Description

Alexander and Baldwin (ALEX) is a long as it is undervalued on a sum-of-the-parts basis.  The catalyst for value creation is coming up later this year in the form of a separation of the Company’s two main businesses, Matson, a Jones Act container shipping and logistics business and, A&B, a real estate leasing, development and agriculture business.  Once the separation occurs, it will be much easier for the street to value each piece of the company as there will be better disclosure and more analyst coverage.  In addition, the valuation of ALEX on a post-split basis should improve as shipping investors can focus on Matson and real estate investors can focus on A&B.

SUMMARY

Catalyst:              ALEX is splitting into separate publicly-traded shipping and real estate companies.

Timing:                Form 10 filing in late Mar 2012/early Apr; Split complete in 3Q 2012.

Valuation:           $58 - $75, Average Value = $66.50

Upside:                 25% - 62%

Key Risks:            Recession, weak shipping volumes/pricing, global trade war, weak demand for commercial RE, lack of RE sales, RE project delays/cancelations, low sugar prices

VALUATION

DETAIL

ALEX comprises two very different companies:  1) Matson, a Jones Act container shipping and logistics company and 2) Alexander & Baldwin (A&B), a real estate leasing, development and agricultural business.

Matson

Matson comprises a few different businesses, 1) Ocean Transportation, 2) Logistics, 3) 35% ownership in SSA Terminals.

Ocean Transportation

• Matson is the largest US West Coast to Hawaii container and auto carrier (67% market share).  The company also services Guam andMicronesiaand has an Asia transpacific service as well.       Matson’s primary competition is in theHawaiitrade is Horizon Lines and Pasha Hawaii Transport Lines.  Horizon is currently capital constrained and as such is in a relatively weakened position. Pasha is exclusively a car carrier (roll-on/roll-off vessels only) and as such only presents competition in the shipping of automobiles.  Since Horizon Lines has exited theGuamtrade, Matson is currently without competition there.  Regarding Matson’s transpacific service, the company competes with a long list of much larger global shipping companies but does so on the basis of on-time express delivery service.
• Matson owns 17 Jones Act vessels consisting of 10 containerships, 3 combination container/roll-on/roll-off ships, one roll-on/roll-off barge and three container barges.  The average age of its fleet is 18-years.  In addition, Matson owns 33K containers and 14K container chassis.
• In addition to its vessels and containers, Matson owns Matson Terminals which provides container stevedoring and other terminal services for Matson and other ocean carriers at its 105-acre marine terminal inHonolulu.
• Future growth drivers include:  1) potential Hawaiian infrastructure  projects including the $5.3bln 20-mile Honolulu commuter rail project as well as another $500mln of “shovel-ready” infrastructure projects that were recently proposed by the Hawaiian Senate, 2) growth in Guam service as a result of troop relocation from Japan (now 4,700 troops instead of 8,000), 3) general growth in the Hawaiian economy from growing tourism expenditures which nearly reached all time highs in 2011, 4) lack of current Guam competition, 5) improved pricing in the Transpacific trade (where pricing is currently close to historic lows) where Matson operates an express China-Long Beach service as carriers accelerate the idling of capacity.   In addition, Matson plans to pay a dividend $0.50-$0.70 dividend post-split which should help to support the stock.

*excludes SSAT equity earnings and 50% of total ALEX Corporate Expenses

• EBITDA used in valuation: $145mln (co should be able to do at least $145mln in annual EBITDA over a cycle, this number could be much higher if volumes recover and pricing in the transpacific trade improves)
• EBITDA multiple: 8x – 9x (based on comps using 2012E EBITDA: KEX 8.6x, HOS 9.0x, SSW 9.0x, RLOG: 9.6x)
• Enterprise Value: $1,160mln - $1,305mln

Logistics

• Matson Logistics is the 9^th largest US freight brokerage.
• The company plans to expand its warehousing and distribution channel.
• Average EBITDA since 2005 is $16mln vs. current EBITDA in the $8-10mln range so there is significant room for growth when the economy shows sustained improvement.

• EBITDA used in valuation: $10mln (conservatively assumes recovery to 2009-2010 levels)
• Valuation Multiple: 8x - 13x (based on comps using 2012E EBITDA:  CHRW 13.1x, UTIW 8.2x, EXPD 10.9x, and HUBG 10.6x)
• Enterprise Value: $80mln - $130mln

SSA Terminals JV

• SSA Terminals is a JV between Matson and SSA Marine.   Matson owns 35% of the JV.
• SSA Terminals provides terminal and stevedoring services at six terminals (two inSeattle, WA; two in Oakland, CA; and 2 inLong Beach,CA) to Matson and numerous international carriers.

• Equity Earnings used in valuation: $10.6mln (2005 to 2011 annual average equity earnings)
• Valuation Multiple: 19x - 28x (based on comps: DPW LN 19.3x 2012E EPS, HPHT SP 23.7x 2012E EPS, and FPT LN deal done at 27.6x 2010 Adj. EPS)
• Value of JV Interest: $201mln - $297mln

A&B

A&B is in the real estate leasing, property development, and agricultural products business.  In addition, A&B owns approximately 87,000 acres of land that is currently designated for either agricultural use (58,000 acres) or conservation (29,000 acres) in Hawaii most of which is on the islands of Maui (approx 67,000 acres) and Kauai (approx 20,000 acres).

Real Estate Leasing

• Diversified portfolio of retail, office and industrial properties with a total of 7.9mln square feet of leasable space inHawaiiand numerous states on the US Mainland.  The company’s Hawaiian leasing portfolio consists of 1.4mln square feet of Gross Leasable Area (GLA) on approximately 150 acres and its Mainland portfolio consists of 6.5mln square feet of GLA on approximately 480 acres.
• As of year-end 2011, A&B’s Hawaiian portfolio of properties is 91% leased and its Mainland portfolio of properties is 92% leased.
• A&B plans to re-focus its commercial real estate portfolio on Hawaiian properties over time.  This will be a positive as management’s has a competitive advantage in Hawaiian real estate.

*Op Inc is after 50% Corp Exp Allocation, 38% tax rate=average tax rate over last 7 years

Per-property Valuation Comparable Transactions

Per-property Valuation of A&B Leasing Portfolio

• Unlevered After-Tax NOI used in Valuation: $38mln (based on 7-year average of $37.8mln)
• Cap Rates: 6.0% - 7.0%
• Cap Rate Valuation of A&B Real Estate Leasing Business:  $543mln – $633mln.
• Per-property valuation of the A&B Real Estate Leasing portfolio: $837mln less approximately $200mln in cumulative deferred taxes as a result of 1031 tax-deferred exchanges: $637mln

Real Estate Sales

• The Real Estate Sales business generates its revenue through the development and sale of commercial and residential and other properties including raw land.
• Current development assets include projects in various stages of development on Maui, Kauai, Oahu, the BigIslandand the Mainland.
• Earnings from this business are somewhat lumpy and unpredictable, as such, a per-property valuation is most appropriate.  In our valuations, we made assumptions for everything from construction cost per square foot, development costs per lot, sale prices per square foot and lot, how many years before a project begins to sell product, how many years until the project is sold out, and discount rates.  Our assumptions were based on conversations with the company, company-provided documents, as well as independent primary research and conversations with property appraisers, property valuation consultants, and construction cost consultants.  Using our assumptions, we calculated the after-tax profitability of each property which we then discounted over an appropriate period of time.  Since many of A&B’s properties are still in the planning stage, our discounting conservatively assumes that cash flows don’t start for many years on those properties.  Please note that given the inherent uncertainty in the real estate development business, some of the projects listed below may never be developed which why we provide the valuation per acre so one can gauge what value we are placing on the underlying land on a per acre basis.

*Assumed 70% economic interest in Kukui’ula JV

• Valuation range based on per-property valuations: $644mln - $723mln

Agribusiness

• A&B’s Agribusiness unit comprises Hawaiian Commercial & Sugar Company (“HC&S”) a 34,700 acre Maui sugar plantation; a 3,000 acre coffee plantation on Kauai now leased to Massimo Zanetti Beverage (MZB) which plans to market, sell and distribute the Kauai Coffee brand throughout the US; Kahului Trucking and Storage, Inc and Kauai Commercial Company which both provide several types of trucking services.
• HC&S and McBryde Sugar Company produce electricity for internal use and for sale to the local electric utility companies.  HC&S produces power by burning bagasse (the residual fiber of the sugar cane plant) and by hydroelectric generation.  McBryde produces power solely by hydroelectric generation.  HC&S and McBryde sell approximately 80,000 – 90,000 MWHs of power per year to the local electric utility.
• Growth drivers include increased sugar demand resulting in sustained high sugar prices, improved farming practices resulting in higher sugar production per acre, and new power generation initiatives like the plans to develop a 6 megawatt solar project on Kauaiin partnership with the Kauai Island Utility Cooperative.

• EBITDA used in valuation: $15mln (slightly better than the 7-yr avg. as operations appear to have improved yet substantially below the avg. EBITDA for 2010 and 2011)
• Valuation Multiple: 6x - 8x (no comps;6x=low growth cyclical mult, 8x possible growth mult)
• Enterprise Value: $90mln - $120mln

Undeveloped Land

• A&B owns approximately 87,080 acres of undeveloped land (land not in the current development pipeline) primarily on the islands of Maui andKauai.  Of the total, 29,170 acres are designated as watershed / conservation land, 34,700 acres are currently farmed by HC&S for sugar production, 3,000 acres are leased to MZB for coffee production, 9,260 acres are leased to third parties, and 10,950 acres are classified as “Other agricultural, pasture and misc. purposes.”
• A&B has been creating value from its real estate holdings by entitling, developing and selling its land for decades and it will continue to do so.  The hard part is calculating the rate at which this will happen and how much land will be developed.  We approached this problem by making some fairly conservative foundational assumptions:  1) the entitlement process in Hawaii takes a very long time, at least a decade if not longer for any given development, and 2) only a small fraction of this land will ever be developed.
• Based on the above, we put together a DCF using the following assumptions:

1. Only 15% of the Agricultural land, or 8,687 acres will ever be developed.
2. The net sale price after entitlement/development costs for each acre will be $900,000 (this is pre-tax).
3. Cash flows from property sales won’t start for another 10 years and will end in 100 years.
4. The annual after-tax cash flow from property sales is $53.9mln based on the above.
5. Discount rates of 7.0% - 10.0%

• Valuation of Agricultural Land: $228mln - $418mln ($3,943 - $7,211 per agricultural acre).
• Valuation of Conservation Land: $25mln - $45mln ($845 - $1,548 per conservation acre).  This is based on the above assumptions and only assumes 5% of the land is developed over 150 years.  We thought about valuing this land at zero but that would not be correct as this land does have some value.

Catalyst