Seeking Alpha

George Fisher's  Instablog

George Fisher
Send Message
I am the author of My Investment Navigator monthly newsletter, focused on timely dividend paying stocks. In addition, my services include a review of individual portfolios along with education of portfolio management techniques. I have been a Registered Investment Advisor, financial author, and... More
My company:
My Investment Navigator
My blog:
My Investment Navigator
My book:
All About DRIPs and DSPs
View George Fisher's Instablogs on:
  • Riding on These Luminary‚Äôs Coattails

    A few astute financial luminaries allow individual investors to tag along.  There was an online discussion a few weeks ago on this topic, and an offering of a list of twelve such names peaked my interest. I compared the 3-yr and 5-yr total shareholder returns for these investments against the S&P 500 (SPY ETF), and selected those firms that beat the market in both categories and provided positive shareholder returns. The list boils down to four – Mass Financial (MFCAF.PK $10.24), Fairfax Financial Holdings (FRFHF.PK $374.00), Berkshire Hathaway (BRK.B $78.23), and Hilltop Holdings (HTH $12.14).  Keep in mind SPY’s total return was -19.4% for the 3-yrs and +6.4% the 5-yrs ending May 8, 2010.

    Individual investors should look at these investments both as a long-term holding and as a commitment to a specific manager’s ability to create long-term shareholder value.  Because of potentially steady cash flows, insurance companies and merchant banks are good vehicles for investment managers.  The ability to generate consistent above market returns with a growing premium or interest/fee income stream should compound shareholder returns over time.

    Mass Financial

    Mass Financial is a Bermuda-based merchant banking firm headquartered in Hong Kong.  MFCAF is managed by Michael Smith, an ex-venture capitalist and private equity investment manager.  MFCAF provides commodity trading services, mezzanine financing and direct investments, such as its hospital medical equipment business in China.  Smith is somewhat secretive and does not offer substantial information concerning his movements.  For example, financial statements are issued once every six months and usually about five months after the close of the period.

    The most recent financials are from the six months ending June, 2009, and showed nice performance especially in light of tough economic conditions.  Earnings were $60 million, or $2.52 a share, on revenues of $212 million compared to $1.15 a share on revenues of $305 million for same period in 2008.  MFCAF earned $0.99 for all of 2008 and $2.09 in 2007.  As of 6/30/09, cash was a hefty $252 million, or $10.32 a share, and book value was calculated at $9.38 a share.  Year-end 2009 should be issued in a few weeks. 

     

    MFCAF currently trades on the Vienna Stock Exchange as its primary exchange, carries $67 million in long-term debt, has 25 million shares outstanding, and a market capitalization of about $275 million.  The current share price is in the $10 to $11 range, not much more than the last reported cash balance and a small premium to last reported book value.

    Fairfax Holdings

    Fairfax Financial Holdings is a Canadian property and causality insurance company that is managed by a pretty savvy investor, Prem Watsa. Fairfax operates globally with offices in Canada, the U.S., Asia, and Europe.   Net written premium revenues are approx $4 billion a year.  Soft market conditions have elevated the combined ratio (claims paid to premiums received) to 111% in the first qtr of 2010, up from 98% in 2009.  In response, management has tightened its underwriting, willing to pass on less profitable business.  As insurance market pricing improves over the next few years, the combined ratio should return to sub-100%, improving profitability.

    FRFHF has a sizeable investment holdings, both in the US and Canada.  According to their most recent presentation, each share equals $1,005 of portfolio investments, or about 2.8 times it current share price of $361.00.  The value of total investments is approx. $21.8 billion.  The portfolio consists of 17% in cash, 54% in income investments with a cash yield of 6.5%, 27% in equities, and 2% in other.  These investments are generating realized capital gains of between $10 and $15 annually per share. 

     

    Fairfax Holdings trades on both the US and Toronto exchanges.  There are 20 million shares outstanding, has a market cap of $7.3 billion, carries $2.3 billion in debt and has $1.2 billion in cash.  Book value as of Dec 2009 was $365, and is anticipated to grow to between $410 and $460 by the end of next year.  FRFHF pays a $10 annual dividend for a cash yield of 2.8%.

    Hilltop Holdings

    Hilltop Holdings is an interesting insurance company sitting on a huge pile of cash that is managed by a legendary bank-turnaround specialist, Gerald Ford, and his son, Jerry Ford.  Hilltop owns a small insurance company that specializes in property and causality insurance for low value and manufactured homes, builders risk, sports liability, and inland marine markets in the South and Southwest.  Net written premiums are about $115 million a year, and book value for the business is about $95 mill. The company operates at a small loss for earnings.

    The insurance business is towered by an unallocated capital / cash balance of $740 million, mostly invested in overnight deposits.  The Fords have been on the prowl for an adequate distressed bank to acquire.  They have bid on a few FDIC-assisted offerings, but have not yet produced a winning bid.  Hilltop has maintained a large cash position since July 2007, generated by the sale of its mobile home real estate holdings.

    With the current banking crisis and the numbers of failed banks, the Fords have the ability to wait until the right opportunity comes along.  A current investment in Hilltop Holdings should be considered as a start-up, failed bank turn-around opportunity that is not quite in place yet.

    Berkshire Hathaway

    There have probably been more written about Berkshire Hathaway than any other investing topic.  One aspect of Berkshire that is overlooked by many investors is its small business conglomerate.  Business exposure in private firms is greater than its equity holdings or insurance businesses.  This, to me, is Berkshire’s greatest asset and should be the driver of future book value growth.  Enough said.

    This is just a list of ideas for investors who may be unaware of these financial pros.  In the process of a due diligence review, it is important to research each manager’s performance over time, investing style, and their backgrounds.  Company websites for investor’s presentations and latest financials press releases are great places to start.  Listed below is a table with 3-yr and 5-yr shareholder returns for each of the twelve firms.  Past performance is not necessarily an indication of future returns.

    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. 

    5-yr Total Returns

         
       

    Price

     

    Price

    Symbol

    Manager

    5/8/10

    Return

    5/8/05

             

    MFCAF

    Michael Smith

     $    10.24

    292.3%

     $       2.61

    FRFHF

    Prem Watsa

     $  374.00

    151.0%

     $  149.00

    BAM

    Bruce Flatt

     $    23.26

    51.1%

     $     15.39

    BRKB

    Buffet & Munger

     $    78.23

    39.2%

     $     56.20

    PICO

    Raymond Web

     $    33.65

    31.5%

     $     25.58

    CET

    Wilmot Kidd

     $    20.16

    30.1%

     $     15.50

    CSWC

    Gary Martin

     $    91.59

    17.7%

     $     77.84

    LUK

    Joe Stienberg

     $    21.12

    8.0%

     $     19.56

    HTH

    Gerald Ford

     $    12.14

    7.7%

     $     11.27

    SPY

    Standard & Poors

     $  116.00

    6.4%

     $  109.00

    MLK

    Tom Gayner

     $  355.00

    4.1%

     $  341.00

    GLRE

    David Einhorn

     $    23.90

    0.8%

     $     23.70

    BH

    Sardar Biglari

     $  325.00

    -20.9%

     $  411.00

             

    3-yr Total Returns

    Price

     

    Price

             

    Symbol

    Manager

    5/8/10

    Return

    5/8/07

             

    MFCAF

    Michael Smith

     $    10.24

    127.6%

     $       4.50

    FRFHF

    Prem Watsa

     $  374.00

    93.8%

     $  193.00

    BRKB

    Buffet & Munger

     $    78.23

    7.0%

     $     72.50

    BH

    Sardar Biglari

     $  325.00

    6.9%

     $  304.00

    HTH

    Gerald Ford

     $    12.14

    4.4%

     $     11.63

    GLRE

    David Einhorn

     $    23.90

    8.0%

     $     23.70

    CET

    Wilmot Kidd

     $    20.16

    -9.3%

     $     22.22

    SPY

    Standard & Poors

     $  116.00

    -19.4%

     $  144.00

    MLK

    Tom Gayner

     $  355.00

    -28.0%

     $  493.00

    PICO

    Raymond Web

     $    33.65

    -28.4%

     $     47.01

    LUK

    Joe Stienberg

     $    21.12

    -40.8%

     $     35.66

    BAM

    Bruce Flatt

     $    23.26

    -41.1%

     $     39.49

    CSWC

    Gary Martin

     $    91.59

    -44.5%

     $  165.00 

     

    Disclosure: Long MFCAF.PK, BRK.B and have been a shareholder since 2009 - No other positons
    May 13 11:25 AM | Link | Comment!
  • Inquiring Minds Want to Know: What is KHD Worth?

    A great hobby of mine is uncovering somewhat obscure companies and then figuring out their value versus current market prices.  KHD Humboldt Wedag International Ltd. (KHD - $14) is one tough cookie to crack.  It operates two basic businesses and is in the process of splitting each off to shareholders.  KHD is managed by a pretty smart ex-venture capital guy, Mr. Smith. KHD revenues in 2008 were $635 mil, and the company has over $180 mil in accumulated operating cash, not counting E&C contract deposits.  Keep in mind there are 30 million shares of KHD out, and current stock market cap is $423 million.

    KHD owns the royalty rights to a large iron ore mine in Labrador, Canada and, through a holding company structure, operates an engineering and construction (E&C) firm focused on cement factory production, and is currently based in Germany.  That is the easy part.

    Originally founded in 1856, KHD was part of several businesses acquired, managed, and controlled by Mr. Smith, and was transformed in 2005 into its current business.  Mainly known as a cement E&C company, KHD acquired the iron ore royalty rights as part of its transformation.  At the time, the royalty contract was fixed at a rate of $4.5 million a year, and was a minor contributor to overall cash flow.  However, in 2007, the contract converted from a fixed rate to a production and price based formula and royalty revenues skyrocketed to $18 mil in 2007, $30 mil in 2008 and estimated $11 to $15 mil in 2009. 

    The cement E&C business targets developing countries such as Russia, India, China, and throughout Africa, where cement is used as a primary building material and the need for new factories, along with upgrades and capacity expansion, has been historically strong.

    In order to unlock shareholder value in these diverse businesses, management is separating the company into 1) a royalty income company and 2) cement E&C company.  In the process, management has assigned a book value for each as of 9/30/09 - $9.50 for the royalty income business (cash and value of royalty revenue stream) and $3.98 for the cement E&C (mainly cash).

    Terra Nova (KHD)

    The royalty income business will be named Terra Nova and will carry the NYSE trading symbol KHD.  The ore mine has been active since the 1955 and was recently reassessed for resource valuation.  The reassessment upped the reserves to 75 million tons, or approximately 15 years of current production.   Management has calculated the reserves revenue stream is currently worth approximately $200 million, and will be adding around $130 mil in cash (less $50 mil in liabilities) during the separation.  In its year-end discussions, management estimates the royalty should generate an average of $5.00 per ton of ore, with increases based on production and price.  Average ore production should be about 4 to 5 million tons, generating royalty revenues of $20 to $25 million, similar to 2007 and early 2008.   

    The stated goal of Terra Nova is to invest its cash balance in similar businesses to increase shareholder value.  If management is able to realize similar returns as its current royalty, it could generate an addition $8 mil in income, while maintaining a net debt level (cash less liabilities) of zero.  Total royalty revenues for 2010 could start out around $15 to $20 mil and has the potential to increase to $30 to $35 mil over time. 

    From royalty revenues are deducted operating expenses, such as a depletion allowance and basic management fees.  One of Mr. Smith’s companies, Mass Financial (OTC:MFCAF), will manage the royalty business for an 8% annual fee.  From there, corporate income and royalty taxes are paid.  Many royalty income companies are structured as a publically traded limited partnership or trust to reduce corporate tax exposure, but it does not appear the Terra Nova will take this route.  While the stated goal of Terra Nova management is to provide an income stream, it could be prudent for KHD to retain a portion of cash flow for re-investment.

    At this time, it is very difficult to calculate Terra Nova’s distribution policy or amount.    Factors include amount of applicable taxes and depletion allowances along with an anticipated payout ratio.  Until these are established, estimates of distributions will be like throwing darts.  Investors should know more about these factors over the next few quarters.

    As a basic commodity, iron ore is a necessity in manufacturing steel, although demand and pricing fluctuates year to year.  2008 was an exceptional year for iron ore producers, but the market collapsed in 2009.  As the world economy rebounds, so will the demand and price of iron ore.  There are several similar iron ore royalty companies, and many have been around for quite a while.  Their stocks usually trade based on distribution yield and book value, in addition to perceived future strength of their businesses.  These are currently difficult matrixes to compare as Terra Nova has not announced their distribution policy and their recently recalculated value is much more current than others.

    KHD Humboldt Wedag (KWG.F)

    Pre-separation KHD, through a holding company structure, owns over 90% of outstanding stock for the cement E&C business.  The cement E&C will be known as KHD Humboldt Wedag, abbreviated as KID, and KID shares will be distributed to KHD shareholders.  The balance not owned by KHD trades on the Frankfurt exchange using the Yahoo finance symbol KWG.F.  There are currently slightly less than 14 mil shares outstanding.  The plan is to split the shares 2:1 and complete a secondary offering to increase liquidity.  After the split and distribution to KHD shareholders, KID should have about 33 mil shares outstanding. 

    As an E&C company, KID has been severely affected by the financial crisis and global economic slowdown, and it does not appear business will be heating up anytime soon. Due to KID being a German company, the following discussion will be in Euros, €, with a conversion to USD of around 1:1.35.

    KID management last week announced 2009 results with a discussion on their guidance for 2010 and 2011.  As an E&C company, new project awards and uncompleted project backlogs are important criteria to evaluate future business.  While KID reported € 37 million in net income for 2009, € 16 mil was from non-cash credits reversing previous years’ write-offs.  Operating income appears to be in the € 21 mil range or € 1.50 per share pre -split/dilution, or about € 0.60 after the spin-off to shareholders.

    This is as good as it’s going to get for a while.  Below is a recap of 2009 operating numbers and management guidance for 2010 and 2011:

    Revenues 2008 - € 339 mil
    Revenues 2009 - € 360 mil
    Revenues 2010E - € 240 mil
    Revenues 2011E - € 170 mil

    New Awards 2008 - € 374 mil
    New Awards 2009 - € 58 mil (€ 120 mil intake less € 62 mil canceled)
    New Awards 2010E - € 130 mil
    New Awards 2011E -€ 200 mil

    Backlog 2008 - € 530 mil
    Backlog 2009 - € 230 mil
    Backlog 2010E - € 103 mil
    Backlog 2011E -€ 133 mil

    t is obvious that KID’s fortunes probably won’t improve until 2011.  Most importantly, management’s guidance is for earnings to be at breakeven in 2010 and a net loss for 2011. As the majority of controllable cost of goods sold is personal overhead, look for layoffs this year and next to reflect substantially lower levels of business.

    What is the current KHD worth?

    This is the $64,000 (or € 46,000) question today and going forward.  Until we know the distribution policy and expense ledger of Terra Nova, it is impossible to determine a realistic market price as it will most likely trade based on distribution yield.  With about 40% of book value in cash destined to be invested to generate addition income, and as the demand/price for iron ore increases with an economic return to “normalcy”, distributions should rise over time. 

    KID is much more problematic as their visibility is not encouraging.  The strength is their cash balance.  According to guidance, investors should look to 2012 for a turnaround.  While the cement E&C business is a great niche long-term, management is forecasting a tough couple of years.  Growth will return to KID - it will just take a while and obviously patience will be required.

    The market currently values KHD based on the combined book value of between $13 and $14 a share.  With this opaque company and the lack of information still available, this is probably pretty reasonable.   I plan on holding my shares of KHD and adding to Terra Nova for income and some capital appreciation potential after the split and once the distribution / expense formulas are clearer.   I plan on keeping KID shares and will add to the position as business improves.  A good place to start your due diligence and more information can be found at their websites:   

    Current KHD:  http://www.khdhumboldt.com/phoenix.zhtml?c=92949&p=irol-irhome

    KID Consolidated Financial Statement 2009: http://en.khd-hv.com/financial-reports.html   

    Disclosure: Long KHD and have been a shareholder since 2008

    Disclosure: Long KHD and have been a shareholder since 2008
    Feb 26 2:44 PM | Link | Comment!
  • TimberWest Forest Products: Back from the Abyss?
    TimberWest Forest Products (TWF_U.TO - C$5.10; TMWEF.PK - $4.88) is a small cap timber company located in British Columbia, Canada.  It is the largest owner of private timberland in western Canada with 796,000 acres, mainly in and around Vancouver and it is estimated TWF owns approximately 11% of the island of Vancouver.  Of this acreage, approx 134,000 acres are designated as higher use and, over time, should be for sale as development land.  The company estimates it could provide upwards of 25% of the real estate needed for Vancouver Island’s future economic development.  The vast majority of TWF’s harvestable timber is higher quality Douglas Fir.  

    Timber companies usually derive the majority of revenues from the logging of timber, augmented by the sale of land that is worth more for development than for growing timber. As demand for lumber and export logs severely declined in 2008 and 2009, timber harvests industry wide were delayed to match. While a unique character of timber as an asset is its ability to increase in value as it grows and delaying harvest usually improves long-term asset values, it is necessary to log sufficient volume to generate positive operating cash flow.  

    Unfortunately, this has not the case for TimberWest.  The recession has not been nice to TWF, and has created financial stress and a weaker balance sheet. Both log demand and pricing collapsed during the past 2 years.  Annual revenues for the past several years are listed below (C$ millions):

    2006
           2007       2008       2009E

    345         318         164         144
     
    2010 and 2011 revenues, cash flow, and operating profit/loss have a wide range of estimates, based on the perceived strength of a recovery in both US and Asian lumber markets.  TWF exports logs to Asia, with China surpassing Japan as the largest opportunity.  2010 revenue estimates range from C$160 million to C$240 million, with EBITA ranging from breakeven to $0.40 per share.

    TimberWest has a different share structure that provides an interesting twist for shareholders.  Investors purchase “stapled units” which consists of one long-term note and one share of common stock.  The note has a par value of C$8.96 and pre-2009 paid C$1.08 (12%) in interest annually. The market for the stapled unit historically traded in the C$10 - C$14 range. 

    In response to crushingly lower operating financials and a possible debt covenant violation, management needed to restructure its debt, relieving pressure on cash flow.  In early 2009, TWF re-negotiated the terms of the note component of the stapled units and issued C$150 million of new 5-yr 9% convertible debentures (convertible to stapled units at a conversion price of C$3.50), with much of the proceeds going to repay bank debt.    The stapled unit notes now pay a variable interest rate set by the company that can range from 2% to 12%, with the option to accrue payments up to 18 months.  Currently, the yield is set at 2% and payments are being accrued. 

    In addition, the yield on both the stapled units and the debentures can be satisfied with a payment-in-kind (PIK) by issuing more units or debentures. While dilutive to current unit holders when PIK is used (up to 3.8 million shares a yr or about 3.1% dilution), the capital generated from the issuance of the debentures and reduced interest payments on the stapled unit notes  has allowed the company to stay afloat. Recently, TWF’s banks waived their EBITA loan covenants for 2010 and 2011.  While still strapped for cash on the books, TimberWest appears to have sufficient breathing room to survive until business returns to a more normal level.

    So why should I be interested in a timber company that is on shaky financial ground during one of the worst markets for wood demand, especially when there are other timber investments available with companies that have solid financials?  The answer is fairly simple – the market price (C$ 5.10) is currently a deep discount to the underlying value of TWF assets.  The value of the timber land and developable real estate is estimated at between C$7.50 and C$10.00 per stapled unit.   In addition, the units are currently trading at a little more than half the par value of the notes.  Since stapled unit and debenture investors now control the majority of outstanding debt rather than banks, hopefully financial pressures will be a little less testy, as demonstrated by the recent covenants waivers. 
     
    If the US housing market begins to improve, and the Asian export market recovers, TimberWest should regain its financial footing, albeit with higher debt and more dilution than pre-recession.  As the economic recovery plays out over the next few years, timber harvest volumes should increase sufficiently to generate consistantly positive cash flow once again. Increasing real estate sales should add to timber cash flow, although 50% of real estate proceeds over C$50 million annually are swept for bank debt repayment.   Increased cash flow should also generate higher cash distributions, although probably not returning to previous levels.  Cash yields on today’s invested capital could be substantial at the peak of the next business cycle.

    Over the past few months, lumber prices have been rising due to slightly higher demand and lack of supply.  With lumber mill closures and log harvest cut-backs, there is little inventory in the pipeline.  While this strength is not anticipated to last, it is a very welcomed “green shoot” worth noting.

    TimberWest has a stock capitalization of C$572 million, with 77 million stapled units outstanding.  Including bank debt, debentures, and stapled unit notes, total long term debt is C$710 million.  Liquidity includes C$90 million available from their C$250 million bank credit line.   

    TimberWest is a high risk opportunity relying on a timely return to improved revenues and cash flow from stronger end-user markets.   If successful, TWF could provide both acceptable capital gains and an intriguing cash yield on invested capital.  For example, the current C$0.18 interest payment, or 2% yield on the C$8.96 stapled unit note that is being accrued, will represent a 3.5% yield on today’s invested capital when paid.   As the company returns to profitability, the variable rate interest payments should increase, with the potential to double, or more. 

    Patience will be required with this mid- to late-cycle turnaround.  My personal 24 month price target is a stapled unit price of C$8.50 ($8.00) and a yield on today’s invested capital of 3.5% to 7.0%. At the peak of the next business cycle, TWF could trade over C$10 and generate an annual cash yield on invested capital in the double digits.  TimberWest is not for the faint of heart, for the fast money trader, nor for those who are not bullish on timber and real estate in Vancouver, BC.   A great place to start your due diligence is the investor presentations section at the company website, www.timberwest.com.        



    Disclosure: Long TMWEF.PK and was a shareholder from 2004 to 2007, re-instituted position in 2009
    Tags: timber
    Feb 17 12:06 PM | Link | 5 Comments
Full index of posts »
Latest Followers

StockTalks

  • ABB is reported to be buying ABB for $65-$75/shr. Been a shrholder since 2006. Great co and should go for this premium
    Jan 29, 2012
  • Dems want to bring back Windfall Profits Tax on oil. That is what I call a national energy policy - NOT - http://bit.ly/zs005J
    Jan 20, 2012
  • Hillbilly - ever look at NFG? Goobs of gas, pipeline & uts. My thoughts http://seekingalpha.com/a/6v0u
    Jan 17, 2012
More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.