Description

Company Description

Monarch Cement Company (Monarch) is principally engaged in the manufacture and sale of portland cement. The marketing area for Monarch's products consists primarily of the State of Kansas, the State of Iowa, southeast Nebraska, western Missouri, northwest Arkansas and northern Oklahoma. Sales are made primarily to contractors, ready-mixed concrete plants, concrete products plants, building materials dealers and governmental agencies. Subsidiaries of Monarch (which together with Monarch are referred to herein as the "Company") sell ready-mixed concrete, concrete products and sundry building materials within Monarch's marketing area.

Overview and Thesis

We initially submitted this idea back in March of '14 and continue to own every share and then some. There are certain companies that fall into the perennially cheap category-oftentimes because of management's incompetence or ethical lapses, some sort of structural impediment to the business, or ick factor. Monarch has always been cheap but, we'd argue, doesn't fall into any of the above categories. It's a high quality cement manufacturer with substantial operating tailwinds in an industry with multiple competitors eager to acquire it. We are comfortable that the business should accrete in value and, given the recent tender and appetite for additional tenders going forward, that we will own a larger share of the pie in the future.

Valuation

 EV: 229 (includes their equity portfolio and investment in a brick company but also docks them fully for their pension)

TTM EBITDA: 51mm

'20 Estimate: 54-55mm

'21 Estimate: 62mm (Competitors have hinted at an $8/ton price increase--we're calling it $6 and dropping that number on 1mm tons plus some operating leverage to EBITDA)

 EV/'21: 3.7x

Management

 Walter has certainly frustrated us over the years. He is quite recalcitrant, knows that he largely controls the vote through the super voting shares, and is hesitant to implement any suggestions from outside shareholders. That said, after years of refusing to repurchase shares above tangible book value, he went ahead and announced a tender offer:  https://backend.otcmarkets.com/otcapi/company/dns/news/document/45178/content and the results https://backend.otcmarkets.com/otcapi/company/dns/news/document/46064/content . We were pleased with the announcement as it was a marked shift in his prior behavior and, we believe, a harbinger of good things to come. He's a confusing figure in some respects; he's certainly not motivated by the stock price, per se, but he's also accutely aware of how much the company is worth and takes pride in that knowledge (as if he possesses a secret). As a member of the Portland Cement Association he has fostered close relationships with his peer set and, in the end, this will be a company that is sold and not bought.

What it might be worth to an acquirer

Like the metaphor about an obese man not needing to step on a scale for his doctor to tell him he's overweight, so too, is Monarch obviously cheap. Also obvious, we think, is that numerous competitors would love to purchase the company and make little effort to hide that fact. We have spoken with two public ceos both of whom said it was the number one company on their wishlist and would be willing to pay a very large premium to acquire it. Walter knows this. We think cement assets should trade in a 10-12x range with some wiggle room on either end. On our '21 estimate that results in a $179-212 stock price. The numbers are the numbers and, while silly in relation to the current share price, so goes microcap investing. It's usually a fool's errand to predict the timing of a transaction and there is certainly nothing in his demeanor that suggests he is eager to sell. We have found through the years that family controlled companies are subject to their unique vagueries----subsequent generations have differing levels of emotional attachment to the company, different lifestyles to support, etc. 

We were fortunate enough to be shareholders of Ash Grove cement (Monarch's neighbor in Kansas)-a situation that certainly rhymes with Monarch. While there ended up being some tax-driven catalysts that led to the sale of the company in 2018, beforehand there was a long period where we asked ourselves how, or when, we were going to end up being paid.  We took comfort in owning a fractional interest in a company with an impeccable balance sheet, meaningful cashflows, and an undemanding valuation. We hope that history repeats and are certain that Walter paid close attention to the situation.

Recent Financials

https://backend.otcmarkets.com/otcapi/company/financial-report/262473/content

https://backend.otcmarkets.com/otcapi/company/financial-report/253880/content

https://backend.otcmarkets.com/otcapi/company/financial-report/246447/content

 State of the state of Kansas (data from USGS website)

December shipments haven't yet been reported but ytd through November volumes were up 5.8% in '20 vs the prior year.

We are also heartened that there is a backlog of highway spending that should benefit Monarch is the coming years. Under the previous administration, Governor Brownback tapped the highway fund to try and balance the state budget. We have read that more than two billion dollars were swept from '11-'18. While not all of this was earmarked for roads, a healthy amount of funding should exist for highway construction/refurbishment in the coming years.

Conclusion

Our investing is grounded in a deep value orientation--for better or worse, he haven't changed our stripes and are believers in the adage-good things happen to cheap stocks. This is not a troubled company by any means and yet trades for a distressed valuation. We believe that value will accrete nicely over time and the enormous discount to its intrinsic value will narrow considerably.

Catalyst

• continued share repurchases
• strength in operating results