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.
Thanks for the high quality posts. I enjoy reading your writings.
1. It seems that you generate ideas in countries that are non English speaking, such as France with Societe Marseillaise du Tunnel Prado-Carenage SA. Looking over their website, it doesn’t appear they offer a report in English.
Just curious, are you a polyglot, do you use a translator, or how are you reading these reports not in English?
2. I would love to hear, either in response to this comment, or in a separate post, how you discover companies such as Societe Marseillaise du Tunnel Prado-Carenage SA, outside of the USA.
I can understand the basics of a business document written in French, Spanish, or Italian, but I definitely am not multi-lingual. I rely on the various free translation tools out there, most of which are very good! If I really want to dig into the details, I enlist the help of a native speaker. Writing this blog has helped me develop relationships with many excellent investors in Europe and elsewhere.
I highly recommend a website called “screener.co” for investigating foreign markets.
Brickwork owns approximately 40% of WHSP and WHSP own approximately 40% of Brickworks.
^^ Exactly, Perpetual (and others) have tried and failed multiple times to unlock value in Brickworks by breaking apart the archaic cross-shareholding. It’s an obvious corporate governance issue which provides both management teams with considerable protection from a takeover/activist.
A share exchange would be incredibly beneficial for both enterprises. However, I would be more inclined to criticize the existing relationship had each company not been fairly successful and created a lot of wealth for shareholders over time.
Yes! That’s an fascinating and under-appreciated aspect that I simply lacked the time to explore. Brickworks recently sold off some WHSP to fund their acquisition of a US-based brick maker. Probably not a bad idea given that WHSP trades at fair value or a slight premium to NAV.
Societe Marseillaise du Tunnel Prado-Carenage SA:
I’ve looked a few similar plays. Depending on your tax status, you could have a problem where a companies’ value depends purely on a few years of cashflow (with no terminal value) and a lot of that cashflow is paid out in dividends. If you have to pay WHT or income taxes, then the tax leakage means the net value is much lower than the headline amount of dividends.
Brickworks Limited – Australian Stock Exchange: BKW
It looks like you have used the market cap rather than the enterprise value in your SOTP. Anyway, debt doesn’t seem to be too significant but it could reduce your value by 300m or so largely discounting the brick operations. In addition, I imagine the cost basis of the long term investment is low and there is further tax leakage when this is monetised? Does that impact your SOTP? What about a holding company discount?
I did account for withholding tax when estimating SMTPC’s value. As an American investor, there would be substantial tax leakage. You righty point out that investors must consider these issues when evaluating investments.
As for Brickworks, I didn’t bother to go into detail on the valuation. As is, the market capitalization is so far below asset value that the net debt hardly changes things. A holding company discount is appropriate, but not a large one. I view holding company discounts as a function of how well the company is actually managed and its track record. Berkshire Hathaway is a holding company, but few argue that a large discount should be applied, based on its historical success and strong capital allocation policy. Other, less disciplined holding companies with middling long-term records absolutely deserve large discounts. Brickworks has a fairly strong track record so I think a 10-15% discount would be fair.
Earlier this year MCHB management was saying they are possibly going to cross the $10b threshold themselves. Possibly a signal that they are not selling soon.
I am fine with that, if that’s what they think will create the most value. Crossing $10 billion would involve one or more significant acquisitions/mergers. Ultimately, they will sell. Investors in the fund will want liquidity.
Hopefully they stick with small M&A if they are determined to cross the $10 billion threshold. It would be easy to screw up the integration in a large deal. Any idea when the Ford funds are scheduled to liquidate? 5-7 years?
Think that M&A takeout figure for MHCB should be positioned against tangible book. A $45k per share takeout would be a ~2.75x multiple of tangible book – that’s too high, even when juicing the MHCB valuation with a premium for the deposit valuation (MHCB’s deposit base is probably its most valuable asset). Just my 2 cents, but MHCB seems more like a 8% ROE carry trade for an interim period, call it 1-2 years, as they rebuild the capital positions. Think there are better positioned (and priced) banks in the sector to allocate into given the market selloff.
If memory serves, after Ford got control of MCHB, they did a reverse split to make the shares more expensive. It may have been a 1 for 5 reverse split or perhaps a larger number. In any event, these shares, already trading for around 3,000 or so, became less liquid. I owned some shares and sold them before this happened as I would have cashed out. Obviously Ford has done well for the shareholders who were able to stay with him, including the former management. Nevertheless, the actions of Ford after he took over, raises the question of whether the Ford will respect the rights of the minority holders when he sells the bank.
Hi, for SMTPC, I would really double check that management is pro shareholders and competent.
I am French, and I do not trust French management that is not owner operated, they would usually do something stupid. And the city of Marseilles is a total basket case in terms of politics, to a level barely thinkable abroad. Have not researched SMTPC, but be carefull
Always good to remember that perverse incentives may exist!