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The Violent Capitalist graduated with a BS in Finance and International Business and a minor in Politics from New York University in 2004. He is also a CFA Charterholder (2009) who has held many roles throughout the industry. He has been a credit research analyst at an independent credit... More
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  • KHD Post Spinoff Valuation is Dirt Cheap 5 comments
    May 7, 2010 9:26 AM | about stocks: MIL, KHDHF
    Conservative Fair Value Estimate: 15 euro
    Current Price: sub 6 euro
    Strategy: Buy 2% allocation, double down at 5 with rising Euro volatility


    All #'s below are Euro!


    I obviously have developed a sort of fascination with Michael Smith and his portfolio co's - only because they are some of the best managed companies in terms of 1) efficiency 2) profitability 3) truly maximizing book value, not even to mention the management teams in place.

    So, as most of us know by now, KHD has split itself into 2 entities, Terra Nova Royalty and KHD International (German exchange, symbol: KWG). My discussion here will be on the KHD part of the business. I believed previously this was the main attraction of the company and I still do today. I have previously written a valuation of the original KHD so please check that out if you can, as the explanation below is an update of that Article. One extremely important note of importance, is the fact that backlog now stands at about 200 million, with the company expecting nominal net income over the next 1-2 yrs.

    Recap on Margins
    In 2008 they incurred costs (directly related to progress billed or how much they charge for percentage of completion) of $170 million and earned nothing, I'm assuming this is because of cancellations and other charges they took on their income statement.. In 2007 they incurred costs of $390 million and about $100 million in profit, about a 25% earnings rate on billings.. Taking these into account, I believe that going forward they can earn 20% on future incurred costs

    - Looking at their current operations I estimate $100 million in incurred costs per year

    - Backlog is now 200 million, so the life of their backlog is 200mil/100mil which is 2 years. All my valuations will be projected based on 2 years (I won't discount them back to today)

    - Take 20% of $100 mil for 2 years and that totals $40 million in additional book value from their backlog.

    - With current book value at $170 million, book value is expected to be $210 million in 2 years

    - I am disregarding any valuation from maintenance service contracts, so my minimum valuation for this company is now 210 million
    .

    At this conjecture, KWG is trading at 5.75 euro. No doubt there is some volatility since the spinoff but this price is 100% absurd. At 5.75 and just under 16.5 million shares outstanding, gives it a market cap of 100 million euro. Against 226 million in net cash, Enterprise Value is a negative 120 million. At minimum shares should be trading at 10, where market cap would be on par with Book Value. Account for an additional 40 million in book value over the course of 2-3 years, and they should trade closer to 12-13 euro a share. Account for new orders to start flowing in 2011-2012 generating a positive 10 million in cash flows, and shares can hit upwards of 20.

    For this reason I have sold my TTT and held on to KWG and plan on building that position.


    Disclosure: Long KWG (german equity, listed on Frankfurt)
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Comments (5)
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  • Value Scouter
    , contributor
    Comments (14) | Send Message
     
    sell TTT and accumulate KWG is likely a smart thing to do. Although TTT is also undervalued, it is probably not as much as that of KWG.
    Is KHDHF the same as KWG trading on a different market?
    8 May 2010, 12:33 PM Reply Like
  • Violent Capitalist
    , contributor
    Comments (100) | Send Message
     
    Author’s reply » yes, KHDHF is the pink sheets of the German equity KWG - I probably should have tagged that in. At 1.3 dollars to the Euro the prices are pretty much on par with one another - so there's probably no conversion ratio on the pink sheets from the german equity
    10 May 2010, 10:43 AM Reply Like
  • Joe Cornell
    , contributor
    Comments (7) | Send Message
     
    I agree KHD (KHDHF). FYI, KHD has about 33 million shares outstanding.
    27 May 2010, 10:16 AM Reply Like
  • Violent Capitalist
    , contributor
    Comments (100) | Send Message
     
    Author’s reply » joe i think your mistaken, i believe you're looking at the old khd shares which were converted to terra nova, the old website being the khdhumboldtwedag.... whatever

     

    you have to look at the new khd shares, of which the new khd website relates to: khd.com

     

    by all means if i'm wrong i'm sorry! holiday weekend, so i'm working off of memory here.
    28 May 2010, 07:41 PM Reply Like
  • Violent Capitalist
    , contributor
    Comments (100) | Send Message
     
    Author’s reply » turns out you were right as per latest reports... i swear I still cannot figure out where you found that 33mil share # though unless u only looked at msn!
    27 Aug 2010, 03:47 PM Reply Like
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