TRE - Treasure ASA

[alwaysinvert]

Today, the Hyundai Motor Group issued a press release describing a restructuring plan to eliminate circular ownership within the group.

 

As part of this transaction, Hyundai Glovis will purchase operating assets from Hyundai Mobis through issuance of new shares. If the transaction obtains all necessary approvals in Korea (including the annual general meeting scheduled for 29 May), Treasure ASA's shareholding will be reduced from currently 12.04% to 4,64% once the planned transaction is completed in July 2018.

 

http://www.newsweb.no/newsweb/search.do?messageId=447857

 

http://www.theinvestor.co.kr/view.php?ud=20180328000920

[peripatetic]

The announcement posted above led me to have a new look at Treasure. I am cautiously optimistic that this is the trigger I have been waiting for, and have bought back the position I lost patience with last year. My thinking goes as follows:

 

 

1. Since being spun off in 2016, Treasure ASA seems to have come to rest at a 35%-40% discount to its net asset value, which is comprised of a 12.04% stake in Hyundai Glovis and a negligible net cash position. As I write this, Glovis last closed at KRW 188,000 and TRE is trading at NOK 17.6, implying at 38% discount. Glovis is up some thirty-eight percent this year, and while TRE is hanging on, the discount is not closing.

 

2. As per the above announcement, the Hyundai conglomerate is set for a major reshuffle, with non-core parts of Hyundai Mobis to be effectively spun off to Glovis, with Mobis shareholders receiving compensation in the form of shares in Glovis. I do not pretend to have a good grasp of the terms of these acrobatics, but Mobis shareholders' opposition to the proposed spin-off indicates the result will likely be beneficial to Glovis. So does the Glovis share price. For now, I'm going to go with the hypothesis that the reorganization, if approved on May 29th, is neutral or positive to Glovis.

 

3. While I do not have a strong opinion as to whether the reorganization will create value for Glovis' shareholders in the long term, I do think it is likely to trigger a significant repricing of shares in Treasure ASA by the end of 2018. As Glovis' acquisition of the assets spun off from Mobis will be paid for in Glovis shares, the number of shares outstanding in Glovis is set to more than double. That will bring Treasure's ownership in Glovis down from 12.04% to 4.64%. The Wilhelmsen family has already demonstrated, by spinning off Treasure, that the strategic importance of owning a non-controlling stake in Glovis is waning. With its ownership diluted below 5%, my bet is that we will soon see Treasure dispose of its Glovis stake altogether. Not only is Glovis no longer of strategic importance, but as has already been pointed out by alwaysinvert, falling below 10% ownership would make a disposal of the Glovis stake subject to capital gains taxation in Norway. Unless they dispose of it within the current calendar year, that is.  With nothing but cash on the balance sheet, and a controlling owner with a track record of being both shareholder friendly and a good capital allocator, the share price should move closer to Treasure's net asset value. Reducing the discount to net asset value from its current 38% to a more normal 10-20% would imply an upside of 30-40% from today's share price of NOK 17.60. Obviously, a move in Glovis' stock price could increase or decrease that upside.

 

4. So what if the Hyundai reshuffle does not get voted through? Well, Glovis is up quite a bit so far this year, and would likely give that back. Treasure would follow suit, but I don't see the discount widening much.

 

 

Again, my understanding of the whole Hyundai mess is lacking and I am fairly agnostic with respect to what value that may or may not create. My bet is simply on this narrowing the discount to Treasure's net asset value. That said, I have so far chosen not to hedge out the Glovis exposure. Anyone else had a look at this? Any views on which way the vote will go on May 29th?

[writser]

Interesting idea. I see that a private investor proposed a liquidation at this year's AGM but the board is against it. Might be an interesting meeting to drop by to try to get some idea of future plans.

 

Hard to judge if the Wilhelmsen conglomerate wants to sell their stake or sees it as strategic. If they want to sell, I suppose there might be some buying interest around the Hyundai restructuring (if that goes through). And a 25% capital gains tax is a big incentive to do something ..

 

For the Norwegian tax experts: suppose (best case) that Treasure ASA decides to liquidate: what would be the tax consequences of such a liquidation for its investors?

 

 

[_JJ_]

That will bring Treasure's ownership in Glovis down from 12.04% to 4.64%. The Wilhelmsen family has already demonstrated, by spinning off Treasure, that the strategic importance of owning a non-controlling stake in Glovis is waning. With its ownership diluted below 5%, my bet is that we will soon see Treasure dispose of its Glovis stake altogether. Not only is Glovis no longer of strategic importance, but as has already been pointed out by alwaysinvert, falling below 10% ownership would make a disposal of the Glovis stake subject to capital gains taxation in Norway.

 

I don't think it works like this.

 

"Participation exemption – Capital gains derived by a Norwegian limited company on the disposal of shares in another Norwegian (or EEA resident) limited company are exempt from taxation. For gains realized on the disposal of shares in a company in a low-tax jurisdiction within the EEA, the exemption applies only if real business activities are conducted in that jurisdiction. Capital gains realized by a Norwegian limited company on shares in a company resident in a non-EEA country are exempt from taxation if at least 10% of the shares have been held for at least two years and the foreign company is not resident in a low- tax jurisdiction."

 

Source:

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-norwayhighlights-2018.pdf (page 2)

 

It makes sense that after you have held the shares for more than two years it doesn't matter if you get diluted below 10% or sell down the stake below 10%

[writser]

I agree that that interpretation would make sense but I am not 100% convinced that that is the correct interpretation either - i.e. if you have owned 10% of a company for 2 years you don't have to pay capital gains taxes for the rest of your life no matter what happens in the future?

 

In any case I'd like a bit more certainty about the tax situation. I asked the company for a clarification but: "there are so many moving parts in this transaction that we cannot comment on any implications for Treasure ASA until after all approvals in Korea are in place. [..] Once our Board of Directors are giving us a go-ahead, we will inform the market uniformly on impacts regarding the SHA, board representation and tax".

[alwaysinvert]

My understanding is that there are no locked in gains in the shares atm, Wilhelmsen took care of that in 2014 and 2015 (check note 5 in WWASA's 2014 AR) by changing the ownership structure. The prices "paid" in the current holding company are still quite a bit higher than today's stock price. I don't know exactly how this works legally, but I remember it costing them a fair bit of money to do. They commented on those costs at the time but I haven't managed to chase down exactly what they said again.

 

However, as I understand it they will have to pay additional taxes on dividends after the ownership goes below 10%.

 

Otherwise I have pretty much reasoned completely the same as perpatetic. It makes the block of shares way more liquid too. if nothing else, they could probably just sell it over the market now.

[peripatetic]

Thanks for pointing that out, alwaysinvert. It makes sense that their tax cost basis would be based on the market value at the time of the 2014 transaction, meaning Glovis still has quite a bit to catch up before we are back in capital gains territory.  (I got sidetracked by the fact that NAL carried the Glovis shares at a cost of USD 300m, before reclassifying these as "available for sale financial assets" in 2016. )

 

So I guess that means Treasure is in less of a hurry to dispose of the Glovis stake. Still, the dilution to below the 10% threshold will certainly make dividends subject to taxation in Norway. (I think you're too optimistic, JJ, that having been above the threshold in the past will provide lasting relief.) Taxes aside, the key point remains that with the stake diluted, the SHA voided and the board seat gone, there's simply no reason to hold on much longer.

[writser]

https://www.bloomberg.com/news/articles/2018-05-21/hyundai-scraps-vote-on-8-8-billion-deal-after-elliott-pressure

[alwaysinvert]

I assumed that the family had already lined up support from NPS (and possibly other institutions) before they announced the merger. The Samsung/Elliott case should have been instructive. I was 100% wrong in that assumption. It's hard to understand what they were really thinking. Maybe they always just saw it as an opening bid.

 

It will be interesting to see if they come back with some tweaks soon or if it will turn into a dragged out story.

[writser]

Discount now at ~45% by my quick calculations. Glovis itself also beaten down from ~180k to ~125k KRW after the proposed transaction was cancelled. If Glovis management successfully implements another reorganisation you are potentially looking at a double whammy. For example if Glovis is bought out at a small premium (not that I think that that will happen) Treasure ASA shares could easily be worth 100% more than the current market price.

 

Might be an interesting entry point. Hard to handicap the underlying Korea/Chaebol situation though.

[alwaysinvert]

Discount now at ~45% by my quick calculations. Glovis itself also beaten down from ~180k to ~125k KRW after the proposed transaction was cancelled. If Glovis management successfully implements another reorganisation you are potentially looking at a double whammy. For example if Glovis is bought out at a small premium (not that I think that that will happen) Treasure ASA shares could easily be worth 100% more than the current market price.

 

Might be an interesting entry point. Hard to handicap the underlying Korea/Chaebol situation though.

 

Your timing seems to have been fairly good

 

https://newsweb.oslobors.no/message/466252

 

Not a large repurchase but they are pretty restricted by their available funds. Apparently there was not enough shareholders willing to part with their stock to reach the maximum of 2m shares at 12 offered by the company.

[alwaysinvert]

Another repurchase recently: https://newsweb.oslobors.no/message/468259

 

Can hopefully continue buying back at big discounts as funds become available to them.

[writser]

Your timing seems to have been fairly good

 

Only in theory.. Didn't actually pull the trigger.

[writser]

Reference is made to the notice issued on 30 April 2019, where Treasure ASA ("the Company") launched an offer to buy back up to 1.000.000 shares in Treasure ASA. The company did not receive any offers to purchase shares.

 

Treasure ASA has been trying to buy back shares but nobody is selling. Discount to NAV is 40%+ again, larger than the average of the past few years. On-exchange volume is minimal. Glovis might be a cyclical business with some (corporate governance) hair but had an average ROE of 20+% the past ten years, is conservatively leveraged, growing, pays out a smallish dividend and is not diluting shareholders.

 

Through treasure ASA you are buying Glovis at ~0.8x book and ~6.5x average last 5y earnings. I agree with Packer that there should be a holding discount due to double taxation (Glovis dividend taxed in South Korea and Treasure ASA dividend taxed in Norway) and overhead costs. However, both dividends are smallish and Treasure ASA has been trying to buy back shares instead which is more tax-efficient. And overhead is minimal, ~$300k p.a. on a $550m asset base. As a major holder Treasure ASA has no tax liabilities when they monetize their stake (which I believe is the endgame). I believe a smaller discount is warranted.

 

Multiple ways to win here. Treasure ASA getting more aggressive in closing the discount and/or monetizing this vehicle, a sudden jump in Treasure ASA stock price due to illiquidity and low free float, a resolution of the Hyundai conglomerate mess, Elliott getting involved again, etc. In the meantime Glovis is compounding at a nice rate.

 

Last time I posted something optimistic in this thread I actually didn't pull the trigger and shares shot up 30% in a few weeks .. At that time you could buy Glovis at even more attractive 'look through'-multiples. But as of now it still looks cheap and boring to me, which I like. I bought a small starter position.

[writser]

H1 2019 available: https://www.treasureasa.com/news . I estimate current NAV per share is about 24.5 NOK vs a 13.25 share price for a ~46% discount. Company bought back 2.2m shares the last few months and is trying another 1.5m share buyback through a bookbuilding proces with prices up to 13.50 NOK. We'll see if they can get any shares this time - last time nobody was interested. I still like this as a small, boring position at the current discount.

[compounding]

H1 2019 available: https://www.treasureasa.com/news . I estimate current NAV per share is about 24.5 NOK vs a 13.25 share price for a ~46% discount. Company bought back 2.2m shares the last few months and is trying another 1.5m share buyback through a bookbuilding proces with prices up to 13.50 NOK. We'll see if they can get any shares this time - last time nobody was interested. I still like this as a small, boring position at the current discount.

 

This tender should have a higher probability of success since it's priced above market, which the last one wasn't. Think it's worth noting that Hyundai Glovis has performed well the last few quarters as well; steadily increasing sales and earnings. The share price is up 50% or so from the bottom in Q3 2018, but it's still at just over 9x EV/EBIT, which via Treasure becomes quite attractive considering the 46% discount. Multiple ways to win from here as a shareholder of Treasure: continued good performance for Glovis, revaluation towards historical averages at Glovis, restructuring within Hyundai, buybacks and/or the discount tightening at Treasure.

[writser]

The truth was somewhere in between. They managed to buy back 465k. The buyback program is very slow and opportunistic. If they wanted they could probably easily borrow enough money to launch a significant tender offer. They can probably even borrow $100m to buy out all minority holders at a big premium - but if they wanted that they would probably not have listed this vehicle in the first place. Is Wilhelmsen even interested in this vehicle trading around fair value? I'd say so given the buybacks, dividend and in fact I think the whole reason they spun it off is to make the value of their assets more transparant. But I'm not sure. Maybe there are some tax consideration I am unaware of.

 

Not sure what the Treasure ASA endgame plan is (probably wait for something to happen in Korea first?) but at the current discount I don't really care. I basically agree with the above post. The underlying asset seems attractive, holdco overhead / tax leakage isn't too big of an issue, they buy back some shares and though I think a discount is warranted until some catalyst changes the picture even a re-rating to a ~30% discount (and shares actually traded around that level both in 2017 and 2018) implies 25% upside.

[alwaysinvert]

My guess is that they spun it out partly to make the Wallenius Wilhelmsen merger easier and partly because they expected the Hyundai restructuring to play out earlier. I don't think making pricing more efficient was part of the rationale.

 

I'm not holding out great expectations for value accretion via buybacks - the free float is just too low to allow that. Still, whatever they can and will do is nice. A buyout at some discount would make sense from the Wilhelmsen side, especially if they expect to soon be able to liquidate the position. However, if the Hyundai restructuring suddenly happens soon after a buyout, they will have to explain how they didn't know about that beforehand, which is pretty rough if you are on the board...

 

I just think that they also have been expecting the catalyst for a long time but the Elliott business has dragged it out unexpectedly. The stub holders are probably stuck waiting for that one catalyst, which is a bit sucky but not that bad with the current discount. 

[writser]

My guess is that they spun it out partly to make the Wallenius Wilhelmsen merger easier and partly because they expected the Hyundai restructuring to play out earlier. I don't think making pricing more efficient was part of the rationale.

You are probably correct.

 

Good post, thanks.

[kab60]

I believe there is a wealth tax in Norway, thus they might not be in a hurry to close the gap. One of the reasons I didn't invest for long in Wilhelm. Wilhelmsen even though it is obviously cheap (and a better business than most shipping CO's). The spinoff of Treasure was a nice surprise, but since then they haven't done much. Just figured the opportunity cost is real, but if one fancies Glovis there's some optionality in Treasure.

[compounding]

Q4 results are out and they were good: https://pulsenews.co.kr/view.php?year=2020&no=74022

 

Also noteworthy is that they are growing their share of ex-Hyundai business which is now 53% of PCC revenue.

 

Furthermore, Elliott is out of their positions in Motor and Mobis. Elliott was probably the main reason for the restructuring being rejected, so this should increase the probability of a new attempt. Glovis is still likely to be the favoured entity in a restructuring proposal since Chung Euisun has his personal holdings concentrated there.

 

http://www.koreaherald.com/view.php?ud=20200123000529

[writser]

I believe there is a wealth tax in Norway, thus they might not be in a hurry to close the gap. One of the reasons I didn't invest for long in Wilhelm. Wilhelmsen even though it is obviously cheap (and a better business than most shipping CO's). The spinoff of Treasure was a nice surprise, but since then they haven't done much.

Yes, that certainly could be true. Though with these billionaires you never know - offshore trusts, etc. etc. They've been doing some things to unlock value and to highlight the value of their business though. I'm not super worried about this but incentives could certainly be a bit skewed.

 

Q4 results are out and they were good: https://pulsenews.co.kr/view.php?year=2020&no=74022

[..]

Thanks for the update. I'm tempted to buy a bit more here with the discount at 40%+ but I think that that is more due to a lack of better ideas than anything else so I'll try not to do it ..

[writser]

2019 annual report just released: link. Basically one of the simplest and boring annuals out there. Nothing happened, the board is proposing a 0.40 NOK dividend and a renewal of the max 10% share buyback / issuance authority, as they did last year. During the year the company bought back 1.2m shares. Discount to NAV still around 40% by my calculations. Overhead is minimal (though there is some tax slippage with regard to Glovis dividends).

 

I don't mind owning Glovis at a ~6x PE multiple on a look through basis, especially in combination with a possible restructuring as a catalyst. Hat tip to alwaysinvert for his thoughts in this thread.

[alwaysinvert]

With Elliott gone, I would expect a new restructuring proposal to pop up shortly - perhaps in time for the Hyundai AGMs in the spring. The joker is what happens after that, but I *think* Treasure will seek to sell the position and then either liquidate the company or turn it into a more straight-forward investment vehicle. A full combination with WWI is also possible.

[writser]

Another 2.5m share buyback through bookbuilding: https://newsweb.oslobors.no/message/505030 . Again not a huge buyback but nice, at a 40% discount.

 

Also, perhaps interesting to note that there seems to be some sort of rebellion in the Wilhemsen family ( https://finansavisen.no/nyheter/shipping/2020/02/09/7496120/familieoppror-i-wilh.-wilhelmsen-femte-generasjon-vil-fornye-eierstruktur-og-styringsmodell ) . I'm not sure I understand all the nuances through Google Translate, but it seems like a part of the family owning ~60% of the shares of the holdings wants more influence. One family board member resigned. It would be appreciated if some of the Scandi pro's on this forum could share their insights.

 

It's probably not going to have a huge effect on Treasure ASA in the short run though.