|Shares Out. (in M):||19||P/E||0||0|
|Market Cap (in $M):||1,360||P/FCF||0||0|
|Net Debt (in $M):||50||EBIT||0||0|
|TEV (in $M):||1,410||TEV/EBIT||0||0|
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SEACOR is the maritime investment vehicle of Charles Fabrikant, focused on various assets within the “things that float…mostly” category with the goal of producing ~2-3x the risk free rate over a long period of time without too much risk. Excellent background on CKH was given by Coda in his writeup from 2013, which was both extensive and extremely well timed. It is essential reading.
CKH has done very well over time, compounding book value at 13.4% from 1992 to 2013, with Fabrikant taking advantage of maritime tax laws to enhance long term compounding, utilizing spinoffs, buybacks, and investing counter cyclically in a cyclical industry. It is worth spending a minute upfront to understand how Fabrikant thinks about capital allocation decisions, as that is one of the key reasons the situation is noteworthy. The below are some quotes from the interesting book “Dynasties of the Sea” (Lori LaRocco, 2012) which profiles Fabrikant in one of its chapters:
After several years, in the latter part of the 1980s, expecting the market to recover, Fabrikant saw an opportunity to jump back in. “A group of us decided it might be interesting to get back into the shipping business. By then, I had also wandered into the inland business, so I was operating barges and towboats. Our group was primarily interested in conventional shipping, and I wanted to get back into the sector.”
That didn’t stop the trio. Fabrikant had been researching the offshore industry at the suggestion of the head of the workout division of the Maritime Administration, who told him: “If you think barges are cheap, then you should look at the rest of the stuff I’ve been bagged with,” referring to offshore vessels. “The CFO of our barge business had struck up a relationship with Chicago area utility named NICOR, which had a fleet of 35 offshore vessels. We used the NICOR dry-dock for our towboats. I took a look and said to Bill Simon, his son Peter, Robert and the rest of the group, ‘Although offshore vessels are not ships, they float.’ It looked cheap, and we pounced.” That transaction was the genesis of SEACOR. “One of our new employees came up with the name SEACOR, because the cheapest way to meet our obligation to change the names of the vessels and save money on paint was to cover the ‘NI’ with the letters ‘SEA’.”
When considering an investment, leaders must ask if the idea is compelling enough, recognizing that available capital is finite. SEACOR, however, is in the enviable position of not having much capital constraint. However, Fabrikant’s approach is to invest as if every dollar were his last. When asked about investing in conventional ships, tankers or dry cargo, Fabrikant replied, “If I put my money in a commodity – and that’s what a ship is– I really want the odds to be very strongly in my favor.” His goal is to earn a return on the order of two to three times what he could get in a relatively risk-free investment. “I’m really not interested in earning five or six percent on my capital. That is pretty unappealing, although, in these times of zero interest rates, it is hard to do better without taking on some leverage. Generally we’ve managed in a lumpy form to earn something on the order of 18 to 19 percent pre-tax with limited leverage, 12 to 13 percent after tax.” Fabrikant explained that, if the investment doesn’t have the potential to reach this bar with limited leverage, they reject it.
SEACOR also assesses the breadth of market opportunity before deploying capital. “You don’t want to own a commodity which has a very limited market.” The supply and demand quotient is critical. “In the past couple of years, I’ve been curious about classic box ships, but I doubt I would ever be interested in large container ships because not many users in the world are out there for that kind of tonnage. I suppose that if I could buy it for scrap, and scrap were cheap, that might be a different story, but that is really not the case now. I might be interested in smaller container ships, if they got cheap enough.”
Despite the headwind of a large fleet and excess shipyard capacity, Fabrikant says there is a lot of capital that’s “anxious to go to work.” When making these types of decisions, it is a delicate combination of experience and guts. “Sometimes you can be burdened by too much experience and knowledge,” Fabrikant said. “It has made me very cautious, perhaps too much so. On the other hand, I’ve frequently seen folks buy at apparently big discounts to market peaks, and it turned out in the end the discount was not as compelling as they first thought.”
Fabrikant’s capital deployment strategy depends on how much money he has, what he wants to risk, and how he is willing to risk it. When assessing a possible opportunity, Fabrikant considers two major points: • the asset’s value is not likely to decrease more than 20 percent from the purchase price he has to pay, even if the market continues to weaken, and; • the asset has a 50/ 50 chance of appreciating 50 percent after two or three years. “It doesn’t mean I couldn’t buy a ship and its price would go down 30 or 40 percent,” he admitted. “But frankly, if I thought that could happen, I really wouldn’t touch it.” Picking bottoms, Fabrikant says, can be a matter of luck, and often he would rather wait for signs of an upturn. “It’s often preferable to buy ships as the market improves, on the way up, rather than average down. But that’s just me.”
Unfortunately, the oil crash will depress CKH’s earnings substantially in its Offshore Marine Services (OMS) group, which is their largest segment. Although it is unclear how much or for how long this division will remain depressed it is probably safe to assume “a lot” and “quite a while.” So based on what Charles said above, shouldn’t we wait to buy on the way up and with signs of an upturn? Why is CKH attractive today? Basically I don’t think you need a near term rosy scenario in those end markets to do pretty well here over time. Not all the value in CKH is oil services dependent and the dislocation in that space is likely to provide CKH with solid opportunities to deploy capital at attractive multi-year returns.
While it is difficult to figure out what the entirety of CKH is worth precisely, one smart thing to do is wait for Fabrikant to start aggressively buying in the stock. One of his lieutenants has said something to the tune of “Charles has a number in his mind all the time about what this is worth. He will never tell you what it is but he knows the number.” At a higher stock price, Charles told a story about raising money and someone asking what he was going to do with the capital, to which he said something like “I’m going to wait until things get worse/the stock goes down and buy a lot of it back.” Apparently that was the wrong answer for the meeting but I believe it is the way Fabrikant generally operates. For that reason, I think buying in tandem with large buybacks is a pretty decent money making strategy. When CKH is trading well below “the number,” Fabrikant acts (but doesn’t make a big deal out of it - they don’t do earnings calls, etc.) In their last quarterly release, CKH announced that they had been very active in their stock:
Share Repurchases - During the quarter ended September 30, 2014, the Company purchased 1,116,464 shares of its common stock for an aggregate purchase price of $87.9 million. Subsequent to September 30, 2014 and through October 24, 2014, the Company purchased 472,200 shares of its common stock for an aggregate purchase price of $35.7 million.
That repurchase of ~1.6m shares in 4 months (with a starting balance of less that 20m shares outstanding) was signal vs. noise and meant that Fabrikant thought the stock was cheap (around ~$80/share in that period). Unfortunately, he was early and since then oil has obviously been a disaster. Many of his assets are dependent on oil capex and those assets are now worth less than three months ago. However, on December 29th, with most of the oil price shock felt, CKH filed an 8k with the below information:
SEACOR Holdings Inc. (the "Company") announced today that on December 26, 2014, its Board of Directors increased its authorization for repurchases of the Company's common stock for a total authorized expenditure of up to $150.0 million. During the period beginning October 1, 2014 through December 24, 2014, SEACOR purchased 921,828 shares of its common stock for an aggregate purchase price of $68.2 million.
So while there was a decrease in the pace of the buyback (~$124m in the first 4 months followed by ~$32m in the following 2 months) these are all material numbers for a ~$1,375m company in a six month period. For CKH to increase the authorization by an additional $150m after oils fall seems to signal that Fabrikant still thinks buybacks can make sense here. If Fabrikant executes on that additional tranche of the buyback in the next six months CKH will be on pace to decrease the share count by around ~20% in a year. Alternatively, if Fabrikant stops buying in shares (while this will be a disappointment) the excess capital in CKH can likely still find attractive asset purchase opportunities in this environment.
So what do investors pay for the OMS segment today, how much might that be worth and what could that imply for a return profile in the stock? I am going to group CKH into 4 main buckets: Shipping, Barge, Equity Investments/Corn and OMS.
Fabrikant has written that, given the way CKH accounts for its capex (by expensing it), the historical cost of the vessels is a relevant book value proxy. He also provided each segments insured value of the PP&E in this years letter, which was basically a little in excess of historical cost. Fabrikant refers to both historical and insurance value as metrics worth looking at (although he is very clear that those values are not FMVs). Nonetheless, I think that for the Barge and Shipping divisions they are reasonable ballpark numbers to use.
The Barge segment is likely worth close to the historical cost of the fleet plus the construction in progress, or ~$530m (~$500m historical cost and ~$30m construction in progress). To put that into perspective, LTM EBITDA (which is more like EBIT) was just over ~$50m and Coda approximated a normalized EBIT of ~$75m in his writeup. Kirby (which is probably the best comp for this segment) trades at ~11x EBIT and over 2.5x TBV.
The Shipping segment could end up being worth more than its historical value, and this segment is likely underappreciated in SEACOR, but we can use the historical cost plus the construction in progress of ~$630m (~$455m historical cost and ~$180m construction in progress) as an OK high level approximation. To put this into perspective, LTM EBITDA (same point as above on EBIT) was almost ~$70m (but there is a lot of noise) and many of these assets could be MLP eligible.
Equity investments at CKH (which are made up of a variety of positions) are carried at ~$445m. I think these are marked reasonably with the important caveat that ~$110m of the assets are OMS related (which now have very tough end markets). Haircutting those OMS investments by half would reduce the equity investments account to ~$390m. In a nice surprise, the ethanol division has really put up strong numbers and produced around ~$40 in LTM EBITDA. For simplicity I’m going to assume this roughly offsets CKH’s corporate costs and add in an additional $100m value deficit since I’d prefer to capitalize that corporate expense stream at a higher multiple.
So those three components would add up to about $1,450. With an adjusted EV of about ~$1,500m (unadjusted for buybacks post 9/30) you end up paying roughly nothing for their OMS segment. As an important note: CKH has a messy balance sheet so at the end of this writeup there is a quick note on some assumptions to get that $1,500m adjusted EV number.
So what could the OMS segment be worth? Most assuredly less than six months ago but the divisions PP&E was insured at the end of the year for ~$1,350m with a historical cost of ~$1,100m as of last quarter (again, Fabrikant gives some rationale for the relevance of these two metrics in his letters, although states emphatically that they are not necessarily reflective of FMV. His letters are excellent and very worth reading even if you hate this stock idea. They are available here: http://ir.stockpr.com/seacorholdings/letters-to-stockholders Just to ballpark what that business might be worth as a standalone entity trading today, lets compare some related companies:
So U.S. comparables to the OMS division trade at about 70% TEV/PP&E (messy metric – just one way to simplify it – these businesses have pretty simple balance sheets.) If the OMS segment is worth 70% of its historical cost it is worth just under ~$800m. That implies solid upside (perhaps ~50%) on the stock depending on what you think of the other segment values.
To put those numbers in context – Coda thought the OMS segment should have a normalized EBIT of around ~$180m. That should give some sense of the upside scenarios in any eventual recovery, which over time could be excellent. Coda’s writeup was better timed in many respects (since it was ahead of improving earnings and this is ahead of declining earnings) but if Fabrikant thinks this is worth more today then investing alongside likely can provide favorable returns in the medium to long term.
Note on the adjusted EV calculation: That number includes the Construction Reserve Fund as cash because Fabrikant has a solid long term track record. Not making a deduction for the deferred income tax because my understanding is that it can be deferred indefinitely. Giving CKH cash credit for its “Other” receivables but not its Other Assets and am not making a deduction for CKH’s Other Current Liabilities (which is a similar amount by which AR exceeds AP). CKH also has future payment obligations for ordered ships (~$520m) that one may feel deserves some haircut to value. ~$200m of that order book is in the OMS segment so perhaps a ~$100m haircut is conservative there. I’m curious to hear others thoughts on the above and open minded to different interpretations re. what investors are paying for OMS today.
DISCLOSURE: There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of CKH without notice for any reason at any time.
Investor attention, continued buyback, eventual end market recovery
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