I just got done reading "Running Money" by Andy Kessler, fantastic read. Made me really think about the industrial revolution and the flow of capital.
One of the key takeaways was the American transformation from manufacturing to service/post-industrial(the patent age?). Essentially we capitalized on the rest of the world's desire to escape agrarian society. We gave them the means via thinking, designing, and innovating things for them to build. It can slide away just as quickly as it came.
While not based in intellectual property Sandstorm (SND) displays many of the characteristics held by these companies. They are the only player (that I found) in this capital light, high return business. This time though we are not betting on the success of a microchip or an erection pill. This time we are betting on commodities and capital allocators.
Company:
Sandstorm is a Canadian firm that provides late stage financing to natural resource players. By providing capital with very low interest rates (or none at all) SND lets these fields/mines hit a point of production. This is done without the debt that can so often cripple these mines, or the equity that can destroy shareholder value.
In exchange for this financing, SND purchases the underlying commodity at a price defined in the streaming agreement. They then turn around an unload it on the market collecting the spread between the contracted price and spot market price. This is the same model that Silver Wheaton (SLW) used and it worked out OK for investors (~800% returns in 7 years for the common equity).
Sandstorm was spun off from Sandstorm Gold, a company run by the same group that runs Sandstorm Metals & Energy.
Properties/Contracts:
I am not going to go through every scenario for pricing as I feel that it isn't necessary, plus it entails a slew of speculation. Since their costs remain set by the initial contract, we can abide by one simple rule: if commodities go up so will profits with little incremental cost.
Thunderbird
Gordon Creek, a gas field located next to Drunkards Wash in Utah. Drunkards Wash is a huge gas field that is absolutely fascinating to read about. Seriously. It has amazing geographic features and Gordon Creek shares similar attributes. They have paid $25M for the rights to purchase 35% of the gas produced at $1/mcf. The first wells are scheduled to come online in early 2012 and full production is scheduled by 2014. Management estimates that this will produce after tax operating profit of $5M in 2013 and $8-10M in 2014 based on $3.50/mcf natural gas.
Donner Metals
Bracemac-Mcleod mine in Quebec. For $20M SND received the right to buy 17.5% of copper produced at the mine for $0.80/lb if copper is more than $2.75/lb or $0.55/lb should copper fall below $2.75/lb. Production is expected to start in late 2012 early 2013. Management estimates that Donner will generate ~$2M in operating profit in 2013 and ~$5M in 2014 if copper is $3.00/lb.
Terrex Energy
Two Creek and Strathmore projects. They purchased the rights to buy 15% of the oil from Terrex for $15/bbl. Management estimates that if oil is $80/bbl than Terrex will generate $1-2M in operating profit in 2013 and similar amounts in 2013.
NovaDX
Coal mining operations in Alabama and Tennessee. For $30M they purchased the rights to buy 25% of production from both mines for several years. Their share decreases to 16% after several years. They are able to buy coal at $75/ton the whole time. Management estimates that if metallurgical coal costs $160/ton and thermal coal costs $70/ton operating profit will be ~$4M in 2013 and ~$7M in 2014.
Surge Capital helped connect NovaDX and Sandstorm and received a finders fee and shares.
Royal Coal
Coal mine in Kentucky. They have shut down and the investment was written off. To say this was a mess is putting it lightly. To make a complex story more confusing, NovaDX invested in Ikerd Coal Company. Ikerd Coal Company turned out to be a total failure and NovaDX suffered. Six weeks after the settlement Royal Coal went belly up. An embarrassment for NovaDX and more importantly Sandstorm. Royal Coal, like most mines I'm sure, was full of hope and endless riches.
Management
Nolan Watson's background can be seen in his Wikipedia page. The article has been revised numerous times by "Denvyboy." While it is only speculation, there seems to be a faint familiarity between the editors user name and Denver Harris, IR Manager at Sandstorm.
There is plenty of promotion for the company via Youtube videos, interviews with small podcast reporters, and individual investors. The company promoted stuff shouldn't be too surprising since the board and management has several people who worked in IR or on the sell-side.
There are no mining experts on the board or in management that I saw. It mostly consists of investment bankers. I personally would want to see a few people with a deep expertise of mines not just of investing. Overall I don't have a firm opinion one way or another of management.
Margin of Safety
Each streaming deal carries along with it cash flow guarantee. According to the SND presentation all cash flow guarantees and cash on the book roughly equal the market cap today (~$125M). But how guaranteed are those promises from the various resource collectors?
Royal Coal offers us some indication as to the value of these guarantees. Given that they have gone under the only question now is: how much is Sandstorm getting back?
The answer right now is: I don't know (and I've yet to find anyone who does). These streaming agreements are a mix between debt and equity. Senior secured like debt, upside like equity. For investors in mining though, all that matters is a hole in the ground produces more cash than it loses. While these guarantees are great, they really only apply if the mine is making enough money to pay them. The margin of safety exists in the mines.
In the Q4 CC Nolan highlighted that they now have a large tax benefit due to the Royal Coal write-off. I would rather have cash from the original agreement. When asked about changes made to the due diligence process going forward answers have been vague and in my opinion, unsatisfactory.
Are the individual properties worth investing in?
Luckily all of the mines and fields that Sandstorm has invested in are traded on Canadian exchanges, so information is plentiful. The NovaDX mine has generated quite a bit of optimism from one blogger, so let's examine them a little.
NovaDX In-depth
All sources with (pg --) are from the Rex Mine Technical Report.
NovaDX has two properties that are interesting to Sandstorm investors, Rex #1 and Rosa. From the SND presentation, Rex #1 should produce 500k tons/year and Rosa should produce 150K tons/year. Rosa is currently in commercial production and generated $1.6M in revenues in Q4 2011, $233K going to SND(pg 28 Dec 31 2011 Financial Statement). Rex #1 is under construction and should be up by Q3 2013.
The company itself is cash flow negative and has $3M cash to $3.7M in debt. They will probably need to issue more debt, equity, or streaming agreements soon due to cash burn and capital expenditures required before Rex #1 is fully operational. With SG&A of $1.2M and COGS of $3.8M in Q4 2011 they've got a ways to go before becoming profitable.
While the blogger above believes that metallurgical coal has restricted supply and steady long term contracts, this mine needs to first be cash flow positive to benefit from either scenario.
Another hurdle is getting the Stinking Creek Plant (what a name) processing facility up and running. Right now they are selling coal at a discount ($90/ton, pg 69) to a 3rd party metallurgical alloy and specialty coal producer (pg 36). The plant is scheduled to be operational in Q3 2012 (pg 67) and the mine should be at full production in Q3 of 2013(pg 64).
SND reported Rex 2P reserves of 32M tons (slide 10). The most recent technical report from NovaDX lists 2P reserves at 11.2M tons (pg 18). The new report was much more conservative and the SND IR presentation hasn't been updated yet. A 65% reduction in reserves is a lot and while doesn't take away from the potential investment(on a 10 year time span), it certainly takes away from the mentioned blogger's extremely long life of mine assessment.
Finally, Neil MacDonald is CEO and Robert Payne is COO. They both resided over the acquisition of Ikerd's Flatwood property, which was done with Sandstorms knowledge. This did not end well. They then got shares and ownership to Royal Coal, which as explained above, did not go well either. There is a lot of money and pride riding on the success of the Rex and Rosa mines.
With cash costs of ~$80/ton(pg 73), selling prices of $90/ton and huge capital expenditures, it's hard for me to get comfortable with NovaDX. Factor in their history of investments and it's even less appealing. Right now with my limited knowledge I put NovaDX in the "too hard" pile. This could change upon new information regarding the processing plant, cash flows, and consistently less deleterious investments.
Conclusion:
Sandstorm offers a compelling story. And for me right now that's about it.
The bull thesis hinges on Nolan Watson and his team executing. I would like to understand his successes and failures at SLW better before declaring him a visionary. This is 100% a bet on management and I lack conviction in them right now. For reasons unknown to me, Libra Advisors is selling large blocks of shares at a rapid clip.
In two years the company might be generating $25M in FCF. Relative to today's EV gives SND a FCF/EV yield of ~29% (MC of 125M minus 40M cash on the books). This FCF figure depends on the commodity prices outlined by SND here. Some are higher now(oil), some are lower now(natural gas). If we assume that cash will get spent in a year or two (Nolan said they were starting to look for new streaming agreements in the Q4 CC) than EV=MC. In that case 2014's FCF of ~$25M gives us a 20% yield. Good, but not great given the uncertainty of mining.
I will follow up with some other posts that try to examine the individual value of the Donner, Terrex, and Thunderbird Streams. This investment as a whole sits in the "too hard" pile currently. It may be cheap, but with a few more Royal Coal's, it may be bankrupt. Being a sucker for predictable cash flows I will keep on researching. This might very well make a phenomenal investment, but right now it's not so clear to me.
Tuesday, April 24, 2012
Saturday, April 7, 2012
Niska Gas Storage NKA
Business:
Niska is the largest independent natural gas storage companies in North America. Using old salt mines Niska stores natural gas in four areas.
AECO: Two fields located in Canada in old hydrocarbon reserves. The two fields have a combined 89 wells and hold 150 Bcf.
Wild Goose: Located near Sacramento, it's an old salt mine that has 15 wells and can store 35 Bcf. They are in the process of expanding both the size of the well(adding another 15 Bcf), and also increasing the injection/withdrawal speeds (up to 0.65 Bcf/1.2 Bcf respectively).
Salt Plains: Located near Oklahoma City, there is 13 Bcf of capacity and 30 wells.
NGPL: Gulf coast areas, 8.5 Bcf of capacity.
They have three different means to make money, long term storage, short term storage and optimization. LT gives them predictability with lower returns, $1.03/MMcf in 2011. ST commanded prices of $1.61/MMcf in 2011. Finally their optimization program attempts to use excess capacity to exploit seasonal spreads. This has the potential to be their cash cow, contributing 2.61/MMcf and 36% of the realized revenue despite only taking up 15% of their capacity in 2011.
Thesis:
This is a different angle to the natural gas play, a mid-stream player. If natural gas will ever become a great base load power supply, large amounts of storage will be required. While no expert, the use of LNG seems counter intuitive due to large energy demands and structural needs.
There are also multiple contrarian bets placed within this. First, the glut of natural gas has to go somewhere and storage will be necessary. Second, while volatility has dropped (and thus spreads to Niska have dropped), could it spike again? The hope here is to understand how profitable Niska is, how capable management is, and determine the probability that they will make money for the next five years.
Will volatility return?
This is difficult to understand. From PNG's 10K(another NG storage company):
"While there are a variety of factors that have contributed to these softer market conditions, we believe the key drivers are (i) relatively flat natural gas consumption over the last year and projected flat consumption for the next several years, (ii) increased natural gas supplies due to production from shale resources, (iii) net increases in storage capacity, and (iv) lower basis differentials due to expansion of natural gas transportation infrastructure in the U.S. over the last five years."
Here is a company that like NKA wants to see spreads return. There are several problems though. I think natural gas is the future, just not right now. Maybe four or five years from now, but not now and demand reflects that (having only increased by a little over 12% since 2001-pg 10 PNG 10K).
This is really a race to the bottom. Niska has increased gas storage, which creates a larger gas reserve, which lowers spreads, which impacts the profitability of Niska (and PNG). While I don't know the future of natural gas volatility I would not want to bet that spreads will return to 2007 levels (up to $4.75/MMBtu).
How capable is management?
Simon Dupere is fairly new, having only been CEO since July of 2011 his track record is unknown. In August of 2011 he believed that spreads were at their lowest, effectively calling a bottom, a brave call for the new CEO. Eight months later, with the benefit of hindsight, we notice he may have been a wee bit early.
Second, they are allowing Carlyle/Riverstone (parent fund) to reinvest their distributions as common units. This totals $18M every quarter. They have used some of the money that was reinvested to pay off their Senior Notes ($659M outstanding as of 2/2/2012). This was done in Q1 of 2011 at a predetermined price of $16/share. At that price the money saved on interest was equal to the money spent on distributions.
With share prices significantly lower now (mid 9's now), a $0.35 quarterly distribution is a 50% hike in cash flows out compared to senior notes. Right pocket left pocket can work when it's zero sum. But when the left pocket is 50% more expensive, not so good.
I have not seen whether or not they continued this program. The last two quarters debt paydown has been through inventory management. While it may turn out to be prudent it could also be the equivalent of burning the furniture to heat the house.
Finally, can they stay profitable?
Probably yes, but I can't grasp how much and for how long. Spreads are low, really low by historical standards, but NKA will be making money on ST and LT contracts. While less profitable they do provide consistency. I have little to add here unfortunately. Inventory management has aided profitability too, this is only supposed to continue for another year.
Conclusion:
It seems like a race for the bottom. Couple that with the leverage (which was downgraded recently) and unproven management I fear being snagged by a falling knife.
Adjusted EBITDA is estimated to be $125M for 2012, this seems optimistic considering managements track record of forecasts. Backing out interest (~$57M depending on further payments) and maintenance CapEx ($3M) I estimate FCF to be ~$65M or $0.95/share. They have been spending millions on expanding their facilities so true maintenance CapEx is open to debate. Spending more just to keep up needs to be considered a true cost of business. Thus CapEx figures will be substantially higher if the future includes never ending storage expansion.
At 10X FCF this seems overvalued. The distribution will need to be cut, or debt will have to be issued, and with the recent downgrade it's unlikely they'll secure debt at 8.75%. I'll let the yield pigs have it for now.
Niska is the largest independent natural gas storage companies in North America. Using old salt mines Niska stores natural gas in four areas.
AECO: Two fields located in Canada in old hydrocarbon reserves. The two fields have a combined 89 wells and hold 150 Bcf.
Wild Goose: Located near Sacramento, it's an old salt mine that has 15 wells and can store 35 Bcf. They are in the process of expanding both the size of the well(adding another 15 Bcf), and also increasing the injection/withdrawal speeds (up to 0.65 Bcf/1.2 Bcf respectively).
Salt Plains: Located near Oklahoma City, there is 13 Bcf of capacity and 30 wells.
NGPL: Gulf coast areas, 8.5 Bcf of capacity.
They have three different means to make money, long term storage, short term storage and optimization. LT gives them predictability with lower returns, $1.03/MMcf in 2011. ST commanded prices of $1.61/MMcf in 2011. Finally their optimization program attempts to use excess capacity to exploit seasonal spreads. This has the potential to be their cash cow, contributing 2.61/MMcf and 36% of the realized revenue despite only taking up 15% of their capacity in 2011.
Thesis:
This is a different angle to the natural gas play, a mid-stream player. If natural gas will ever become a great base load power supply, large amounts of storage will be required. While no expert, the use of LNG seems counter intuitive due to large energy demands and structural needs.
There are also multiple contrarian bets placed within this. First, the glut of natural gas has to go somewhere and storage will be necessary. Second, while volatility has dropped (and thus spreads to Niska have dropped), could it spike again? The hope here is to understand how profitable Niska is, how capable management is, and determine the probability that they will make money for the next five years.
Will volatility return?
This is difficult to understand. From PNG's 10K(another NG storage company):
"While there are a variety of factors that have contributed to these softer market conditions, we believe the key drivers are (i) relatively flat natural gas consumption over the last year and projected flat consumption for the next several years, (ii) increased natural gas supplies due to production from shale resources, (iii) net increases in storage capacity, and (iv) lower basis differentials due to expansion of natural gas transportation infrastructure in the U.S. over the last five years."
Here is a company that like NKA wants to see spreads return. There are several problems though. I think natural gas is the future, just not right now. Maybe four or five years from now, but not now and demand reflects that (having only increased by a little over 12% since 2001-pg 10 PNG 10K).
This is really a race to the bottom. Niska has increased gas storage, which creates a larger gas reserve, which lowers spreads, which impacts the profitability of Niska (and PNG). While I don't know the future of natural gas volatility I would not want to bet that spreads will return to 2007 levels (up to $4.75/MMBtu).
How capable is management?
Simon Dupere is fairly new, having only been CEO since July of 2011 his track record is unknown. In August of 2011 he believed that spreads were at their lowest, effectively calling a bottom, a brave call for the new CEO. Eight months later, with the benefit of hindsight, we notice he may have been a wee bit early.
Second, they are allowing Carlyle/Riverstone (parent fund) to reinvest their distributions as common units. This totals $18M every quarter. They have used some of the money that was reinvested to pay off their Senior Notes ($659M outstanding as of 2/2/2012). This was done in Q1 of 2011 at a predetermined price of $16/share. At that price the money saved on interest was equal to the money spent on distributions.
With share prices significantly lower now (mid 9's now), a $0.35 quarterly distribution is a 50% hike in cash flows out compared to senior notes. Right pocket left pocket can work when it's zero sum. But when the left pocket is 50% more expensive, not so good.
I have not seen whether or not they continued this program. The last two quarters debt paydown has been through inventory management. While it may turn out to be prudent it could also be the equivalent of burning the furniture to heat the house.
Finally, can they stay profitable?
Probably yes, but I can't grasp how much and for how long. Spreads are low, really low by historical standards, but NKA will be making money on ST and LT contracts. While less profitable they do provide consistency. I have little to add here unfortunately. Inventory management has aided profitability too, this is only supposed to continue for another year.
Conclusion:
It seems like a race for the bottom. Couple that with the leverage (which was downgraded recently) and unproven management I fear being snagged by a falling knife.
Adjusted EBITDA is estimated to be $125M for 2012, this seems optimistic considering managements track record of forecasts. Backing out interest (~$57M depending on further payments) and maintenance CapEx ($3M) I estimate FCF to be ~$65M or $0.95/share. They have been spending millions on expanding their facilities so true maintenance CapEx is open to debate. Spending more just to keep up needs to be considered a true cost of business. Thus CapEx figures will be substantially higher if the future includes never ending storage expansion.
At 10X FCF this seems overvalued. The distribution will need to be cut, or debt will have to be issued, and with the recent downgrade it's unlikely they'll secure debt at 8.75%. I'll let the yield pigs have it for now.
Wednesday, March 28, 2012
Atlas Resource Partners (ARP)
Natural gas prices are low, MLP yields are high. Throw in a spin-off and you get Atlas Resource partners.
Background:
Atlas Energy (ATLS) is a MLP with two subsidiaries, Atlas Pipeline (APL) and the newly spun off Atlas Resource Partners. The old Atlas Energy MLP was sold to Chevron in November of 2011 for 3.2B in cash. The company is engaged in US natural gas and oil plays.
ARP was spun off March 15, 2012. ATLS retained 20.96M common units, 2% general partner interest and all incentive rights. They have over 8,600 wells operating currently and ARP recently bought 277 bcfe of proven reserves from Carrizo (CRZO) for $190M. They expect 2013 pro-forma distributions to be $2.25-2.40 representing a yield around 8% at today's share prices.
Properties:
Currently ARP has 8,500 drilled wells in Appalachia that produce ~30Mmcf/d, 150 wells in Indiana, 450 wells in Tennessee, and hopes of drilling over 200 wells in Colorado. The recent Carrizo acquisition gives them access to an additional 198 wells and 277 Bcfe of reserves. Carrizo sold these properties to pay off revolving debt and to fund expenditures in their Eagle Ford play. It also sounds like they wanted to focus more on liquids. As many E&P companies are.
While I can only speculate, it seems that they did get a good deal. At $4,219 per Mcfed ($23,204 per BOE/d) and 0.69/Mcfe proven reserves this reflects favorably compared to other public companies and previous transactions. As a comparison one can buy Gale Force Petroleum at outright at 11M and get 275 BOE/d, with plans of getting 350 soon. While obviously not a perfect comparison for multiple reasons it works out to $40,000/BOE/d.
Management:
Jonathan Cohen is the Chairman of the Board and Edward Cohen is their CEO. The father and son team has been in the oil industry for awhile and did quite well with old Atlas. From the time of the IPO to the acquisition shares grew over 800%. I loved Edward's quote from CNBC just a few weeks ago "the people who are busily selling, we are busily buying. When the blood is running in the street that's a good time to be buying." I'm not sure there's blood in the streets due to low natural gas prices, but he is in Texas, so who knows.
COO is Matthew Jones. He too has been with Atlas for since the IPO, CFO since 2005.
Valuation:
I'm new to MLP land and thus I revert back to understanding the business, it's prospects, it's management and it's downside. Right now with natural gas in the dumps and oil sky high it seems every company is doing what is expected: dumping natural gas and spending heavily on liquid rich fields.
The lack of capital spending on natural gas will eventually catch up and Mr. Smith's invisible force will be upon us. When? I have no idea and pretty much any forecast besides "never" will probably be too soon. With the proposed EPA restrictions on more polluting coal plants, companies like Huntsman and Dow bringing production back to the US due to low natural gas prices, and other economic influences prices should recover.
Well capitalized and more importantly, well managed, natural gas companies should emerge with relative earning power if natural gas prices recover.
From their Form-10 they believe they will generate AEBITDA of $61.5M for the 12 months ending 12/2012, AEBITDA needs to be 52.9M to pay the minimum distribution. They have maintenance capex of 9.2M and interest expense of 900K, therefore FCF will be around 51M in 2012.
This was before the Carrizo acquisition and thus FCF will be higher. I'll consider distributions a reasonable proxy for FCF. With the expected distribution in 2013 2.25-2.40 we're given a FCF yield of 8.0%-8.6%.
The future predictability of their cash flows is obviously dependent on two variables, the price of the commodity and the amount of said commodity they can produce. They have hedged well, as shown in their presentation and noted in their filings. They indicate they have upside potential if prices climb. How much is up for debate, they estimate they have 90% of natural gas production hedged next year.
Conclusion:
I believe that ARP is a well managed company. Unfortunately I don't believe it is worth an investment right now. No number of models lead me to 20% returns annually. The bottom line is that this is a company selling at roughly 12X distribution, a rough estimate of FCF. While great if I wanted long term steady income, I will pass for now. I will continue to investigate small natural gas plays hoping to find the diamond in the rough. This spin-off has not created an opportunity in this case.
Background:
Atlas Energy (ATLS) is a MLP with two subsidiaries, Atlas Pipeline (APL) and the newly spun off Atlas Resource Partners. The old Atlas Energy MLP was sold to Chevron in November of 2011 for 3.2B in cash. The company is engaged in US natural gas and oil plays.
ARP was spun off March 15, 2012. ATLS retained 20.96M common units, 2% general partner interest and all incentive rights. They have over 8,600 wells operating currently and ARP recently bought 277 bcfe of proven reserves from Carrizo (CRZO) for $190M. They expect 2013 pro-forma distributions to be $2.25-2.40 representing a yield around 8% at today's share prices.
Properties:
Currently ARP has 8,500 drilled wells in Appalachia that produce ~30Mmcf/d, 150 wells in Indiana, 450 wells in Tennessee, and hopes of drilling over 200 wells in Colorado. The recent Carrizo acquisition gives them access to an additional 198 wells and 277 Bcfe of reserves. Carrizo sold these properties to pay off revolving debt and to fund expenditures in their Eagle Ford play. It also sounds like they wanted to focus more on liquids. As many E&P companies are.
While I can only speculate, it seems that they did get a good deal. At $4,219 per Mcfed ($23,204 per BOE/d) and 0.69/Mcfe proven reserves this reflects favorably compared to other public companies and previous transactions. As a comparison one can buy Gale Force Petroleum at outright at 11M and get 275 BOE/d, with plans of getting 350 soon. While obviously not a perfect comparison for multiple reasons it works out to $40,000/BOE/d.
Management:
Jonathan Cohen is the Chairman of the Board and Edward Cohen is their CEO. The father and son team has been in the oil industry for awhile and did quite well with old Atlas. From the time of the IPO to the acquisition shares grew over 800%. I loved Edward's quote from CNBC just a few weeks ago "the people who are busily selling, we are busily buying. When the blood is running in the street that's a good time to be buying." I'm not sure there's blood in the streets due to low natural gas prices, but he is in Texas, so who knows.
COO is Matthew Jones. He too has been with Atlas for since the IPO, CFO since 2005.
Valuation:
I'm new to MLP land and thus I revert back to understanding the business, it's prospects, it's management and it's downside. Right now with natural gas in the dumps and oil sky high it seems every company is doing what is expected: dumping natural gas and spending heavily on liquid rich fields.
The lack of capital spending on natural gas will eventually catch up and Mr. Smith's invisible force will be upon us. When? I have no idea and pretty much any forecast besides "never" will probably be too soon. With the proposed EPA restrictions on more polluting coal plants, companies like Huntsman and Dow bringing production back to the US due to low natural gas prices, and other economic influences prices should recover.
Well capitalized and more importantly, well managed, natural gas companies should emerge with relative earning power if natural gas prices recover.
From their Form-10 they believe they will generate AEBITDA of $61.5M for the 12 months ending 12/2012, AEBITDA needs to be 52.9M to pay the minimum distribution. They have maintenance capex of 9.2M and interest expense of 900K, therefore FCF will be around 51M in 2012.
This was before the Carrizo acquisition and thus FCF will be higher. I'll consider distributions a reasonable proxy for FCF. With the expected distribution in 2013 2.25-2.40 we're given a FCF yield of 8.0%-8.6%.
The future predictability of their cash flows is obviously dependent on two variables, the price of the commodity and the amount of said commodity they can produce. They have hedged well, as shown in their presentation and noted in their filings. They indicate they have upside potential if prices climb. How much is up for debate, they estimate they have 90% of natural gas production hedged next year.
Conclusion:
I believe that ARP is a well managed company. Unfortunately I don't believe it is worth an investment right now. No number of models lead me to 20% returns annually. The bottom line is that this is a company selling at roughly 12X distribution, a rough estimate of FCF. While great if I wanted long term steady income, I will pass for now. I will continue to investigate small natural gas plays hoping to find the diamond in the rough. This spin-off has not created an opportunity in this case.
Monday, March 12, 2012
Paulson Capital Corp (PLCC)
PLCC is a boutique broker dealer and boutique investment firm headquartered in Portland, OR. Founded several decades ago by Chester Paulson they specialize in small and nano-cap IPOs and charge commissions for brokerage trading. Mr. Paulson and his family own a majority of shares, Chester himself owns 2.11M shares (~36% of shares outstanding).
Recent Events:
The company is a net-net and would likely make Dr. Graham himself an investor as they are selling at 48% of stated net-net value. Reading through transcripts this is nothing new and they have sold below liquidation value for many years.
It was announced just a few weeks ago that the brokerage side of the company was sold to JHS Capital Advisors. Details on the sale are currently scarce and the sale price is unknown, thus offering potential market inefficiency. A few notes should be made as this is not Mr. Market acting completely irrationally prior to the announcement.
First, $5.5M of the $16.1M of total assets exist as receivables from clearing organizations. While regarded as "very liquid" and a "good place to put cash" (Q2 2008 conference call) it is likely that all of this will be going to JHS. Of course if that is true, accounts payable ($366K) will be going too.
Second, their trading and investment securities on the balance sheet consist of companies that are not very liquid (for the most part) and for the most part awful companies(from a value perspective). Of all the 13G's looked through, the largest position was in S&W Seed. As of 3/9/2012 PLCC held 420,000 shares worth about $2.486M. It is safe to say that a discount should be applied to these assets as it will be difficult to recognize them at easily trackedprices. An additional $3.9M of investments are made in 5 privately held companies. How accurately audited these are is anyone's guess.
This point shows why it is important to read the filings deeply because while most financial sites would consider this a net-net, I do not. Their investments are illiquid and hard to value, definitely not cash or cash equivalents. In my eyes the only liquid position is S&W Seed, making real net-net value around
Third, while insiders own a significant stake in the company it doesn't necessarily mean they are completely aligned with outside shareholders. Chester and his wife took home around $360K last year, their son-in-law and CEO took home $261K. This is a family operation and Chester's son, Charles, heads proprietary trading and advises the firm on market dynamics and trends. His understanding of market dynamics and trends resulted in losses in investment income and/or trading for 3 out of the past 4 years. Perhaps the firm should take a contrarian stance.
While I don't consider the pay egregious, they probably have more invested outside of the company than with the company. I have no clue if this is true or not though.
What would JHS buy them at?
This is a tough one but I believe we can come to a comfortable range of valuations that JHS went through.
We know the firm as a whole is losing money and it's pretty easy to see why. Commissions and salaries totaled $14.8M in 2011 compared to total revenue of $15.4M, $14.6M was related to commissions (the unit being sold). The company expects there to be a huge drop in employees with the remaining Paulson Co. Going through the list of people at the firm it seems likely that Chester Paulson (184K salary), Murray Smith (salary unknown), Jacqueline Paulson ($184K salary), Trent Davis ($261K salary), and Lorraine Maxfield ($116K salary) will be staying behind. JHS likely assumes that they can take all of their salaries out and will then try to get rid of duplicative overhead.
For the sake of simplicity I will take the $14.8M in commission and back out their salaries, which come to $867K. With some rounding ($67K lopped off as a margin of safety) salaries and commissions for the unit being sold will total $14M. This is relative to $14.6M of commissions generated (with around $1B in AUM that's one healthy management fee, perhaps I'll start a hedge fund in Oregon). This very simple exercise says that JHS will probably see $600K of profit just through elimination of the family salaries.
I believe this to be conservative though as I'm sure there will be several people axed in this process on both ends. JHS likely will see numerous redundancies and for a unit that generates 14M in revenue every 100K plus benefits will quickly add up. Also, JHS charges fees for their RBC platform that range from 0.5%-3%. When all is said and done we can safely say: pretty much the same as Paulson.
How much will they are willing to pay is a grey area though. Pick your chosen multiple off my conservative estimate. Do they expect to see better profits? Do they expect growth? Will there be an equal exchange for assets existing? I have no idea.
Gut level says they pay 6-10X of their expected first year profits. Therefore my ruler says 3.96-6.6M plus some small asset purchases at book price. Exactly what those are though is unknown to me. How receivables from RBC are treated is another big question mark. It isn't clear to me that these represent apples to apples receivables depending on collateral requirements.
So for a quick valuation, that I believe is conservative, we can do a sum of the parts. Their trading firm and investment side is pretty bad, I will value the business at zero and say it is only worth cash and "short term investments" which as discussed above are small caps and numerous warrants. So here goes my inputs...
Cash as is at 292K
Investment securities: 20% discount to 10K value despite the run up in equities (just to be conservative) = 6.1M
It is unclear to me what other assets will be considered part of the brokerage firm so I will value the remainder of the assets at zero (again to be conservative).
Liabilities are difficult to assign so to be conservative I will assume all liabilities stay with Paulson Co. -1.748M
I will assume JHS fought a hard battle and wants to buy the brokerage firm at 7X conservative earnings or $4.6M.
Conservative value = 292K+6.1M+4.6M-1.748M = $9.2M.
I'm sure there will be plenty of bonuses after the acquisition, so lets call it $9.0M. This compares to a market cap as of 3/9/2012 of 5.77M, 63% margin of safety based off of my conservative value. If we back out 3.9M (say the private company investments are worthless) PLCC is priced roughly fairly(9.0-3.9=5.1M).
I don't think PLCC should trade at book value. To put it bluntly, they are poor allocators of capital and there is no reason to believe that they could liquidate tomorrow and actually get book values. No position. All figures not linked from public filings.
4/17/2012: Well a very small transfer of business profits, and now the transaction is done I'm looking forward to reading the next SEC report that gives audited financials. For a total of $1.6M in cash from JHS, they'll have $1.9M in cash (at most, I'm sure there will be some congratulatory bonuses for selling a business with $14M in revenue for $1.6M...).
So going to my quick valuation we have cash of $1.9M, and equities worth around $6.1M (old data I know) and liabilities of $1.748M. I'm not sure whether or not to add back the receivables, but I think I will this time to get a high estimate. So 1.9+6.1+5.5-1.748 =11.75 (6.25M w/o receivables FWIW). Some of these liabilities will probably drop, since compensation expenses were included in the merger. Regardless it's pretty damn hard to come up with a fair value, especially a fair value that shareholders will see. Paulson is now a business with $1.3M in revenue paying salaries of at least $867K. Throw in another $200K for other general and administrative expenses and we're basically at breakeven.
Recent Events:
The company is a net-net and would likely make Dr. Graham himself an investor as they are selling at 48% of stated net-net value. Reading through transcripts this is nothing new and they have sold below liquidation value for many years.
It was announced just a few weeks ago that the brokerage side of the company was sold to JHS Capital Advisors. Details on the sale are currently scarce and the sale price is unknown, thus offering potential market inefficiency. A few notes should be made as this is not Mr. Market acting completely irrationally prior to the announcement.
First, $5.5M of the $16.1M of total assets exist as receivables from clearing organizations. While regarded as "very liquid" and a "good place to put cash" (Q2 2008 conference call) it is likely that all of this will be going to JHS. Of course if that is true, accounts payable ($366K) will be going too.
Second, their trading and investment securities on the balance sheet consist of companies that are not very liquid (for the most part) and for the most part awful companies(from a value perspective). Of all the 13G's looked through, the largest position was in S&W Seed. As of 3/9/2012 PLCC held 420,000 shares worth about $2.486M. It is safe to say that a discount should be applied to these assets as it will be difficult to recognize them at easily trackedprices. An additional $3.9M of investments are made in 5 privately held companies. How accurately audited these are is anyone's guess.
This point shows why it is important to read the filings deeply because while most financial sites would consider this a net-net, I do not. Their investments are illiquid and hard to value, definitely not cash or cash equivalents. In my eyes the only liquid position is S&W Seed, making real net-net value around
Third, while insiders own a significant stake in the company it doesn't necessarily mean they are completely aligned with outside shareholders. Chester and his wife took home around $360K last year, their son-in-law and CEO took home $261K. This is a family operation and Chester's son, Charles, heads proprietary trading and advises the firm on market dynamics and trends. His understanding of market dynamics and trends resulted in losses in investment income and/or trading for 3 out of the past 4 years. Perhaps the firm should take a contrarian stance.
While I don't consider the pay egregious, they probably have more invested outside of the company than with the company. I have no clue if this is true or not though.
What would JHS buy them at?
This is a tough one but I believe we can come to a comfortable range of valuations that JHS went through.
We know the firm as a whole is losing money and it's pretty easy to see why. Commissions and salaries totaled $14.8M in 2011 compared to total revenue of $15.4M, $14.6M was related to commissions (the unit being sold). The company expects there to be a huge drop in employees with the remaining Paulson Co. Going through the list of people at the firm it seems likely that Chester Paulson (184K salary), Murray Smith (salary unknown), Jacqueline Paulson ($184K salary), Trent Davis ($261K salary), and Lorraine Maxfield ($116K salary) will be staying behind. JHS likely assumes that they can take all of their salaries out and will then try to get rid of duplicative overhead.
For the sake of simplicity I will take the $14.8M in commission and back out their salaries, which come to $867K. With some rounding ($67K lopped off as a margin of safety) salaries and commissions for the unit being sold will total $14M. This is relative to $14.6M of commissions generated (with around $1B in AUM that's one healthy management fee, perhaps I'll start a hedge fund in Oregon). This very simple exercise says that JHS will probably see $600K of profit just through elimination of the family salaries.
I believe this to be conservative though as I'm sure there will be several people axed in this process on both ends. JHS likely will see numerous redundancies and for a unit that generates 14M in revenue every 100K plus benefits will quickly add up. Also, JHS charges fees for their RBC platform that range from 0.5%-3%. When all is said and done we can safely say: pretty much the same as Paulson.
How much will they are willing to pay is a grey area though. Pick your chosen multiple off my conservative estimate. Do they expect to see better profits? Do they expect growth? Will there be an equal exchange for assets existing? I have no idea.
Gut level says they pay 6-10X of their expected first year profits. Therefore my ruler says 3.96-6.6M plus some small asset purchases at book price. Exactly what those are though is unknown to me. How receivables from RBC are treated is another big question mark. It isn't clear to me that these represent apples to apples receivables depending on collateral requirements.
So for a quick valuation, that I believe is conservative, we can do a sum of the parts. Their trading firm and investment side is pretty bad, I will value the business at zero and say it is only worth cash and "short term investments" which as discussed above are small caps and numerous warrants. So here goes my inputs...
Cash as is at 292K
Investment securities: 20% discount to 10K value despite the run up in equities (just to be conservative) = 6.1M
It is unclear to me what other assets will be considered part of the brokerage firm so I will value the remainder of the assets at zero (again to be conservative).
Liabilities are difficult to assign so to be conservative I will assume all liabilities stay with Paulson Co. -1.748M
I will assume JHS fought a hard battle and wants to buy the brokerage firm at 7X conservative earnings or $4.6M.
Conservative value = 292K+6.1M+4.6M-1.748M = $9.2M.
I'm sure there will be plenty of bonuses after the acquisition, so lets call it $9.0M. This compares to a market cap as of 3/9/2012 of 5.77M, 63% margin of safety based off of my conservative value. If we back out 3.9M (say the private company investments are worthless) PLCC is priced roughly fairly(9.0-3.9=5.1M).
I don't think PLCC should trade at book value. To put it bluntly, they are poor allocators of capital and there is no reason to believe that they could liquidate tomorrow and actually get book values. No position. All figures not linked from public filings.
4/17/2012: Well a very small transfer of business profits, and now the transaction is done I'm looking forward to reading the next SEC report that gives audited financials. For a total of $1.6M in cash from JHS, they'll have $1.9M in cash (at most, I'm sure there will be some congratulatory bonuses for selling a business with $14M in revenue for $1.6M...).
So going to my quick valuation we have cash of $1.9M, and equities worth around $6.1M (old data I know) and liabilities of $1.748M. I'm not sure whether or not to add back the receivables, but I think I will this time to get a high estimate. So 1.9+6.1+5.5-1.748 =11.75 (6.25M w/o receivables FWIW). Some of these liabilities will probably drop, since compensation expenses were included in the merger. Regardless it's pretty damn hard to come up with a fair value, especially a fair value that shareholders will see. Paulson is now a business with $1.3M in revenue paying salaries of at least $867K. Throw in another $200K for other general and administrative expenses and we're basically at breakeven.
Saturday, January 7, 2012
Exelis XLS
Spin off from ITT. Hands down the worst of the three companies both with debt and business prospects. Ripe with opportunity. Insiders have started to buy decent sized lots on the open market. It is loaded up with all the pension liabilities of ITT, Fitch estimates them to be in excess of 1.7B, but with the belief that the cash flows will adequately support them.
Business: Defense contractor with a wide array of products. About 73% of their sales (as of their 10-12B) was DoD related. International sales were 11%, the remainder went to corporations and private based business.
Geospatial systems, night vision, IED jammers, US SINCARS etc. I'm somewhat familiar with their work thanks to the research on EMAN. The night vision products are held as high quality and I think this will be a product long into the future capable of driving revenue.
Financials: They generated 5.8B in revenue for 2010 and 430M in net income from operations. For the next five years or so they expect to push 200-300 million towards their pension liabilities to get back to fully funded. According to the investor day conference this assumes no change in discount rate (historical low) or a temporary government relief (which has happened before). Management has made it clear they don't expect either to happen.
This year they are expected to generate (calculated annualized previous 9 months which will likely discount) a little over 340M in net income.
Cuts to Defense Spending: There will be cuts to defense spending, how much is slowly becoming clear. Right now the running rumor is 450B over the next decade. How this will actually be done is the million dollar question but lets just call it an even 45B/year. With defense spending estimated to total 650B in the US this means there will be a 7% drop.
With this quick and dirty calculation we can now find some sort of reference point for revenue drops at XLS.
Scenario 1: 20% revenue drop next year: 4500M in revenue for XLS. Gross margins have averaged around 22%...Gross profit of 990M. SG&A is 600M/year R&D is 100M/year and interest expense is 32M/year. Operating income of $258M a year. All of their FCF will go towards pension payments.
Scenario 2: 10% drop in revenue, same parameters: 400M in operating income. 250M to pension payments. 150M in income before tax, 100 if a 33% rate is applied. ~75M in dividend payments are adequately covered.
Both of these scenarios assume a much greater than expected average cut to defense spending. With rates at historical lows there's little room for them to go lower and any push up would only help XLS. I think what is important to note is that this is generating substantial FCF relative to it's MC of 1700M as of 1/7/2012.
None of their debt has to be rolled over for awhile (2016 I believe), giving them time to pay down their pension before worrying about the tranche of debt coming up.
Investment decision: I'm still trolling through their products. I've got some leads and preliminary indications that their products are better and stickier than the market is giving it credit for. A lot of bad news is written into this and the game theorist in me says this is an opportunity, at a lower price. Under $8.50/share (a MC of ~1600M) I believe one is compensated for the risk. If cuts are imminent (they've already been downsized by 10% from initial CBO estimates) I would like to believe that a larger defense contractor would take a look at XLS (LMT, RTN NOC etc). No position.
2/6/2012: Kept on reviewing. I basically compared this to a recent investment in a highly levered company. We know they have 9B plus of backlog. While this isn't guaranteed it likely will flow through the pipeline. This would give us 2 years of scenario 1. This assumes no new contracts and a rugged drop in revenue.
The more information that comes out about the defense cuts the more I believe they won't be as severe as stated. Most of the savings is from withdrawing from Iraq and Afghanistan. They then hope to save more money through technological advances, essentially just cutting troops and enabling lots of UAV's. This is a space XLS has a presence in already. When everything is all said and done DoD funding will actually rise 1.5% annually over the next five years. So this is essentially a bet XLS won't receive the worst of the worst cuts. Considering their exposure to over budget stealth fighters (none) I'm one to believe revenue will not drop ridiculously. Management seems capable and smart. The pension liability, while quite high, is well covered and once it is fully funded there will be ample cash for shareholders.
This is a beaten down sector but a company that has good management, good products and some growth kickers in their air traffic divisions and exposure to the Middle East. Forced use of FCF,while not ideal, certainly prevents disaster acquisitions or squandering of cash. I judge FCF to be roughly 300M in Scenario 1 (adding back in certain non-cash items found in MRQ's 10Q). Small position for now. Plenty of potential to be wrong. Long XLS.
3/2/2012: Quarterly results released. Nothing particularly surprising here. They hit their 2011 numbers in line with what they have stated previously. For 2012 they expect revenues to be 5.4-5.8B, a slight decline from 2011 but no deleterious fall. They expect FCF to be around 125M for 2012, AFTER pension contributions of 320-370M and dividends of 75M. They have a funded backlog of 3.6B relative to a total backlog of 11.7B.
They spelled out their pension contributions, namely what they are going to do, very well. This is still the scariest thing about the company in my opinion. They have a high return rate of 9% (~40% of pension assets are in fixed income, not getting 9% there!) that likely will be readjusted. While the future is unknown at least I, the investor, know where the companies cash is going.
The CEO mentioned that he wanted to do some acquisitions and would prefer to be "a bit more active than not." This is not what I wanted to hear but until action is taken and the impact is assessed I will stand still.
Due to the shifting capital structure, higher I&T segment revenues and lower C4ISR revenues, depreciation will begin to outpace CapEx. The effect will be stronger free cash flows relative to declining net income. With this shift also comes lower margins, but management expects this shift to stabilize soon.
I still think this company remains undervalued, and as such remains an investment.
Business: Defense contractor with a wide array of products. About 73% of their sales (as of their 10-12B) was DoD related. International sales were 11%, the remainder went to corporations and private based business.
Geospatial systems, night vision, IED jammers, US SINCARS etc. I'm somewhat familiar with their work thanks to the research on EMAN. The night vision products are held as high quality and I think this will be a product long into the future capable of driving revenue.
Financials: They generated 5.8B in revenue for 2010 and 430M in net income from operations. For the next five years or so they expect to push 200-300 million towards their pension liabilities to get back to fully funded. According to the investor day conference this assumes no change in discount rate (historical low) or a temporary government relief (which has happened before). Management has made it clear they don't expect either to happen.
This year they are expected to generate (calculated annualized previous 9 months which will likely discount) a little over 340M in net income.
Cuts to Defense Spending: There will be cuts to defense spending, how much is slowly becoming clear. Right now the running rumor is 450B over the next decade. How this will actually be done is the million dollar question but lets just call it an even 45B/year. With defense spending estimated to total 650B in the US this means there will be a 7% drop.
With this quick and dirty calculation we can now find some sort of reference point for revenue drops at XLS.
Scenario 1: 20% revenue drop next year: 4500M in revenue for XLS. Gross margins have averaged around 22%...Gross profit of 990M. SG&A is 600M/year R&D is 100M/year and interest expense is 32M/year. Operating income of $258M a year. All of their FCF will go towards pension payments.
Scenario 2: 10% drop in revenue, same parameters: 400M in operating income. 250M to pension payments. 150M in income before tax, 100 if a 33% rate is applied. ~75M in dividend payments are adequately covered.
Both of these scenarios assume a much greater than expected average cut to defense spending. With rates at historical lows there's little room for them to go lower and any push up would only help XLS. I think what is important to note is that this is generating substantial FCF relative to it's MC of 1700M as of 1/7/2012.
None of their debt has to be rolled over for awhile (2016 I believe), giving them time to pay down their pension before worrying about the tranche of debt coming up.
Investment decision: I'm still trolling through their products. I've got some leads and preliminary indications that their products are better and stickier than the market is giving it credit for. A lot of bad news is written into this and the game theorist in me says this is an opportunity, at a lower price. Under $8.50/share (a MC of ~1600M) I believe one is compensated for the risk. If cuts are imminent (they've already been downsized by 10% from initial CBO estimates) I would like to believe that a larger defense contractor would take a look at XLS (LMT, RTN NOC etc). No position.
2/6/2012: Kept on reviewing. I basically compared this to a recent investment in a highly levered company. We know they have 9B plus of backlog. While this isn't guaranteed it likely will flow through the pipeline. This would give us 2 years of scenario 1. This assumes no new contracts and a rugged drop in revenue.
The more information that comes out about the defense cuts the more I believe they won't be as severe as stated. Most of the savings is from withdrawing from Iraq and Afghanistan. They then hope to save more money through technological advances, essentially just cutting troops and enabling lots of UAV's. This is a space XLS has a presence in already. When everything is all said and done DoD funding will actually rise 1.5% annually over the next five years. So this is essentially a bet XLS won't receive the worst of the worst cuts. Considering their exposure to over budget stealth fighters (none) I'm one to believe revenue will not drop ridiculously. Management seems capable and smart. The pension liability, while quite high, is well covered and once it is fully funded there will be ample cash for shareholders.
This is a beaten down sector but a company that has good management, good products and some growth kickers in their air traffic divisions and exposure to the Middle East. Forced use of FCF,while not ideal, certainly prevents disaster acquisitions or squandering of cash. I judge FCF to be roughly 300M in Scenario 1 (adding back in certain non-cash items found in MRQ's 10Q). Small position for now. Plenty of potential to be wrong. Long XLS.
3/2/2012: Quarterly results released. Nothing particularly surprising here. They hit their 2011 numbers in line with what they have stated previously. For 2012 they expect revenues to be 5.4-5.8B, a slight decline from 2011 but no deleterious fall. They expect FCF to be around 125M for 2012, AFTER pension contributions of 320-370M and dividends of 75M. They have a funded backlog of 3.6B relative to a total backlog of 11.7B.
They spelled out their pension contributions, namely what they are going to do, very well. This is still the scariest thing about the company in my opinion. They have a high return rate of 9% (~40% of pension assets are in fixed income, not getting 9% there!) that likely will be readjusted. While the future is unknown at least I, the investor, know where the companies cash is going.
The CEO mentioned that he wanted to do some acquisitions and would prefer to be "a bit more active than not." This is not what I wanted to hear but until action is taken and the impact is assessed I will stand still.
Due to the shifting capital structure, higher I&T segment revenues and lower C4ISR revenues, depreciation will begin to outpace CapEx. The effect will be stronger free cash flows relative to declining net income. With this shift also comes lower margins, but management expects this shift to stabilize soon.
I still think this company remains undervalued, and as such remains an investment.
Wednesday, November 30, 2011
Seche Environmental, brief unedited and unfinished writeup
EPA: SCHP
All figures in Euros
Market Cap 11/30:240M
Business: Seche collects and disposes of waste. They operate in two segments, non-hazardous waste and the much more dangerous hazardous waste. Disposal runs the spectrum of simple collection to energy generation (biogas/incineration) to highly engineered decomissioning (PCB transformer).
Investment Belief:
With the Euro-zone in the news everyday there is tremendous pessimism. While it may be warranted towards the government and certain debt laden entities dependent on short term financing (banks, insurance etc) I believe that longer term a company like Seche can and will prosper. A steady, essential (nobody screws with trash unless political suicide is in order), profitable business that is being priced extremely low. Throwing the baby out with the bathwater so to speak.
Financials: In 2010 the company generated 406M revenue, operating cash flow of 93M and CapEx of 30.3M. They carry 382M in total liabilities, this has been trending down the past several years. Debt has decreased from 237M to 177M. FCF, defined as operating cash flow less CapEx, was 63M in 2010, 42 in 2009, 22M in 2008, and -100M in 2007(explained later). Right now Seche is being priced around 10x depressed 2008 earnings.
Management and their use of capital: Joel Seche is CEO of the aptly named company. He owns 40% of shares outstanding according to lemonde.fr economy section. He's been there since 1981 and is currently salaried at 412K Eur. He serves on Altamir Amboise Sca's Board. I loathe multiple boards but can live with one.
He has proven to be a prudent allocator of capital. The negative FCF in 2007 was partially attributable to a large capital expenditure. The financing was secured through common stock issuance. About 85M of stock was issued at share prices roughly 5x those of today. This example (although only one) showcases a textbook example of taking advantage of overpriced stock in a bubble. I applaud management for that.
Business Notes:
Hazardous waste represents a majority of their business. Goldman published reports on Veoila and Suez declaring that industrial waste declines will be a drag on the bottom line. This obviously could effect Seche but...
Non-hazardous waste, although a smaller portion of total revenues is growing much faster. It was up 17.5% YoY, helped by the energy production. With lower debts and higher energy production
Right now it is 2:1 HW:NHW revenue. A weaker Euro will likely facilitate industrial production, leading to more waste generation. They expect 7% growth in 2011. No predictions as to the growth in 2012.
They have a investment in Saur water treatment.
EPA: SCHP
All figures in Euros
Market Cap 11/30:240M
Business: Seche collects and disposes of waste. They operate in two segments, non-hazardous waste and the much more dangerous hazardous waste. Disposal runs the spectrum of simple collection to energy generation (biogas/incineration) to highly engineered decomissioning (PCB transformer).
Investment Belief:
With the Euro-zone in the news everyday there is tremendous pessimism. While it may be warranted towards the government and certain debt laden entities dependent on short term financing (banks, insurance etc) I believe that longer term a company like Seche can and will prosper. A steady, essential (nobody screws with trash unless political suicide is in order), profitable business that is being priced extremely low. Throwing the baby out with the bathwater so to speak.
Financials: In 2010 the company generated 406M revenue, operating cash flow of 93M and CapEx of 30.3M. They carry 382M in total liabilities, this has been trending down the past several years. Debt has decreased from 237M to 177M. FCF, defined as operating cash flow less CapEx, was 63M in 2010, 42 in 2009, 22M in 2008, and -100M in 2007(explained later). Right now Seche is being priced around 10x depressed 2008 earnings.
Management and their use of capital: Joel Seche is CEO of the aptly named company. He owns 40% of shares outstanding according to lemonde.fr economy section. He's been there since 1981 and is currently salaried at 412K Eur. He serves on Altamir Amboise Sca's Board. I loathe multiple boards but can live with one.
He has proven to be a prudent allocator of capital. The negative FCF in 2007 was partially attributable to a large capital expenditure. The financing was secured through common stock issuance. About 85M of stock was issued at share prices roughly 5x those of today. This example (although only one) showcases a textbook example of taking advantage of overpriced stock in a bubble. I applaud management for that.
Business Notes:
Hazardous waste represents a majority of their business. Goldman published reports on Veoila and Suez declaring that industrial waste declines will be a drag on the bottom line. This obviously could effect Seche but...
Non-hazardous waste, although a smaller portion of total revenues is growing much faster. It was up 17.5% YoY, helped by the energy production. With lower debts and higher energy production
Right now it is 2:1 HW:NHW revenue. A weaker Euro will likely facilitate industrial production, leading to more waste generation. They expect 7% growth in 2011. No predictions as to the growth in 2012.
They have a investment in Saur water treatment.
Wednesday, October 12, 2011
Seagate STX
Business: Manufacturer of hard disk drives. Competes with WDC, STEC and others in this commodity of a business.
Why I like it:
Seagate has dropped considerably over the past couple of months. It is percieved to be a cyclical in a dying industry. Looking at it compared to its growthy brothers (flash) we can see that it has produced consistent profits for owners of the business. FCF has averaged over 550M/year for the past nine years. This is even with including the 2.5B goodwill write off taken in 2009.
Unlike flash producers it is actually making money after CapEx. MU is a perfect case in point of a business that really isn't making money, it just looks like it is.
STX has a 0.72/share yearly dividend and is buying back shares by the bucket load.
Temp Issues:
High commodity prices are squeezing profits and the fear that this cyclical is headed the way of the dodo is starting to price in. On multiple years of conference calls we can see the angst in each analysts voice over weekly changes in shipments.
Valuation:
No position for now. If offered at say 8x normalized FCF (EV of 4B...MC of 3.5B) I would build a position.
Why I like it:
Seagate has dropped considerably over the past couple of months. It is percieved to be a cyclical in a dying industry. Looking at it compared to its growthy brothers (flash) we can see that it has produced consistent profits for owners of the business. FCF has averaged over 550M/year for the past nine years. This is even with including the 2.5B goodwill write off taken in 2009.
Unlike flash producers it is actually making money after CapEx. MU is a perfect case in point of a business that really isn't making money, it just looks like it is.
STX has a 0.72/share yearly dividend and is buying back shares by the bucket load.
Temp Issues:
High commodity prices are squeezing profits and the fear that this cyclical is headed the way of the dodo is starting to price in. On multiple years of conference calls we can see the angst in each analysts voice over weekly changes in shipments.
Valuation:
No position for now. If offered at say 8x normalized FCF (EV of 4B...MC of 3.5B) I would build a position.
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