Investment Thesis                                                                                                                                                                        

I propose a long position in the common stock of Alex & Baldwin ("ALEX" or the "Company") due to the underappreciated quality of its niche transportation business and presence of significant hidden real estate assets. At current levels you are paying for ALEX's real estate holdings while getting the transportation and Ag business for free. Limited sell-side coverage focuses on the transport segment with only cursory detail. All investor presentations have been at logistics conferences. Conservative management seems to play down the SOTP value while investors overlook +$1.5B of value on the real estate side, representing +70% from the current stock price.

Catalysts

Near-term catalysts to value realization include: 1) improved fundamental in the Hawaiian RE market combined with the planned sale of completed projects in 2H'11 - will help expose the market to its underlying real estate holdings and 2) volume growth, rate increases and the recapturing of fuel surcharges in its transport segment. A potential medium-term catalyst is the splitting of the real estate segment into a REIT and the transport operating company into a C-corp. In April Pershing Square filed a 13D likely with such a plan in mind. Though it is hard to handicap how this activism will play out, limited discussion in the media by activists so far is potentially a sign that management has been receptive. The fact that yesterday (7/6) the Company announced it is appointing a veteran GS banker and former external advisor as CFO may also be a positive signal. 

Structure

ALEX operates in three primary segments: transportation (Matson), commercial real estate and property development (A&B) and to a lesser extent agriculture (primarily HS&TC).      

Investment Merits

• Attractive shipping business: Matson ships containers within the LA>Hawaii >Guam>China and LA>China lanes with 17 vessels (ave. life of 23 years), 42k containers and several warehouses. Matson is the largest Jones Act West Coast container and auto carrier and has historically been referred to as 'Hawaii's lifeline.' Prohibitive entry cost for Jones Act shipping lanes ($250M per ship) and ALEX's domination of this small market create huge barriers to entry (+65% share). The Company also derives significant competitive advantages due to its land holdings at the port (105 acre Sand Island terminal in Honolulu) and ship type (smaller vessels that can provide expedited trans-Pacific service, 10 days). This position is substantiated by its pricing power whereby it maintained its rates through the recession. The other pair in the HI string duopoly is HRZ (30% share). Pricing in the market is published (vs. privately negotiated) and has historically been rational. On 3/29, HRZ breached a senior debt covenant due to weakness across its mainland and Puerto Rico operations. HRZ also recently plead guilty in a DOJ anti-trust case in Puerto Rico, potentially resulting in the forfeiture of government contracts in HI and Guam. The natural beneficiary will be ALEX. Regardless of this outcome, HRZ's perilous financial position renders it incapable of adding capacity or pursuing aggressive pricing. As a side note, an anti-trust class action suit brought against the two in HI was recently dismissed.
• Volumes to HI are more consistent than those of other trade lanes given the lack of alternatives (ie. limited warehousing space on the island and the perpetual need to restock). Growth in 2011 will come from 1) expansion into China with existing customer-base (underway with all ships chartered, Company says customer interest has exceeded expectations, should increase EBIT +20-25% in 2011); 2) Guam port build-out with an increased military presence; and 3) further recovery of the local HI market. Fundamentals have been improving: HI lane experienced an 8% Y/Y increase in container vols in 1Q'11 and West Coast container traffic was up 5% Y/Y in April. Public shipping data indicates that June 2011 base rate per container from LA>HI was $3700 vs. $3200 in June 2010 while fuel surcharges increased +100% from 1Q to 2Q as Matson recoups fees it lost in 1Q.
• Real Estate Holdings: On the commercial side under A&B, ALEX owns 44 properties, 7.8M sq ft (65% industrial, 19% office, 16% retail) all of which are in urban centers. Outside of HI the segment is focused on secondary metro areas. On a stand-alone basis A&B recorded NOI of $56M in 2010 (almost all of which was attributable to commercial leasing and is only reported annually in a supplemental package that also seems to be overlooked) that equates to an EV of $780M if a peer multiple of 14x is applied (implying a 7.1% cap rate). Recently fundamentals have been improving in this segment with occupancy and rent-rolls anticipated to increase through 2011.
• A&B is also involved in property development with 19 late-stage residential and commercial projects that in aggregate are worth over $1B based on recent sale prices. Monetization of these real estate development holdings will begin to accelerate toward the end of 2Q'11, which should lead to more market recognition of these assets in 2H'11. A long history in Hawaii (+100 years), 29k acres of conservation land and 58k acres of agriculture holdings enable it to more effectively negotiate for land entitlement (other developers choose to JV with them for this reason). In 1Q'11, A&B sold a land-locked Ag property on Maui with no road access for $40k/ acre. If this valuation were applied to the Company's entire 88k acres, the rural land holdings are worth $3.5B (note: below I assumed almost no value for this land, most of which is much more desirable than the plot recently sold).

Valuation

There are three components to the Company's value. The first are the real estate holdings, the details of which are disclosed on the Company website and in the annual supplemental RE file below (the property level valuations performed is at the end of the write-up).

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDE4Nzg4fENoaWxkSUQ9NDMxODg1fFR5cGU9MQ==&t=1

Based on recent transactions this equates to an NAV of $2.5B-$2.9B ($900M for the commercial RE portfolio + $1B for the development projects + $500M for the rural land). Meanwhile all public peers trade at 110-120% of NAV. The second component is the Matson transportation segment valued at $1.6B-$1.7B based on peer multiples and FCF yield. This does not directly include the port assets in HI (5), Guam, LA, Oakland, Portland and Seattle. The last is the Ag business: given the evolving state of this segment no value was assumed. In aggregate this yields an NAV of $3.6B-$4.1M or $87-$98 per share, a +70% premium from the current stock price.

ALEX's current stock price relative to its asset value provides substantial downside protection in and of itself. There are, however, a number of potential additional sources of upside. The most significant are increased cash flow from development sales and continued improved fundamentals on the shipping side, in particular the retroactive recouping of fuel surcharges that will take place over the balance of 2011(increased to 47.5% in June vs. 21.75% in Feb). 

Investment Considerations & Risks 

• Agriculture: Hawaiian Sugar & Transportation Cooperative ("HS&TC"): 35,000-acre Maui sugar plantation and Kauai Coffee: 3,000-acre plantation are the largest Ag producers in HI. This segment lost money in 2009, made $6.1M in 2010 and is basically break-even to marginally profitable given the rebound in sugar prices. No value is ascribed to this operation other than the land. The Company is likely transitioning this area to a federally subsidized bio-energy farm ($12M grant received). ALEX can continue to use land as bargaining position for entitlement on the commercial side (ie. we'll keep it green if you approve development plan on commercial side).
• Management: Management (6% owner) has shown discipline by purchasing and developing properties through the downturn. They are now more focused on harvesting real estate investments in 2011 now that the market has improved. Compensation (+55% LT incentive) tied to ROIC (10% for transport, 8% for RE) and EBT.
• Risks:
• Shipping business could roll over with potential for high current shipping rates leading to influx of capacity. This would not apply to its existing Jones Act lanes (95% of container vols) and is less likely given lead-time for expansion.
• New CLX2 line introduces risk (but also a growth opportunity) given that it is outside of ALEX's core market and area of competitive advantage. Was an $10-15M EBIT drag in 2010 due to start-up expenses.
• Real estate price deterioration in HI would challenge leasing and sales. The region is currently coming off of a multi-decade low. Real estate asset prices in NAV based on historically depressed prices, so any meaningful recovery would provide additional upside.
• If sugar prices decline to 2009 levels, Ag will start losing money again causing a drag on earnings. The Company is scaling back in this area so risk gets muted.

Segment Financials & Valuation