humans, we find death a difficult topic because it causes so much anxiety, fear, and confusion. And sadness. Thinking about our mortality is very sad. We like to put it out of our minds, but like taxes, death is an absolute certainty, as Mr. Benjamin Franklin so succinctly put it.

Here at The Edge, we look for intact shareholder value as well as companies that underperform activist investors. Furthermore, when we meet them, we need to explain exactly how this can be achieved. Sometimes companies are sitting on hidden value and other times they need to be pushed to think more closely to find and ultimately realize that value for shareholders.

One company that got on our radar two years ago was Hillenbrand ( HI ), which currently trades at $45. This Indiana-based company is listed on the NYSE and has a market capitalization of just over $3 billion. It has many businesses that complement each other well in the industrial sector. The business that sticks out like a thumb and doesn’t match the company is the “Batesville” operation, which is involved in the manufacture and sale of funeral service products, including funerals and caskets, cremation. Containers and urns, other personalized and memorial products and technology applications for funeral homes. The following is all reported from us as of March 31, 2022 with some recent updates and is available upon request.

Timing is everything. why now

In the last two years, the administration has Hillenbrand

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The death care business has continued to evolve from selling coffins to becoming a large, sprawling industrial company. At the time, we believed that with the help of an activist investor, the company could break from its 2008 lows and create value for shareholders. However, a lot has happened between then and now which makes the coffin episode even more compelling.

If HIA’s stock price hadn’t doubled, Batesville’s market value would have been so small it would have been kicked out of the SmallCap 600 index, and shareholders would have been under pressure to sell the index.. Likewise, HI’s debt at the time was around 4x and presented a challenging breakup. Now, using the stable and predictable cash flow from BATES, the debt is down to about 1.5x as of Q1 2022. And finally, with a new person who sees firsthand what value a spinoff can create. Today there is a great opportunity to drive. This doubling of stock puts Batesville at the right size (big market place) and the right leverage point for a soft breakout.

HI increased its industry focus from a 70/30 revenue split to an 80/20 split. In the last two years, the administration has Hillenbrand, Inc. The death care business has continued to evolve from selling coffins to becoming a large, sprawling industrial company. HI’s 100+ year old death/funeral business first started in It follows a series of acquisitions that began in 2010. Initially, Batesville’s casket business was the only segment that contributed 100% of its business. Now, after buying its Molding Technology Solutions business (Millaron Holdings Corp. (MRN), which closed recently on March 30, 2020, for $1.9 billion, this has increased the percentage of the industrial side of the business to 70% of its renovations. Up from 80% (or vice versa, Batesville Earlier contribution to 30% revisions to 22% in FY21 and 9M2022).

Breakdown of income: End of most recent fiscal year

Batesville is the perfect size for a spinoff in 2022.

As of March 2020, HI was a $1.4 billion market cap (3.1 billion EV) company. Today, HI is a $3.3 billion market cap company with an EV of $4.1 billion. In the year Back in 2020, the minimum market capitalization limits would have been lower than they are today, with both RemainCo and SpinCo remaining in the S&P SmallCap 600 Index to prevent any recent index selling pressure, among other problems surrounding it. A debt would arise. Therefore, the SpinCo (Suggested Mark BATES) Creating a pure-play and high free cash flow generating business is in a much better position to list today. Check out our different market price scenarios below.

Based on the March 2020 earnings distribution, the break-up would have yielded a higher leverage (4.3x) to Batesville (BATES) on a standalone basis. In addition, the split would have caused Batesville to drop out of the S&P SmallCap 600 in March 2020, as inclusion criteria required it to remain in the SmallCap index at least $600 million.

If management wanted Batesville to remain a part of the SmallCap index, it would need a 42% debt distribution if it wanted to convert its debt at this rate, which would have given Batesville a whopping 6.2x leverage. Even less attractive to investors as an independent company

If HI plans to split the company based on revenue contribution in today’s terms (as of February 2022), even if the benefit looks more impressive than in March 2020, the market cap will still drive Batesville out of the S&P SmallCap 600 index. The recently revised criteria required the minimum market value to reach $850 million, which is higher than in our case. However, if we adjust the debt allocation so that BATES remains in the S&P SmallCap 600, the chart below is the optimal credit distribution scenario.

Based on the above, a 73%-27% dividend puts BATES above the minimum $850 million market cap required to remain in the S&P SmallCap 600 Index and gives it leverage of 2x, which is less than the combined parent’s 2.3. x. At 2.3x (Scenario 3) or 1.4x (Scenario 2) rates, the benefit is less than the 3.7x average (CSV: 5.4x, MATW: 3.8x and SCI: 3.6x). Therefore, this gives HI management more room to manage and distribute debt between RemainCo and SpinCo.

If management decides to allocate enough debt to BATES to trade at its estimated multiples of peers (around 3.7x), this would require a debt spread between Advanced Process Solutions and Molding Tech Solutions and BATES in the 51-49% ratio. , respectively. This brings a market cap of approximately $1.6 billion for BATES and a $1.7 billion market cap for RemainCo (at a leverage of 1.4x).

BATES exciting idea to expand the business as an independent entity

In March 2020, after HI bought the larger Mylaron, the company’s debt was around 4x and hence why we raised this high leverage would have been challenging to break even at the time. However, over the past two years, management has used the stable and predictable cash flow generated by Batesville ( BATES ) to significantly reduce that debt to 1.5x by Q1 2022. , 2022), according to the administration “Our next strategic pillar is managing Batesville with cash.”

However, when asked about the long-term shift to cremation (as per peers), this topic was not fully explored, and management reported a slight decrease in revenue due to an increase in families choosing to cremate. In fact, 55% of all funerals in the United States today are cremations. The real question is whether BATES, as an independent listed company, will use this predictable cash flow to expand their FY22E margins (20% versus 30% as peers SCI and CSV), especially given the relatively high mortality rate seen in 2020 and 2021.

The table above highlights the high conversion rate of FCF HIAs, which confirms their superior debt servicing capacity and ability to manage high operating scale (if required) with their own funds. Furthermore, management proudly states that they have achieved a 100% FCF conversion rate over the past decade, indicating that both BATES and the rest of the HI business (Preprocessing and Molding Technology Solutions) are high free cash flow generating units.

Batesville (BATES) derives 89 percent of its business from casket sales, while its peers are a mix of mortuary sales and funeral services, and we believe the services business is helping these peers achieve better operating margins compared to BATES. Currently, BATES is expected to report a margin of around 20-21% for FY22E, primarily from selling caskets. Peers SCI and CSV are expected to contribute around 30% and 33%, respectively, due to their revenue mix. We believe that the separation into an independent company will allow BATES to leverage its operational performance and drive higher margins.

HI has underperformed its peers and the broader market.

From 2020 to 2021, HI’s stock price went from a low of $14.29 (March 18, 2020) to over $45 at the end of February 2021. This is reflected in the 2-year TSR annualized (shown below), but historically HI has always been. It has recently outperformed its peers and index at the lower end of the TSR chart.

Total Shareholder Return: HI Vs. Peers and index

Finally, management is no stranger to value creation from spinoffs. There is a new CEO after the former CEO of HI was there for the last eight years And with the company for 27 years. Joe A. Raver retires at the end of 2021. HI’s new and current CEO (as of January 1, 2022) is Kimberly K. Ryan. Ms. Ryan was previously on the board of the company that completed the spinoff. She was a board member of Kimball International.
KBAL
(KBAL) Since January 2014, Kimball Electronics, Inc. KE jumped +128% in the first year since the spinoff, so Ms. Ryan has seen it first hand and can appreciate the potential for value creation following a spinoff..

With the stock market having gone through a slump, as the economy tightens its belt, companies need to think about their shareholders and give more consideration to how to provide value to stockholders. Hillenbrand seems like an obvious candidate to unleash hidden value.

Our one year The base case target price is $67.36. For HI, it represents +45% growth from the current share price of $46.57. However, ours The total price of the parts comes to $78.99This represents a potential increase of +70%.

Price matrix

Peer comparison matrix for preprocessing and molding technology solutions

Peer comparison matrix for the Batesville class

Finally on July 20th, the company announced a strategic review of their Batesville business. We believe the right path for them is to spin the business to existing shareholders to maximize value.

If you are an activist investor looking for companies like this or a regular investor looking to take advantage of price movements due to corporate change, please contact me and experience our services.

The author owns shares of Hillenbrand Inc.