The SPAC that went SPLAT


Apollo Healthcare and Beauty (AHC – TSX) has stunned the Canadian stock market by issuing back-to-back quarterly financials that had
1.     YoY revenue jumps over 100%
2.    EBITDA of $28.43 million and then $30.97 million (the six previous quarters were under $5 M and most were negative EBITDA)
In just two quarters, the company became debt-free, and the stock has jumped almost 10-fold in four months.
Naturally, you would expect the Street to be all over this—an amazing stock market darling from pennies to dollars, and it’s located right in Toronto, the financial capital of the country….
But nope. Nothing. Nada. And folks, the story I’m about to tell you, tells me…that the The Street isn’t just unaware—it’s avoiding Apollo.
For regular retail investors, it might have something to do with Apollo’s website——which has all of two links to SEDAR, the Canadian equivalent of EDGAR, where all company records can be searched. 
There is no info on management, the business, financials—no positive touchy-feely copy or pictures to show off their products or business.
With these kinds of numbers, you would expect that the stock at these prices would be expensive. But a peer comparison shows that it’s not. In fact, it is downright cheap.
And no one, I mean NO ONE, on the street is even covering the story.
How is it possible that a big growth story that is hugely profitable could slip through the cracks?
Easy – this company was literally the biggest boondoggle in Canadian finance only two years ago. It involves some of highest placed names in Canadian business. It was a mudstain on everyone involved.
But now…that mud has turned to chocolate. Healthy and beautiful chocolate.

The SPAC that went SPLAT

Apollo was originally incarnated as Acasta Enterprises. Acasta came to market in 2015 as a special purpose acquisition vehicle, or SPAC.
Most investors know about SPACs nowadays—they are blank cheque companies often with a big name management team who are given the task of buying a great business or idea and growing it. 
But back in 2015, they were new. In Canada, they were virtually unheard of.  Acasta was one of the first SPACs to ever go public in the Canadian market.
Acasta was not just any SPAC. It was virtually a who’s-who of the heavy hitters in Canadian industry. Acasta’s directors included:
-Belinda Stronach, a former VP of international of auto parts Magna and daughter of the CEO, magnate Frank Stronach. She was also a federal conservative MP and ran for the federal leadership!
-Geoff Beattie, who was once a partner at storied Torys LLP law firm and president of Woodbridge, the investment arm of the Thomson family
-Gordon Nixon, former CEO of Canada’s largest company, the Royal Bank
-Hunter Harrison, former CEO of Canadian National Railway
-Tony Melman of Onex Corp., a high profile private equity firm
With an all star cast Acasta set on a bold acquisition strategy which promptly fell flat on its face. The company slipped into the most common traps of an acquisition focused business: overpaying and taking on too much debt.
Acasta acquired three companies in late 2016. Two of them were private label consumer package goods (CPG) companies. One of those was Apollo (The purchase price was $390 million) while the other was JemPak Corporation. 
The other business they acquired was an airline leasing business owned by Stellwagon Finance Company. In total they spent $1.2 billion on the three acquisitions.
The details are spotty but it seems like the airline leasing business was the real drain. The company began to lose money and could not pay on its debt.
By early 2018, the airline business was sold for about 60% of the US$270 million it was purchased for. Jempak, which was purchased for $135 million, was sold later in 2018 for $118 million.
Melman left in 2018. The board was mostly disbanded. Everyone was embarrassed to be associated with it. It was a mess. 
Left in the rubble was the one remaining acquisition – Apollo. A well-run, previously owner owned and private company that had suddenly found itself in the middle of a public company maelstrom.


The makings of a good turnaround story.

There are generally a few elements that make up a good turnaround story. 
1.     Nothing wrong with the business
2.    Nothing wrong with management.
3.    Something happened to throw a wrench into things.
In other words, the best turnaround stories are the one’s you never really had to turnaround. You just had to pull the wrench out.
That is what we have here. There is nothing wrong with the business.
Apollo operates a very straightforward business. They sell an array of personal care products—16 product lines in 5 categories; everything under the sun:
Source: Apollo AIF
Most of these products are white labeled. That means they aren’t selling them under their own brand, they sell them to another company that puts their own branding on them. 
They collaborate with all the big Canadian retailers. Walmart, Loblaws, Costco, Target, Shoppers, CVS. Flip over the big jug of hand sanitzer from Costco – that’s Apollo.  Walmart’s private label Equate brand – that’s Apollo.
They’ve one a number of awards for their role as supplier to these huge firms:
Source: Apollo AIF
In a year where we have learned just how little Canada manufactures, Apollo is a Canadian manufacturing success story. All these products – manufactured right in Ontario. 
Apollo has a 486,000 square foot product development and manufacturing facility located in Toronto, Ontario. The facility was described to me as “brand spanking new” facility with a $100 million in steel alone in it.
Apollo is flying so under-the-radar that it isn’t even funny. There is no sell side research on the name. No one is talking about this story except for a friend of mine that introduced me to the name.
The management team is great, but they are about as far from promotional as you can get.
My contact that introduced me to the name has talked to management. He told them, “look you got to put an investor presentation out there, you got to talk to more guys”.
But you know what is stopping them? The business is too busy. There is simply too much real work to be done to takes hours out of the day meeting with investors.
And this management team is not a public company management team. They are just interested in running the business. The CEO, Charles Wachsberg, has been doing this for over 30 years. 
He has built a relationship with brands and they trust that he can deliver on time with SKUs. His #1 priority is clearly the business. He didn’t ask to make his company public. He just got an offer a few years ago that he couldn’t refuse.
All of this may be bad for the share price, but it is arguably good for investors—because this is a business that should be worth more than it is trading at.
The reason for the blow-out results is that with COVID-19, we have all become clean-freaks. In particular, Apollo white labels hand sanitizer to all the big chains. 
Do I really need to say any more?  
This has been the big driver for top-line and obviously EBITDA growth. Pre-COVID, EBITDA was as high as $5 million per quarter, but sometimes it was negative. Apollo produces everything they sell, from shampoo to mouth wash. They have been doing it for years.
The stock took off in August.  The Holy Cow!! moment was the Q2 earnings release. Apollo blew everyone away – and by that I mean everyone who even remembered the stock existed – by doing $30 million of EBITDA.  In a single quarter. (for the math-challenged, that’s an annualized rate of $120 million EBITDA)
This from a stock that, at the beginning of August, had a $50 million market cap. 
Obviously, a mispricing was at hand. The stock popped to $2 and then rose from there. Now it is close to a $6 stock.
Does that mean that the run is done? Well, think that this was nearly a $400 million business when Melman bought it. And it is a better business now.
They recently received Health Canada approval for wipes. That would be another product in their arsenal that should be a big winner. And their liquid soap business will almost certainly remain strong post-COVID.
I get that vaccines for COVID are coming within days. BUT…cautious attitudes will definitely NOT go away. Things like wipes aren’t going away. We will be wiping down tables at restaurants, desks as school, door knobs for years after COVID fades into the past. 
I think it will be the same thing with the hand sanitizer. We have at least a couple of years of vigorous hand sanitizing and even after that it will linger at higher levels than before COVID. 
Another iron in the fire is a Health Canada cannabis/CBD license for skin creams and beauty products.
More growth could come from acquisition. As the street comes around to the story, the potential for Apollo to acquire will show itself. 
Right now, the brands that Apollo delivers are almost all in white-label format, where the brand mark-up is done by the big chains. 
Apollo has everything to put together those kinds of brands. 
A well-placed acquisition of a branded product line could bring that mark-up in house.
What is the stock worth post-COVID? That is the question. Based on the last couple quarters, we are looking at a $100 million+ run rate in EBITDA. Can that run rate be sustained post-COVID?
CPG—Consumer Packaged Goods—companies trade at high multiples right now. IF Apollo can keep that kind of annualized EBITDA, a 10x EBITDA multiple, which would be more than a double from here, would still look cheap
Without a question that includes a COVID bump. The hand sanitizer sales have been through the roof and that is largely COVID. So maybe that multiple is a bit lower, which still leaves plenty of upside.
This is Part 1 of the Apollo—the ghosts of Christmas past and some of the present. Tomorrow is Part 2—an interview with CEO Charles Wachsberg.
Keith Schaefer