Steel Excel is an Attractive Special Situation – SXCL

Shares of Steel Excel are trading well below the value of the merger consideration they will receive when the company is taken over by its majority owner, Steel Partners LP.

On December 7, Steel Partners announced an agreement to acquire the 36% of Steel Excel that it does not own in return for preferred units of Steel Partners LP. The units would carry a 6.0% coupon and mature in nine years. Steel Excel shareholders would receive $17.80 in Steel Partners LP preferred units per share. Evidently, the deal was not acceptable to one of Steel Excel’s major shareholders, GAMCO. After discussions with GAMCO, Steel Partners unveiled an amended merger agreement on December 23. The preferred units’ distribution would now be cumulative, and Steel Partners agreed to offer to redeem at least 20% of the preferred units on a pro rata basis in cash within three years of issuance. Steel Partners also agreed to seek an NYSE listing for the preferred units.

Following the announcement, shares of Steel Excel scarcely budged, though the amended terms offered much better value for Steel Excel shareholders. Specifically, the fact that 20% of the preferred units will be redeemed within three years reduces both the effective maturity and the credit risk of the preferred units.

Modeling the implied IRR of Steel Excel shares is a simple matter. When converted into Steel Partners preferred units, holders will receive $1.07 in dividends per year and will have the option of redeeming 20% of their preferred units some time in the first three years after the merger closes. Assuming Steel Partners waits the full three years to redeem units for cash, the IRR for purchasers of Steel Excel shares at $14.75 is 9.3%. Earlier redemption would result in a higher IRR.

9.3% is a generous return for these Steel Partners LP obligations. Though the preferred units are junior to all of Steel Partners’ other obligations, the holding company is quite well-capitalized. At September 30, Steel Partners LP held cash and investments of over $97 million against debt of $57 million. Upon taking full ownership of Steel Excel, Steel Partners will assume direct ownership of another $122 million in net cash and securities. The full face value of the Steel Partners LP preferred units in issuance as the result of the merger transaction will be $72 million.

So what are Steel Excel shares/Steel Partners LP preferred units worth? I think it’s worthwhile to break down the cash flows into buckets and value each using a spread over treasury rates. I ran some numbers using current treasury rates and various credit spreads: 200 basis points over treasureies for 0-3 year cash flows, 350 basis points over for 3-6 year flows, and 500 basis points over for cash flows in years 6-9. The resulting calculation values Steel Excel shares at $17.09, 16% higher than the current trading price. At $17.09, Steel Excel shares would provide an IRR of 6.7%, which seems fair to me.

In reality, I don’t expect the gap between the current Steel Excel price and the face value of Steel Partners LP units to close because of the rich interest rate spread, I expect it to close because investors will see a listed preferred unit trading at a 17% discount to face value (at a $14.75 trading price for Steel Excel shares) and bid the price up.

The Steel Excel merger is expected to close in the first half of 2017 and is subject to a shareholder vote. Holders of more than half of the 36% of shares not owned by Steel Partners LP must approve the deal. GAMCO owns one third of those shares and has implicitly blessed the merger, so I don’t expect approval to be a problem.

Alluvial Capital Management, LLC manages a private investment partnership. If you are a qualified client and are interested in learning more, please contact us at

Alluvial Capital Management, LLC holds shares of Steel Excel Inc. for client accounts. Alluvial may buy or sell shares of Steel Excel Inc. at any time. 

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

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Falling Peso Benefits Rassini SAB de CV

Alluvial Fund, LP is now accepting limited partners. I can’t say much more about it here, but please contact me if you are interested.

The last few years have seen a stunning decline in the value of the Mexican Peso, from around 13 to the US Dollar in 2012 to over 20 today. The scope of this decline spurred me to take a look at an old favorite, Rassini SAB de CV, and I’m very glad I did.

A Mexican company, Rassini is North America’s largest producer of suspension components for light consumer and commercial vehicles, especially pickup trucks. The company is also a major producer of brake components, with two plants in Michigan. Rassini also has operations in Brazil. Notably, Rassini earns nearly all its revenues in US Dollars, but the large majority of its expenses are in Pesos.

My original thesis for investing in Rassini was expected debt reduction and margin expansion, driven by strong US auto sales and the weak Peso. The idea worked very well, and I sold when shares reached a reasonable valuation.

Since then, the company has continued to prosper. Revenues have risen substantially, both organically and debt has been further reduced. Margins have widened as revenues come back in ever more valuable US Dollars. Shares are somewhat higher than where I sold a few years back, but the company’s valuation has once again compressed to very attractive levels.

Simply put, the market has not adequately anticipated the dramatic increase in Rassini’s earnings power as a result of the recent plunge in the Peso’s value.

Here’s a look at Rassini’s most recent results, in Pesos.


Every figure is a record. Now here are those figures in the context of Rassini’s valuation. The value of Dollar or Real-denominated debt is converted to Pesos, as closely as possible.


Rassini appears very reasonably priced on trailing results. However, these results dramatically understate the company’s true trailing profitability, since the Peso was much stronger than it is now for most of the period. The next step is to see what Rassini’s results would have been at current exchange rates.


At current exchange rates, Rassini’s revenues would have been much higher. Much of the difference would flow directly to EBITDA and EBIT, since Rassini’s cost base is substantially Peso-denominated. (The notable exception is the brakes division, which is US-based. More on that in a second.)

Simply adjusting Rassini’s trailing revenues to current exchange rates revalues revenues upward by nearly 2.3 billion Pesos. What about costs? Costs for the Mexican North American Suspension division would be virtually unchanged, given the salaries and plant expenses are in Pesos. Brakes, which is Michigan-based and pays expenses in dollars, would see a rise in translated expenses. But how much? Translated, the uplift in Brakes division revenue is 678 million Pesos. The 2015 annual report shows EBITDA margins for the brakes division of 19.2%. Assuming depreciation of 5% of sales (higher than the other segments) and an EBIT margin of 15% yields an EBITDA uplift of 130 million Pesos and an EBIT uplift of 102 million Pesos from the Brakes division.

The impact of the weak Peso on translated earnings from the Brazilian business can be ignored, since that business is operating at break-even right now.

The addition of 2.3 billion Pesos to Rassini’s EBITDA and EBIT (less the increased operating costs at Brakes) makes a huge difference in the company’s valuation.


As the markedly different exchange rate environment translates into higher earnings in 2017, I expect the market to take notice and revalue Rassini’s shares.

Now, there are risks. The largest is the possibility of a slowdown in US auto sales, light trucks in particular. Sales of these vehicles have been strong for several years and may have plateaued. A sales decline would have a magnified negative impact on Rassini’s results due to operating leverage. I would not expect operating margins to decline to the previous low teens range, because of the beneficial currency impact. But they could decline to the high or mid teens range.

Another risk, and probably the one on everyone’s mind, is the possibility that free trade with Mexico will be substantially limited. Again, this could have a meaningfully negative impact on Rassini’s revenues and margins. But I think this risk is somewhat reduced by the fact that Rassini operates two plants in the US that provide many goods jobs. Rassini is less likely to be seen as a “parasitic foreign job-stealer” when it can point to the direct employment benefit it provides US blue collar workers.

Finally, there is the risk that the Peso will reverse its decline and Rassini’s profit bonanza will evaporate. Well, that’s the beauty of being a US investor in foreign companies operating in Dollars! If you convert dollars to Pesos and then use the Pesos to buy Rassini stock, you’ve created a natural hedge that will shield you from fluctuations in the USD/MXN exchange rate. You’ve essentially “locked in” the current exchange rate. For example, if the Peso continues to decline, the value of your Rassini shares will decline in Dollar terms. But, Rassini’s earnings will increase! So it’s a wash. The opposite occurs if the Peso strengthens. Your investment is immediately worth more, but Rassini’s future earnings will decline.

I believe investors purchasing shares at current levels are more than adequately compensated for these risks, and I expect great results from Rassini in 2017.

Alluvial Capital Management, LLC holds shares of Rassini SAB de CV for client accounts. Alluvial may buy or sell shares of Rassini SAB de CV at any time. 

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


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NYC Trip and Coats Group Plc – LSE:COA

Quick note: I’ll be in Midtown NYC from December 5-7. I’d be happy to meet up with anyone interested in knowing more about Alluvial’s soon-to-be-launched private partnership, or any blog reader. Get in touch.

w2xozx5vI believe shares of Coats Group Plc, traded in London, are attractive. Coats Group’s operating business is valuable and the holding company is significantly over-capitalized. Once the company settles its legacy pension issues, I believe the company will return capital to shareholders.

Coats Group Plc has a storied history. Founded in Scotland in 1755, it predates even the famed Scottish Widows Fund. Coats actually invented cotton thread as a wartime substitute for silken thread. Coats was floated on the London Stock Exchange in 1890 and underwent a series of mergers before being bought by Guinness Peat Group in 2003. Guinness Peat Group itself has an esteemed history, with roots stretching back hundreds of years to the famed Guinness family of Ireland. Guinness Peat once held dozens upon dozens of investments around the world (and actually succeeded in scuppering the proposed merger between the London Stock Exchange and Deutsche Boerse), but has spent years divesting these holdings. Following the final round of divestments, Guinness Peat Group renamed itself after its sole remaining operating business, Coats Group.

Today, Coats is one of the world’s largest manufacturers of sewing threads and fasteners. These range from ordinary crafting yarns to high-specification fiber-optic and heat-resistant threads. Coats is the world’s second-largest supplier of zippers behind YKK. It’s a global business, and its a pretty good one. For the twelve months ended June 30, Coats reported adjusted operating income of $154 million on revenues of $1.46 billion. (Coats reports in USD, though it trades in GBP.) Results for the six months ended June 30 showed excellent improvement in adjusted operating income, as Coats has taken steps to close down loss-making operations and invest in higher-margin, faster-growing segments.

Before we can get closer to determining a value for Coats, we must consider a very significant confounding factor: legacy pensions. Though Coats (remember, formerly Guinness Peat) owns only one business, it remains responsible for multiple pension plans. Turns out these plans are rather under-funded. This finding by the British government put a halt to Coats’ plans to return its holding company-level cash to shareholders. Here’s a graphic from Coats most recent report showing the deficits at each legacy pension.


Coats Group’s three major legacy pension plans are Brunel, Staveley, and Coats UK. Brunel is 68% funded. Staveley is 91% funded, and Coats UK sits at 84%. You might be thinking “by American standards, these really aren’t bad.” However, the UK pensions regulator doesn’t see it that way. In 2015, Coats agreed to contribute £55 million to the Brunel plan over 10 years. In June, Coats agreed to contribute £74 million to the Staveley plan.

Investigations into the funding status of all three pensions continue. For now, Coats has agreed not to distribute any of its holding company cash to shareholders and to use its substantial cash balance to support the pensions. The company continues to negotiate a settlement with the regulators. In its last report, the company indicated it would proceed to court hearings if a settlement could not be reached. No update has been provided, but I believe it is very likely the parties will arrive at an agreement, court-arranged or otherwise, before the end of 2017.

I believe any settlement will provide Coats with substantial leeway to return capital to shareholders. Coats actually holds enough cash (in GBP) at the holding company level to eliminate its pension obligations in their entirety. But there is no reason to assume the regulator will force Coats to bring its pensions to 100% funded status immediately. That would be absolutely unprecedented. Rather, the regulatory body and Coats will almost definitely agree on a plan in which Coats contributes a lump sum to the plans and commits to annual contributions.

Back to the operating business. As I mentioned earlier, Coats is producing normalized operating income of $154 million. This figure should rise in 2017 as Coats exits its unprofitable UK crafts business and benefits from strategic investments in high-performance threads and a promising software business. Long-term, Coats should be able to grow its top-line revenues slightly faster than world GDP growth. People will always need clothing, and Coats high-specification specialty threads should see growing demand.

I would be perfectly comfortable buying Coats for 10-12x EBIT. Assuming Coats can produce $160 million in operating income in 2017, that values the operating business at $1,600-$1,920 million. The operating company has net debt of $337 million for net value of $1,263-$1,583 million. Now, Coats does not own 100% of all of its operating subsidaries. Specifically, the Bangladeshi and Vietnamese subsidiaries are very profitable but not 100% owned. For the twelve trailing months, income attributable to minority interests was $12 million. When considering Coats Group’s valuation, these minority interests must be capitalized. I think a 12x multiple of income is reasonable for minority interests in emerging markets ventures.

At the holding company level, Coats has $396 million in cash versus combined pension deficits of $349 million. (In reality, this cash is held in Pounds. But the pensions are also GBP-denominated, so the net effect of currency movements is limited.) Just to be extra pessimistic, let’s say the regulators and Coats come to agreement to bring pension funding to 95%. Again, that would be unpredecented. But let’s go with it, because there is the possibility that the pension liabilities are under-stated. Anyway, 95% funding would require Coats to commit another $241 million of its holding company funds to the pensions. That would leave $155 million in funds available for distribution to shareholders, or for investment in the operating business.

Let’s compare Coats Group’s present valuation against the value of the operating subsidiary and the example excess holding company cash. Coats has a market capitalization of £528 million, or $668 million at current exchange rates. To that we must add the capitalized minority interest, which I’d put at $144 million. Total market capitalization: $812 million. There’s $337 million in operating company net debt, plus my very rough and conservative estimate of $155 million in excess holding company cash. That’s ultimate net debt of $182 million for an enterprise value of $994 million.

For your $994 million, you get $160 million or so in operating income for a multiple of 6.2x EBIT. That strikes me as extremely cheap for a reasonably good business producing high levels of free cash flow, albeit with only moderate growth potential. If my estimate of the value of the operating business is anywhere close to accurate, then shares of Coats should be worth nearly twice the current trading price. I think my valuation is supported by Coats Group’s free cash flow yield, which exceeds 10%.

Why so cheap? I think it all comes down to uncertainty. The market is fearful that the UK pensions regulator could proclaim the pension deficit is larger than anticipated or could call for onerous contributions. Brexit still weight heavily, then there is the fact that Coats Group is a small company despite its once mightly stature. Still, I think the current price represents a good value for investors willing to look past the next few quarters.

Alluvial Capital Management, LLC does not hold shares of Coats Group Plc for client accounts. Alluvial may buy or sell Coat Group Plc shares at any time. is an Alluvial Capital Management, LLC publication. For information on Alluvial, 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

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Transactions Costs, Amortization Disguising Earnings Power at Alerus Financial – ALRS

Note: Last chance to sign up for The MicroCap Conference in Philadelphia on October 24 and 25. It’s a great place to network and hear from some interesting small companies. Sign up here. If you’re going, please let me know. I’d like to meet you.



Alerus Financial is one of my favorite little financial services firms. Despite being a bank, the majority of Alerus’ value actually derives from its non-banking segments like retirement plan administration, wealth management and mortgage origination. Alerus is one of the nation’s fastest-growing retirement plan administrators.

When I originally wrote about the company in 2013, Alerus was suffering from mis-classification. Investors were focused on the banking operations and assigned the business a conservative multiple, when the company’s fast-growing non-bank segments were producing the majority of revenues and earnings. Three years later, this remains the case. Since my original post, retirement plan and wealth management revenues are up 57% while net interest income from traditional banking is up 22%. (Revenues at the  company’s other significant segment, mortgage origination, are down. This is to be expected from a cyclical, interest rate-driven business like mortgage origination.)

The market did eventually catch on and Alerus’ shares rallied nearly 90% in the 2 years following my write-up. However, shares now trade more than 20% off the highs reached one year ago. What gives? In short, Alerus’ value proposition is once again obscured. Earnings per share have declined as a result of significant one-time expenses related to acquisitions, high on-going expenses related to amortization of intangibles, elevated personnel expenses due to hiring for growth, and declining contribution from the mortgage unit. Reported EPS has declined to $0.92 per share for the twelve trailing months, after peaking at $1.46 per share in 2013. Not too many companies are going to see stock appreciation in the face of a 37% decrease in reported earnings.

Alerus appears to trade at around 17x trailing earnings, probably a defensible valuation for this sort of banking/non-bank financial services hybrid business. However, normalized earnings power is substantially greater on a forward basis because of one-time costs in the trailing earnings figure and future earnings contributions from some recent acquisitions, such as:

  • The addition of $350 million in banking assets via the acquisition of Beacon Bank in Minnesota. The acquisition, which saw Alerus expand into the Duluth market, closed in January. A full year’s earnings contribution from Beacon Bank is not yet reflected in Alerus’ results, but one-time costs associated with the acquisition are. Additionally, the acquisition created an amortizable deposit premium asset which has reduced Alerus’ earnings, but not its cash flows.
  • The acquisition of Alliance Benefit Group North Central States, a retirement plan administration overseeing accounts for over 75,000 participants and $6 billion in plan assets. The purchase also closed in January, creating one-time expenses and an amortizable asset.

For the second quarter of 2016, Alerus reported net income of $2.94 million and EPS of $0.21. Let’s take a crack at normalizing this figure. In the quarter, Alerus recorded $2.1 million in one-time costs related to conversion and integration expenses for the newly-acquired Beacon and Alliance assets. Alerus also recorded $414,000 in one-time expenses related to extinguishing FHLB borrowings.

Most interestingly, Alerus recorded $1.78 million in intangible amortization expense for the quarter. This expense is intended to represent the declining value of acquired bank deposits from Beacon Bank and customer lists at Alliance Benefit Group North Central States. This expense has no cash impact on Alerus beyond reducing its taxable income, yet intangible amortization has become a very meaningful income statement item for Alerus as it continues to be an enthusiastic acquirer. The increasing levels of amortization have had a seriously negative impact on reported earnings without impacting cash flow.

Here is a look at Q2 earnings with the one-time expenses and non-cash charges stripped out. Alerus’ tax expense has hovered around 36% of pre-tax income for some time, so I am using that to estimate the tax shield from one-time expenses.


After adjusting for the acquisition-related and debt extinguishment expenses, Alerus’ net income look substantially better at $4.5 million, 55% higher than the reported figure. Things get even better when we adjust for the substantial non-cash amortization expense. Alerus’ adjusted cash EPS is more than twice the reported figure at $0.45 for the second quarter.

I wish computing Alerus’ P/E ratio were as easy as annualizing this adjusted Q2 figure, but it is not so. While the company’s banking, retirement plan administration and wealth management segments show minimal seasonality, the mortgage origination unit performs substantially better in the second and third quarters. We can compensate for this factor by adjusting Alerus’ Q2 mortgage income down to the average figure for the twelve trailing months, which happens to be $6.26 million. We’ll also have to make an assumption on the segment’s operating margin. I think 20% is appropriate, given that Alerus as a whole has an efficiency ratio of around 80%.


Call the $0.43 adjusted adjusted quarterly cash EPS. (I am aware we’re getting deep into adjusted territory and the dangers of such. Still, I don’t believe I have committed any unjustifiable logical leaps.)

Annualizing that figure yields estimated forward cash EPS of $1.74 without assuming any growth. Looks like Alerus’ earning power has continued to increase, only now it is being disguised by the rising non-cash amortization expenses and transactions costs.

On today’s price of $16.60 or so, Alerus is trading at a normalized forward P/E of 9.5. In my opinion, this is far too cheap a price for a company with a history of strong growth in its non-bank operations, and stability and profitability in its banking segment. It is possible that income from mortgage operations will decline further in the face of rising interest rates, but I believe the current valuation more than compensates investors for this possibility.

Alluvial Capital Management, LLC is launching a private investment partnership. If you are an accredited investor and are interested in learning more, please contact us at

Alluvial Capital Management, LLC holds shares of Alerus Financial for client accounts. Alluvial may buy or sell shares of Alerus Financial at any time. 

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

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Flughafen Wien AG

Shares of Flughafen Wien AG offer the chance to invest in critical world-class infrastructure at a singularly low valuation. Flughafen Wien is insulated from competition, only modestly leveraged, and its services are critical to the modern economy.


Long-time readers may know I have an affinity for businesses that are insulated from competition and enjoy at least a degree of pricing power. Past examples include Jungfraubahn AG (nobody’s constructing major new tourist railways in the environmentally-sensitive Swiss Alps) and Logistec Inc. (Cargo needs to be loaded and unloaded at a specific port. There are few alternatives.) Shares in companies like these exhibit highly desirable “equity bond” characteristics where long-term shareholder returns will approximate the current earnings yield plus organic unit demand growth plus inflation. The best of these companies rarely experience declining or stagnant earnings due to the critical nature of their operations and their strong competitive positions.

Because of the stability and strong long-term outlooks that these businesses typically enjoy, they often trade at bond-like earnings yields. Not so for Flughafen Wien. While competitors offer free cash flow yields as low as 3%, Flughafen Wien offers a free cash flow yield of nearly 8%, despite a strong outlook.

So what does Flughafen Wien actually do? Simple. The company owns and operates the Vienna International Airport along the Danube River to the south-east of Vienna, Austria. Additionally, the company owns a 48% interest in Malta International Airport and a 66% interest in Slovakia’s Košice Airport. The Vienna Airport is, of course, the company’s major asset. The airport was originally built in 1938 as a military facility, then taken over by the British following World War II. The Austrian government expanded and improved the airport over the following five decades, and privatized it in 1992. Today, just 11.8% of the company’s shares are freely floating. 50% are owned by local governments and an employee ownership plan, and 38.2% are owned by a major Australian infrastructure investment group, IFM Global Infrastructure Fund. IFM has expanded its ownership aggressively in recent years, but more on that later.

About 55% of the company’s revenues are its airport operations: collecting income from passengers and airlines who use the airport facilities. The next biggest segment is “Handling” at 23% of revenues. Handling refers to a variety of activities including prepping aircraft between flights, loading and unloading cargo, security services, and other services that ease the movement of passengers and aircraft. A further 20% of revenues consists of retail and property revenues associated with parking, rents on commercial storefronts and restaurant spaces within the airport, advertising space, and more. While it is the smallest of the three major revenue segments, Retail and Properties actually accounts for 48% of the company’s operating income. Airport operations are the second most profitable segment, making up 37% of EBIT, while Handling contributes less than 10%. The graphic below from the 2015 annual report illustrates this more clearly.


Recent years have been good for the Vienna Airport with steady passenger growth and rapid improvement in financial results. This is despite weak economies and instability in destinations to Vienna’s east, especially in Russia and Ukraine. From 2010 to 2015, annual passenger movement at Vienna International Airport rose at an annual rate of 3.0%. Strong operating leverage (a high percentage of fixed costs vs. variable costs) allowed operating income to rise by 6.9% annually over the same period. Meanwhile, net debt has been cut in half.

Things were not always so rosy at Flughafen Wien. As recently as 2011, the firm was troubled by massive cost over-runs in the construction of its Skylink addition to Terminal 2. But a new management team and a scaled-back capex program righted the ship and the company is now on solid operational and financial footing. At Eur 22 per share, Flughafen Wien trades at less than 8x EBITDA and a P/E of 17.2, with a free cash flow yield of 7.8%. This represents a very large discount to the valuations of other major European airports and airport groups.

The graphic below displays financial statistics for other publicly-traded European airport operators. Figures are in millions USD using today’s exchange rates.


You will see that Flughafen Wien’s valuation compares very favorably to its peer group, despite above average revenue growth and below average leverage. The only area where the company comes up short is its operating margin, which is slightly below its peers. The Copenhagen is the clear superior operator of the group, with excellent revenue growth and margins. But that is fully reflected in its premium valuation. The only other operator with similar figures to Flughafen Wien is Fraport AG. However, Fraport (which operates the Frankfurt airport) suffers from sub-par operating margins and carries a large amount of debt.

So why does Flughafen Wien trade at a material discount to its peer group? The biggest reason is likely the market’s nervousness about the company’s major destinations outside of Western Europe. Departures to Central and Eastern Europe were down 5.3% in 2015 and down 14% from the peak in 2012. Moscow in particular has experienced a serious decline. The market likely fears further declines in departures, which is entirely possible given the threat of Russian aggression and continued sluggish economic conditions.


Then there is the prospect of major capital projects on the horizon. Flughafen has elected to go forward with a project to modernize and expand its facilities, to the tune of Eur 500 million between now and 2023. The company says the project will enhance its profits, especially via the creation of additional shopping and restaurant space, but investors may be justifiably nervous about potential cost over-runs and delays. Investors may have short memories, but their memories are not short enough to forget that a botched expansion nearly brought down the company only five years ago. I believe this risk is mitigated by the new management team and Flughafen Wien’s very reasonable leverage, but the risk remains.

Finally, there is the fact that Flughafen Wien is one of the smallest public European airport operators, with few shares in public hands. The 11.8% of the company held by the public is worth only Eur 218 million at current prices, ruling out investment in the company for most infrastructure funds and other investment companies of size.

And that’s where the opportunity lays. Readers should know I have absolutely no qualms about investing in controlled companies, so long as the controlling shareholders are motivated to increase shareholder returns. This is certainly the case with Flughafen Wien with IFM owning nearly 40% of shares. There is also a meaningful possibility that IFM will take steps to further increase its ownership. IFM’s first tender offer came in November 2014. IFM paid 20.50 Euros (split-adjusted) per share and netted 29.9% of the company. The second tender offer made in April 2016 collected another 8.3% of shares. This time, IFM paid Eur 25.00 (again, split-adjusted) per share. What price might IFM offer in a third round? Whatever that price may be, another holder of Flughafen Wien stock thinks previous offers have been far too low. The UK’s Petrus Advisers put out a presentation supporting its view that Flughafen Wien shares are worth as much as Eur 36.50 per share, after accounting for the 4-for-1 share split that Flughafen Wien recently did.

It honestly concerns me little whether IFM tenders for the rest of the publicly-held shares or not. I am happy to hold a top-quality infrastructure asset at a low-grade valuation for as long as the market allows me.

Alluvial Capital Management, LLC is launching a private investment partnership. If you are an accredited investor and are interested in learning more, please contact us at

Alluvial Capital Management, LLC holds shares of Flughafen Wien AG. for client accounts. Alluvial may buy or sell shares of Flughafen Wien AG at any time. 

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

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Brief Update – Announcing Alluvial Fund, LP

I am pleased to announce that my investment management company, Alluvial Capital Management, LLC, will be launching a private investment partnership. Sitestar Corporation will be providing $10 million in seed capital for Alluvial Fund, LP. You can read their press release here.

Details are very preliminary, but we are targeting a January 1, 2017 launch date. If you are an accredited investor and are interested in knowing more, please send me an e-mail at and I will provide additional information as it becomes available.

In other news, I’ll be in Philadelphia on October 24th and 25th for The MicroCap Conference. Previous conferences have been great opportunities to hear from some promising small companies and to network with other investors. I hope to meet some readers there.


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Value in my Own Backyard – Allegheny Valley Bancorp and Standard Financial Corp.

On Monday, two Pittsburgh banks announced they would combine in a merger of equals. Allegheny Valley Bancorp (AVLY) and Standard Financial Corp. (STND) each have long histories in the city and the surrounding region. Allegheny Valley Bank was founded in 1900 as an alternative to local banks controlled by industrial titans like the Mellon family. The bank stood firm through the Great Depression and the steel industry collapse that rocked Pittsburgh in the later 20th century. Standard Bank is equally venerable, founded in 1913. While Allegheny Valley focused on urban Pittsburgh, Standard Bank grew its base in the suburbs and small cities to Pittsburgh’s east, eventually expanding into Western Maryland. Originally a mutual bank, Standard demutualized in 2010. Following the merger, the surviving entity will be named Standard AVB Financial Corp.

I have followed these banks for some time, observing the business practices of each. Both are well-run, if somewhat unremarkable. For its part, Allegheny Valley has focused on maintaining a conservative balance sheet and paying a robust dividend, while Standard has followed the optimal post-mutual conversion playbook of repurchasing shares and increasing its dividend over time. Still, each bank suffers from the problems facing most small banks: sub-par ROEs from compressed interest spreads and rising compliance costs, and a lack of growth caused by low loan demand and insufficient marketing and technology resources. I believe the proposed merger will do much to alleviate these headwinds, leaving shareholders in the combined entity extremely pleased.

Competitive Position

At present, each bank is only a blip on the local financial radar. Allegheny Valley has a deposit market share of just 0.3% in the Pittsburgh MSA, while Standard’s Pennsylvania operations have just 0.2%. The combined entity will control 0.5%. Still small, but sufficient to vault the combined entity to 15th place among local banks from the current 20th and 25th positions. A higher market share will benefit the combined bank via improved marketing efficiencies and better geographic coverage. Standard AVB will blanket Allegheny County and adjacent Westmoreland County rather than one or the other.



I am always skeptical of projected cost savings in mergers, but bank mergers typically do realize substantial savings. Many duplicated functions can be reduced or eliminated when similar banks combine. Allegheny Valley and Standard are projecting a 16% reduction in non-interest expenses, which comes to $3.5 million pre-tax on a trailing twelve month basis.

Balance Sheet Rationalization

Presently, Allegheny Valley Bancorp is over-capitalized and Standard Financial Corp. is highly over-capitalized. Allegheny Valley’s common equity-to-assets ratio is 11.8% while Standard’s is 15.1%. The combined entity will have a 13.6% equity ratio. This strong capitalization will allow for a better return on equity than Standard currently manages, plus greater capacity for growth investments and/or acquisitions than Allegheny Valley’s balance sheet allows at present.

The proposed merger also strengthens and diversifies the banks’ loan books and deposit bases. Standard’s loan book is dominated by traditional residential real estate lending, while Allegheny Valley is much more involved in commercial lending. Standard relies heavily on CDs and traditional savings accounts, while Allegheny Valley has a much higher percentage of lower-cost (but potentially transient) demand accounts.




Allegheny Valley Bancorp shareholders are to receive 2.083 shares of standard per AVB share, or 46% of the resulting business. The surviving entity will have 4.78 million fully-diluted shares outstanding. The combined bank is projected to have equity capital of $128.5 million at the end of the first quarter of 2017.

Standard’s shares have traded down meaningfully following the merger announcement. I suspect this is because a large number of Standard’s shareholders had expected and desired a buyout by a larger bank, as is common for a recently converted mutual thrift. These shareholders may be displeased at the prospect of Standard remaining independent, even as part of a larger, more efficient organization. Standard’s shares closed at $23.80 on Thursday, down 8% since the merger was announced. But this decline only highlights the prospective value. Pro forma book value following the merger is $26.88, putting shares of Standard at 89% of book value. Earnings will take a temporary hit due to severance and restructuring charges, but forward earnings power will benefit from cost savings. Assuming the stated cost savings projections are met and a 40% tax rate, the combined entity’s annual earnings should increase by $2.1 million, or 44 cents per share. That benefit plus each bank’s trailing earnings would put earnings per share at $1.92 for a pro forma trailing P/E of 12.4. And again, this is for a bank with a very “lazy” balance sheet. Standard AVB Financial has a clear path to earnings growth through balance sheet expansion. The combined bank could expand its asset base by 60% and still maintain an 8% common equity to assets ratio.

While I think shares of either bank are attractive considering the proposed combination, shares of Allegheny Valley are priced at a 2.7% discount to the deal value. (The discount is actually larger once Allegheny Valley’s generous dividend is factored in.) I like both the current discount to book value, the solid earnings yield, and the strong prospects for earnings growth. For anyone interested in beginning due diligence, here’s a direct link to the merger presentation.

There is one more interesting wrinkle. Another Western Pennsylvania Bank, S&T Bancorp, owns 14.2% of Allegheny Valley’s shares. S&T will own about 6.5% of the combined bank, making S&T the largest shareholder. A future tie-up with Standard AVB Financial would solidify S&T’s status as a top 10 bank by deposit share in the Pittsburgh MSA. Not saying it will happen, but S&T is acquisitive.

Alluvial Capital Management, LLC holds shares of Allegheny Valley Bancorp and Standard Financial Corp. for client accounts. Alluvial may buy or sell shares of Allegheny Valley Bancorp and/or Standard Financial Corp. 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


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Kaanapali Land – KANP

Being somewhat of a business history nerd (perhaps the least sympathetic or relatable type of nerd) I am always intrigued when I happen across a company that represents the last public vestige of a once-great corporate empire. I own a few of these (one being Retail Holdings NV, the modern remnant of the mighty Singer Manufacturing Company) and beyond the monetary gain I hope to achieve, I also get an odd sense of participation in American and world economic history. (Again, not that sympathetic or relatable.)


One such company is Kaanapali Land LLC. “KLL” traces its roots all the way back to 1849, when German boat captain Heinrich Hackfeld arrive in Hawaii and started a general store. The store was a success, and Hackfeld expanded into many other ventures, including lodging, sugar production, and import/export activities. H. Hackfeld & Company eventually became one of Hawaii’s largest land-owners, at one point holding 60,000 acres. All was well until World War I, when the US government confiscated the company under the “Trading with the Enemy Act.” At the time, the loyalties of German-Americans, even those who had been US residents for generations, were considered suspect. The government auctioned the company’s assets to a group of Hawaiian businessmen, who renamed the business “American Factors.” The company’s sugar business grow rapidly and was the company’s main source of profits until Hawaiian tourism took off in the 1960s. American Factors profited handsomely by expanding its lodging and resort operations and by selling land for development. Over the next few decades, American Factors (renamed “Amfac” to match corporate conventions of the time) followed the 60s and 70s playbook of continual expansion into a wide range of unrelated industries. As often happened in such cases, Amfac eventually found itself unfocused and over-leveraged. A series of divestitures and complicated transactions meant to fend off hostile takeovers left the company less indebted but still not reliably profitable. Multiple loss-making years eventually forced the company to accept a $920 million buyout offer from a major Chicago-based real estate company, JMB Realty. JMB set about slimming Amfac down to its agricultural and property development roots, hiving off or selling all the mainland operations and contributing various other Hawaiian assets to other JMB companies. Unfortunately, sugar production in Hawaii was in terminal decline and Amfac Hawaii declared bankruptcy in 2002.

Amfac Hawaii emerged from bankruptcy in 2005 as Kaanapali Land, LLC. 167 years after Herr Hackfeld opened his shop on Maui, what remains in Kaanapali is 4,000 acres of Maui land, some $25 million in cash, a $22 million pension surplus, and various minor current assets and liabilities. The company’s only activities are managing and monetizing its remaining real estate, as well as dealing with some residual legal actions related to bankrupt subsidiaries that are now in liquidation. The company is working on gaining approvals for its Ka’anapali 2020, Wain’e, and Pu’ukoli’i Village developments, and it has successfully created an innovative agricultural/residential development in Ka’anapali Coffee Farms. Of the 51 lots at Ka’anapali Coffee Farms, 12 are still available for purchase.

The company’s website contains detailed project plans for each development, with videos and maps.

In all, the three proposed developments will account for just over half of Kaanapali’s developable land. (Of the company’s 4,000 acres, 1,500 are protected conservation lands.) Problem is, approvals for new development can take a long time in Hawaii, where a fraught history often results in strong local opposition to real estate projects. Kaanapali has made great efforts to work with the local community in planning these developments, including committing to infrastructure improvements and affordable housing. But that is no guarantee that actual development will begin soon, or at all.

Interestingly, Kaanapali has disclosed that it signed an agreement with a third party to sell all of its landholdings for $95 million in January, 2016. However, the unidentified buyer eventually backed out and the deal fell through. The company also had an agreement to sell its Pioneer Mill site (essentially, the proposed Wain’e development) for $20.5 million, but that deal also fell through. The proposed sale price for all of Kaanapali’s acreage works out to $38,000 per acre. The price for the 200-acre Pioneer Mill site alone was $102,500 per acre. Though neither deal actually went through, the failed transactions provide a helpful yardstick for valuing Kaanapali’s land.

At the current trading price, investors in Kaanapali are buying developable Maui land at a price of just $10,900 per acre, net of corporate cash. If we credit the company for its pension surplus, the effective price falls to just $2,100 per acre. (Crediting the company for the full value of its pension surplus is dubious, as actually accessing a pension asset is a difficult proposition.) Either price is a fraction of what the land is likely worth, but then again there is substantial doubt as to the feasibility and timing of actually developing that land. Still, I don’t know of a cheaper way to buy Maui land, even if indirectly.

Potential investors in Kaanapali should be aware that the company is not current on its financial filings, though it is working on filing updated annual and quarterly reports. The company neglected to file these reports for some time, though it has nearly 700 shareholders of record. An SEC notification set the company on the path toward current filing status. (Turns out, there is a point at which the SEC will intervene on behalf of shareholders in an unlisted company. Who knew?) The most recent financial statement data is as of June 30, 2015, though the company has disclosed all material events since that date. Potential investors should also be keenly aware that realizing value from Kaanapali’s assets could take an extremely long time, if it ever happens at all. Finally, potential investors should consider Kaanapali’s extremely tiny float: only about 330,000 units are free-floating, with a current value of around $10 million.

Author David Waters owns one unit of Kaanapali Land, LLC, so he can talk about his getaway in Maui. 



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Urbana Corp. – URB.TO, URB-A.TO

The other day I was looking back through some old investment notes and I found the name of a company I had quite forgotten, Urbana Corporation. Urbana Corporation is a Canadian investment company that focuses on investing in the financial sector, exchanges in particular. An investment thesis on the company made the rounds back in 2011, when various value bloggers wrote about Urbana. (See a few of those old posts here and here. Isn’t it remarkable how long ago five years seems in internet history?)

Essentially, Urbana was trading at a gigantic discount to the value of its holdings and aggressively repurchasing its shares. It seemed like a good recipe for success, but there were also a few red flags. For one, management seemed to enjoy buying tangential assets like gold mining stocks and other things far outside the fund’s core strategy. Management had also begun making investments in related-party companies, creating the possibility of conflicting interests between management and shareholders. Finally, Urbana’s operating and management costs were high in relation to its asset base, and management was firmly in control via its ownership of the firm’s voting shares.

Weighing the discount to NAV and the ongoing share repurchases against these negatives, I chose to pass on the company and didn’t give it another thought until yesterday.

Turns out, I passed on a decent rate of return. Over the last five years, Urbana’s A shares returned 98%, well in excess of market averages. The strong return was driven by a combination of appreciation in the firm’s investment holdings, and by continued share repurchases. It’s hard to over-estimate just how seriously Urbana has taken its repurchase program. Since the end of 2009, the company has repurchased 39% of its shares outstanding, always at significant discounts to its net asset value. These accretive share repurchases have had a major positive effect on Urbana’s NAV, which has risen from a low of  CAD $1.70 per share at year-end 2011 to CAD $3.75 now, a 15% annualized rate.

Urbana’s current trading price is CAD $2.26, a 40% discount to NAV. But what sorts of holdings does that NAV include? Unfortunately, the proportion of non-traded assets in Urbana’s portfolio has grown, and that makes it more difficult to pin down a precise value for Urbana’s holdings.

Urbana NAV 7.22.2016

Urbana reports its holdings and NAV on a weekly basis. Investments in publicly-traded assets make up 56% of Urbana’s assets.  Large American and Canadian banks and securities exchanges represent the majority of these public holdings, though Urbana also has holdings in Canadian materials stocks. Despite my dissatisfaction with Urbana’s propensity to invest outside its wheelhouse, I must admit the investments in “Canada, Inc.” (management’s terminology) were well-timed and have performed well.

The private side of Urbana’s investment book is more interesting. The largest of Urbana’s private holdings is Real Matters Inc. Real Matters is a real estate technology company providing appraisals and valuations to banks and insurers. Real Matters has been a home run investment for Urbana, though Real Matters is strongly levered to the potentially over-heated Canadian real estate market.

The second largest private investment is the Bombay Stock Exchange. This investment has not done as well for Urbana, though the Bombay stock exchange has received approval to conduct an IPO and may receive a higher valuation if and when it does so. (It appears that Urbana invested in several private securities exchanges when their valuations were higher. These include the Budapest Stock Exchange and the Minneapolis Grain Exchange. Value investor favorite [perhaps former favorite] FRMO Inc. has also invested in the Minneapolis Grain Exchange.)

Most controversially, Urbana has invested in a private financial company owned by Urbana’s CEO, Thomas S. Caldwell. The company maintains that investments in Caldwell Financial Ltd. are done at valuations of one-third to one-half of what Caldwell Financial would fetch in private sales. I have no reason to believe this is not so, but these related-party transactions introduce an element of additional uncertainty in evaluating Urbana’s holdings, and require investors to exercise a greater degree of trust in management.

Urbana management has indicated it will continue to buy back shares aggressively, but also notes that large blocks of class A shares are becoming more difficult to source and that the pace of repurchases may slow.

Shares at current prices offer a way to purchase an otherwise inaccessible collection of private exchanges and other intriguing assets at a large discount to NAV. I don’t know if these underlying assets will provide strong returns in coming years, but continued share repurchases should help grow Urbana’s value per share. Investors will have to judge for themselves if the 40% discount to reported NAV is large enough to overlook the company’s high management costs and complicating related-party transactions.

Alluvial Capital Management, LLC does not hold shares of Urbana Corporation for client accounts. Alluvial may buy or sell Urbana Corporation shares 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

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Quarterly Letter and a Wilhelmsen Update

I’ve finally gotten around to posting Alluvial Capital Management’s first quarter 2016 letter to clients on my company site. Please go here if you are interested in reading it or any other letters.

Three months ago I wrote about Wilh. Wilhelmsen ASA, a deeply-discounted Norwegian specialty shipping company with an upcoming catalyst in the form of a spin-off. That spin-off has been accomplished, and Wilhelmsen ASA and Treasure now trade independently. The price of each is well, well below a conservative reckoning of fair value.

Treasure ASA

The newly independent Treasure ASA is easy to value. The company’s major asset is a 12.04% stake in a Korean logistics company, Hyundai Glovis. Treasure also holds USD 18 million in cash, contributed by Wilh. Wilhelmsen. On the liability side, Treasure remains a guarantor on Wilhelmsen’s corporate-level obligations, though this liability is minor. (Wilhelmsen has strong liquidity and all its corporate-level bonds will roll off within a few years.)

At current exchange rates, Treasure’s stake in Hyundai Glovis is worth USD 687 million. Adding Treasure’s cash holdings yields total value of USD 705 million. Translated to Norwegian Krone, Treasure’s value is NOK 5,839 million, or NOK 26.54 per share.

Treasure’s last trading price was NOK 15.50, a 42% discount to NAV. It’s normal for a holding company to trade at a discount to the value of its assets, but a discount of this magnitude is unusual and I do not expect it to last. Either Treasure will take advantage of this discount and repurchase shares, or Treasure’s majority owner (Wilh. Wilhelmsen Holding, with a 72% stake) will increase its ownership.

Needless to say, I think Treasure’s current price is driven by non-economic selling pressure and that buyers at the current price will be well-rewarded.

Wilh. Wilhelmsen ASA

While the newly-spun off Treasure ASA looks quite attractive, Wilh. Wilhelmsen may be even more so. Wilhelmsen’s goal in shedding its Korean assets was to highlight the value of its autmotive shipping and logistics operations, but the market has shown no inclination to cooperate thus far.

Wilhelmsen shares last traded at NOK 23.30 per share and a market capitalization of NOK 5,126 million. Meanwhile, Wilhelmsen’s tangible book value is north of NOK 11 billion. (This value will increase materially with next quarter’s results, due to an accounting gain from an acquisition.) So, Wilhelmsen’s price to tangible book value ratio is somewhere below 47%, a level usually reserved for the kind of distressed, unprofitable firm that Wilhelmsen most certainly is not.

For the twelve trailing months, Wilhelmsen’s remaining operations produced free cash flow of more than NOK 800 million, for a free cash flow yield in the mid teens.

I believe Wilhelmsen shares should be valued at a premium to book value. Company management has demonstrated ability to earn robust returns on capital through the cycle, no small accomplishment in a cyclical, capital-intensive, largely commoditized industry. All the same, I do understand the market’s more pessimistic point of view. As was plainly illustrated in Wilhelmsen’s first quarter results, the shipping market remains deeply unfavorable. Auto shipments have held up well, but shipments of mining and construction equipment have fallen markedly. I would not be surprised if the next few years were difficult for Wilhelmsen. Still, I expect the company to remain profitable and to use the downturn to set itself up well for the eventual return to happier times.

At less than half of tangible book value, the market is telling us that Wilhelmsen’s assets are severely impaired, that the firm will fail to earn its cost of capital over the next economic cycle, or that a long period of unprofitability will erode the equity base. I disagree with all of these scenarios, and I expect good things from Wilhelmsen stock.

Alluvial Capital Management, LLC holds shares of Wilh. Wilhelmsen ASA and Treasure ASA for client accounts. Alluvial may buy or sell shares of Wilh. Wilhelmsen ASA and/or Treasure ASA 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

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