In this transaction ECIP was valued at 21c on the $

A big reason the company is so undervalued is management needs to deploy the money in order for it to translate to returns, not easy to do for such a small bank. I also believe management may be waiting for an acquisition. You can imagine how value accreditive acquiring another ECIP bank would be where the ECIP money is a liability but not one worth 100c on the dollar.

Below is an explanation of why the ECIP is not worth 100c on the dollar and how an acquisition of another ECIP recipient may be extremely valuable:

In mid-2022, Citizens was the recipient of $95.7 million in funds from the United States Treasury as part of the Emergency Capital Investment Program (ECIP). The ECIP funds are in the form of preferred stock that Citizens issued to the Treasury with the following terms:

• It is non-cumulative (i.e., missed payments do not accrue).

• It is perpetual (i.e., it never has to be paid back).

• The interest rate on the preferred stock will be 0% in years one and two. From years 3-10, the rate will be between 0.5% and 2.0% based on how it is deployed (i.e., how much it is able to increase lending to minority groups). After year 10, the interest rate will be fixed in perpetuity at a rate equal to the average rate paid from years 3-10.

• The Treasury will transfer its preferred investment in a merger/acquisition as long as the buyer is a CDFI or MDI. If the buyer is not a CDFI or MDI, then the Treasury may still transfer its investment, but prior approval is required.

• The Treasury has the right to sell this preferred security at any time. When the Treasury sells this security, the preferred stock is first required to be valued by an independent third party. Then, the issuing bank has the first right of refusal to buy back the preferred stock at that valuation. This preferred stock is worth a substantial discount to par because it is perpetual, yields just 0-2% and the investor has basically no ability to enforce payment (i.e., it is non-cumulative). In my view, it is worth ten – 25 cents on the dollar. The Treasury realizes this and has put in a stipulation that the preferred cannot be repurchased for below ten cents on the dollar. At some point in the future, this preferred stock may get redeemed at a large discount to par, which means it essentially turns into a grant.

Here is an overview of the ECIP program from Investopedia and here is more information on it from the Department of Treasury: Emergency Capital Investment Program | U.S. Department of the Treasury.

ESG benefits

In addition to issuing $95.7 million of preferred stock to the US Treasury as part of the ECIP program, Citizens has also issued $27 million of non-cumulative preferred stock to two or more large national corporations (TD Bank is one of them) at a 1% fixed coupon.

Citizens has relationships with various Fortune 500 companies that have chosen to do business with the bank to further their ESG initiatives, including the NFL, JP Morgan, Tractor Supply, Coca Cola, Netflix, Delta Airlines, TD Ameritrade, and others. Citizens has done a good job attracting these partners due to the bank’s status as an MDI and CDFI. These partnerships have various forms, some of these national corporations have borrowed money from Citizens (such as the NFL), some of these companies have deposits with Citizens and, in the case of JP Morgan, Citizens has partnered with them on an ESG-focused money market fund. Citizens’ management team is bullish about doing further deals with large companies. If Citizens is successful in doing so, this will have a significant impact to its bottom line.

Additionally, it is possible Citizens could secure additional low cost preferred and/or grants. In the 3rd quarter of 2023, it received another grant of $500,000.

Risks

Falling rates combined with inflation could be a nasty combination for CZBS as they earn less in interest income and their nonproductive cash while inflation eats away the purchasing power in real terms.

A recession obviously would hit the minority bank in Atlanta Georgia pretty hard. Management is conservative with loan loss allowances and such, but a bad recession would hurt.

The bank is now overcapitalized, to put this capital to work management is expanding into new states such as Texas Tennesse and Louisiana where they have no prior experience. Do you trust management given their track record to prudently expand?

Conclusion

While there are headwinds CZBS is very undervalued with all signs of a good, conservative management team. Buybacks at these prices will be hugely value accreditive, however barring a tender offer it won’t be easy for CZBS to buy back as much stock as they desire. This reminds me of a bank Buffett might like, given his love of conservatively run banks.

Links

OTC Markets stock information on Citizens Bancshares: https://www.otcmarkets.com/stock/CZBS/overview

Citizens Bancshares investor relations website: https://ctbconnect.com/investor-corporate-governance-information/

Link to access call reports: https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

Link to the ECIP program information from the U.S. Department of Treasury’s website: Emergency Capital Investment Program | U.S. Department of the Treasury

“TD Bank invests $5 million in Citizens Trust Bank, a minority-owned financial institution serving the Atlanta region for over 100 years”: https://www.otcmarkets.com/stock/CZBS/news/TD-Bank-invests-5-million-in-Citizens-Trust-Bank-a-minority-owned-financial-institution-serving-the-Atlanta-region-for-o?id=382172

Citizens Trust Bank receives funds through the JP Morgan Empower class money market funds shares: https://news.delta.com/delta-citizens-trust-bank-continue-build-financial-mobility-atlantas-underserved-communities

Link to Citizens Bancshares’s parent only financial statements: https://www.ffiec.gov/npw/Institution/Profile/1078958?dt=20220920

Evolution gaming agreed to buy Galaxy gaming. The deal was expected to close “Mid 2025” per management. It is now late 2025 and the deal has not closed. The termination date is January 18 2025. In addition Galaxy Gaming’s acquisition is not on the Nevada regulators list for this month. Leaving two more before the deal gets terminated (Jan 18 termination date). Part of the reason I say in the title “No Downside Merger Arbitrage” is because the deal not going through may not be such a bad thing. My thinking goes like this, the market today is definitely expensive, it may be a bubble it may not who knows. Why not park in an asymmetric bet that even if the market blows up you are unlikely to lose more than 10% holding GLXZ so if greater opportunities came along, you could reallocate relatively unscathed. If no market blowup you have a chance of a 58% IRR. If the deal doesn’t go through you have a great company that will be trading at 5x FCF in 2029, there is a $5m termination fee so EVO has some incentive to get the deal done besides getting a strategic foothold into the US market with licenses and Galaxy fiscally benefits from the deal not going through.

2.79->3.20 14.6% return 3 months 58.7%IRR

Shareholders approved

EVO is much larger than GLXZ so financing shouldn’t be a concern.

Concerns are regulatory.

Thesis: 58.7% IRR if deal closes on time, IRR is so high if it got delayed IRR would still be more than adequate. If the deal doesn’t go through, Galaxy gets 5 million (termination fee) which is not pennies to a company with a current market cap of $70m and I’m stuck with a high margin, debt reducing company that’s grown every year except COVID, with a moat?

Below is the chart depicting Revenues

Below is Managements Estimates of the business through 2029. Current EV is $100m meaning in 2029 based on estimates this growing company with 1% churn would be valued at 5 FCF, which can’t be right. This is why I say the deal going through isn’t such a bad thing (I used adj EBIDTA-CAPEX)

Currently, the bulk of GLXZ’s business centers on licensing table games to traditional casinos. Table games like blackjack, craps, and roulette are public domain table games. GLXZ assets include full proprietary table games (“full games”), proprietary side bets for table games (“side bets”), progressive bet systems (“progressives”), and internet games (“iGaming”). Given the asset-light, IP-centric nature of the business, GLXZ generates 99% gross margins (with the 1% being the “Cost of ancillary products and assembled components”). Management has indicated that the customer churn rate is ~1%.

The business is divided into two segments.

GG Core- Their ‘physical world’ segment where they license their products to casinos, racinos, and cruise ships and to providers of gaming devices.

Some of their proprietary table games are 21+3, Lucky Ladies, and Bonus Craps. The casinos use these games alongside other games like Blackjack.

Bettors enjoy these games as they add the potential for higher payouts and casinos like them as they have a better edge than on other games. For example, on Blackjack, the house has between a 0.5% and a 2% edge compared to between a 5% and 20% edge on GLXZ’s games.

Based on their Q3 2023 earnings, about 68% of the revenue came from this segment

GG Digital- this segment focuses on licensing their table games to online casino platforms and Igaming operators.

Based on their Q3 2023 earnings, 32% of their revenue came from this segment.

Most of their revenue is recurring, as they get paid monthly. Depending on the contract, payments are either a flat rate or based on the actual revenue or usage generated from the game. In 2023, they entered into a perpetual license arrangement with a large customer in which the customer paid upfront to have perpetual rights to the gaming systems. In Q3 about 11.9% of their revenue came from the perpetual license arrangements with the rest coming from recurring license revenue.

As an iGames provider, of the top 7 side bets online, Galaxy’s iGames make up five. Galaxy is well positioned to ride the huge tailwind in the iGaming industry as US states slowly start to legalize iGaming. 30% EBITDA margins. Galaxy operates in a high barrier to entry industry as they are required to obtain licensing approvals from various jurisdictions for both their table games and their Bonus Jackpot System. As a matter of fact, of the top seven side bets online, Galaxy iGames make up five including the world’s number one side bet, 21+3, Perfect Pairs, Buster Blackjack, Lucky Ladies, and Lucky Lucky.

Backstory of Debt

The story of why they took on the debt is very interesting. The Nevada Gaming Commission threatened to reject the company’s license application because of the founder’s past.(rejecting a license application is like scarlet ink basically a death sentence when trying to obtain other licenses either for physical gaming or online gaming) So, the company had to buy out the founder’s shares, who owned 60% of the total shares.

Galaxy Gaming took $60 million in financing from Fortress, maturing in November 2026, with an interest rate of approximately 13%, based on the 3-month SOFR (LIBOR) rate plus a fixed margin.

Because of this debt, they are paying about $7 million in annual interest payments which is killing their bottom line.

What I find weird is the company has $17 million in cash which they could use to pay off some debt to decrease the interest payments.

Interesting that this didn’t change anything given it happened a few years before 2021

Despite the huge barrier of entry in this space (licensing approvals, upfront costs, etc.), Galaxy is actually operating in a highly competitive field. Their main competitors as gaming suppliers are Scientific Games (NASDAQ: SGMS) and PlayAGS (NYSE: AGS) who are both larger companies than Galaxy. Also, a few years ago, the US Patent Office stopped recognizing patents for table games, including Galaxy’s games. In that vein, I asked management, “Why doesn’t EVO copy GLXZ’s games (e.g., 21 + 3), call it something else, and then cut out GLXZ?” Apparently, EVO tried to do that, and in the gambling business it can be difficult to enforce IP since you can’t patent math. When EVO rolled out its version, players didn’t like it because they were used to the GLXZ version. Players asked for it and EVO brought on the GLXZ products.

Debt

This refinancing reduces the company’s total outstanding debt by $12.6 million, lowers interest rates, extends maturities, and achieves approximately $2.8 million in annual interest savings, enhancing financial flexibility and supporting growth initiatives.

The Company utilized the proceeds from the New Term Loan, along with cash on hand, to fully prepay and terminate all commitments under its previous Term Loan Facility due 2026, as well as to settle all related fees and expenses associated with this transaction

So why does this opportunity exist Kaspi is a super app, performing many many functions basically the Amazon, Ebay, PayPal, Instacart, Sofi of Kazakstan. Now you might begin to understand the incredibly low valuation. However, 7 yes 7 times earnings is still extremely cheap for a company growing 40% year over year with a 35% net profit margin wherever it is. Kaspi is undervalued relative to it’s past with a 5 year average P/E of 12. Part of the concern is that growth will slow as Kaspi becomes so big and fully penetrated in Kazakstan, however at 7 P/E I don’t think much if any growth is discounted into the price. Kaspi recently acquired a e commerce platform and bank in Turkey. Kaspi spent about $1 Billion (roughly 1 year of cash flow) on Hepsiburada the e commerce platform in Turkey, the bank was “non - material”. Critics are concerned whether this foray into Turkey will work out, to that I agree. But would you rather they don’t even try? To me it’s encouraging to see Kaspi trying to grow and replicate the playbook in Turkey a market quite a few multiples bigger than Kazakstan in terms of TAM. If the Turkey foray doesn’t work out it’s one year of fcf gone. But if it does the sky’s the limit, especially given Kaspi’s great management this is a bet I want them taking all day. In addition, there is the big looming country risk. My first thought regarding government interference is how Kaspi facilitates the Charlie Munger win win mental model. For those unfamiliar Munger likes businesses like Costco that were beneficial to employees, suppliers, society. In other words, not making money unethically it led him to steer clear of Valeant and Credit Acceptance Corp (CACC), Credit Acceptance has been a good investment but like Buffett says rule number 1 don’t lose money rule number 2 don’t forget rule number 1, so I think it worth missing CACC to avoid Valeant. Kaspi benefits from this mental model because of their gov tech services.

GovTech

Finally, Kaspi’s “GovTech” is used by around 80% of MAUs to pay taxes and fines, receive social security, pay for public services fee-free, upload government documents, register their car, renew a drivers license, register a business and so on. Kaspi is now used to register the majority of cars in the country, and is being used to set up the majority of small businesses. While this segment generates no revenue, it’s yet another service that the people of Kazakhstan just love - it attracts people to the app and keeps them there.

(Matt Newell’s Substack article, GO READ!!)

Also I consider the risk of higher taxation not too concerning again 7 P/E and the current administration wants to increase foreign direct investment and what worse way to do that than to increase taxes, especially on your crown jewel. Kaspi also obviously benefits from network effects in many of it’s businesses as we’ve seen with businesses like Visa, E-Bay and Amazon. Kaspi being a large well respected tech company attracts the best talent around leading to a flywheel effect there. Now back to geographical concerns, inflation and currency risk. Now I’m no currency expert so I would love to be corrected if this line of thinking is wrong. Mohnish Pabrai made a hugely successful investment in Turkey which has suffered from crazy inflation (ie 40%+) and therefore crazy currency devaluation. Pabrai looked for obviously a company trading at less than intrinsic value but then also considered macro effects, real estate is a decent way to play inflation especially the company he invested in as they can increase rent prices with inflation while the buildings were built in yesterday’s dollars. Now Kaspi is very asset light so the Capex aspect doesn’t concern them, however Kaspi being so essential they should have no problem increasing prices in line with inflation (there kind of a toll on economic activity in Kazakstan, or so I like to hope) mitigating the effects of currency devaluation and inflation on your investment.

Last musing is I think most people see Kaspi as a stock and not a business. Kaspi stock is very volatile but the business, not so much. Lots of things like the short report impact the stock price but not the business, protests in Kazakstan, stock price not so much the business. I think it’s helpful to remind yourself that this is a real business somewhere whose value obviously doesn’t fluctuate 50%.

This was pretty messy and a bit of a ramble, I hope at least one person found this useful to help their thinking. Any suggestions welcome! :)

Estimate Range of Intrinsic Value $23-$30

Current Market Price $13.31

I have to address briefly the history of this company because that is where we get part of our value/margin of safety, in the sentiment. Boston Omaha in its current form started in 2017, run by two CEOs Alex Rozek (familial ties to Warren Buffett) and Adam Peterson (our current CEO). Due Rozek’s tie to Buffett, and I assume the name of the company Boston OMAHA and structure: conglomerate. The price of this company got pushed way intrinsic value up to a peak of $46.98 in 2021 vs $13.31 as of today. As a result of this many investors got burned and now that Rozek is no longer with the company the “Mini-Berkshire” story lost its fuel.

So naturally with any company that has seen share price action like this sentiment is at all time low, providing a qualitative (not tangible) margin of safety from that aspect. It reminds me of a Howard Marks memo during 2008 when he expounded on his correct role as a skeptic that sometimes you have to be skeptical of too much pessimism (i.e. sentiment thinking it can only get worse) whereas most associate skeptics with only the other side of the pendulum that is only being skeptical of too much optimism. I will also acknowledge that governance is questioned by some of the bears. The reason for this being is in 2021 Peterson and Rozek got their whole bonus plan in one year resulting in $7.5m for each of them. The way this happened is Peterson and Rozek at the beginning only took $100k compensation each and were incentivized under the bonus plan with 10% each of any book value growth above a 6% hurdle. Pretty good bonus plan if you ask me, akin to the original Warren Buffett partnership fee structure. Peterson and Rozek made a very successful investment in Dream Finders Homes which was a multibagger, this is how the bonus plan was triggered. Pretty fair if you ask me. This triggered a huge increase in book value hence their bonus payment, which doesn’t resume until 2032 and will be capped then. Added to the list of things management supposedly did wrong is issue shares. This was done when the share price was way above intrinsic value, it reached $46.98 at one point!! I view this as good capital allocation and similar to when Henry Singleton would do the same, even the great Warren Buffett pulled a similar maneuver when buying insurer Gen Re in all stock deal in 1998 when he viewed his stock as overvalued. Issuing stock at those levels allows an inflated currency to be realized. The last sin in most people’s eyes is the premium Rozek was paid for his shares when departing, this was determined by a third-party consultant at $26 (interesting given today’s price).

That about sums up the majority of what you need to know about the history of Boston Omaha. Where does that leave us today, I’ll tell you it leaves us with a diverse group of businesses ( LINK billboards, SKYH private airplane hangars, GIG surety insurance, BOB broadband) each possessing a moat, trading at half price with a shrewd CEO who has tools at his disposal like buying back shares or laying more fiber specifically to protected builds which yields around 20%, or converting static billboards to digital which yields at least 20%. Due to the nature of broadband, lay the wire, wait for penetration to increase time itself is a catalyst and is a part of why our dollar bill is growing. SKYH and GIG are also growing at healthy rates. Boston Omaha could sell its billboard subsidiary LINK today and get a huge portion its market cap if not the entirety. Excluding cash and marketable securities Boston Omaha is selling at 8.8 FCF 25E and 6.5 FCF 26E. This is for businesses with a moat and i’ll say yet again a great CEO.

Perspectives/Musings/Intangibles/Parallels

I came across this investment after reading The Outsiders by William Thorndike. I was thunderstruck, Peterson could have been in the book. If you haven’t read the book stop everything and go read it, I thoroughly enjoyed it. The gist is Thorndike identifies CEOs who went against conventional wisdom and through shrewd capital allocation and decentralization generated spectacular market beating returns for shareholders. Such as Buffett (Berkshire Hathaway), Singleton (Teledyne), Malone (TCI), Anders (General Dynamics). With $20m in buybacks in place, an emphasis on decentralization and attractive ways to deploy capital Peterson seems to be embracing the same traits as the Outsiders.

Li Lu the successful hedge fund manager when talking a Columbia class mentioned how when he was interested in TIMS stock and finished examining the numbers he went to the CEOs community, talked to neighbors went to his church etc. to figure out what type of person he was. In this vein “The author has known Adam for approximately twenty years and has a favorable view of his character and investing skills. Adam grew up and lives in Omaha, Nebraska. He came from a modest background and discovered value investing at a young age. A prominent family office in Tulsa, Oklahoma, recognized Adam’s abilities at an early age and hired him as an analyst in his early twenties, eventually backing him with tens of millions of dollars, leading to the creation of Magnolia Capital. Soon, other prominent allocators, including MITIMCO (the Massachusetts Institute of Technology Investment Management Company), recognized Adam’s potential and backed him. Magnolia Capital has now been operating for nearly twenty years, and its track record is fantastic. We have spoken to Adam’s early backers, all of whom speak highly of him.

The author views Adam as exceptionally intelligent, hard-working, and focused. We know the family office that backed Adam, have a relationship with MITIMCO, which backed Adam, have met several other investors in his fund, and know many others who have worked with him. All of them provided positive feedback about Adam.” I think a lot of value investors like me who look up to Warren and Charlie dream of going from running a successful partnership to one day steering the ship of our own business. Ask yourself if you got to that position how would you treat your shareholders who trust you? Especially if one of your idols is Warren Buffett.

Intangibles

Directors get paid base compensation of $25k a year

Heavy Insider Buying after the share price dropped due to Rozek’s departure

Conclusion

To finish up Ill invoke some Mohnish Pabrai a well-known value investor. Pabrai looks for bets where “heads I win, tails I don’t lose much” in other words asymmetric bets similar to what Ed Thorp of beating the dealer fame waited for in Blackjack with his card counting. Given the undervaluation on many levels I described the worst-case outcome I can come up with is a sub-par rate of return such as 5% or my capital back after 3-5 years. On the contrary is a lollapalooza effect of various factors resulting in a 100% - 150% return, maybe even 200% especially if the investment takes time to play out. Like I mentioned time is on our side. So that sums up my thoughts on Boston Omaha and why I regard it as the “measuring stick” of my portfolio when looking at new potential investments. Like Warren and Charlie, I think do I want to own x or more BOC (Coke in their case).

Thank you for reading this is my perspective on some facts regarding BOC and the mental models I use to think about it! Use the link to the more in depth writeup if you want more specifics and citations VIC writeup