Grand Havana Enterprises (PUFF): Management attempts to buyout outsiders

By David Polonitza

Grand Havana Enterprises announced a plan to go private at .22 cents a share today. In my opinion this is a very low valuation for the company. With over a 1,000 members for its two clubs, Grand Havana has the ability to institute price increases that would translate to a significant growth in net income. An increase in monthly membership fees of 50 dollars would translate to 600k in additional net income. It would not be a stretch for this company to produce 2 million dollars in operating cash flow a year. The possibility of future license agreements beyond the Moscow Grand Havana Room, could also increase the company’s bottom line. With these business characteristics, Grand Havana should be bought at a much higher price than that the total of 6 million dollars included net debt outstanding.

There is also an arbitrage play in the shares, which have been selling in large volumes at .215 cents a share for an attractive annualized gain if the company’s plan to take the company private is completed.

Below is my writeup of the company last month:

Grand Havana Enterprises (ticker: PUFF), which operates the Grand Havana Room, trades on the Pink Sheets after de-registering from the SEC in April of 2006. Upon filing to de-register with the SEC, the stock plummeted from over .25 cents a share to under .10 cents. Even before de-registering, Grand Havana had seen its share of controversy over the years.

The company, which runs two exclusive cigar clubs in NYC and Beverley Hills, makes virtually all of its operating profit from the membership fees it charges (there is apparently a long waiting list to become a member). Grand Havana’s previous CEO, Harry Shuster, became entangled in a stock manipulation scheme in the late 90’s which led to his son, Stanley Shuster, taking over reins of the company. The legal troubles of the former CEO combined with the dwindling financials of the company resulted in a delinquency of financial reporting from August 2001 until March of 2005. Upon reemergence as a reporting company, Grand Havana was a profitable entity that had the ability begin fixing their balance sheet, which had been loaded with deferred payments and obligations to the former CEO.

Since the company has de-registered (the reason for de-registering is presumably to save the costs associated with filings and Sarbox requirements) the company has continued to provide income statements to shareholders in a timely manner. Grand Havana is on pace to generate between 1 and 1.2 million dollars of operating cash flow for the trailing twelve months. With possible licensee expansion and membership fee increases, there is a potential for operating cash flow to increase in the high single digit rates. The company is saddled with approximately 2.5 million dollars in debt after cash, (the exact amount is presently unknown, awaiting thecompany’s 2006 annual report) which hopefully be paid down now that profitability is secure. Net Operating Losses of 11.5 million dollars will shield any taxable income for many years.

With a current market price of .19 cents a share and slightly under 15 million shares outstanding, the market cap for PUFF is 2.85 million dollars, with another 2.5 million dollars in debt after cash, leaving an enterprise value of 5.35 million dollars. Grand Havana is trading at 5 times operating cash flow to enterprise value, with the payment of debt and future revenue growth catalysts to increase the stock price in the future.

Pink sheet stocks do carry a certain risk to them once they no longer registered with the SEC. Please perform proper due diligence before deciding to purchase a stock no no registered with the SEC.

Full Disclosure: I hold 6.9% of the common stock outstanding in Grand Havana Enterprises

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