Mass Financial, Terra Nova, KHD: Cash, Cash and More Cash

 |  Includes: KHDHF, MFCAF, MIL
by: George Fisher

What is the biggest hurdle for businesses to overcome when seeking to expand? The simple answer is: the ability to finance their acquisitions, creating the reality of “cash is king”. The best managers generate cash used to invest in growth initiatives for the benefit of all shareholders. The reserved Mr. Michael Smith has a history of quietly creating piles of cash and investing it wisely.

Three international companies are built around Mr. Smith’s relatively large piles of cash – Mass Financial Corp (OTC:MFCAF - $9.25), Terra Nova Royalty Corp (TTT - $6.85), and KHD Humboldt Wedag (OTCPK:KHDHF - $7.75). Combined, these companies have approximately $646 million in cash and securities on their books, and management is out seeking the best return on their hoard. One share of each of these three companies equates to an investment of $24, and offers a combined total $22 worth of cash and securities assets.

Michael Smith is a 54 year-old entrepreneur, having cut his teeth as a private equity manager in the early 1980s. In 1984, Smith branched out on his own buying and selling companies, retaining bits and pieces along the way. One favorite method has been to spin-off business entities to shareholders. The current splitting up of TTT and KHDHF is a good example.

Mr. Smith is the CEO of Mass Financial and Terra Nova, and is very involved in KHD. Mass Financial seems to be the flagship organization, with Terra Nova a budding iron-ore resources investment vehicle. To a lesser extent, KHD has the ability to generate sizeable cash flows during good economic times.

Mr. Smith hates paying taxes and has domiciled Mass Financial in Barbados. TTT is a Canadian corporation and KHDHF is based in Germany. Mr. Smith is also somewhat secretive in his activities. For example, Mass Financial skips the usual quarterly reports in favor of semi-annual reporting. Typically filed late in the reporting season, investors will see year-end MFCAF financials about June of the following year.

Mass Financial Corp is a specialized merchant bank with interests in commodities trading, healthcare, and other businesses, such as a 51% ownership of an India-based oil and gas company and a German-based emergency vehicle manufacturer and leaser to municipalities. In its ‘09 annual report, MFCAF lists 26 partially or fully owned subsidiaries.

As of 12/31/09, Mass Financial had $346 million in cash and securities, offset by short term bank loans and current portion of long-term debt of $157 million and long term debt totaling $56 million. With 28 million fully diluted shares, MCFAF’s market cap is $252 million. Mass Financial earned $2.70 a share in 2009, up from $0.91 in ’08. The current share price trades at a 3.4 PE to ’09 EPS and 10 times ’08 EPS, and is trading at less than 12/09 book value of $9.72. Book value has increased substantially over the past three years, from $2.43 in ’06 to $4.39 in ’07 to $5.32 in ’08 to $9.72 last year. Working capital has more than doubled over this time frame to $232 million while maintaining a 2.14 current ratio.

Terra Nova Royalty Corp owns an indirect interest in an iron ore mine in Labrador, Canada, and receives royalty income based on production and market pricing. Terra Nova has a market capitalization of $206 million, and has $120 million on the books after this month’s oversubscribed rights offering. Mr. Smith is actively seeking investments in the resources sector to add to the royalty income. However, TTT is just beginning this quest, and lacks a financial history.

KHD Humboldt Wedag manufactures cement making equipment with major markets in India and other developing countries. Clients are cement factories looking to expand/upgrade production and to build new facilities. KHDHF accepts deposits against future client billings and maintains a healthy cash balance. Net of client deposits, management has accumulated $180 million in cash and has a market capitalization of $305 million. As a cyclical company, KHDHF’s fortunes should be improving as global infrastructure markets regain their footing.

Mr. Smith recently recently separated TTT from its sister company KHDHF, with TTT retaining a 19% interest in KHDHF and a 5% interest in Mass Financial.

These companies are not without risks. Mass Financial is having problems with its recent $13 million investment in the Indian oil company, Terra Nova is pretty much a start-up company, and KHD is facing continued stiff economic headwinds. In addition, Smith is not known for great communications, and is not followed by Wall Street.

However, having $646 million in cash with global economies coming out of a recession is an enviable position. With Mr. Smith’s track record, these companies should be worth watching as their cash is turned into various forms of investment income and capital growth.

Investing in these companies requires not only limit orders due to their low trading volume, but also a leap of faith that Mr. Smith will continue his winning ways. As a speculative international portfolio selection, the downside seems to be minimal with a large part of combined book value being in cash. In addition, future returns are limited only by the skill and performance of Mr. Smith as he deploys shareholder cash.

All three company website offer easy access to Annual Reports and SEC filings. Review of the past few years should be helpful in understanding the potential of these businesses.
Mass Financial
Terra Nova
KHD Humboldt Wedag

As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.

Disclosure: Long MFCAF since 2009, Long KHDHF since 2007, and Long TTT since 2010