Siem Industries Revisited – SEMUF

I originally wrote about Siem Industries here in April, noting the extreme divergence between the company’s trading price and the market value of its publicly-traded equity investments. Since then, the company has released both fiscal 2011 and first half 2012 reports.

Despite progress at the company, the valuation gap remains. Here are some highlights from the previous two reports:

– At the time of the original post, book value per share stood at $86.69. Halfway through 2012, book value has increased to $129.79 per share. The majority of the increase is the result of a write-up in the carrying value of Siem Industries’ investment in SubSea 7. SubSea 7 merged with Acergy SA in January 2011, triggering the revaluation. The $601 million write-up that resulted was accounted for as a deferred gain and is, according to the company, free of any tax consequences.

– Shares outstanding have decreased by 70,330 or 0.46% since the the time of my post. While modest, it is encouraging the company continues to repurchase shares far below their intrinsic value. Each time the company shells out $65 or $70 to repurchase one of its own shares, it buys a portfolio of public holdings worth $122 or so.

– On the subject of public holdings, the company’s portfolio has seen some changes. STAR Reefers was renamed “Siem Shipping Inc.” and the company now has a 21% interest in Veripos Inc., spun off from SubSea 7 in late July.

The value of the company’s public holdings has declined somewhat, though part of the decline is due to an $48.1 million dividend received from SubSea 7 in July 2012. The value of the company’s equity portfolio still substantially exceeds the company’s market capitalization.

– In May, the company recorded a gain of $81.4 million ($5.33 per share!) from the sale of its claims against Lehman Brothers International (Europe). Simply put, the company had loaned several million of its SubSea 7 shares to Lehman Brothers as part of a bond marketing effort. When Lehman went under, the shares went with it. Siem Industries sold its right to any eventual recovery from Lehman in return for cash upfront.

– After adjusting for the special dividend and Lehman recovery income, the company’s pre-tax profits increased from $26.15 million to $92.08 million in the first half of 2012 compared to ayear earlier.

All in all, the most recent reports paint a picture of a healthy, profitable company.

Subsequent to releasing its first half 2012 report, Siem Industries announced a $400 million exchangeable bond issue. The bonds are due in 2019 and pay 1% annual coupons. While the bonds are subject to a variety of call and put provisions, their most interesting feature is their exchangeability for shares of SubSea 7 that the company owns. The bonds are exchangeable for SubSea 7 shares at $29.00 per share, 25% above where the shares currently trade. The bond issue can be looked at as a hybrid traditional debt/covered call transaction where the company trades some upside on its SubSea 7 holdings for access to substantial capital at nearly no cost. The $400 million bond issue will cost the company just $4 million annually and give the company substantial firepower for acquisitions or any other corporate purpose. Just what Siem Industries is planning is an open question.

Despite a small gain since my first report, Siem Industries remains a compelling value, trading at just over half the value of its publicly-traded equity holdings alone. The company also owns significant private assets. While there is no readily identifiable catalyst on the horizon (with the possible exception of the recent bond issuance), time can be catalyst enough in deep value situations.


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