2013 | 2014 | ||||||
Price: | 11.07 | EPS | $0.00 | $0.00 | |||
Shares Out. (in M): | 49 | P/E | 0.0x | 0.0x | |||
Market Cap (in $M): | 539 | P/FCF | 0.0x | 0.0x | |||
Net Debt (in $M): | -25 | EBIT | 0 | 0 | |||
TEV (in $M): | 514 | TEV/EBIT | 0.0x | 0.0x |
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I am recommending a long position in NL industries common stock. NL is primarily a holding company controlled by Texas billionaire and former corporate raider Harold C. Simmons. It is quite illiquid and also lacks sell side coverage.
NL’s primary assets are its
NL’s primary liabilities are
NL appears to be trading at a ~42% discount to its NAV, defined as the market value of its listed stakes plus parent cash less parent debt and accrued environmental remediation. To close that 42% discount without changing the value of the listed stakes would imply NL shares would need to trade up 72% to $19.08 per share.
VHI Stake @ Market | 273.8 | ||||
KRO Stake @ Market | 547.7 | ||||
CIX Stake @ Market | 142.0 | ||||
Trading Value of Stakes | 963.5 | ||||
Plus: NL Parent Cash | 25.1 | ||||
Less: NL Parent Debt | 0.0 | ||||
Less: Accrued environmental remediation | (59.8) | ||||
Implied NAV | 928.8 | ||||
NL Shares | 48.7 | ||||
Per NL Share | $19.08 | ||||
Current NL Share Price | $11.07 | ||||
Implied Premium (Discount) | (42%) | ||||
Implied Gain (Loss) to Remove | 72% |
In the meantime, NL offers a 4.5% cash dividend while you wait. I would also expect that NL’s single largest asset, its stake in KRO, should trade up significantly in value as the next TiO2 cyclical upturn unfolds. While much has been written about TiO2 in the various KRO and TROX threads, suffice it to say that TiO2 has historically been a violently cyclical commodity chemical, and one in which pricing power (or lack thereof) has generally been driven in large part by inventory levels. After suffering from significant excess inventories beginning in Q4’2011, the industry (and KRO specifically) have significantly reduced inventory levels.
Here is the disclosure from KRO of their finished TiO2 days of inventory on hand going back several years:
KRO Finished TiO2 Inventory | Days | % Chg YoY | % Chg QoQ | ||||
12/31/2006 | 68 | ||||||
3/31/2007 | 68 | 0% | |||||
6/30/2007 | 55 | (19%) | |||||
9/30/2007 | 50 | (9%) | |||||
12/31/2007 | 59 | (13%) | 18% | ||||
3/31/2008 | 64 | (6%) | 8% | ||||
6/30/2008 | 49 | (11%) | (23%) | ||||
9/30/2008 | 55 | 10% | 12% | ||||
12/31/2008 | 113 | 92% | 105% | ||||
3/31/2009 | 64 | 0% | (43%) | ||||
6/30/2009 | 42 | (14%) | (34%) | ||||
9/30/2009 | 48 | (13%) | 14% | ||||
12/31/2009 | 58 | (49%) | 21% | ||||
3/31/2010 | 56 | (13%) | (3%) | ||||
6/30/2010 | 39 | (7%) | (30%) | ||||
9/30/2010 | 42 | (13%) | 8% | ||||
12/31/2010 | 52 | (10%) | 24% | ||||
3/31/2011 | 63 | 13% | 21% | ||||
6/30/2011 | 49 | 26% | (22%) | ||||
9/30/2011 | 48 | 14% | (2%) | ||||
12/31/2011 | 104 | 100% | 117% | ||||
3/31/2012 | 110 | 75% | 6% | ||||
6/30/2012 | 84 | 71% | (24%) | ||||
9/30/2012 | 79 | 65% | (6%) | ||||
12/31/2012 | 102 | (2%) | 29% | ||||
3/31/2013 | 68 | (38%) | (33%) | ||||
6/30/2013 | 51 | (39%) | (25%) |
It stands to reason that as demand increases and inventory levels fall further, the price of TiO2 should start to increase again after falling precipitously for the past year and a half. Huntsman is clearly of that belief, as their definitive agreement to buy Rockwood’s TiO2 assets this month, thus nearly doubling down on TiO2, is generally consistent with that family’s history of trying to buy deeply cyclical commodity chemical companies near cyclical troughs.
I think the biggest risk to NL in the short term comes from the potential for an adverse verdict in the current Santa Clara lead pigment litigation at the initial trial court level. While such an adverse verdict is quite possible, particularly in a state like California and at the trial court level, page 19 of the NL 10-Q notes that NL has never settled nor lost any such case after all appeals have been exhausted and final adjudication. Here is an excerpt:
“We do not believe it is probable that we have incurred any liability with respect to all of the lead pigment litigation cases to which we are a party …
• we have never settled any of the market share, risk contribution, intentional tort, fraud, nuisance, supplier negligence, breach of warranty, conspiracy, misrepresentation, aiding and abetting, enterprise liability, or statutory cases,
• no final, non-appealable adverse verdicts have ever been entered against us and
• we have never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a twenty-year period for which we were previously a party and for which we have been dismissed without any finding of liability.”
I think the likelihood of any adverse trial court verdict ultimately sticking is exceedingly remote, given the industry’s undefeated litigation history across decades, and across so many different types of cases and “novel” legal doctrines, not to mention the sheer quantity of cases. I would note that SHW uses nearly identical language to NL’s 10-Q in its communications with investors.
I think the greatest “real” risk is that the discount to NAV persists or even widens. With that said, I would note that one of Simmons’ longest held controlled portfolio companies, Titanium Metals (ticker TIE), was purchased by Precision Castparts in December 2012 for cash. If that transaction was any indication, Simmons might not be opposed to further monetization and simplification of his empire, especially as he continues to age (he is 82 years old). He has also spun off various subsidiaries (or portions thereof) over the years.
I suspect that many Chinese TiO2 or other Chinese chemical companies could have an interest in KRO, given China’s long time desire for modern chloride TiO2 technology and the associated human capital and operational know-how. China has not only been alleged to have stolen parts of such technology and bribed American engineers of rival companies, but the Chinese government has also been shutting down dozens of smaller and highly polluting sulfate TiO2 plants in China.
Given that TROX raised a war chest of cash to participate in TiO2 industry consolidation and given that HUN is now buying the Rockwood assets, it is also possible that TROX could look to acquire KRO. KRO’s TiO2 footprint is largely in Europe, while TROX’s footprint is largely in Mississippi and Australia. Moreover, TROX has massive NOLs in the US while KRO has huge NOLs in Germany.
Simmons has also continued to buy modest amounts of NL stock on the open market in recent years, and at prices above the current quote.
Risks
Headline risk from potential adverse ruling at initial trial court level in Santa Clara case
Discount to NAV persists or expands
Catalysts
No imminent catalysts.
Potential for sale, monetization, or spinoff of stakes (or even entire companies) in the cases of KRO, CIX, or VHI.
Continued purchases of the remaining minority public float of NL by Simmons as time goes by.
No imminent catalysts.
Potential for sale, monetization, or spinoff of stakes (or even entire companies) in the cases of KRO, CIX, or VHI.
Continued purchases of the remaining minority public float of NL by Simmons as time goes by.
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