Loews Corporation (L) - Value Investors at a Discount?

Loews Corp is a diversified holding company, with significant interest in P&C insurance, natural gas, and offshore drilling through controlling ownership of its publicly traded subsidiaries:

-Diamond Offshore Drilling Inc. (NYSE: DO): 2nd largest publicly traded offshore drilling contractor after Transocean. Operates 47 offshore rigs.
-CNA Financial Corp. (NYSE: CNA): Struggling P&C insurer with underwriting history below the industry average.
-Boardwalk Pipeline Partners, LP. (NYSE: BWP): 3 natural gas pipeline systems extending from the South-West US to North-East US.

Non-Public Subsidiaries:

-Highmount: Natural gas production and exploration company with assets in Texas, Michigan, and Alabama.
-Loews’ Hotels: Luxury hotel chain operating 18 hotels in the US and 2 hotels in Canada.

The equity securities of Loews Corp are undervalued on a NAV basis. The shares are trading at a discount to their interest in their publicly traded subsidiaries. When you add in the fact that you are getting $12.16 per share of other assets for free, after subtracting parent company debt, the shares present a truly compelling value opportunity.

In addition, the value creation by this company's management over the past 50 years has been extraordinary. They have a long history of successful transactions (ex. Lorillard), which may continue into the future. They are self proclaimed value investors, and have shareholder interests in mind. Usually family managed conglomerates trade at discount to NAV because of shareholder unfriendliness, or dual share structures, but this should not be a problem in this scenario.

The company is also using cash to repurchase shares, and has a history of reducing outstanding shares by 25% in every one of the past 4 decades.

Investors could also play this trade by shorting out the market risk of the publicly traded shares.

See valuation below:



Have fun.

NOTE: No Holding. This is not an invitation or a recommendation to purchase securities. Please do your own research.

GBO Inc

We feel that the shares of GBO Inc. provide a compelling value opportunity from recent trading prices.

GBO manufactured windows and doors, primarily in 3 types: exterior doors, PVC windows and wooden windows. The company operates out of Quebec, Canada where it has 3 plants and provides jobs for 500 workers. Sales are divided as follows: 43% Quebec, 30% Ontario, 5% Atlantic Canada, 22% US.

The company recently completed the sale of 2 of their divisions for cash considerations of $12.5M. The divisions sold manufactured PVC windows. The company is now trading at ~65% of current assets after subtracting all liabilities, what we feel in this case can be used as a rough indication of liquidation value. A large portion of current assets is in cash and the cash burn rate is minimal.

In addition, if that is not compelling enough, the company announced on Oct. 7, 2009, that they would be repurchasing 15M common shares for $0.20 a share, or 46% of their outstanding shares! That compares to their last trading price of $0.17. As of now, the bid has not yet commenced.

If 46% of the outstanding shares are successfully repurchased at $0.20, which assumes tendering by majority holders, our estimate of the per share liquidation value post issuer bid would be ~$0.36.

Keep in mind that, this stock is VERY thinly traded, with public float of only about 10%. 60% of the outstanding shares are held by Fonds de solidarite des travailleurs du Quebec (FTQ). We feel that the tender is likely to come from these holdings: their position is in the “turnaround” portfolio of the FTQ. The tender offers them an exit opportunity. The other 30% is held by insiders.

Unfortunately, we have been unable as of yet to acquire shares at our limit price. The shares traded at $0.13 on January 14, 2010, and in the past few days have ticked up to $0.16 and then to $0.17. Recent trading activity suggests shares are available, however an investor should tread very carefully; especially in considering post-repurchase liquidity if they should choose to hold rather than tender.

Woopdeedoo.

SG

NOTE: No holding. This is not an offer to buy or sell securities. Do your own research.

Chesswood Income Fund (CHW.UN)

We believe that the trust units of Chesswood Income Fund present a compelling value opportunity as well as offering the potential for growth.

Chesswood Income Fund owns 3 businesses: Pawnee (an equipment lease financing company operating in the US), Acura Sherway (an automobile dealership in Toronto), and Lease-win (an automobile lease financing company) which is being wound-down. We very much like the business of Pawnee, where most of the trust’s profits come from. The business of Acura Sherway, while not in the most attractive industry, has an excellent location adjacent to sprawling Sherway Gardens shopping mall in Toronto. Acura Sherway has shown remarkable resilience to the economic downturn, especially for an automobile dealership, although it does not throw off very much in terms of profits. On a consolidated basis the fund as a whole has operated profitably throughout the credit crisis, after adjusting for goodwill impairments.

We believe the real value driver going forward will be Pawnee, with added optionality from the business that is Acura Sherway.

Pawnee offers commercial equipment lease financing to “B” credit businesses and start-ups for up to but not exceeding $30,000 per lease. We like this “niche” business because if risk is managed properly the margins are much better than a typical leasing company. We feel that management has done an excellent job of managing risk as proven over the trying credit-crunch period.

The company has a rigorous credit testing process and generally only funds a lease when they feel they are getting an above average risk/reward ratio; they actually fund less than 10% of lease applications received by dollar volume.

As a matter of protection, Pawnee diversifies to an incredible extent. No individual leasing contract makes up more than 0.01% of the lease portfolio. Leases are also diversified across 85 different industries and 65 different equipment categories. All leases require a personal guarantee from the business owner. And they eat their own cooking too; Pawnee keeps all of their leases on-balance sheet, rather than generating fees through the origination and sale process.

Obviously revenue from leases must exceed charge-off rates in order for the investment to be successful; so how about little bit of math. Since 2000 charge-offs as a % of net investment in leases has averaged 8.5%, while lease income as a % of net investment has averaged 30%. Assuming credit standards have not changed (leases funded as a % of applications received have not), this would imply a normalized charge-off rate of $6.8M, and revenue of $24.4M on $81.2M net investment in leases.

Assuming no recovery in revenue streams, and adjusting to normalize provision for credit losses, earning power of at least $7M can be conservatively expected within the next few years. Using this number, EPS of $0.76 is not to be unexpected, after assuming conversion of outstanding dilutive securities. The trust units are currently trading at only 5.3 times this number, and at 75% of book value.

It is important to bear in mind that Pawnee’s lease portfolio grew at a rate of ~17% between 2000 and 2006, and averaged 12% between 2000 and 2008. If the pre-credit crisis expansion rate is any indication then we feel that the patient unit-holder may be pleasantly surprised with a purchase at today’s price of $4.02.

Although we would rather own a pure-play on Pawnee, Acura Sherway should not be a drag on investment performance through a holding in Chesswood Income Fund. We do, however, feel that a transaction to split Pawnee and Acura Sherway would be beneficial to unitholders.

NOTE: If you are Canadian as we are, keep in mind by holding this position you are incurring foreign exchange risk, even though the equity is listed on the Canadian market. Management owns ~28% of CHW.UN on a diluted basis.
NOTE: Author has a long position in CHW.UN. This is not a recommendation or an offer to buy or sell securities. Do your own research.

Quest Capital Corp (QC) - Update

Quest Capital has announced a normal course issuer bid under which it will repurchase up to 10% of its outstanding shares. In addition the company has repurchased $20M worth of their preferred share liability. I think that this bodes well for an investor in the company's common stock, as it shows they are making progress on resolving their loan impairments and that there has been significant cash flow generated by monetization efforts. Also, the insiders are still buying shares, acquiring roughly 7% of the company since the beginning of this year.

Disclosure: I own shares in QC.

SG

Quest Capital Corp (QC)

(All data from quarterly June 30 2009)

Quest capital is a mortgage finance company in Canada. They focus on short-term (less than 2 years) mortgage lending, and therefore do not have significant exposure to interest rate risk. The investment thesis for this company is quite simple; the company was hit quite hard by the credit-crisis and is now trying to monetize its loan portfolio. They have stopped issuing new loans. The share price is trading at less than a reasonable estimate of what the company will be able to recover through its monetization efforts.

The market cap of QC is $170M or $1.12 per share with 151M shares outstanding. It appears as though this price is much too low; the shares are trading at 55% of adjusted book value.

The company has paid down all its debt and is working on the repayment of its preferred shares. The preferred shares carried a coupon of 13.5% that has now been renegotiated to 12.75% and will be reduced further to 12% on January 1st 2010. Preferred shares have been subtracted in the calculation of book value above.

The company has 49 loans outstanding with total principal of $369.8M. They have taken provision for loan losses of $20M. The company classifies loans as impaired when either principal or payment becomes past due by 90 days. 17 of the 49 (34%) loans outstanding have been deemed impaired as at the end of Q2. Total impaired principal is $162M (44%). However, management’s estimate of fair value of the collateral underlying these impaired loans is $171M.

There is also $6M of loans past due but not yet classified as impaired. For the purpose of this analysis I will assume this amount is already impaired. The $6M appears to be the last of the past due loans.

The nature of the business is such that the balance sheet can be used to determine the value of the business to a purchaser of the company’s common shares.

The majority of the loans outstanding should be partially recoverable, if necessary, through the monetization of collateral. Since the total collateral value is estimated at $171M, which is more then the total value of the impaired loans, it is reasonable to assume that most, if not all, of the principal will eventually be recovered. For this reason, I feel there is a higher probability for a positive outcome.

It seems as though the current price offers an appealing risk-reward scenario. Of course the success of this investment depends on stability in the real-estate market. Even if a relapse were to occur, it is not certain that a purchaser of the shares at these prices would suffer a permanent impairment of capital. The situation as it is along with the fact that the CEO is purchasing shares seems to provide a sufficient margin of safety to warrant an investment of capital in this situation as part of a diversified portfolio.

Disclosure: I own shares in QC. This is not a recommendation to purchase or sell securities.

And It Doubles...

Arctic Glacier Income Fund (AG.UN) mentioned here yesterday, issued a press release last night at around 7:30:

Arctic Glacier Income Fund announced that its U.S. subsidiary, Arctic Glacier International Inc., has reached agreement with the U.S. Department of Justice. The agreement settles all charges related to allegations that three former employees conspired with a co-conspirator company from January 2001 through July 2007 to allocate packaged ice customers in southeastern Michigan and the Detroit metropolitan area. Arctic Glacier initially entered into this market in 2005 when it acquired shares of certain companies in that market. Because it acquired shares it assumes liability for such practices and conduct in those predecessor companies. Under terms of the agreement, Arctic Glacier International Inc. agreed to plead guilty and to pay a fine of US$9 million, payable in instalments over the next five years. Arctic Glacier has also agreed to cooperate with the DOJ's ongoing investigation of other companies and individuals. The agreement remains subject to court approval.

The shares opened up 120% this morning.

Unfortunately, I did not have a position. This is just another example of why it makes sense to bet against the crowd.

The entire company is now trading at $156M in the market. Average cash flow has been about $30M for the past 4 years. If you take out tax they will have to pay once they convert over to a corporation, whenever they decide to do it, they are likely to produce $24M of cash. Therefore, the stock still looks cheap at 6.5 times. The packaged ice industry is the type of stable industry you would expect to be trading closer to 13 or 14 times.

SG

Stocks On My Radar

Although I have not had much time recently to do any in-depth analysis, here are some stocks that appear to offer interesting characteristics and the potential for an attractive buy price:

World Color Press – Previously, “Quebecor World”, in the printing business. The company emerged from bankruptcy protection on July 21, 2009. It entered bankruptcy largely due to financial issues rather then fundamental business problems. The common stocks of recently reorganized companies sometimes offer attractive buying opportunities due to selling pressure by previous debt holders. Reorganization information is at this link (including management projections):

World Color Press - Plan of Reorganization Documents

Arctic Glacier Income Fund - Recently cut their dividend. They are now the subject of US Department of Justice Antitrust investigation. The accusation is that Arctic Glacier and its peers in the packaged ice industry had been avoiding competing with each other in the same geographical market. One of their competitors the Home City Ice Co. has already plead guilty and is facing a fine of between $24M and $48M USD. Arctic Glacier is a larger company and is likely facing a fine larger than that if proven guilty. The stock is trading at approx. 2 times avg. cash from operations valuing the entire company at about $69M CAD. It looks like this might be too low even given the antitrust investigation and warrants further investigation.

AG Growth International – What a horrible name for a corporation…Sounds like something out of my grandmothers’ mutual fund portfolio. That aside, the company makes agriculture equipment and grain storage products. They have recently converted from an income fund to a corporation via reverse merger, which may be a cause for undervaluation. I don't know anything about the agriculture industry, but the shares look cheap based on how much they are on track to earn this year. Revenue for the first 6 months of 2009 vs. 2008 is up 34%, partly due to price increases. 3rd quarter is usually strongest for their seasonal business.

TVA Group Inc. – Trading at 6.5 times LTM Earnings. They are a francophone media company operating in 3 businesses: television (conventional and specialty), publishing and movie distribution. They are the market leader (about 56% market share) in the francophone conventional television market and are expanding into the more profitable specialty channel industry (currently 8% market share). Recently purchased Sun TV is losing about $6M after tax, and may be written off soon which will result in earnings increasing by about 10%. A rebound in the publication segment could produce comparatively large gains in earnings based on recent margin expansion in this business segment. The distribution business operates as a sort of "option" and can produce large gains depending on if any blockbuster films are released in a given year. The subordinated voting structure is a potential risk. One person I talked to suggested that the management might be depressing the stock price in attempt to buy the entire company cheaply. It is possible but it seems like they would be doing many more things wrong if they were trying to depress the stock price, rather then booking record revenue like they did in 2008. They have repurchased about 10% of their shares in the last year and have filed an issuer bid to repurchase another 5%. My feeling is that 6.5x earnings is much too low. For instance, competitor Astral Media trades at 12x.

Other stocks looking cheap at first glance:
- Clublink Corp.

I'd like to mention again that I have in no way done in-depth analysis on any of these stocks besides TVA Group. Thus far, they are just things I am looking into.

Disclosure: The above is in no way an offer or recommendation to purchase or sell securities. I own shares in TVA Group Inc.

SG

Aberdeen International (AAB) - Value Opportunity

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.

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.

Cheung Kong Holdings LTD - Value Opportunity

Market environments like the current environment often create opportunities that are so obvious that in-depth analysis proves pointless. Take for instance Cheung Kong Holdings LTD, a company that trades on the Hong Kong stock exchange and on the American OTC market as depository receipts (OTC: CHEUY).

Cheung Kong is a real-estate conglomerate, mostly focusing on property development and property management. However, they also retain a controlling interest in CK Life Sciences which is a pharmaceutical company. They currently have operations in 56 countries around the world, with a large focus in Asia.

This investment hypothesis is based on several quite basic, and quite obvious concepts:

1. The company has seen growth averaging around 25% for the past 15 years.
2. The company has about 20 projects currently in development set to be finished in the next year, so the growth rate is sustainable in the short-term.
3. China’s GDP has grown about 7-9% over the past 10 years and this growth will translate into a long-term prosperity for Cheung Kong.
4. Real estate is a stable industry. While it is interest rate sensitive, the future economics of the industry will look similar to how they have in the past under normal circumstances.
5. The current low-interest rate environment should allow for improved financing position. Strong financial position should ensure Cheung Kong’s ability to secure financing.
6. This investment can double as a play on currently depressed real estate prices.
7. Li Ka-Shing and Li Tzar Kuoi (chairman and managing director) own in aggregate about 77% of outstanding shares in the company. This will act as an incentive to shareholders’ interests.
8. Trading at only 7 times last years earnings. Even if the company was not growing at 25% per annum this would be a bargain. With 25% growth the market is effectively putting a negative value on growth.
9. If the company is able to earn $13 HKD a share in the coming years, an extremely conservative estimate, the company is trading for only about 4.5 times earnings.
10. The company is trading at $62.8 HKD which is about 66% of book value per share $98.9 HKD, using fair value accounting for investment properties. Once again, the market is applying a negative value to the operating business and future growth effectively offering them for free.

At the current price of $62.8 HKD per share (about $8 USD) this company investment is a bargain. Typically investors will have to pay out the nose for growth. The recent financial turmoil has created situations such as this one, where the investor is effectively paying nothing for 20+ % growth.

SG

Disclosure: I do not own shares of Cheung Kong.