At Durig Capital we have developed a process for review, selection, and monitoring of a investment portfolio containing High Cash Stock Review companies, that is aligned with our investment model! We enclosed our review of (KHD) and supporting documents why we beleive it makes sence in our client sportfolio. You can find other high High Cash Stock Reviews at http://investment-income.net/category/high-cash-stock-review
High Cash Stock Review on KHD Humboldt Wedag International Ltd. (KHD $13.45) - A Supplier of Technologies, Equipment and Engineering Services for Cement Production Physicality Globally.
KHD is a supplier of proprietary technologies, equipment and engineering/design services for cement, coal and minerals processing. The 150 year old Humboldt Wedag Coal & Minerals Technology GmbH Plant engineering and equipment supply firm, has supplied services and machines to the coal and minerals processing industry.
Step 1 - We first search for companies with pristine balance sheets.
KHD has roughly $407 million dollars in cash, and $11.4 million long term debt, giving a value of $395.6 million cash minus debt or over $13 in cash per share. KHD has a very strong balance sheet.
Step 2 - We like extremely low enterprise values.
When you subtract out the cash and debt out of the enterprise, KHD enterprise value is actually negative, or the value of the ongoing operations of the company, has more cash than the entire company is worth. KHD has more working capital and restricted cash than most companies I follow, but simply, for a profitable company with very few global competitors it should trade above it's cash levels. To us, this makes KHD appear to be extremely low.
Step 3 - Is the operation or enterprise driving value to the shareholders?
KHD receives another yes. They had an outstanding quarter, as they had profit of 50 cents without write offs and 25 cents even after write offs, which is better than the analyst estimate for a nickel with much higher intakes or new orders... better than 3rd quarter, 2008, and better then 2nd quarter, 2009, but below their current revenues.
Dollars Time Frame
113.0 3rd Quarter 2009 New Orders
75.0 Break even quarterly forecast going forward*
31.1 2nd Quarter 2009 New Orders
81.0 3rd Quarter 2008 New Orders
148.2 3rd Quarter 2009 Sales
Order intake for the quarter ended September 30, 2009, was $113 million, an increase of 39 percent from 2008. Of this total, 31 percent came from Russia and Eastern Europe, 25 percent from Asia, 18 percent from the Middle East, 15 percent from Europe and 11 percent from Africa.
* KHD forecast a $300 million break even estimate going forward which works out to be $75 million a quarter. Thus, with a $113 million intake, even if only 70% is realized, they appear to be profitable intake in the 3rd quarter. Of the third quarter 2009 order intake, $76.8 million came from cement and $36.2 million from coal and minerals.
With many people worried about the dollar, KHD has very little business currently in the United States and Europe. The real growth is in India and China, the Middle East is doing well and Russia is having financial issues related to development. A $130 million order in Russia has not achieved financing. It's in question and it has not been celebrated, or booked. So, again, this is mostly an emerging economy company.
Step 4 - Is this a good business?
Anytime you can increase cash by over $50 million in the middle of a down turn, like KHD this last Quarter 3, 2009, you probably have a pretty good business. That one quarter's cash flow works out to be about 1/8 the entire value of the company. Now, that is one low priced company with strong operational leverage and growing margins.
KHD appears to be a great way to play the new global economies. The young and growing economies of the world are, then, ones that need new or upgraded cement factories, so this is almost a natural selection process for investing in the new world economies. KHD remains one of the cheapest emerging market plays we can find, especially for emerging nation when you consider cement and electricity is required for a nation to develop into a valued country in a mechanized global society.
We believe this is a very good business with few global competitors. KHD is a well financed cycle company, and they have stated that they believe quarter 2, 2009, was their bottom. It appears cash is growing nicely even at the lower business levels, with their break even at about $300 million they are taking new orders already above break even.
KHD completed a review of all the backlog and removed $96 million that was questionable due to the recession, KHD now believes they have a firm order backlog as of September 30, 2009, that was $626.3 million.
Step 5 - Is the Train Wreck and, then, the fog from the Wreck clearing?
When finding companies around cash value, often there is what we call a Train Wreck. With KHD, I believe the biggest negative issue is that the world went into a great economic tale spin.
This economic down turn helped foster KHD's need to sell the Cologne coal division, which reduced 333 employees and the company had also guided to a reduction of 124 employees during H109 (this compares to 1,270 employees as of Dec. 2008). So, headcount has been reduced to around 800, a 35% reduction, which should reduce the company’s ongoing cost base to $300 million. The company’s 18 month target is to reduce the workforce by 50% - it's no wonder they are forecasting better margins.
Of course due to world events, global cement factories and engineering would be greatly affected. Now that the company is forecasting 2010 to be a "fairly good year" and a "good step forward", KHD believes the worst is behind them. So, the train might be back on the track, but we needed the global recession to drive value on a good company like KHD to a value below cash.
In fact, KHD currently identifies $1-$2 billion in new projects (knowing that half might never come through due to problems in securing financing).
KHD currently is in a position that we are trying to identify for our clients - a good business with operations showing many strong tangible signs of improvement, at a very low price, in this case below even the level of cash on it's books, with the possibilities of great appreciation and/or possible buyouts, and the hopefully limited downsize. Even if the company hasn't hit bottom, KHD's negative enterprise value alone could be the basis for a limited value increase.
This is obviously a very cyclical industry, where the company buttons down the hatches during tough times, and makes out-sized profits during the good years.
Disclosure: Yes, and absolutely yes, I and related accounts own this company. We started buying around 11.49 per share. I just wish I could raise the money and buy the whole company. We like to invest in profitable business enterprises that have almost zero or, like in this case, a negative enterprise value. I'm sure other successful business persons would also like to do the same.