KHD Humboldt Wedag: Continued Strong Growth; Tremendous Future Ahead

I always have to look up the spelling of the names in this company, from here forward it will be KHD (KHD). It has not been long since the company released year end results, and now 1st quarter numbers are out. There is one glitch (scientific term) in the numbers, which I will attempt to explain away, but the rest is all good.

KHD’s primary business is to manufacture cement plant equipment. It sells the majority of its cement plants where the infrastructure needs more cement: Russia, the Middle East and Asia. The main thrust is the manufacturing of the equipment of a cement plant, which it installs and sells spare parts for. It is expanding its business model to set up partnerships to build, own and operate cement plants.

The important fact is that business is good and growing. A few numbers from the first quarter results compared to Q1, 2007:

• Revenues: $136.8 million, up 28%.
• Order intake: $288.4 million, up 91%. 61% of new orders from Russia and Eastern Europe. 29% from emerging Asia.
• Order backlog: $1.1 billion, up 74%.
• Order backlog by region: 36% from Russia and Eastern Europe, 28% from the Middle East and 27% from Asia.
• Pro-forma earnings per share: 43¢, up 54%.

An important point on the earnings per share: The net earnings per share were 28¢ due to a non-cash charge of $5.4 million. The charge was the result of the company having U.S. $100 million in banks where the primary currency is not dollars. The company was forced to take the (non-cash) charge because the dollar fell in value against the local currency (Euros) in the 1st quarter. The $100 million is still fully intact and being held for investment opportunities. The money will most likely be invested as dollars (the reason for being held as dollars) so no real charge will ever be taken. Thus, the pro-forma earnings are, IMHO, a better indication of the 1st quarter results.

Analysts (both of them!) estimates for the 1st quarter were 31¢ per share, so of course the market is knocking down the stock price on the “miss”. KHD management has given earnings guidance for the year of $2.05 to $2.15 and the analysts “concur”. I see the company growing its order backlog at 40-50% per year trading at 15 times projected 2008 earnings.

In my last post on KHD I covered the company's initiatives to focus and grow its revenues. This quarter it announced the formation of an environmental group. This unit will offer equipment and services to its customers to recover and recycle energy, water and waste in its facilities. Definitely a money-maker in their markets and today’s environmentally conscious world.

KHD is a component of this site’s Special Opportunities Portfolio. I believe the stock is an emerging market infrastructure play that is not well known and has a tremendous future. Think $3 in earnings trading at a 30 multiple in 2009!

Notes: I have a long position in KHD.

Comments

[hermanbrut]

I agree. KHD has a bright future. When we pay $120 a barrel for oil, guess where the profit goes? Right. Middle East, Russia, parts of Asia where it will be spent on infrastructure, which uses requires lots of cement for concrete and ultimately benefits KHD's bottom line.
Also KHD equipment produces cement cheaper and cleaner than old plants. I recommend you look at their website.

[samcat]

I have held KHD since it was a spinoff Swiss bank from paper producer Mercer (MERC). The Swiss bank became a collection of misc. investments that also were spun off to share holders. The Swiss bank bought KHD, gave the shareholders the European REIT, and moved back to Hong Kong, where the original MERC had had its working offices before the Chinese retook HK. KHD has been always an excellent investment because the company has been run by top managers. I'm not sure who still controls the cash cow of iron ore near Duluth MN. Anybody know?

[Andy Jones]

Also relevant is that the company's balance sheet is really solid - almost half the value is cash, if we could strip this out then the multiple you are paying is way below 10x earnings

[Tim Plaehn]

There were some comments on the conference call about an iron mine, so I guess the company still owns it.