Aberdeen is an international asset management company. They have been primarily focusing on equity investments in resource-based companies around the world. The company has been repurchasing shares. The value to be found here is based on balance sheet numbers. The company is trading at a discount to its investment portfolio:
Market Value of Aberdeen Intl: $24M CAD
Market Value of Equity Portfolio @ April 30 2009: $37M CAD
The company may be undervalued in the market because of an unfortunate and complex situation in which a $10M loan made to South African mining company Simmers and Jack may not be repaid . Even with no value attributed to this loan the equity is still undervalued. As per the debenture agreement, the company is supposed to receive a 1% net smelter royalty from Simmers and Jack, which they have in fact been paying. This royalty is held as a long-term asset and is valued at $38M on the balance sheet. I believe this is a bloated number due to the fact that the company used a 5% discount rate, which would imply a risk-free return. In fact, Simmers and Jack has proven that any dealings with them are not risk-free by refusing to repay the $10M loan. I am inclined to say that the smelter royalties " are worth more then 0" from a conservative stance. The company also owns several other assets which may end in defaults, but are not truly material in terms of their value.
There are warrants outstanding for 42M shares expiring in 2012, which may be another reason for the undervaluation. The warrants are currently valued at only $2M by the market. The total value in the market is therefore $26M. Which is still less then the portfolio of securities. I am going to say that the warrants offer a much better vehicle for capital appreciation, due primarily to their lower relative price (8 cents a share vs 27 cents for common) and the time interval till expiry.
Disclosure: I own warrants and shares issued by AAB.
Wednesday, August 19, 2009
Sunday, August 9, 2009
Hudson Highland Group (HHGP) – Value Opportunity
Hudson Highland group is a specialized staffing agency. They provide permanent and contract based staffing solutions. Hudson was spun-off from Monster Worldwide in March 2003. That being said, the staffing industry is neither the most exciting industry nor is it unsatisfactory. The near term industry outlook is volatile, however, the longer term outlook is stable; people will always need jobs, just like they have in the past. For that reason I believe that HHGP’s past earnings record is sufficiently representative of the future to use it as a guide. As of right now the stock has a 51 M market cap and is trading at $1.93 per share.
First and foremost, the balance sheet in the recent quarterly report shows 46 million of cash and 11 million in borrowings. This leaves 35 million in net cash. Right away you can separate that cash from the operating business. If you take the cash value out of the market cap you are left with a value of 16 M for the operating business. This is far too low and I will show why.
The income account has been muddled up the past few years due to all sorts of reorganization expenses and acquisition integration expenses. The value of the company should be determined based on a valuation of each of the separate segments. The regional segments are Hudson Americas, Hudson Europe and Hudson Asia Pacific.
SEGMENT VALUATION
Hudson Europe and Hudson Asia Pacific are both satisfactory businesses that are profitable, even in the current climate. The loss reported as earnings is primarily a result of reorganization and losses suffered by Hudson Americas. The different segments should be valued separately.
I will allocate corporate overhead expenses roughly based on percentage of revenue basis for the purpose of valuation. Corporate overhead of 30 M is allocated as follows:
-Hudson Americas: 25% = 7.5M
-Hudson Europe: 37.5% = 11.25M
-Hudson Asia Pacific: 37.5% = 11.25M
I believe that the 2008 results are at minimum representative of the company’s long-term earning power because of the difficult climate. In other words, earnings going forward are likely to average at least as good as 2008 results.
Hudson Europe earned roughly 14 M in 2008 after adjusting for reorganization expenses and goodwill impairment charges. After deducting corporate expenses, after-tax earnings for Hudson Europe are roughly 4 M. Since the business has in fact grown over the last 5 years I’m inclined to use a satisfactory multiple of about 8. This gives the segment a value of 32M.
Hudson Asia Pacific earned roughly 14M in 2008 as well after adjustments. After corporate expenses income after-tax is roughly 4M. The valuation here is similar to Hudson Europe and I will also use a multiple of 8. This gives the segment a value of 32M as well.
Hudson Americas earned roughly -0.4M in 2008. After corporate overhead expenses the segment lost about 5.6M after-tax. This is not a horrible result considering the environment. Of course, if the segment were to continue losing money, it would have no going-concern value. Because Hudson Americas is borderline profitable I am inclined to say that the segment is not valueless. If it were trading in the market alone it would probably be valued based on current assets plus a premium for the prospect of profitability. At worst, I’d say this segment is worth 0, however, there is an embedded option which gives the chance for significant upside if the segment becomes profitable.
TOTAL VALUE
The total equity value is net cash + Hudson Europe + Hudson Asia Pacific + Hudson Americas. This calculation results in a value 35M + 32M + 32M + 0M (with possibility of upside) = 99M. At the current market cap of 51M this stock is trading at 50% of it’s value, leaving a wide margin of safety as well as a probably large gain.
US DOLLAR HEDGE BONUS
In addition, deriving the majority of sales overseas, the company is pretty good hedge against the US dollar which is likely to decline over the next 10 years.
Disclosure: I own shares of HHGP.
First and foremost, the balance sheet in the recent quarterly report shows 46 million of cash and 11 million in borrowings. This leaves 35 million in net cash. Right away you can separate that cash from the operating business. If you take the cash value out of the market cap you are left with a value of 16 M for the operating business. This is far too low and I will show why.
The income account has been muddled up the past few years due to all sorts of reorganization expenses and acquisition integration expenses. The value of the company should be determined based on a valuation of each of the separate segments. The regional segments are Hudson Americas, Hudson Europe and Hudson Asia Pacific.
SEGMENT VALUATION
Hudson Europe and Hudson Asia Pacific are both satisfactory businesses that are profitable, even in the current climate. The loss reported as earnings is primarily a result of reorganization and losses suffered by Hudson Americas. The different segments should be valued separately.
I will allocate corporate overhead expenses roughly based on percentage of revenue basis for the purpose of valuation. Corporate overhead of 30 M is allocated as follows:
-Hudson Americas: 25% = 7.5M
-Hudson Europe: 37.5% = 11.25M
-Hudson Asia Pacific: 37.5% = 11.25M
I believe that the 2008 results are at minimum representative of the company’s long-term earning power because of the difficult climate. In other words, earnings going forward are likely to average at least as good as 2008 results.
Hudson Europe earned roughly 14 M in 2008 after adjusting for reorganization expenses and goodwill impairment charges. After deducting corporate expenses, after-tax earnings for Hudson Europe are roughly 4 M. Since the business has in fact grown over the last 5 years I’m inclined to use a satisfactory multiple of about 8. This gives the segment a value of 32M.
Hudson Asia Pacific earned roughly 14M in 2008 as well after adjustments. After corporate expenses income after-tax is roughly 4M. The valuation here is similar to Hudson Europe and I will also use a multiple of 8. This gives the segment a value of 32M as well.
Hudson Americas earned roughly -0.4M in 2008. After corporate overhead expenses the segment lost about 5.6M after-tax. This is not a horrible result considering the environment. Of course, if the segment were to continue losing money, it would have no going-concern value. Because Hudson Americas is borderline profitable I am inclined to say that the segment is not valueless. If it were trading in the market alone it would probably be valued based on current assets plus a premium for the prospect of profitability. At worst, I’d say this segment is worth 0, however, there is an embedded option which gives the chance for significant upside if the segment becomes profitable.
TOTAL VALUE
The total equity value is net cash + Hudson Europe + Hudson Asia Pacific + Hudson Americas. This calculation results in a value 35M + 32M + 32M + 0M (with possibility of upside) = 99M. At the current market cap of 51M this stock is trading at 50% of it’s value, leaving a wide margin of safety as well as a probably large gain.
US DOLLAR HEDGE BONUS
In addition, deriving the majority of sales overseas, the company is pretty good hedge against the US dollar which is likely to decline over the next 10 years.
Disclosure: I own shares of HHGP.
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