National RV Holdings: Good Deal or Bad Deal? - Part 1

March 27, 2007

Editor's Note: Julio Guardado, Editor and Publisher of RV Investor participated in due diligence on a consulting basis with an investor group that made an offer to purchase National RV Holdings. The offer was rejected. None of the information provided in this commentary or anywhere on our website is proprietary or confidential as it is all obtained from public sources. We have not held shares of NVH nor do we hold shares of any companies covered in our website as a matter of policy. The opinions and analysis that follows is solely those of this publication.

National RV's year-end results press release in part stated:

"The turning point was the sale of Country Coach on February 20, 2007, which resulted in the infusion of $38 million of cash and enabled us to pay off our line of credit, pay down our suppliers, and end the uncertainty of the process. We are pleased to be in a position where we can once again turn our full attention to providing our dealers and customers with some of the finest motorhomes in the industry," continued Albrechtsen. "The Company is in the process of dramatically resizing itself to be profitable at current demand levels, including significantly reducing our operating footprint by consolidating onto a portion of the Perris property, and analyzing other alternatives. We are looking at and implementing numerous strategic initiatives to increase sales, lower costs, and increase margins."

That will be a tall order given the company's five year streak of losses. Their recent sale of Country Coach will allow them to focus on ailing National RV but it may be too little too late.

What's the size of the remaining National RV Holdings?

We estimate that the remaining National RV is at least a $125 million following the sale of Country Coach. NVH reported sales of 1,187 diesel and 1,137 gas motorhomes in 2006. We know that all of Country Coach's business is diesel. If we make an "ex-recto" assumption that National RV shipped 20% of the total diesel units then the resulting unit split is 950 from CCI and 1,374 from NRV. CCI's models are all highline diesels while NRV's are predominantly low-end gas models. We estimated wholesale prices to be discounted 25% from their MSRP which we also guessed at by looking at RV sales Internet sites. A little playing around got us close to the $171 thousand reported ASP and the $397 million reported revenue. This is not a particularly rigorous approach to estimating the revenue split between CCI and NRV, but hey, if you don't like the assumptions, plug in your own!

Where will the Cash from the CCI sale go?

After paying of the deal costs, not estimated here, the cash will have to go to debt and to paying off overdue suppliers.

NVH reported $29 million in debt along with a book overdraft of $2 million. NVH will renegotiate their credit line for working capital. They ought to be able to get $10-15 million. If they can get $15 million, they still have to pay down $16 million of debt. That would leave them with about $23 million.

At the end of 2006, NVH reported that they had $39.5 million in accounts payable compared with $19.8 million in 2005. Given that their revenue in 2005 was $66.5 million higher than 2006, we could reasonably expect a decrease but A/P increased by $19.8 million instead. As part of the CCI deal, $12 million was paid to overdue suppliers. We believe the remaining $7.8 million is on the NRV side overdue and will need to be paid from the proceeds of the CCI sale in Q1'07. That would leave them with $15 million in the bank.

What should NVH's business look like?

Probably the best current benchmark for NVH is Winnebago but we can also look at NVH's performance prior to the CCI acquisition in 1996 as a sanity check.

Winnebago has gross margins of 11% and operating expenses of 5%. That leaves an operating income of 6%. In 1996, NVH had gross margins of 13%, operating expenses of 4%, and operating income of 9%. In 1996, NVH also had net income of 5% and generated $4.5 million in cash with six month revenues of $68 million. That revenue run rate is right where we estimate that NVH is today.

On the productivity side, Winnebago has a revenue per employee of $275 thousand. To achieve similar productivity, NVH would have to slim down to 470 employees. NVH had 2,744 employees (including CCI) at the end of 2005.

What can NVH be worth?

Using our benchmark model, NVH should be able to generate net income of $4-5 million or so. A modest PE of 15 yields a $63 million market cap. At WGO's PE of 28.8, their market cap would be $118 million. That range is 3-5 times higher than their current cap of $21 million or a $6-10 share price. Unfortunately, what it can be worth is largely fantasy given the past performance of the company.

Perris Real Estate Deal

One card that remains to be played is the Perris real estate for which NVH announced a buyer but which has yet to close.

According to the company:

"National R.V. Holdings, Inc. announced the termination of its agreement with Warrior Holdings, Inc. and executed a Purchase and Sale Agreement with First Industrial Acquisitions, Inc. according to SEC filings. Subject to the terms and conditions of the Agreement, National R.V. agreed to sell its Perris, California real estate to First Industrial for $31.75 million. National R.V. will enter into a triple-net lease for the Property for an initial term of ten years with two five-year renewal options. The lease will provide for approximately $2.7 million in annual lease payments, increasing 3% annually. The deal is subject to approval by the Company's Board of Directors and satisfactory due diligence by First Industrial during a review period expiring February 9, 2007, according to the company's 8-K filing. Closing is expected to occur on February 15, 2007. Pursuant to the Agreement, First Industrial agreed to place a $250,000 deposit into escrow within two days of executing the Agreement and an additional $750,000 upon the expiration of the due diligence review period."

No news is bad news though and one deal already fell through.

The Riley Factor

The B. Riley investor group paid $51 million for CCI. At the end of 2006, B. Riley held a little over 11% of National RV Holdings.

CCI has a great highline reputation. If they can drive the same business model as Winnebago, this deal should be a 3-5 bagger at least for Riley. Given they control the company, their return is in their hands.

The question is whether Riley will be able exert its influence over NVH and whether they will try to acquire it. Now that NVH has cash in the bank though, we wouldn't bet on it in the short run.

Stay Tuned

Stay tuned for Part 2 when they release their first quarter 2007 results and pro-forma statements.

RV Investor

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