Checking in! Once again, life gets in the way. My wife and I welcomed a baby girl in September. (Everyone is doing very well!) And of course, Alluvial Fund keeps me very busy. But the search for value goes on, and I’d like to share a few interesting companies I’ve happened upon. These are only vignettes, but you may find them intriguing enough for further due diligence.
Societe Marseillaise du Tunnel Prado-Carenage SA – Euronext Paris: SMTPC
I’m a bit of an infrastructure nerd. I’ve always been fascinated by bridges, tunnels, ports, canals, pipelines, transmission assets, the list goes on. Even better when these assets are publically-listed! The grandly named Societe Marseillaise du Tunnel Prado-Carenage SA is a shining example. SMTPC holds the concession on the 2.5km tunnel linking the A50 motorway in Marseille with the A55 motorway. This critical tunnel saves motorists time, allowing them to duck under the ancient, winding streets to the hilly south and east of the city.
SMTPC holds this concession until 2025. The present value of conservatively estimated profits from now to the end of the concession, plus balance sheet net working capital, appears to be substantially higher than SMTPC’s market capitalization. The company pays substantial dividends, yielding 10.7%.
An important question for investors concerns SMTPC’s plans following the end of the concession period. The obvious path for the company would be an orderly liquidation, but perhaps the company has other plans. It could bid on brand new tunnel or bridge concession projects, though these seem to be few in number in France. It could attempt to purchase existing concessions, though they would face serious competition from much larger infrastructure investors like pension funds and insurers.
There is also the question of competition. Apparently, the Prado-Carenage Tunnel is known for high tolls and traffic jams. In October, the long-planned L2 North roadway opened up, allowing drivers a free means of avoiding central Marseille. It remains to be seen just how much revenue this costs SMTPC. Certainly some, but perhaps less than expected if the new roadway quickly becomes over-burdened and slow.
Brickworks Limited – Australian Stock Exchange: BKW
A brick company! What could a boring value investor like more than that? After all, mankind has been using some variety of bricks for several thousand years with no end in sight. Brickworks is a brick manufacturer, but it’s also a lot more. Thanks to a lucky and/or skillful investment made in the late 60s, Brickworks owns a sizable interest in one of Australia’s oldest and most successful holding companies: Washington H. Soul Pattinson. WHSP is listed on the Australian stock exchange under the ticker “SOL.”
Here’s where a dowdy basic manufacturer gets interesting. Brickworks is valued at less than its stake in WHSP. Brickworks’ market capitalization is AUD 2.55 billion, while its 42.72% ownership in WHSP is worth AUD 2.70 billion. Brickworks also has property interests worth more than AUD 500 million, let alone its namesake building products segment. In 2017, the building products segment produced operating income of AUD 76 million. A conservative 6x operating income would value the segment at AUD 456 million.
Based on these very simple estimates, Brickworks appears to be worth at least AUD 3.70 billion, quite a lot more than the company’s value in the market today. Lately, the company has increased its investment in US brick manufacturers. Brickworks sold off some WHSP shares to fund the deals. Despite the share sales, the value of the company’s holdings in WHSP will continue to be by far the largest driver of Brickworks’ value.
Mechanics Bank of Richmond – OTC: MCHB
It’s no secret that I like very high-priced stocks. Not a lot of retail investors are willing to pony up for shares with five digit dollar price, and that results in lower valuation. One such stock is Mechanics Bank of Richmond. Mechanics Bank is a $6 billion institution located in Southern California.
In 2015, Ford Financial Fund purchased a controlling interest in this venerable bank. Ford Financial is run by Gerald J. Ford, an extremely successful investor in banks and other financial services companies. Mr. Ford has a history of stewarding banks to greater profitability and scale before orchestrating a sale at a large premium. This is exactly what will happen to Mechanics, eventually.
Since the takeover, Mechanics has acquired two local competitors and has grown its balance sheet from $3.6 billion to over $6 billion. I don’t know how large Mr. Ford and his lieutenants expect to grow Mechanics before seeking an acquirer, but I do know that they have made progress and will make more.
US banks with $5-10 billion balance sheets trade have a median valuation of 1.3x book value. Mechanics trades at about 1.05x book value. A sale at even 1.5x book value would fetch over $45,000 per share. Whether a sale happens in 2019 or it takes a few more years, I fully expect to earn a healthy profit on shares of Mechanics Bank.
Alluvial Capital Management, LLC holds shares of Mechanics Bank of Richmond for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at firstname.lastname@example.org.