HNH - Handy & Harman Ltd.

[Jurgis]

I looked at this company and decided to pass. Not sure if it's worth to open a thread in such case. Let me know if you find it useful or not (in PM or here :) ).

 

HNH is a small conglomerate - hah, let's say a "platform" company. It covers a bunch of industrial (joining, tubing, etc), building products, commercial food processing equipment/service. Most shares are held by Steel Partners Holdings, GP. It is acquiring other companies usually where Steel Partners have invested before and possibly hold a significant share. It is also divesting some subs. This makes analysis a bit cumbersome. E.g. looking at 2015 10K, last 3 years FCF yield is pretty high, but a lot of it comes from divestitures. Also growth might be coming pretty much from acquisitions, which would require adjusting CF for money spent on acquisitions. Ultimately my feeling was that there were too many moving parts and company was not attractive enough from sales growth and earnings/FCF point of view. OTOH, it might be that I am being too conservative in subtracting capex and acquisition costs.

 

Also it could be a bet on the jockey. Assuming that one trusts the management, this might be attractive "platform" investment. Management claims that it adopts "Steel Business System" in acquired companies that optimize their metrics. Maybe some people here have looked at it and have a more positive impression than I did. ;)

[NBL0303]

I looked at this company and decided to pass. Not sure if it's worth to open a thread in such case. Let me know if you find it useful or not (in PM or here :) ).

 

HNH is a small conglomerate - hah, let's say a "platform" company. It covers a bunch of industrial (joining, tubing, etc), building products, commercial food processing equipment/service. Most shares are held by Steel Partners Holdings, GP. It is acquiring other companies usually where Steel Partners have invested before and possibly hold a significant share. It is also divesting some subs. This makes analysis a bit cumbersome. E.g. looking at 2015 10K, last 3 years FCF yield is pretty high, but a lot of it comes from divestitures. Also growth might be coming pretty much from acquisitions, which would require adjusting CF for money spent on acquisitions. Ultimately my feeling was that there were too many moving parts and company was not attractive enough from sales growth and earnings/FCF point of view. OTOH, it might be that I am being too conservative in subtracting capex and acquisition costs.

 

Also it could be a bet on the jockey. Assuming that one trusts the management, this might be attractive "platform" investment. Management claims that it adopts "Steel Business System" in acquired companies that optimize their metrics. Maybe some people here have looked at it and have a more positive impression than I did. ;)

 

Thanks for posting and for the interesting analysis.  Do you have a rough intrinsic value estimate?

[Jurgis]

I think the spread between the optimistic and pessimistic scenarios is very wide, so I am not sure if it's very useful if I post them. But here we go:

 

Pessimistic: take 2015 income from continuing ops ~$17M, slap 10-15 PE == 170-255M

 

Optimistic: take 2015 58M OCF, slap 15 multiple on that == 870M. OK, this might be a bit overtop, but if you assume good 10%+ organic growth and middling terminal PE, or DCF at 10%+ growth, 10% discount rate, 30M FCF, you gonna get to similar numbers.

 

But with a company where you have to expect continued wheeling and dealing, these are not very useful IMO. You either trust the management and their holder overlords to do the right things or you don't. :)

 

I don't know much about their businesses, headwinds/tailwinds there. With 4+ subs, this would require quite a bit of industry knowledge to analyze.

 

I agree with someone (Picasso?) who said that platform companies at this stage are risky because they've been buying companies at potentially inflated prices in late stages of bull market. Perhaps Steel Partners avoided that a bit since HNH bought "captured" companies where Steel Partners had stakes, but the risk is there.

 

They have a rather high pension liability. Pensions haven't blown up yet as some bears have predicted, but something to keep in mind.

 

Anyway all just MHO.

[NBL0303]

Good analysis.  Thank you!