Global Ports Investments Plc – GLPR:London

Before I begin, I wanted to let readers know I will be in NYC on November 10 and 11 for a series of meetings. If anyone would like to schedule a meeting or just grab coffee, let me know and I’ll see what I can do. I always enjoy meeting blog readers. They’re a sophisticated set. 

So, who’s interested in buying shares in a leveraged, capital intensive business operating in one of the world’s least attractive geographies and fraught with political risk? What if I also told you that this company’s revenues are down 25% year-over-year and that this weakness may continue for the foreseeable future? If you’re still reading, I suppose I should also tell you this company produces huge and sustainable cash flows, operates with barriers to entry, enjoys the backing of the world’s premier operator in its industry, and benefits from US dollar strength.

This company is Global Ports Investments Plc. True to its name, the company owns and operates 10 different marine terminals, in whole or in part. Despite the ambitious moniker, the terminals are actually clustered in and around St. Petersburg, with two in Finland, one in Estonia, and the final terminal on Russia’s eastern coast.


Global Ports Investments has existed in its current form since late 2013, when the company merged with rival NCC Group to form Eastern Europe’s largest container terminal operator. The resulting firm has 537.2 million shares outstanding, of which 20.5% are publicly floating. Global Ports Investments shares trade as Global Depositary Units on the London Stock Exchange, where one GDR equals three shares. The GDRs are denominated in US Dollars. The remaining 79.5% of Global Ports’ shares are held by various large port and marine terminal operators. Major international terminal operator APM Terminals (part of the A.P. Moller-Maersk empire) owns 30.75%, and Russian transportation group TIHL owns another 30.75%. The remaining 18% is held by the former owners of NCC Group.



St. Petersburg’s proximity to Moscow and Russia’s populated regions makes it the port of choice for Russian imports and exports to the West. In 2014, Global Ports had throughput of 2.7 million container equivalents. This represented 53% of Russia’s total 2014 container volume, which has grown rapidly over the last decade. Unfortunately, Russia’s current woes (slumping commodities prices, the plunging ruble, internationally condemned military actions, crippling social issues, and more!) have taken their toll and the nation’s import and export activity has plunged. Container market volumes are set to finish 2015 at 2008 levels, down 26% from 2014.

CaptureGlobal Ports has not avoided the carnage. The company’s first half 2015 report showed consolidated revenues down 25%. Below is a look at Global Ports’ recent results as reported. I have adjusted EBIT and EBITDA for one-time figures like writedowns, but otherwise I am simply parroting the company’s earnings releases. The presence of minority interests complicates the financial reporting somewhat, but I’ll get to that in a bit. Results are in USD, Global Ports’ operating and reporting currency.


At first glance, things look bleak. Revenues, EBITDA, EBIT, free cash flow, all down. But there’s something extraordinary here, the EBIT margin! In an environment of falling revenues and utilization, Global Ports managed to expand its operating margin by a full 1,240 basis points. That is an extraordinary achievement. The company credits the results to cost control. Indeed, Global Ports’ cash operating costs declined 37% from 2014. The cuts were achieved by heading headcount by 10%, idling 15% of equipment and looking for administrative cost savings. Impressive. Not many companies mount this kind of all-out assault on costs during difficult revenue environments. However, the company also had a very important tailwind: the crash of the ruble. Nearly half of Global Ports’ operating costs are staff-related, and the plunging Russian currency accomplished the company’s goals quite neatly, effectively reducing salaries for Russian employees by 40%.

So that’s how Global Ports has been able to withstand a dramatic decline in revenues: an equally dramatic decline in operating costs. I do expect that trade volumes will recover eventually, and continue their growth path in the long run. I am confident that on the whole, world trade will continue to increase in the decades to come. I also expect the trend toward containerization to increase. It’s simply efficient. Nonetheless, I would not be surprised to see Russia’s shaky economic standing leave traffic at Global Ports’ facilities depressed for quite a while. Assuming no recovery in trade volumes, just what level of profitability and free cash flow can Global Ports sustain?

Figuring that out requires a bit of digging. First, let’s take a look at exactly what Global Ports owns. Below is a listing of the company’s various terminals and their capacities, plus the company’s level of ownership in each.


Global Ports’ share in its Russian terminal holdings equates to 94.3% of the total throughput capacity of these terminals. That’s great, because these operations account for the lion’s share of the company’s profits. The oil terminal, Vopak EOS, is the second largest source of profit. The Finnish ports are only marginally profitable, though they are growing quickly. Global Ports very helpfully provides a high level of disclosure for each of their operating segments. The graphic below shows 2014’s segment results and Global Ports’ ratable share of profits. Though it’s impossible to tell exactly how profitable each particular Russian asset was, I’ll be using the 94.3% capacity ownership figure to estimate Global Ports’ share in profits. It’s the best I can do.


Looks like in 2014, Global Ports’ share of its segments’ EBIT was about $281 million. That’s really not so far away from the reported figures after all, but it is a difference. Now I will perform the same exercise for the first half of 2015’s figures. I’ll go a step farther and provide some pro forma net income and free cash flow figures for each segment as well. Global Ports’ financial statements have some huge one-time currency-related items and tax effects, which I’ll ignore. Instead, I’ll use the statutory tax rate for each geography.


Again, Global Ports is looking pretty good with $129 million in proportional EBIT in the first half of 2015, and $112 million in pro forma free cash flow. This is not a particularly seasonal business, so assuming no further deterioration in trade volumes, it seems likely that Global Ports will be able to post nearly $258 in annual proportional EBIT and $224 million in free cash flow in 2015.

So what do you have to pay for that kind of EBIT and free cash flow? I could compare that free cash flow with the company’s market cap and show a yield figure (hint: it is high) but I always prefer to evaluate businesses on an enterprise value basis. In order to do that, one more step remains: figuring out the company’s ratable net debt. Fortunately, the company once again provides that level of disclosure.


That wasn’t too tough. On a proportional basis, Global Ports is carrying a cool $1.11 billion of debt. That’s high, but not beyond reason for a capital intensive firm with a toll-taking business model and strong margins. In the depressed environment in which the company is operating, Global Ports has wisely decided to cease paying dividends and to devote excess cash to deleveraging. The company paid down $92 million in debt in the first half of 2015 alone. The upcoming debt maturity profile is prudently staggered, with annual principal payments through 2018 at below trailing operating cash flow.


The average interest rate on the company’s debt is 6.0%. And most importantly, virtually all of the debt is USD-denominated. I can hardly stress enough how important this is. No matter how the Russian ruble may fluctuate, Global Ports debt service requirements will remain constant and matched by USD revenues.

Now back, finally, to what we have to pay for all of this. At present, Global Ports’ market capitalization is $764 million. Add the $1.111 billion in proportional net debt and you get an enterprise value of $1.875 billion. Based on my 2015 projections, Global Ports shares trade at 7.3x current year EBIT, and a massive 29% free cash flow yield. On an unleveraged, fully-taxed basis, the free cash flow to the enterprise yield would be 14.1%.

Those are rock-bottom figures for a business with this competitive position and free cash flow profile. Seems to me that the current valuation reflects excessive pessimism and a myopic focus on near-term results. But before anyone goes out and buys shares in the morning, please read on. There are also real risks to Global Ports Investments shares.

First, there is no getting around the fact that this is a Russian business. Yes, its tax domicile is in Cyprus and it operates in USD, but substantially all the company’s major sources of income are quite literally on Russian soil. Investors in undemocratic societies with weak rule of law always run the risk that their company’s assets, or their own shares, will be “liberated” at a time and valuation not to their liking. After all, why should greedy, hegemonic Westerners profit from the labor of the Russian people? The Motherland, and all that business. It’s a real risk. I do think the involvement of a major European conglomerate (A.P. Moller-Maersk) reduces the risk of anything untoward going down, but at the end of the day, just under half of Global Ports’ shares are owned by Russian billionaires. These guys don’t exactly have a sterling reputation for treating minority interests with fairness.

Second, investing in Global Ports is placing a bet on stabilization and recovery taking place in the Russian economy. Yes, I did say that I believe that global trade has nowhere to go but up in the long run, but that doesn’t mean investors won’t feel quite a lot of pain in the meantime. Every investment one makes comes at the cost of not buying something else, and those waiting for a Russian economic recovery may find themselves waiting for a long time. Nobody really knows when or if commodities prices will bounce back, or if Putin will see fit to end his warmongering and economic sanctions will be rolled back. Things could easily get much worse before they get better.

Finally, I can see one more scenario in which Global Ports shareholders would lose out: one in which shipping volumes are stagnant or decline further, but the ruble climbs. This would reverse the cost-saving effects that Global Ports has enjoyed, and could put a serious crimp on operating margins. The ruble is actually down 13% since June 30, but it’s a volatile currency and it could easily soar. I don’t view this risk as all that likely since shipping volumes and a rising ruble are likely positively correlated, but it is real and difficult to hedge against.

Of course, none of these potential pitfalls could come to fruition, and investors buying at this price could realize a very nice return as the company deleverages and its earnings recover. I view this as the slightly more likely scenario, but I am not quite confident enough in that assessment to take the bait. Still, Global Ports will be a fun one to watch for now.

Alluvial Capital Management, LLC does not hold shares of Global Ports Investments, Plc for client accounts. Alluvial may buy or sell shares of Global Ports Investments, Plc at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at



Posted in Uncategorized | 9 Comments

Keweenaw Land Association – KEWL


Today’s post concerns one of the more unusual and companies I’ve come across in my research. Keweenaw Land Association has a long and interesting history, stretching back to before the industrial revolution. During America’s great age of canal-building in the second half of the 19th century, Congress made a land grant to a company engaged in building a canal across the Keweenaw Peninsula of Michigan’s Upper Peninsula. The canal would speed travel along the southern coast of Lake Superior. Financial difficulties ensued, and the canal was not completed until 1891, 23 years after it was started. The finished canal was sold to the US government, leaving the company with 400,000 acres of wilderness in its possession. The company went through a few iterations, but was organized as a Michigan partnership in 1908. The company reached its present form in 1999, when it reorganized as a Michigan corporation.

Over the course of the twentieth century, Keweenaw did exactly what one would expect it to do with 400,000 acres of densely forested, sparsely populated land: it sold timber. The lands were heavily logged to support the war efforts during both World Wars, but the company transitioned to a modern model of forest management in the 1960s and continues to manage its forests sustainably today. Modern forestry is focused on optimizing total returns over a forest’s entire life cycle rather than maximizing current income at the expense of future harvests. Over the years, Keweenaw’s lands have produced millions in profits for their owners and will continue to do so for centuries longer.

The company also engaged in leasing its mineral rights to miners and prospectors. The Keweenaw has long been a producer of copper and other minerals, though production of copper actually peaked in 1916. Today, the region produces only token amounts of copper. Still, Keweenaw Land Association still owns the mineral rights underlying all its original lands, even those that have been sold since the founding of the company.

Today Keweenaw Land Association owns just over 167,000 acres in Northern Wisconsin and Michigan, plus the mineral rights to 402,000 acres. Nearly all the company’s land holdings are productive timber assets. The most current map of the company’s properties is below. Keweenaw’s properties are non-contiguous, but concentrated in Gogebic County.


Before I get into the value of Keweenaw’s timber assets, allow me a moment to discuss timber as an asset class. I’m a fan. I think nearly every investor can benefit from exposure to timber. It’s an ideal inflation hedge in a way that other commodities can’t be, because it has a yield. Precious metals and oil are inert. They sit in the ground until they are extracted via expensive, capital intensive processes. Mines and wells are heavily regulated and production can take months or years to scale. Timber, on the other hand, multiplies itself over time and is far easier and cheaper to harvest. Even in non-inflationary times, timber provides an on-going yield with only moderate investment by the owner. The sun and the rain are free, after all. If the prices of logs and land increase, well that’s just a return kicker.

The value of Keweenaw’s timber lands are subject to the fluctuations of timber prices, which vary in anticipation of data like housing starts. Every three years or so, the company hires a consultant to perform a valuation of its timber lands. The results for the last few surveys are presented below.


As Keweenaw is fond of pointing out, the value of the company’s timberland has grown substantially over time, compounding at 5.6% on a per-acre basis from 1998 to 2012. The value of the company’s holdings has grown through good forestry, but also through the company’s policy of selling off less productive lots for recreational and development uses and reinvesting the proceeds in more valuable timber lands. The company is able to defer taxes on these transactions by using 1031 exchanges. Unfortunately for Keweenaw, timber prices have fallen since 2012 because the anticipated increase in new home starts has taken longer than expected to materialize. When the company performs its 2015 timber valuation, I expect to see valuations somewhere between those of 2009 and 2012.

As for the company’s mineral rights, no active mining is taking place on the company’s acreage. There is a fully permitted mining site and Keweenaw has a royalty agreement with Canada’s Highland Copper. However, the prospects of Keweenaw receiving any material royalties are dim. The low price of copper has Highland Copper in a holding pattern, and most of the minerals underlying the company’s land cannot be extracted economically. Should prices for copper and silver double or triple, maybe some mining activity will occur. The company estimates its lands contain nearly three billion pounds of copper and nearly sixteen million ounces of silver. But as is, Keweenaw’s mineral rights do not represent a meaningful source of value for shareholders.

So what does it cost to buy $130-something million worth of timber, with an “out-of-the-money option” in the form of extensive mineral rights? As I type, Keweenaw has an enterprise value of just over $105 million. So right there, the entire company trades at a discount of around 20% to the value of its timber holdings, ignoring the mineral rights entirely.

In a May 2015 presentation, management touts the company’s long-term returns, showing its 20 year compounded annual return at 9.87% compared to 7.12% for the S&P 500. But this is inaccurate. The S&P 500’s total return was actually in the mid 9% range for the period. The company conveniently ignores the index’s dividends. So while Keweenaw did outperform, it was only by a slight margin. The short-term picture is much worse, however. From 2005 to 2015, Keweenaw returned only 3.54% annually, compared to over 8% for the S&P 500. Year to date, shares are down 17%.

The main reason for Keweenaw’s lackluster recent performance is timber prices. The housing boom of the mid-2000s pushed up lumber prices and with them, the value of timber-producing land. Despite a substantial rally from 2009 to 2013, lumber prices remain nearly 30% below 2006 levels. That explains the low rate of appreciation in Keweenaw’s lands since 2006. Management has been successful in controlling costs and earning higher margins from its timber sales, earning a gross profit of $46 per cord-equivalent compared to just $24 in 2010.

While management’s cost control and forest management are certainly positives, I do wish they would be more aggressive in attempting to create value for shareholders. Management seems content to harvest only a tiny portion of the company’s lands each year, and canceled shareholder dividends in 2010. There doesn’t seem to be any serious consideration of soliciting offers for the company’s holdings or failing that, taking on a modest amount of leverage in order to increase returns. For a number of years a dissident shareholder tried to persuade the company to pursue all manner of potentially lucrative actions, like undergoing a REIT conversion or exploring wind production. But each time the shareholder was rebuffed and eventually gave up.

Just recently, Keweenaw added a new member to its board of directors, a Mr. James Mai. Mr. Mai is the single largest Keweenaw shareholder at 26%, and the head of Cornwall Capital, a family office founded to manage the Mai family fortune. It’s not at all surprising that a family office would invest extensively in timber, which promises attractive long-term returns and even better, tax deferral. I expect the company will continue to operate profitably under Mr. Mai’s watchful eye.

There are more opportunistic and aggressive timber companies out there, but probably none that offers cheaper timber than Keweenaw Land. For investors looking for a long-term diversifier like timber, Keweenaw may be worth a look. Short-term results may be volatile as timber prices rise and fall, but long-term results should be solid, especially if and when inflation comes around.

Alluvial Capital Management, LLC does not hold shares of Keweenaw Land Association, Ltd. for client accounts. Alluvial may buy or sell shares of Keweenaw Land Association, Ltd. at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Posted in Uncategorized | 11 Comments

Brief Updates: Client Letter, Conference, and More

Just a brief news post today. First, have a look at Alluvial Capital Management’s investing thoughts by reading Alluvial’s third quarter letter to clients.

Alluvial Capital Management Third Quarter 2015 Letter to Clients

In the quarter, all Alluvial strategies outpaced their benchmarks by healthy margins. Alluvial offers separately-managed accounts with a focus on micro-caps, thinly-traded securities and special situations. I welcome feedback and inquiries from potential clients or those who simply wish to shoot the breeze about Alluvial’s holdings and strategy.

Second, there is still time to register for The MicroCap Conference, taking place in Philadelphia on November 5. Plenty of interesting companies and speakers and practitioners are on the agenda. Industry groups represented include energy, pharmaceuticals, manufacturing, social media, and many more.

Finally, I was recently the subject of a detailed article written by Nadav Manham at The Private Investment Brief. The PIB profiles little-known but up-and-coming investment managers, and provides other excellent investment commentary. It’s an invaluable resource for capital allocators. I cannot share the profile here, but I highly recommend contacting Mr. Manham if you are interested in learning more about his publication.

I’ll be back later this week with another post on my favorite kind of company: old, obscure, and successful. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Posted in Uncategorized | 5 Comments

A Trio of French Bargains

Six years into a bull market in nearly all productive assets, “traditional” value stocks are a rare breed. By traditional, I mean obvious opportunities like profitable businesses with solid balance sheets trading at very low multiples of earnings and cash flows. Most of the value opportunities still out there require some real digging to discover. However, there is one market where I still routinely find perfectly good companies trading at 4-7 times earnings: France. I am not exactly sure why so many small French companies trade at these tiny multiples. It does seem that continental investors are loathe to invest beyond large, well-known companies, and the liquidity of many French micro-caps is extremely limited. The resulting neglect may be responsible for the plethora of value opportunities. Today I’d like to present brief profiles of three of these companies.

Docks Petroles D’Ambes: DPAM

“Docks” has operated a storage terminal at the port of Bordeaux on the west coast of France since 1934. The location and function of the terminal have long been considered strategic; the RAF bombed the facility in 1944 to hamper the Nazi supply chain.

Actual mission photo. Bombers from the RAF’s No. 514 Squadron attack the oil storage depot at Bec d’Ambes on August 4, 1944.

The business model is as simple as it sounds. The company collects fees for storing hydrocarbons, plus grain and wood products. Docks links refineries with consumers in the region. Docks also owns a petroleum pipeline. Results do vary somewhat as storage volumes change, but the company is consistently profitable and carries only modest debt. Docks generates a solid return on capital, but unfortunately its opportunities for reinvestment are quite limited. More than half of Docks’ shares outstanding are owned by a larger petroleum storage company, Entrepots Petroliers Regionaux. Another 30% are owned by various refiners and pipeline companies, leaving only 12% of the shares in the public float.

Docks has a market capitalization of Eur 23 million. At a share price of Eur 235, Docks’ P/E is 7.0 and its dividend yield is 6.4%. The high dividend yield is actually a drawback for many foreign investors, because France withholds dividend payments at a 30% rate. It is unlikely that Docks Petroles d’Ambes will experience any significant earnings growth, but it could be an attractive holding for those looking for a low-risk income stream.

Installux SA: STAL

Installux manufactures metal building components. Working mostly in aluminum, the company produces pieces for use in windows, doors, awnings and many other structural elements. Installux’s results depend on the level of construction activity, and on the prices of its aluminum and steel inputs. 50% of the company’s shares are owned by CEO Christian Canty, with another 15% owned by the respected French value investing firm Amiral Gestion.

Installux is not a fast growing company, but it has managed to increase revenues and profits at a modest pace. Nearly all of the company’s revenues are earned in France. Installux’s balance sheet is strongly over-capitalized, to the point where 27% of assets are cash and the current ratio is 3.5.

Installux’s market capitalization is Eur 74 million. The P/E ratio is 9.0. But, the company carries over Eur 20 million in excess cash. Net of that cash, the company’s P/E is just 6.0. Installux shares last changed hands at Eur 244, and the company has a dividend yield of 3.3%. While Installux’s core business is profitable, stable, and efficient, future returns will be strongly influenced by the company’s use of its huge cash reserves.

Graines Voltz SA: GRVO

Graines Voltz is a grower and distributor of seeds, mainly bulk ornamental flower seeds, but also some fruit and vegetable seeds. The company sells its seeds in continental Europe, plus the Middle East and Asia. The company offers hundreds of different varieties, many suitable for mass planting in public parks and landscaping.

As an agricultural business, Graines Voltz experiences large swings in its margins. Unpredictable factors like weather, pests and disease will always influence results. But the company has managed to increase its revenues at a respectable pace, from Eur 46.4 million in 2009 to Eur 73.1 million in 2014, a growth rate of 9.5%. Earnings per share reached a record Eur 4.22 for the twelve months ended March 31, 2015, up dramatically from Eur 0.95 per share in 2009.

The company’s striking success makes its valuation that much more of a shock. At a share price of Eur 16.40 and a market capitalization of Eur 22.5 million, Grain Voltz’s P/E is just 3.9. Its price to book value ratio is 0.8. The company does carry debt, but the majority is low-cost seasonal borrowing used to finance inventory. 2014 EBIT was over six times interest expense in 2014, and greater for the trailing twelve months. Return on equity has exceeded 15% each year since 2010.

It’s possible that Graines Voltz’s results are unsustainable, the result of temporarily decreased competition or unusually benign growing conditions. But I suspect the actual causes of Graines Voltz’s extraordinarily low valuation are its tiny float and practically non-existent liquidity. As of 2013, 10% of the company’s shares are owned by American grower Ball Horticultural, another 10% for European grower Florensis, and 64% by Voltz family members and company employees. In all, only 16% of Grain Voltz shares with a market value of Eur 3.6 million are freely-floating. Average trading volume rarely exceeds a few hundred shares per day, making accumulating a worthwhile position a difficult feat.

While I view each of these companies as distinctly undervalued, please be aware that my French is rudimentary and I made heavy use of translation services in evaluating their financial statements and press releases. It is entirely possible that I have missed some important bit of information that is material to the value of these companies. As always, please do your own in-depth research if you are considering purchasing any of these stocks.

Alluvial Capital Management, LLC does not hold shares of Docks Petroles d’Ambes, Installux SA, or Graines Voltz for client accounts or those of principals. Alluvial may buy or sell shares of Docks Petroles d’Ambes, Installux SA, or Graines Voltz  at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at


Posted in Uncategorized | 7 Comments

A Boston Real Estate Empire at a Discount – New England Realty Associates, LP: NEN

New England Realty Associates, LP is an NYSE-listed real estate partnership that trades at a 30%+ discount to a conservative estimate of asset value. “NERA” is lead by Boston real estate magnate Harold Brown. The partnership has produced exceptional returns for its partners since inception. Though the market has begun to wake up to NERA’s substantial value in recent years, the partnership remains undervalued due to its small size, limited liquidity and confusing structure.

New England Realty Associates, LP (ticker NEN) was founded in 1977 and currently owns 24 properties in and around Boston, Massachusetts. Of these properties, 17 are residential buildings, 4 are mixed use, 3 are commercial buildings and 1 property is comprised of individual units within a condo complex. as of June 30, the partnership owned 2,412 apartment units, 19 condo units and 108,043 square feet of leasable commercial space. Additionally, the company owns partial interests in another 9 properties, a mix of apartments, commercial space and a parking lot.

NERA’s properties are located in central Boston and in surrounding affluent suburbs. The partnership got its start in Allston, and four of the properties are located there.


I’ve done some poking around on various apartment rental sites, and NERA seems to target young professionals and students to fill its rentals, many of which are located in busy settings near universities. Rents seem on par with the local market, and NERA (via Hamilton Company, which manages its properties) gets good reviews as a landlord. (This may be a recent development. There is no shortage of older articles criticizing the company’s property management practices.) NERA’s properties boast occupancy rates near 100%.

Like many realty partnerships, NERA’s ownership structure is made up of multiple classes of units. NERA has two classes of limited partnership interests, Class A and Class B, plus General Partnership Units. Class A units have an 80% ownership interest, Class B unitholders own 19%, and the General Partner owns 1%. None of these units are publicly-traded. What is publicly-traded are depositary receipts that are the equivalent of 1/30th of one Class A Unit. Class A units themselves are not tradable, but may be converted into depositary receipts at a 30-to-1 ratio at any time, then traded. Because of the odd depositary receipt structure, many financial data providers do not accurately report NERA’s market capitalization or units outstanding. This lack of good data contributes to NERA’s mis-valuation.

NERA has a long history of profitable operations. The company does not always report a GAAP profit, but does produce consistent and growing funds from operations. As I’ve mentioned many times before, GAAP net income is a terrible metric for evaluating real estate companies. Non-economic expenses like depreciation and accounting for partial interests obscure actual profitability. What matters is distributable cash flows, and NERA excels at creating these. Here’s a look at the partnership’s historical results. Results are in millions and are taken from the partnership’s annual reports, without any adjustment for restatements or amendments.


NERA’s annual funds from operations have more than doubled since 2008, while gross rents rose 39%. That’s a nice result. But the truly impressive achievement is NERA’s tax efficiency. From 2008 to 2014, the partnership recorded a sum of just $5.0 million in continuing net income for its partners. Yet it produced $77.4 million in funds from operations, a very close proxy for distributable cash flow. What’s clear is that NERA’s management understands the “secret sauce” of real estate investing: leverage and depreciation. Reasonable leverage allows a partnership to control a large asset base while the associated interest expense creates a tax shield. So long as the cap rate on the assets acquired is below the cost of the associated debt, positive cash flow results. The second part of the equation is to continually add new properties to the roster, bringing in fresh depreciable assets to further shelter cash flows from taxation. Because high quality real estate tends to appreciate over time, this depreciation is merely a “phantom” expense and a valuable tax shield.

On a trailing basis, NERA produced nearly $16 million in funds from operations. This figure will almost certainly increase as rents rise and as the company continues to pay down debt. Also, the company just closed on the purchase of another rental complex, the 94 unit Captain Parker Arms in Lexington, Massachusetts. The purchase price was $31.5 million, 79% of which the company funded using its Keybank line of credit. The partnership has also begun converting the parking lot it owns into a 49,000 square foot, 48 unit apartment building. Both of these projects will contribute substantial cash in years to come.

There’s one other area where NERA excels: buying back its units. Since inception, NERA has repurchased a full 30% of its issued units. In the last twelve months, the company reduced its fully-diluted units outstanding by 1.9%, and is set to continue buying back units. In March, the board of directors approved an expansion of the unit repurchase program sufficient to repurchase an additional 13.2% of outstanding units within five years.

But what is NERA worth? The answer to the question depends on determining the proper multiple of net operating income for Boston-area apartment properties. While NERA also holds some commercial properties and condos, the vast majority of its assets are invested in apartment assets. Unsurprisingly, the average cap rate for class A Boston apartment assets is extremely low. The Boston real estate market has long been one of the tightest in the country, and cap rates reflect this. Recent transactions have been done at cap rates as low as 4%! More typical transactions have crossed in the 5% range. For anyone interested, there are a number of market reports available via a little Googling. Here’s one.

For conservatism’s sake, I’ll use a cap rate of 6%/16.7x net operating income to estimate the value of NERA’s properties. The chart below lays out the value of NERA’s fully owned properties and its stake in equity-accounted projects, net of debt.


It’s very easy to get to value of over $255 million for NERA’s properties and investments, net of debt. Using market valuations for the Boston metro yields an even higher value. The chart below shows the values of New England Realty Associates, LP depositary receipts at various cap rates.


At a 6.0% cap rate, NERA depositary receipts are worth just over $70, 48% higher than the current trading price. This value does not include the increased cash flow from the newly-acquired apartment complex, or the value to be created by developing the parking lot into a residential property. If we assign even modest value to those new assets and nudge the cap rate down just slightly, the fair value of NERA’s depositary units approaches twice the current trading price. At NERA’s current trading price, I think it’s fair to say the market is valuing the company’s holdings at a cap rate of around 7.5%, well above market cap rates.

NERA’s valuation is compelling, but potential investors must be aware of a few potential risks. First, NERA’s two largest unitholders, Harold and Ronald Brown, are quite elderly. These men together own over 40% of NERA’s units. In the not distant future, NERA may face succession challenges. NERA also holds many highly appreciated properties, and unitholders may find themselves with an large tax bill should the partnership ever be wound down for any reason. And finally, because NERA is a pass-through entity, unitholders must be sure to handle the associated tax complexity carefully, including paying state taxes to Massachusetts.

For those unconcerned by these risks, NERA could be a great way to create a portfolio of quality Boston properties at a cap rate unheard of on the ground.

Alluvial Capital Management, LLC does not hold shares of New England Realty Associates, LP for client accounts. Alluvial may buy or sell shares of New England Realty Associates, LP at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Posted in Uncategorized | 12 Comments

The Fight for Warrnambool – WCB:ASX

Before I get into this post, I’m happy to say I’ll be a panelist at The Microcap Conference, a new conference taking place in Philadelphia on November 5. It will be a great opportunity to hear from some promising small companies, meet with company management, and network with other analysts and investors. Anyone interested can find more information at

Fair warning: my subject today is so thinly-traded that building a meaningful position is next to impossible. So, I present the situation mainly as a profile in corporate gamesmanship, of multiple competitors sparring to achieve complete control over a valuable asset. The asset in question is a real mouthful: Warrnambool Cheese and Butter Factory Company Holdings Limited.


“WCB” is Australia’s oldest dairy company, founded in 1888. From the very beginning, WCB was export-oriented, first sending a shipment of butter to London in 1893. The company grew by leaps and bounds in the 20th century, overcoming a disastrous fire in 1929 and forming many joint ventures and licensing agreements with major world cheese and dairy brands. Over time, the company’s footprint increased to encompass many different categories of dairy products, as well as many supply chain inputs. The company listed on the ASX in 2004.

Dairy prices can be volatile and WCB’s results are not immune, but on average the company has been profitable. Here are annual results from the company’s listing in 2004 to fiscal 2014.


Like I said. Hardly consistent, but generally profitable and moving in the right direction. Over this stretch, WCB caught the eye of other Australian dairy businesses looking to expand. WCB’s international distribution and valuable partnerships were enticing for other operators looking to achieve higher margins through increased scale and improve their market share.

The first company to propose an outright acquisition of Warrnambool was Murray Goulburn, an Australian dairy co-op. Murray Goulburn approached WCB in late 2009 but was rebuffed. The WCB board viewed the proposal as opportunistic, and to a degree it was. WCB suffered heavily amidst the global financial crisis, and 2009’s results were very poor. Though Murray Goulburn would raise its offer multiple times, they were repeatedly turned down and ultimately withdrew their offer in June, 2010. Still, they began a creeping takeover of WCB, announcing they had purchased nearly 5% of WCB’s shares in early 2010. Through continued purchases, Murray Goulburn increased its stake in WCB to just under 10% by late 2010. WCB, for its part, brought in another competitor as a substantial shareholder. Through a rights offering, Bega Cheese purchased a 15% interest in WCB.

The games would continue, with various competitors quietly building their stakes in WCB. By mid 2013, Murray Goulburn had built its ownership to 16% of WCB, and Bega held 17%. Bega was the next to attempt to acquire WCB, offering the equivalent of $5.78 in cash and Bega Cheese stock. Again, WCB’s board recommended against the offer. Finally, after nearly a year of warring press releases and attempts to rally shareholders for or against the deal, Warrnambool found itself a savior in a white knight: Saputo, Inc. The large Canadian dairy company stepped in with a superior offer of $7.00 per share, payable in cash.

However, Bega Cheese and the Murray Goulburn Co-Op were far from done. Murray Goulburn returned with a bid of $7.50 per share, while Bega Cheese maintained that its offer was superior in that it allowed WCB shareholders continued participation in an Australian dairy company. Saputo fired back with an improved offer of $8.00. Meanwhile, a previously unknown player crept in and began accumulating WCB shares in earnest. On October 29, 2013, Lion Dairy went on a massive buying spree and bought up 9.99% of WCB’s shares outstanding. Lion Dairy is a subsidiary of Japanese beverage giant Kirin Holdings. Lion Dairy had long had a partnership relationship with WCB, and now had a substantial financial investment as well.

On and on it went, with the three bidders increasing their bids in turn. Murray Goulburn’s offer would eventually reach $9.50 per share. Meanwhile, Saputo took matters into its own hands and began buying WCB shares aggressively. In the end, it was Saputo that won out. Bega Cheese capitulated and sold its holdings to Saputo and Murray Goulburn did the same. Through its various open market purchases and the takeover offer, Saputo managed to increase its ownership of WCB to 87.92%.

That might be the end of the story, were it not for Lion Dairy. One of Saputo’s explicit goals in offering to purchase WCB was to obtain a shareholding of over 90%. Saputo even offered an additional 20 cents per share if its offer succeeded in achieving 90% ownership. Why is the 90% threshold a big deal? Well, under Australian corporate law, a purchaser can force remaining shareholders to sell if the purchaser can achieve 90% ownership. Lion Dairy’s stake is now just over 10%, and it represents a blocking interest than prevents Saputo from taking full ownership of WCB. It also prevents Saputo from delisting WCB from the Australian stock exchange, forcing them to continue paying additional listing and auditors fees.

In essence, what Lion Dairy now possesses is a valuable intangible asset via its ability to prevent Saputo from fully achieving its goals. If Saputo wants to achieve complete ownership of Warrnambool, it will likely have to pay Lion Dairy (and all remaining minority shareholders) a premium for the remaining shares. The companies are not exactly adversarial at this point (witness the recent transaction where Lion Dairy sold an entire division to WCB) but Lion Dairy and Kirin Holdings are certainly aware of the strength of their position. Saputo cannot force a merger, nor can it delist WCB, nor can it directly dividend cash back to Saputo without sending 10% of it to Lion Dairy.

Perhaps Saputo will play a waiting game. If a recession rolls around, Lion may become more willing to sell its blocking interest to Saputo at a lower price. On the other hand, Lion Dairy’s asking price may only increase if WCB does well under Saputo’s ownership. Warrnambool Cheese and Butter recently traded at just under Saputo’s acquisition price. Anybody interested in aligning with Lion Dairy and taking part in the next round of corporate soap operatics might enjoy owning a few shares just for the entertainment value, with upside if WCB’s operations perform well. But purchase carefully. Warrnambool’s stock may be one of the world’s most closely-held listed companies, with a free float of less than $6 million on a market capitalization of $522 million.

Alluvial Capital Management, LLC does not hold shares of Warrnambool Cheese and Butter Factory Company Holdings Limited for client accounts. Alluvial may buy or sell shares of Warrnambool Cheese and Butter Factory Company Holdings Limited at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at


Posted in Uncategorized | Leave a comment

What’s New With Retail Holdings NV? – RHDGF

Long-time readers may remember previous posts on Retail Holdings NV. “ReHo” is one of my longest-held and sadly, most stubbornly lackluster performers. Still, I remain convinced that Retail Holdings’ collection of profitable and growing Asian businesses and large discount to NAV will eventually result in substantial appreciation. ReHo recently published its first half 2015 results. Let’s take a look at how they did, and how the company’s earnings and NAV have developed.

Reho’s semi-annual report (available here) reveals a few major changes in the company’s assets and operations. First, Singer Thailand is no longer a Singer Asia subsidiary. In June, Singer Asia sold its 40% stake in Singer Thailand for $44.8 million. In CEO Stephen Goodman’s words,

“The sale reflects the unique circumstances of Singer Thailand: the Company only had a 40% stake compared to the very much larger, majority stakes in the Company’s other operations, and Singer Thailand employs a very different, direct selling business model, as compared to the retail and wholesale business models employed elsewhere.”

Mr. Goodman went on to say there are no plans for any immediate disposition of the company’s remaining subsidiaries, and the use of the proceeds of the Singer Thailand sale is yet to be determined.

The second major revelation is a large writedown in the value of the SVP notes that ReHo holds. These notes have been distressed for a long while and have undergone multiple restructurings. In June, SVP failed to make a full cash interest payment on the notes, and Retail Holdings moved to classify the notes as impaired, writing down their value from $25.9 million to $13 million. This large impairment necessarily took a toll on ReHo’s reported EPS for the half year. I must admit that the degree of the writedown surprised me. I had long valued the notes at less than par, but declaring the notes impaired by a full 50% indicates a great deal more financial difficulty at SVP than I had expected.

Operational results were good. ReHo’s consolidated revenues rose 14.3% year over year in US dollar terms. Retail Holdings’ two largest subsidiaries (via Singer Asia) are Singer Sri Lanka and Singer Bangladesh, and their fortunes moved in opposite directions. Revenues at the Sri Lanka company soared 26% with pre-tax income up 66%. The Bangladesh division struggled with the country’s continued political and economic instability, and revenues declined 7.6%, dashing earnings. Nonetheless, Singer Bangladesh remained profitable. Singer India also turned in a profit, while Singer Pakistan and the newly-established Singer Cambodia lost money.

ReHo’s reported first half EPS was $1.13 compared to $0.73 a year ago, but the figures are hardly comparable due to the SVP notes impairment and the gain on the Singer Thailand sale.

There are two ways to evaluate Retail Holdings NV’s worth: via its assets and via its earnings power. These are, of course, just the two sides of one coin. Still, a separate look at each is useful. Evaluating Retail Holdings from an asset perspective is easy. Retail Holdings owns 54.1% of Singer Asia, which in turn owns five business units in Asia, four of which are traded on local stock exchanges. Additionally, both Retail Holdings and Singer Asia hold unencumbered cash at the company level and Retail Holdings holds high yield bonds, the SVP notes. Neither Retail Holdings nor Singer Asia has any company-level debt.

Here’s a look at ReHo’s current NAV breakdown.




At a current mid-point of $18.63 or so, ReHo shares trade at a 38% discount to NAV. No surprise. This discount has persisted for years in various degrees. Now let’s take a look at the underlying earnings of Retail Holdings’ subsidiaries. The chart below presents trailing twelve months results for the various Singer entities, divided between the profitable and unprofitable segments.


By buying one share of Retail Holdings, you’re purchasing $1.22 in attributable earnings from Singer Asia’s profitable subsidiaries. The losses of the Pakistani and Cambodian subsidiaries can be ignored because they are separate legal entities that Singer Asia is not obligated to support. After backing out the value of the enterprise’s corporate cash, the SVP notes, and the stock market value of the loss-making Pakistani subsidiary, you’re paying a very reasonable multiple for these fast-growing and profitable businesses, Singer Sri Lanka in particular.

As if there weren’t enough tedious explanations in this post already, here’s the breakdown of the components of Retail Holdings’ share price.


Just to emphasize, Retail Holdings’ share price implies a 9.3x earnings multiple on profitable subsidiaries growing at well over 10% annually with no slowdown in sight. The Sri Lankan subsidiary in particular is attractive. The Sri Lankan economy is one of the world’s fastest-growing following the end of the decades long civil war in 2009.

With all that said, one question remains: why? Specifically, why does Retail Holdings NV trade at 62% of NAV and under 10x the earnings of its fast-growing subsidiaries? I don’t think the answer is difficult to find. ReHo’s corporate configuration could hardly be more awkward. What sensible company would be headquartered in a Caribbean tax shelter, operate solely in South-East Asia, and have its stock traded only in the US? On top of that, Retail Holdings’ stock is highly illiquid and the company is not an SEC filer. The cherry on top is repeated broken promises by management to IPO Singer Asia, only to see the IPO process abandoned each time.

I do have some small amount of sympathy for management. It seems that each time the company begins preparing the Asian operations for an IPO, some market or political crisis erupts that torpedoes the IPO market. But the fact remains that Retail Holdings NV is not likely to achieve its full value until an IPO is achieved.

If all Retail Holdings had going for it was the hope of a future convergence to NAV via an IPO of its Asian operations, I would not be interested. There are hundreds of holding companies that trade at a discount to NAV, and many times these discounts persist for decades. But in Retail Holdings’ case, the NAV is growing rapidly and will continue to grow as the Asian subsidiaries grow revenues at 10-15% annually. It doesn’t take long for serious value creation to result at those rates of growth. 9.3x earnings is a silly valuation for companies on this trajectory.

For that reason, I am happy to hold Retail Holdings for as long as its subsidiaries’ values continue to build. The Singer brand remains exceedingly strong, especially in the company’s primary Sri Lanka market. In the mean time, ReHo will continue to pay out most of its free cash flow in annual distributions, with the possibility of special distributions from asset sales, like Singer Thailand.

Alluvial Capital Management, LLC holds shares of Retail Holdings NV for client accounts. Alluvial may buy or sell shares of Retail Holdings NV at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Posted in Uncategorized | 11 Comments

Undervalued Quality – Nathan’s Famous Inc.

Where did the summer go? After quite a long break from the blog, I’m back to talk about the newest stock I’ve been purchasing for Alluvial’s clients: Nathan’s Famous Inc.


Nathan’s will be a familiar name for any New York natives (which I am not, but I know many blog readers are.) Founded in 1916, the company has never deviated from its business of selling hot dogs made with its proprietary blend of spices. These days, the company focuses on franchising and branding revenues. There are around 300 franchised Nathan’s Famous locations around the world, and five company-owned locations. Nathan’s branded hot dogs and other foods can be purchased at many supermarkets and wholesale clubs, and the company sponsors the annual hot dog eating contest at their flagship restaurant on Coney Island.

I’ll go into detail below, but the crux of my thesis rests on a simple assertion: Nathan’s is a premium business, therefore it should command a premium valuation. Nathan’s trades at a very pedestrian valuation. Therefore, Nathan’s is undervalued and is an attractive investment. Just what qualities a “good business” possesses has been explored at length by better investors than I, and I won’t waste words on that topic. Instead, I’ll illustrate the ways in which Nathan’s business characteristics demonstrate its quality.


Nathan’s has a strong history of growth, and there is more to come. Over the last ten fiscal years, Nathan’s revenues grew at 11.5% annually. Nathan’s trailing revenues surpassed $100 million for the first time in the most recent quarter. There is no reason to expect this growth to halt any time soon. At $100 million in revenue, Nathan’s is still a tiny, tiny player and will not run into issues of market saturation for many years. Furthermore, in 2014 the company signed a new product licensing agreement with the world’s largest pork processor, Smithfield. The agreement replaces a previous licensing agreement and provides hugely improved economics for Nathan’s. The new agreement more than doubles the gross sales royalty Nathan’s receives for Nathan’s branded products and features high and increasing minimum annual royalty payments.

Then again, any company can grow. All it requires is a willingness to commit capital, whether through internal investments or external acquisitions. Growth in itself is not inherently good if it requires excessive additional capital. What makes Nathan’s special is its ability to create sustained growth with minimal capital commitment.

Pricing Power/Brand Value

From fiscal 2010 through fiscal 2015, Nathan’s experienced torrid growth and an associated increase in operating income. Revenues rose 95%, from $50.9 million to $99.1 million. Operating income rose more, jumping 135% to $20.0 million from $8.5 million. And what did Nathan’s have to invest to grow operating income by $11.5 million in five years? Very little. Assuming operating cash of 2% of revenues, invested capital increased by just $2.3 million over the stretch.

When a business is able to produce significant profit growth without a corresponding increase in its capital base, it indicates pricing power. Now, investors must distinguish between illusory pricing power that is the result of cyclicality, such as the increased earnings that commodities producers can show when demand growth outstrips supply growth, and authentic pricing power that is the result of brand strength. Seeing as the demand for summertime comfort food remains relatively stable from year to year, it is highly unlikely that Nathan’s results are attributable to some hot dog super-cycle. Rather, Nathan’s strong brand and popular products allow it to command price increases year after year and to achieve better terms on licensing agreements as they come up for renewal.

Operating Leverage and Margin Expansion

Quality businesses find ways to do more with a dollar as they grow, and Nathan’s is no exception. The growing revenue base allows the company to spread its fixed costs over a large base, and the ongoing move into licensing revenues over restaurants sales has resulted in high and higher contributions to the bottom line. Compared to other revenue sources, royalty streams have nearly no associated costs. As a result, Nathan’s operating margins have surpassed 20% and are set to continue their increase. Compared to just five years ago, nearly an additional nickel of every dollar of sales falls to operating income.

Free Cash Flow 

Quality businesses produce copious and consistent free cash flow. Some may reinvest the majority of it into the business in order to further drive growth (above and beyond that which is naturally created by pricing power) but many return most or all cash flow to shareholders. Nathan’s is one of these. In the ten years ended in fiscal 2015, Nathan’s produced total free cash flow of $55 million. Of that $55 million, Nathan’s spent $49.6 million to repurchase shares. How many companies can devote 90% of free cash flow to share buybacks and still triple revenues over the same period? Better yet, the majority of the share repurchases were done in 2008 and 2009, when Nathan’s shares traded at depressed levels. With little need to innovate and minimal capital needs for expansion, Nathan’s appears set to continue returning nearly all cash flow to shareholders in a tax-efficient manner.


I think I’ve made a case for Nathan’s as a “premium” business. There’s more I could talk about, like the company’s astronomical returns on capital and its highly incentivized insiders, but let’s move on to valuation. What is the proper price for an “average” business? It depends on a number of things like interest rates, capital structure, industry growth rates, and margins. But in general, I think the average publicly-traded business is worth at least 10x operating income, assuming a normal economic growth outlook. I usually think I’m getting a good deal if I can pay 8x or less. Premium businesses, on the other hand, can and should command a premium valuation. I don’t hesitate to pay 12, 14, or even 15 times operating income for a business that can truly produce excellent growth with modest investment, while increasing its margins at the same time. I find that the market systematically undervalues these rare companies.

The market currently values Nathan’s at just a hair over 10x adjusted trailing operating income. Before getting further into that, let’s take a look at how the market values Nathan’s competitors. I’ve ranked the chart by historical revenue growth. The calculations are my own.


I don’t mean to say that all these business are directly comparable to Nathan’s. In fact, most are traditional restaurant operators, not licensors. Rather, I provide this chart simply to point out that despite superior growth, margins, and asset utilization, Nathan’s valuation is the lowest I can find among American restaurant companies. Of the companies included in the chart, DineEquity is the most similar to Nathan’s. Despite actually shrinking by 14.3% annually and becoming more asset-intensive along the way, DineEquity trades at a 39% valuation premium to Nathan’s.

So why does Nathan’s trade at this large discount to its peers, most of which are distinctly less attractive from a business perspective? I believe the biggest reason is the large leveraged dividend recap that Nathan’s just did. In March, Nathan’s took on $135 million in senior secured debt at 10%, due in 2020. Nathan’s used the proceeds of the debt offering to pay a $25 per share dividend. Since the dividend was paid out, Nathan’s shares have fallen 36%. Post-transaction, Nathan’s finds itself with very high headline leverage, and also set to see its net income drop substantially year-over-year, neither of which most investors like to see. The $135 million in debt will reduce annual net income by almost $1.80, and now the company appears to have EBIT/cash interest expense coverage of just 1.5x.

To a casual observer, Nathan’s may now appear leveraged to the hilt, with deeply impaired earnings power. However, things are not  as they seem. Despite its large debt load, Nathan’s has $60 million in cash and securities on its balance sheet. The company also has well over $200 million in guaranteed cash flows it will receive between now and 2032, and will probably receive a great deal more. The licensing agreement with Smithfield specifies minimum annual royalties of $10 million in the first year of the contract, growing to $17 million by the last year. Simply put, Nathan’s risk of encountering financial difficulties due to its leverage is practically zero.

I also expect Nathan’s earnings power to be restored in short order. Powered by the new licensing agreement, I expect the company’s growth to continue with an associated gradual increase in operating margins. Earnings rise quickly as leveraged firms grow. Nathan’s interest expense, while high, is fixed, and incremental earnings will flow to equity owners.

So what do I think Nathan’s is worth? It’s hard to say, exactly, because much depends on how successful the company is in increasing its royalty revenues, and how much of that $60 million sitting on the balance sheet is used to repurchase stock. But I do expect Nathan’s to continue to grow its operating income at a double digit rate, and that will quickly result in an increased business value. Sooner or later the market will realize the dividend recap hasn’t permanently crushed Nathan’s earnings power. I expect substantial appreciation from Nathan’s Famous shares in the coming years.

Alluvial Capital Management, LLC holds shares of Nathan’s Famous, Inc. for client accounts. Alluvial may buy or sell shares of Nathan’s Famous, Inc. at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Posted in Uncategorized | 15 Comments

Why Be Unlisted?

An OTC stock is one that is unlisted and doesn’t trade on an exchange. For some, being unlisted indicates a company that is extraordinarily risky with high potential for fraud. In other words, uninvestable. But for others (like me) unlisted stocks are merely a different category of stocks with their own advantages and disadvantages. Still, those of us who consider unlisted stocks part of our investing universe should ask ourselves just why a publically-owned company would choose to remain unlisted. After all, the norm for companies with a significant number of shareholders is to list on a national exchange. Listing on the NYSE or NASDAQ is costly, but the cost is surely more than covered by the benefits of increased liquidity and the higher valuation afforded listed companies.

Allow me to present a brief list of common reasons why companies remain unlisted and trade OTC, from the most benign to the most sinister. I have seen each of these reasons time and time again across thousands of unlisted stocks, both in the US and abroad.

No Need for Capital

This is perhaps the best reason for a company to remain unlisted. Recall that listing on a national exchange typically boosts a company’s valuation to a higher multiple of revenues or cash flows. This indicates a decreased cost of capital, which is extremely beneficial for companies that rely on a flow of fresh capital from investors, especially equity capital. At higher valuations, equity raises result in a smaller percentage of the company being sold in secondary offerings, which benefits existing shareholders.

However, for investors in a company that produces excess capital, a higher valuation can reduce long-term returns. A responsible company will return excess capital to shareholders either through cash dividends or through share repurchases. In either case, a lower valuation is beneficial to long-term holders as they reinvest dividends or as their ownership increases proportionally via buybacks.

A good example of this process in action is Computer Services, Inc. Investors in Computer Services have enjoyed a 12.7% compounded annual return over the last decade, seriously outpacing stock indexes. Computer Services generates substantial excess capital and routinely repurchases stock and increases its dividend. Since 2005, the company has repurchased 16.2% of its shares outstanding. This large decrease would have been muted if the company’s shares had traded at a higher average valuation during the period. Reinvested dividends and share repurchase programs would have netted far fewer shares.

Sadly, these types of companies are all too rare. I can think of only a handful of unlisted companies that regularly generate excess capital and return it to shareholders. Most companies that enjoy these characteristics are either privately owned or have long since by bought by larger competitors.

Small Size

Some companies are simply too small for an exchange listing to be viable. I have seen various figures thrown around for the cost of maintaining an exchange listing, but most estimates indicate that an NYSE listing costs close to $1 million annually when the reporting and compliance costs are included. A NASDAQ listing is cheaper, but both are prohibitive for companies earning only a few million in operating income. Some of my best investments have been in companies earning only $2-10 million per year, and the cost of an exchange listing would have been a material drag on earnings.

Companies too small to support exchange listings are a fruitful market segment for value investors. Because they are both tiny and unlisted, many of these companies receive little press and go under-researched, leading to frequent mis-pricings. Some of these companies possess a valuable option that can result in big returns: uplisting. Many of these tiny companies grow rapidly, and will eventually seek to list. Investors who bought in prior to the listing often do very, very well. I’m almost always thrilled when one of my small holdings announces an uplisting, because I know the increased exposure will result in a higher valuation.

Can’t Meet Listing Standards

The NYSE and NASDAQ require a level of disclosure that some businesses either can’t or won’t meet. Sometimes businesses in the midst of restructuring or restating are unable to file timely financial reports, eventually disqualifying them from listing. And sometimes companies simply do not want to provide the detailed reporting that standard filings require.

This lack of disclosure is a mixed bag. Sometimes important details are left out, but often the incomplete filings provide opportunities for value investors willing to do additional legwork. In the absence of standard filings, some investors conclude the elevated risk of fraud is enough to disqualify a company for investment. That’s fair enough. But I don’t automatically exclude a company from consideration for not disclosing every detail down to its receivables aging schedule. I know of many companies that choose not to release fully-detailed filings simply because of the expense and effort involved.  (Others, of course, provide incomplete disclosure in order to obfuscate and distract from untoward actions. But that’s the next topic.)

In cases where business details are easily verified, incomplete disclosure may be sufficient. I know of a few real estate companies trading OTC that reveal little about the details behind their operations. Yet the holdings are easily verified through public tax records and the assessments and reassessments listed there are invaluable in estimating the real estate’s value.

Shady Insiders

Sometimes companies choose to remain unlisted because the behavior of insiders would never stand up to the increased scrutiny that comes with listing. Excess compensation, empire-building, entrenched management and rampant self-dealing are common in companies of any listing status, but are much easier for unethical management teams to accomplish off-exchange.

There are numerous companies that walk the line between ethical and unethical treatment of shareholders, and some that engage in outright abuses. For example, some years ago I became a shareholder (one share only) in a company that refused (and still refuses) to provide any financial information to shareholders unless they would sign a non-disclosure agreement indicating the shareholder would not share the information with anyone else, including other shareholders. Seeing no alternative, I agreed to this demand and signed the agreement. Sure enough, management’s rapacious actions were obvious soon as I saw the financial statements. Though the company did over $100 million in revenues per year in an industry with reasonable operating margins, operating profits were positive in only one of the previous five years. The reason? Management saw fit to pay themselves over $8 million annually. The board was clearly there only to approve management’s demands, and were paid handsomely for providing effectively no responsible oversight. There is nearly no hope that this company will ever change its ways, and management likes it that way.

Companies like these are probably best avoided by smaller investors, even if the financial metrics look promising. In these cases, management represents a huge intangible liability that offsets any potential under-valuation.

Ramifications for Investors

When evaluating an unlisted stocks, investors should consider the company’s motivations for remaining unlisted and incorporate their conclusions into their subjective opinions of company and management quality. Sometimes remaining unlisted indicates a high quality company with a shareholder-oriented management team. After all, why list if you don’t need capital and you want to maximize returns for shareholders in the long run? Listing might produce a short-term gain at the expense of long-term returns. And in cases where a company’s economics can’t support the expense of a listing, doing so would only be a vanity move meant to bolster management’s prestige at the expense of shareholders.

On the other hand, there are plenty of instances where a company remains unlisted for bad reasons, and investors should approach these companies with caution. When management is a liability, investors should incorporate the liability into their estimate of intrinsic value.


Alluvial Capital Management, LLC holds shares of Computer Services, Inc. for client accounts. Alluvial may buy or sell shares of Computer Services, Inc. at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at

Posted in Uncategorized | 2 Comments

When Ownership Structure Creates a Bargain – Schuler AG

I like companies where a highly concentrated ownership structure leaves only a small percentage of shares in the public float. In this way, sometimes even relatively large companies can be nearly uninvestable for firms of any meaningful size. Now and then this can lead to significant mis-pricing, as market participants who would ordinarily take advantage of the opportunity cannot act.

A prime example of a situation like this is Schuler AG. Schuler is a German metal forming company, just one of Germany’s plethora of successful small-to-medium-sized enterprises often called Mittelstand. These companies share a number of characteristics, among them a focus on efficiency, mastery of niche products and/or processes, a partnership model of owner/employee relations, and a focus on exporting.


Schuler produces the massive, complex and incredibly expensive industrial presses used in many manufacturing processes like automotive manufacturing, coin minting and many others. Recently, Schuler has introduced a line of energy-efficient presses. The company has also made large investments in China. In fiscal 2014, Schuler’s revenues were 1.2 billion Euros while operating income surpassed 100 million Euros for the first time. Because Schuler’s products represent major capital expenditures for its customers, Schuler’s results tend to be cyclical. Still, the company’s revenues have grown by a healthy 7.8% over the past decade. Over the course of the decade, Schuler’s operating margins show a general uptrend. A cyclical company’s operating margins should never be examined in a vacuum; one year’s results say little about normalized margins. But I think it’s safe to say that Schuler has a enjoyed a sustainable increase in operating margins in tandem with its top-line growth. The three year period from 2012 to 2014 produced real Eurozone GDP growth of a cumulative 2.3%. During this period, Schuler’s operating margins averaged 8.3%. The years 2004 through 2006 produced real Eurozone GDP growth of 8.1%, but operating margins for that period averaged a miserable 1.3%. I think it’s safe to assume modern Schuler is not the same company it was a decade ago and future operating margins will look more like those of recent years.

In addition to its operating improvements in recent years, Schuler has undergone a balance sheet transformation. At the end of 2009, Schuler had Eur 51.9 million in cash against Eur 298.1 million in debt and pension liabilities for net debt and pension liabilities of Eur 246.2 million. A mere five years, later, Schuler has piled up a cash balance of Eur 482.5 million. Debt and pension liabilities have fallen to Eur 211.0 million for a net cash balance of Eur 271.5 million. This remarkable change was almost entirely the result of free cash flow generation. From 2010 to present, Schuler raked in Eur 459 million in free cash flow.

Let’s imagine you’re a financial buyer, say a private equity firm. What would you pay to buy Schuler? Using any of the various reasonable approaches to valuation, you could come up with a wide range of fair values. But I guarantee any reasonable bidder would pay quite a bit more for Schuler than its current trading price suggests. Schuler’s market capitalization is Eur 877.9 million. Subtracting the net cash results in an enterprise value of Eur 606.4 million. Schuler shares are being valued at just 5.9x trailing EBIT and 4.9x trailing EBITDA. Shares go for 13.2x trailing earnings, while net cash represents over 30% of Schuler’s market capitalization.

So why does such a successful company trade so cheaply? Schuler has great cash flow and is substantially over-capitalized. The product line is advanced and demand for industrial presses should only grow as the world economy expands.

One reason: ownership structure. Over 95% of Schuler shares are in the hands of Andritz AG, a large Austrian industrial holding company. Andritz had been buying up Schuler shares for years, including those owned by Schuler’s founding Schuler-Voith family. Andritrz brought its ownership to over 95% in early 95% following a buyout offer in early 2013. Following Andritz’s purchase, Schuler shares delisted from the major German exchanges but remain listed in Munich. Trading volume has declined, but over 1,000 Schuler shares still trade hands daily.

Because less than Eur 45 million worth of Schuler shares are in public hands, the company is completely uninvestable for mid-sized or larger institutions. But smaller investors can easily build up a meaningful position if they view Schuler’s value proposition as attractive.

There is a catch, and it’s the chief risk of owning shares in a company that is dominated by a single shareholder. It’s the possibility of a forced merger by the controlling shareholder at an unfair price. I am not a lawyer, and my interpretation of German securities law should be viewed as only a layman’s opinion. But it appears that a company that owns over 95% of another is able to execute a mandatory squeeze-out, purchasing the remaining shares outstanding for cash. The acquiring company sets the buyout price, which is reviewed and approved by independent external auditors. The minimum price is the 3-month average trading price of the target company’s shares.

Schuler’s 3-month average trading price is just 2% below the current price, so shareholders are not currently at risk of a takeunder. I also must assume (and not having any sense of the German legal system, this is only an assumption) that the external auditors in charge of evaluating any takeover by Andritz would not look kindly on a buyout price below the current trading price. And it’s not like paying remaining shareholders a price above the current trading price would be burdensome for Andritz. For example, a 40% premium to the current price would cost only an extra Eur 17 million, a rounding error for a firm of Andritz’s size.

Nonetheless, Schuler shareholders could lose their shares to squeeze-out done at well below fair value. Investors should weigh this risk against the potential gains from investing in a company of Schuler’s quality at a rock bottom valuation.

Alluvial Capital Management, LLC does not hold shares of Schuler AG for client accounts. Alluvial may buy or sell shares of Schuler AG at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at


Posted in Uncategorized | 7 Comments