Mass Financial Is Run By an Undercover Value Investor

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Includes: MFCAF, MFCB
by: Violent Capitalist

Mass Financial (OTC:MFCAF), which I'll refer to as MF, is run by a fellow with the name of Michael Smith. Michael Smith's previous project was putting together a private equity-like firm using assets in real estate, commodities, and an engineering co. to build a firm called KHD Humboldt Wedag - which has since been divested. Read the history of KHD annual reports and it'll go back a couple of years describing an asset-management firm that was on the brink of insolvency, but returned to glory with a series of acquisitions, sales, and divestitures.

As KHD divested its businesses, Michael Smith has too, divesting all of his interests in KHD some time ago but holding onto MF. Whereas KHD's crown jewel was its engineering/construction firm that concentrated on coal/cement plants in emerging markets, MF's jewel is in the commodities businesses - and specifically in being a middle man to enhance the credit risk of companies domiciled in risky locales. In addition, Mr. Smith looks to broaden MF's focus in a PE-type of mold that KHD once was as well.

MF states on its website that it's focused on building book value. It currently holds about $255mil in cash and $180mil in debt. Net income in 2008 amounted to just over $20mil. I will use a number of $30mil going forward as 2009 for commodities was a very good year (it may end up with $60mil in net income for 2009). Add $5mil in depreciation/amortization and my operating cash flow figure hits $35 mil. Capex is minimal. This is something that Michael chose to do with KHD as well, investing in asset-light businesses. My invested capital figure for MF is about $115 million, and my cash flow ROIC for MF equates to 30%. Fantastic. If you had followed KHD at all in the last 5 years, these numbers should not surprise you!

With net cash of $75mil, enterprise value is about $182mil. One way to look at MF is that it trades at an EV/FCF ratio of about 5x. To go by Michael Smith's words and pay attention to book value, let's look at some book value ratios. EV/BV is about 1 currently and Market Cap/BV is 1.43. Hardly expensive for a company that's generating +30% ROICs. At the least, if Michael Smith can maintain this type of performance, shares should be worth $15 within 3 years. In another 2-3 afterwards, consistent performance should allow for a premium and a price of $20/share. Remember, these projections are pretty conservative. Mr. Smith has net $75mil in cash to put into use and generate even higher ROICs.

KHD is not being traded in the US currently as it just recently spun off the commodities portion of its business into Terra Nova Royalty (NYSEARCA:TTT). A ticker for the original KHD should be sorted out shortly..

Disclosure: I am Long TTT, Long KHD, Long MFCAF.PK