Description

Warning: for PAs only.  Very illiquid.  But most likely the cheapest stock you have seen in quite awhile.

Geumhwa PSC – is a maintenance service provider for coal, natural gas and nuclear power plants in South Korea.  The core maintenance business is very stable and nicely profitable with a more volatile and much less profitable power plant construction business layered on top as a funnel to acquire long term service contracts.  Below is a chart of 10 years’ worth of service and construction revenues:

Service revenues have grown at a 13% 10-year CAGR, with variations due to power plant shutdown variability.  Most recently, service revenues are up 22% on a TTM basis.

The growth is primarily a function of market share gains from the incumbent partly-government-owned service company KEPCO Plant Service & Engineering (051600 KS).  Five years ago, the government mandated that every service contract from a government-controlled power plant must be put up for competitive auction. 

In 2004, KEPCO Plant Service had 90% thermal market share and Geumhwa, along with a few smaller private servicers, has been slowly eating away at that share for the last 15 years. As of today, KEPCO Plant Service still has an industry-leading ~46% thermal market share (and 95%+ in nuclear).

We estimate service revenue has roughly 20% EBIT margins while new construction has roughly low-single-digit % margins, varying year by year.  Thus, one can almost ignore new construction revenue other than as a partial guide for growth in future service revenue.  

We forecast service revenues to continue to grow in the high single digit %s annually for the foreseeable future as Geumhwa continues to increase its thermal service market share in Korea from ~18% of the 2019 market. 

Further, the Geumhwa balance sheet has a massive chunk of excess capital just waiting to be deployed. 

There is currently 26,000 won/share in net cash on the balance sheet (80% of the share price) – and even more if you include equity stakes in private equity deals.  Management has stated an intention to use the cash for acquisitions.

They have been very cautious in their M&A activities in the past – though they have made a handful of small acquisitions over the last several years - and we don’t see any immediate indication that that will change.  However, one day we will wake up and they will make an acquisition that is worth approximately the current share price and the company will still be overcapitalized. 

Until that day, we wait patiently as core earnings grow 10%ish per year (and significantly faster than that the last 2 years).  We wait sitting on an EV/FCF valuation of less then 1x and a P/E of ~5.5x.

Catalyst

Growth, value.