MIL - MFC Industrial

[gfp]

MFC industrial is getting interesting again at around 4.20.  Figure a $270 million market cap and a tax free return of capital of $100 million sometime later this year and you've got the rest of the business for $170m.  Smith is still operating behind the scenes, while the CFO came over from Tanaka Capital, who has been a major shareholder for a while and a long time participant in the conference calls.  Kellogg has the big block of shares and Lloyd Miller is at 10%.  I've been buying this one again the last few days.

[jawn619]

MFC industrial is getting interesting again at around 4.20.  Figure a $270 million market cap and a tax free return of capital of $100 million sometime later this year and you've got the rest of the business for $170m.  Smith is still operating behind the scenes, while the CFO came over from Tanaka Capital, who has been a major shareholder for a while and a long time participant in the conference calls.  Kellogg has the big block of shares and Lloyd Miller is at 10%.  I've been buying this one again the last few days.

 

Can someone explain simply how this business works? it looks like a black box, which might not necessarily be a bad thing because it seems like a very profitable black box.

 

"Due to the number of businesses we engage in, our cash flows are not necessarily reflective of net earnings and net assets for any reporting period. As a result, instead of using a traditional cash flow analysis solely based on cash flow statements, our management believes it is more useful and meaningful to analyze our cash flows by overall liquidity and credit availability."

[jawn619]

The most I can muster is that they are a "supply chain business". They buy raw materials and sell them people up the value chain at a markup? Also they do some financing which would mean the buying of that recent European bank makes sense? Anyone with a more coherent explanation of the business would be much appreciated.

[gfp]

Their core business is as you described.  It's basically a trade financing business where they arrange the shipping and provide financing for commodities in transport between a buyer and a seller.  They want to model the business after Noble Group / Noble commodities.  They also do some forfaiting and other merchant bank type stuff on the side.  They have a few captive sources of commodities that they also sell.

 

Then they have a rag tag collection of other assets, some of which are just sitting there like the Pea Ridge iron ore project, the royalty interest on a shut-down mine that may be foreclosed back to MFC (Wabush, owned by Cleveland Cliffs, currently paying the minimum required royalty), a bunch of Natural Gas assets they purchased in the deal for Compton Petroleum at a very low price (some of which are being sold, providing the funds for the $100m return of capital this year).  They also have a couple power plants including a Nat Gas plant they built up at Compton and a hydroelectric plant in Africa.  It was a jockey stock for years under Michael Smith but he has been pushed to the background as 'managing director'.  He and Renee are still there, though, and they are behind a lot of the deals like the purchase of the European bank, the negotiations for Wabush (ongoing), and the "rationalizing" of certain other assets.  It's a mess, which is why it's cheap.  Also, for many years Michael Smith was the President, CEO, CFO, etc etc - which made it looks pretty bad from a governance perspective.

 

*additional stuff -

 

They have also "strived to be fiscally responsible" regarding cash taxes, which is a way to say they make John Malone look like a wasteful, generous tax payer..

 

compton acquisition resulted in bargain purchase gain, large pool of tax assets, land bank, etc...

http://www.mfcindustrial.com/profiles/investor/ResLibraryView.asp?ResLibraryID=57176&GoTopage=1&Category=1908&BzID=2017&G=335

 

 

[jawn619]

Their core business is as you described.  It's basically a trade financing business where they arrange the shipping and provide financing for commodities in transport between a buyer and a seller.  They want to model the business after Noble Group / Noble commodities.  They also do some forfaiting and other merchant bank type stuff on the side.  They have a few captive sources of commodities that they also sell.

 

Then they have a rag tag collection of other assets, some of which are just sitting there like the Pea Ridge iron ore project, the royalty interest on a shut-down mine that may be foreclosed back to MFC (Wabush, owned by Cleveland Cliffs, currently paying the minimum required royalty), a bunch of Natural Gas assets they purchased in the deal for Compton Petroleum at a very low price (some of which are being sold, providing the funds for the $100m return of capital this year).  They also have a couple power plants including a Nat Gas plant they built up at Compton and a hydroelectric plant in Africa.  It was a jockey stock for years under Michael Smith but he has been pushed to the background as 'managing director'.  He and Renee are still there, though, and they are behind a lot of the deals like the purchase of the European bank, the negotiations for Wabush (ongoing), and the "rationalizing" of certain other assets.  It's a mess, which is why it's cheap.  Also, for many years Michael Smith was the President, CEO, CFO, etc etc - which made it looks pretty bad from a governance perspective.

 

*additional stuff -

 

They have also "strived to be fiscally responsible" regarding cash taxes, which is a way to say they make John Malone look like a wasteful, generous tax payer..

 

compton acquisition resulted in bargain purchase gain, large pool of tax assets, land bank, etc...

http://www.mfcindustrial.com/profiles/investor/ResLibraryView.asp?ResLibraryID=57176&GoTopage=1&Category=1908&BzID=2017&G=335

 

Ok thanks. Yeah I saw the iron ore and hydrocarbon assets as free options because they sure aren't worth much right now. I'll take a look into noble and see if I can understand the business more. Do you think it's fair to look at "EBITDA" as a proxy for what they are earning? I know management has stated to look at growth of book value as the best measure of value.

[gfp]

The supply chain business is not very profitable at the moment.  They recently expanded it with a few major acquisitions and took the current CEO from one of them.  They aren't integrated very well yet, and the deal for the bank will likely take a while - but they are working to get the business integrated and performing.  It's very difficult to value it, but I know the entire pool - the debt is all matched to specific long term assets, the cash is mostly excess cash uninvested - is worth more than $170m.

 

*edit- also they have not written down the wabush royalty asset yet, which many would criticize.  Smith thinks this whole mess could be a positive but I think the right thing to do would be to write down the asset and then see if a deal works out.  Nobody trusts stated book value as it is, so you might as well add some credibility by writing wabush down while you wait.

[jawn619]

The supply chain business is not very profitable at the moment.  They recently expanded it with a few major acquisitions and took the current CEO from one of them.  They aren't integrated very well yet, and the deal for the bank will likely take a while - but they are working to get the business integrated and performing.  It's very difficult to value it, but I know the entire pool - the debt is all matched to specific long term assets, the cash is mostly excess cash uninvested - is worth more than $170m.

 

*edit- also they have not written down the wabush royalty asset yet, which many would criticize.  Smith thinks this whole mess could be a positive but I think the right thing to do would be to write down the asset and then see if a deal works out.  Nobody trusts stated book value as it is, so you might as well add some credibility by writing wabush down while you wait.

 

So from their most recent filing I see that they have market cap of around $250M+Debt of $700M-Current Assets of $837M= $122M enterprise value. Let's say they generate around $30M of OI per year that's and EV/EBIT of 4x. Some of those current assets are inventories and "assets held for sale" though. Any insight to how liquid these might be? Also is the Wasbush mine that they haven't written off part of the $300M in "interest in resource properties" in noncurrent assets? TIA

 

P.S. As for the profitability of the supply chain business, POSCO bought Daewoo in 2010 for $2.8B when the company was only bringing in like $100M in earnings. They overpaid for sure but that was the only comparable comp i could find. I heard the current CEO on their most recent conference call say that the business is a "revenue business"... and i think that means that it's not right to to look at typical metrics of profitability like operating income to revenue.

[gfp]

The "Interests in Resource Properties" consist of the Wabush lease (expires 2055), on the books for $161m, and interests in hydrocarbon properties, on the books for $187m.  For more details read note 15 on page 116 of their most recent annual report.

 

For details on the current assets, read notes 9 and 11 on page 110 of the most recent annual report.  Inventories are liquid - this is the trade finance business.  Assets held for sale are primarily the hydrocarbon properties that have been selected to sell this year which, after paying back associated indebtedness, will fund the planned $100 million special dividend (tax free return of capital).

 

http://www.sec.gov/Archives/edgar/data/16859/000156761915000369/s000818x1_20f.htm

 

 

The supply chain business is not very profitable at the moment.  They recently expanded it with a few major acquisitions and took the current CEO from one of them.  They aren't integrated very well yet, and the deal for the bank will likely take a while - but they are working to get the business integrated and performing.  It's very difficult to value it, but I know the entire pool - the debt is all matched to specific long term assets, the cash is mostly excess cash uninvested - is worth more than $170m.

 

*edit- also they have not written down the wabush royalty asset yet, which many would criticize.  Smith thinks this whole mess could be a positive but I think the right thing to do would be to write down the asset and then see if a deal works out.  Nobody trusts stated book value as it is, so you might as well add some credibility by writing wabush down while you wait.

 

So from their most recent filing I see that they have market cap of around $250M+Debt of $700M-Current Assets of $837M= $122M enterprise value. Let's say they generate around $30M of OI per year that's and EV/EBIT of 4x. Some of those current assets are inventories and "assets held for sale" though. Any insight to how liquid these might be? Also is the Wasbush mine that they haven't written off part of the $300M in "interest in resource properties" in noncurrent assets? TIA

 

P.S. As for the profitability of the supply chain business, POSCO bought Daewoo in 2010 for $2.8B when the company was only bringing in like $100M in earnings. They overpaid for sure but that was the only comparable comp i could find. I heard the current CEO on their most recent conference call say that the business is a "revenue business"... and i think that means that it's not right to to look at typical metrics of profitability like operating income to revenue.

[Libs]

To me this boils down to:

 

How involved is Smith; is Cortino really calling the shots? If so, what do we know about him?

 

And getting comfortable with their ever-shifting business strategies. It wasn't that long ago they ramped up the supply chain business. Then they buy Compton; and now they are selling it off ( or parts of it at least).

 

If Cortino is a good operator, and Smith & Kellogg are out of the picture, it could be a steal.

 

 

 

 

[MrB]

Oh yes, I remember these guys. I know them from the "cobalt investment in Africa" days. Blue Earth or something if I remember correctly. Invested in them in my less experienced days and although it was financially rewarding it was a mistake. Management has always had a an outstanding track record....according to management. I don't believe it is possible to independently verify that track record. Too many obscure offshore subs, always a bank or commodity finance/merchant bank involved and they are constantly buying or selling something. Not sure if things have changed over the last decade, but it was impossible to get so much as a peep out of Smith, so questions to him went unanswered and Randall would respond, but never give you a straight answer.

I had a quick look and dug up my old KHD folder. They were called KHD for a while. See attached VIC from 2004. Pretty much the same story today as then.

A quick glance at Reuters tells me they compounded BVPS at 2% since the VIC writeup a decade ago; might be missing a spinoff or something. So lots of talk...big hat, no cattle.

 

Anyway, take what I say with a grain of salt, because I've not looked at them for quite some time. However, I do think that you cannot invest unless,

a. you can figure out from their financial statements how they created value over the last 5 or 10 years (impossible, the last time I checked), and

b. figure out how Smith gets paid (also impossible the last time I checked).

 

Of course it could be just me that was/is unable to analyze the situation correctly.

ViCwriteup.pdf

[TwoCitiesCapital]

I actually owned them during the KHD era and before they changed their name. It was the first real spin-off opportunity that I invested in and was financially rewarding, but the terms of the deal did screw over shareholders and some were less than happy about it.

 

I haven't really followed the company much after booking my 30% gain in KHD, but there is an article on seekingalpha that does an in depth look at the history of the company prior to the KHD spinoff.

 

http://seekingalpha.com/article/290755-15-percent-for-15-years-michael-j-smiths-outstanding-track-record

[jawn619]

This has gotten cheaper and cheaper. Almost a little silly. My only concern is that with natural gas prices falling further the resources properties are worth a lot less than what they have them listed as, even with the recent write-down.

 

MIL (Long)

Market Cap: $125M

Share Price: $2.00

Target Price: $300% upside

 

Introduction

MFC industrial (MIL) is an undervalued, out of favor, obscure investment opportunity with several catalysts over the next 12-18 months to highlight and unlock shareholder value. We see at least 300% upside in an upside case and limited downside in a downside case. The key drivers are a recent acquisition of a bank, normalizing of earnings, and disposal of unproductive assets.

 

History

MFC was run by Michael Smith for many years. MFC touts that he has compounded book value at 20%+ for 10 years. Most of this compounding comes in the form of buying distressed assets or tax efficient spinoffs. Here is a more comprehensive description of MFC’s history.

 

http://static.cdn-seekingalpha.com/uploads/2011/9/1/saupload_totalreturnflow_2__1.jpg

 

Recent Decline & Angry Shareholders

MFC’s main asset, a royalty on the Wabush iron ore mine, went from generating $30M of income a year to being completely worthless.  Its core supply chain business is currently in the red for the first time in many years, despite having over $1B in sales. Its natural gas and resource properties, which was valued at $180M just 3 months ago has been written down to $45M net of liabilities. The stock has declined 80% from $10/shr in 2013 to $2/shr. Listen to MFC’s most recent conference call to hear disgruntled shareholders complain about how they’ve had clients fire them for MFC’s poor performance.

 

It’s not all bad

MIL is trading at less than NCAV and less than 50% of tangible book

Cash and cash equivalents 298,559 4.72

Trade Receivables 120,423 1.91

Inventory contracted at fixed prices 122,632 1.94

Inventory Other 84,103 1.33

Accounts Payable -76,247 -1.21

Short Term Bank Borrowings -206,590 -3.27

Debt -202,629 -3.21

Net 140,251 2.22

Book Value

Cash and cash equivalents 298,559 4.72

Other working capital (1) 39,794 0.63

Long-term debt, less current portion -169,161 -2.68

Other long-term assets 151,979 2.41

Other long-term liabilities (2) -15,839 -0.25

Assets held for sale, net of liabilities (3) 45,974 0.73

Net book value 351,306 5.56

 

1 Working capital, less cash and cash equivalents and assets held for sale (net of liabilities).

2 Total long-term liabilities, less long-term debt (less current portion).

3 Assets held for sale, less liabilities related to assets held for sale.

 

Laser Eye Care Joint Venture

Many shareholders don’t even know of this gems existence. MFC entered a joint venture in 2011 and has its interest valued at cost for $14M. We estimate it will generate $11.5M of net income and distribute $7.5 of cash to MFC in 2015. 

 

                                              FY12             FY13             FY14 FY15 RR

 

Equity income                   6,152           7,107           9,528         11,673

Growth %                                               16%                 34%          23%

 

We conservatively value the joint venture at 6x FY15 Net Income or $70M

 

Core Business, acquisition of bank, and expansion into trade finance

What does MFC actually do?

Suppliers and producers don’t want to hold inventory on their books. MFC is the middleman between supplier and producer. $122M of its $200M of inventory is contracted at fixed prices. Its customer base is concentrated in natural resources, but diversified by industry and geography. One advantage of being the middleman is that it does not require a large fixed investment.  MFC borrows money non-recourse at 3% and provides financing to suppliers and producers. Historically, MFC has made a spread of around 2% for these services.

 

Net Margin(1) 2012      2013      2014 2015E

          2.80%    2.25%      2.1%    0.2%

In our upside case, we assume MFC’s margins normalize to 2% on its expanded revenue base. This equates to $26.5M of pretax income.  In our downside case, we assume the core business continues to run at breakeven.

1. (Net sales – Cost of Sales and Services – SG&A – Interest Costs )/ Net Sales

 

MFC recently announced that they are acquiring a bank and will greenfield an expansion into trade finance. This means providing higher ROE services to current customers. These business lines include factoring and forfaiting. MFC elected Friederich Hondl, who has over 30 years of experience in the European banking industry, to the board. They expect the acquisition to close by the end of this year and are targeting an ROE of 15%. HSBC, BladeX, and Bawag Malta are three banks in similar lines of business that we looked with summary statistics listed below.

HSBC

ROE 7.96%

NET INTEREST MARGIN 1.55%

BLX

ROE 11.7%

NET INTEREST MARGIN 1.66%

BAWAG

ROE 14.9%

NET INTEREST MARGIN 2.33%

 

We think management’s goal of 15% ROE is a stretch. In our upside case we assume they are able to build a bank that has a 10% ROE off $200M of invested capital.  In our downside case we assume MFC achieves a 5% ROE.

Disposal of resource properties

MFC has $210M of assets held for sale with $165M of liabilities associated with those assets. The assets are natural gas properties in the Alberta and Niton area. This past quarter management decided to take an impairment loss of $107M on its resource properties and sounded confident that they would be able to get $45M net for the properties. In our downside case we assume the properties are worth 0 net.

 

Upside Valuation

$20M+$26.5M *(1-0.25) = $34.875M of net income.  8X net income = $280M + $70M joint venture + $45M disposals = $395M ($6.26/shr)

Downside Valuation

$10M+0M*(1-.25) = 7.5M of net income. 8x Net income = $60M +$70M Joint venture = $130M ($2.05/shr)

 

Catalyst Activist Shareholders own 40% of the shares outstanding

Peter Kellogg, through his vehicle IAT reinsurance owns 30% of the shares outstanding. Lloyd Miller owns just under 10% of shares outstanding. Peter Kellogg formerly sat on the board but recently stepped down to allow the business to focus more on its trade finance business. He is locked from trading shares until August 2016. Other shareholders have pushed for share buybacks and management have said they would revisit a share buyback after closing the bank.

 

[kab60]

Holy shit, talk about disfavored industries; iron ore, o&g and a speciality bank. What your take on "other inventory"?

 

I see 870m current assets vs. 670m total liabilities or NCAV of 200m. But if I put a zero on "other inventory" I get NCAV of 116 meaning it's trading just below NCAV at the moment. That might be overly conservative, but the bigger the discount the better these things seem to work out.

[jawn619]

MFC has inventory that is contracted at fixed prices and those not at fixed prices. On their most recent conference call their CEO said that they did not and will not have any exposure via their inventory.

[jawn619]

Also, the list their assets for sale as current assets. This consists mostly of natural gas properties....which might not be worth the full amount.

[arcticfox]

I would suggest reading the last two years worth of conference calls and then determining if you want to own the stock of this company.