The Rational Cloning: Weekly Ideas #59

Macro Ops (Q3 Letter Recaps); Substacks/Blogs & Tweets That Make You Go… Hmm 🤔

The Rational Cloner

Nov 06, 2022

Welcome to the 59th edition of the Rational Cloning Newsletter (Weekly Ideas Series).

Helping you discover the best ideas of others.

Happy cloning.

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Weekly Investment Ideas

(1) Value Investing Q3 Letter Recaps: EMBRAC_B, JOE, And API

1. Nordstern Capital: Embracer Group (EMBRAC_B)

Nordstern Capital makes its first appearance in the Value Investing Letter Recap series. Johannes Arnold runs the fund and pitches EMBRAC_B in this quarter’s letter, which you can read here.
What does EMBRAC_B do?
Via TIKR.com: EMBRAC_B develops and publishes PC, console, mobile, VR, and board games for the games market worldwide. The company has a catalogue of approximately 850 owned franchises, such as Saints Row, Goat Simulator, Dead Island, Darksiders, Metro, MX vs ATV, Kingdoms of Amalur, TimeSplitters, Satisfactory, Wreckfest, Insurgency, World War Z, and Borderlands, and others.
From the letter: “Embracer Group (Embracer) has completed more than 80 acquisitions since its IPO in 2016. The company spent more than $10bn on these acquisitions altogether. In addition, Embracer spent close to $1bn on game development projects.”
Why is it a good bet?
“Acquisition multiples of operative units (including undiscounted out-year earnouts) average around 10- times EV/EBIT. Acquired IPs include evergreens such as The Lord of the Rings, Tomb Raider, or Sudoku.com …
Embracer’s average return on new game releases is about 3-times the investment …
Embracer is targeting to release 110 new PC/console games this financial year, has a pipeline of 222 PC/console games in development, has an unprecedented depth and breadth in the video games industry, is currently operating more than a dozen franchises that return more than 5-times the invested capital, and has a history of exceptionally successful acquisitions …
Before this year is out, Embracer is expected to up-list to the main Swedish stock market. This will bring new buyers. Several funds are restricted from buying Embracer as long as the shares are listed on a ‘mickey mouse’ stock exchange. This is about to change.”
Why does the opportunity exist?
“For recent games, however, that average has dropped. AAA-game Saint’s Row, Embracer’s most expensive development to date, was a disappointment. Acquisitions made over the last two years have had higher price tags and are harder to judge …
Uncertainty regarding the newer acquisitions, performance of recent releases, and doubts about synergies in Embracer’s decentralized model led short-sighted shareholders to sell Embracer’s stock.”
What is the prize if you’re right?
“Embracer is expected to continue double digit organic growth. Management expects to keep taking market share in the video games industry. Embracer’s share price today values this cash flow machine 2.5 years out at 5-times EV/EBIT. We are buyers.”

2. Praetorian Capital: St. Joe (JOE)

My friend Harris Kupperman and his fund Praetorian Capital make their first appearance on the weekly Value Investing Letter Recap series. If you want to learn more about Kuppy and what he’s doing, check him out on Twitter.
You can also read his latest letter here where he dissects one of his largest investments: JOE.
What does JOE do?
“JOE owns approximately 175,000 acres in the Florida Panhandle.”
Why is it a good bet?
“Over the past few years, the population of the Panhandle has hit a critical mass where the Panhandle now has a center of gravity that is attracting people who want to live in one of the prettiest places in the country, with zero state income taxes and few of the problems of large cities …
Besides the valuation, growth, and high Return on Invested Capital (ROIC) of the business, why else do I like JOE? For starters, land tends to appreciate rapidly during periods of high inflation— particularly an inflationary period where interest rates are likely to remain suppressed by the Federal Reserve.”
Why does the opportunity exist?
“It has been widely known that JOE traded for a tiny fraction of its liquidation value for years, but without a catalyst, it was always perceived to be “dead money …””
What’s the prize if you’re right?
“I believe that JOE will grow revenue at 30% to 50% each year for the foreseeable future, with earnings growing at a much faster clip. Meanwhile, I believe the shares trade at a single-digit multiple on Adjusted Funds from Operations (AFFO) looking out to 2024, while substantial asset value is tossed in for free.”

3. Maran Capital: API Group (API)

Dan Roller of Maran Capital makes his first appearance on the weekly Value Letter Recap series with his API pitch. You can read his latest letter here. Also, go follow him on Twitter @Dan_Roller.
What does API do?
“API Group is a holding company for a group of safety, engineering, and industrial services businesses operating globally, with roots dating back to 1926. The company is a market leader in a number of niche industries (fire safety, specialty contracting) and in many countries in which it operates.”
Why is it a good bet?
“In the mid-teens, API Group’s market cap is just north of $3.5 billion. Looking out several years, EBITDA should grow from $600-700 million to close to $1 billion (driven by organic growth and margin expansion), and net debt should fall to around $2 billion.”
Why does the opportunity exist?
“API Group had an interesting path to being a publicly traded US stock. Its life began as a UK-domiciled special purpose acquisition company (SPAC). Following the de-SPACing merger, shares were delisted in the UK and began to trade on the OTC Marketplace “pink sheets” in the US. Combine this non-standard path to market, non-standard trading marketplace, and the Covid-related market decline, and it should come as no surprise that APG “broke” its listing price, ultimately trading as low as the mid-single digits.”
What is the prize if you’re right?
“Bulls might argue the business—based on comparable transactions and business quality—should trade at an 18-20x multiple, but even if the stock only garners a lower 10-13x multiple, it could still be a double or a triple ($35-45/sh).”