Reinhold Industries

Key Statistics:
Ticker: RNHDA; Current Price: $10; Target Price $25-30 EV/EBIT:4x ROIC: 60%

Reinhold Industries is a manufactures custom composite components for various applications. Majority of their products, 88% of 2004 sales, are used in the defense industry (missile components, protective gear, etc.). The rest of the sales come from CompositAir (air carrier seats) and Commercial (water filtration products). The defense sales split evenly between US Aerospace and British NP Aerospace subsidiaries. Company recently divested NP Aerospace subsidiary to Carlyle group for $54M. In late February, Reinhold Industries announced that it is exploring strategic alternatives, including sale, on how to deliver shareholder value.

Company used the proceeds from the sale of NP Aerospace to pay down all of existing debt and paid out the remainder to the shareholders in a form of special dividend of $6 per share. Company’s market capitalization is $31M. Using post deal pro forma balance and assuming that all excess cash was paid out as a special dividend the EV of the company is the same as market cap. Reinhold is worth $75 to $100M which represents a fair price of above $20 to $30 per share.

Reasons to Buy:
· Reinhold’s US Aerospace business is yielding around $8M per year in Free Cash Flow.
· CompositAir subsidiary’s current earnings are below normalized levels. Increasing popularity of lighter composite seats together with a recovery in commercial aircraft building should significantly improve earnings of this unit.
· Management is committed to delivering shareholder’s value as was displayed by two special dividends in the last year and a half.
· Upcoming sale of the company will provide a catalyst for extracting value

Risk:
· Nearly 50% of company sales come from Minuteman missile program which is set to expire in 2008.
· Sale process is uncertain and company may not be able to attract a proper offer

Why is it cheap:
· Company has recently been delisted from Nasdaq because it no longer met 50M MCAP requirement after paying out special dividends. Company has also suspended its quarterly dividend which further reduced its attractiveness to institutional holders.
· Recent results look poor because of one time tax charges stemming from overseas cash transfers. Operating results however are consistent with last years figures.
· Company’s current financial position is not properly shown in all public sources.

Company’s UK Subsidiary was sold at a following multiples
P/2004 S of 2.16x; EV/2004 EBITDA of 10.3x; EV/2004 NI of 17x.
P/LTM S of 1.44x; EV/LTM EBITDA of 6.6x; EV/LTM NI of 10x.
Applying the same multiples to US Aerospace subsidiary would come out with the following valuationThe US Aerospace subsidiary is much more profitable than the NP Aerospace which explains the difference in valuation. It is also important to note that UK earnings are overstated by about $1M due to one time gains from currency translation.
Given the current EV of $30M Reinhold provides more than sufficient margin of safety.

EPV Valuation assumes that 2004 was a normal year for the US Aerospace subsidiary. Even though that unit has grown earnings by about 1M per year in the last two years.
CompositAir unit makes composite compound airplane seats. This unit lost .5M in 2004. This was a result of falling sales due to decreasing number of manufactured aircrafts. In the last two years both Boeing and Airbus pre-sold record number of airplanes. Those airplanes will increasingly use composite seats which are 40% lighter than the regular aluminum seats. Reinhold will definitely benefit from these developments and be able to at least match their profits from the segment two years ago.