Description

Siem Industries is an investment holding company trading at a huge discount to NAV. As of September 30, 2003 the NAV was $18.09 per share, while the shares are quoted at $8 to $8.75. The stock is quite illiquid and this idea will only serve those VIC members who are willing to venture into the shallow and dirty estuary of sorrow that is the Pink Sheets. In spite of all the issues associated with an illiquid, controlled company, Siem Industries is a solid, growing business – or collection of businesses – and the shares are an excellent bargain.

Siem Industries trades at a large discount to the value of its holdings for a few reasons: The company is controlled by Kristian Siem, the chairman and CEO, who controls just over 50% of the shares outstanding through family trusts. Hence, the company is assigned a control discount. Furthermore, over the past several years, the shares have gone from being semi-illiquid to very illiquid, so the shares carry a liquidity discount. Lastly, the company is structured more or less as an investment vehicle, so it is assigned a holding company discount. Siem Industries sits in the middle of most investors’ perfect storm – it is an illiquid, controlled holding company. What better reason not to buy it?

As is sometimes the case, a much closer inspection will reveal some interesting points. First, one should look at Kristian Siem’s record. In a Barron’s article (I think it was 1998 or 1999) Alan Kahn referred to Kristian Siem as the Norwegian Warren Buffett, which is not too far off the mark. Siem Industries went public on the Amex in the late 1980s (The company was originally called Bermuda Star Line, Inc., and later changed its name to Norex America, Inc., then Norex Industries, Inc., before arriving at the present name). The balance sheet from 1989 shows shareholder’s equity of $17.2 million with 4.393 million shares outstanding. There was a 4 for 1 split in 1997, and today there are 16.797 million shares outstanding. Today’s equity is $303,898. The table below illustrates the company’s growth:

Shareholder’s
Equity (NAV)*
1989 $17,214
1990 $36,271
1991 $50,542
1992 $49,778
1993 $80,375
1994 $93,513
1995 $127,503
1996 $193,447
1997 $291,016
1998 $189,463
1999 $308,207
2000 $306,561
2001 $259,875
2002 $289,834
2003 $303,898

* 1989 thru 1995 are June 30 fiscal years; 1995 thru present are December 31 fiscal years.
Another interesting point is Kristian Siem’s investment and operating style. His compensation is a percentage of the company’s net income (I think it is 5%), and he does not award himself large options grants or an excessive base salary. The company’s office is minimalist and is run with a tiny staff. Corporate expenses are kept to a minimum. In sum, the guy is a tightfisted cheapskate with company money. In terms of his investment style, Siem possesses two characteristics that are noteworthy. First, he has never strayed outside his circle of competence, which is shipping, oil and gas, and financial services. Second, he has maintained a very concentrated portfolio, seldom holding more than four or five significant investments at a time. Most VIC readers should be able to appreciate the wisdom of these two aspects of Siem’s approach and the discipline required to apply them – Siem Industries is a testament to their effectiveness.

One final point on shareholder’s equity – in the mid 1990s Siem made an investment in Norwegian Cruise Lines (NCL) via the then distressed debt, gaining a considerable stake in the company and subsequently orchestrating the near bankrupt cruise line’s reorganization. When it was nursed back to health, NCL became the target of a hostile bidding war between Carnival and Star Cruises of Malaysia. Siem realized a whopping NOK 1.3 billion in cash from the sale to Star Cruises in early 2000, versus an initial investment of NOK 483 million. Shareholder’s equity has not done much since the NCL sale, but capital has been put to work during the past few years and Siem Industries is more or less invested again after carrying around a ton of cash. As the table illustrates, NAV growth has been lumpy as investments have been realized in one way or another at varying times. The nature of Siem’s investment style – invest in messed up companies, fix them, and sell them when they are popular – would suggest that returns will continue to be lumpy.

Investments:

Star Reefers Inc.: Siem owns 73.4% of Star Reefers which is currently one of the leading reefer owners. Star Reefers is the result of the re-cap of Swan Reefer, which went under in 2000. Siem persuaded Swan Reefer’s banks for forgive a substantial amount of debt and simultaneously made an equity infusion, taking advantage of the then severely depressed reefer market to tie up a lot of reefers at distressed prices (A reefer is a refrigerated cargo vessel for carrying bananas and other perishables). Reefer rates were at a 20 year low and the industry suffered from the presence of too many small players who competed aggressively on price. The industry was also threatened by the advent of reefer containers which stole a substantial portion of the market from reefer vessels, and is an ongoing issue. Siem proceeded to consolidate the industry at a fast pace while vessel prices were low. Reefer rates have since begun to recover (as you would expect with fewer competitors) and Star Reefers earned $0.86/share in FY 2002, achieving $3.31 in EBITDA/share (for those who pay attention to ebitda). The shares are traded on the Oslo exchange (at around USD$9.15, vs. book value/share of USD$8.56) but are totally illiquid. There was an offer in October of this year from a Greek shipping group to purchase Star Reefers for $70 million, which was subsequently raised to $75 million, which would value the shares at around $9.82/share. Both offers were instantly rejected as inadequate. Star Reefers is consolidated in Siem Industries’ financials, and the asset is probably worth slightly more than stated book, based on the recent offer. There is an exit strategy somewhere down the road, but it could be far in the distance.

Car Carriers: Siem owns 88.1% of a JV that owns 3 car carriers. The economic rationale of this investment is essentially debt pay-down. The carriers are on lease to VW for 5 years, and the leases are considered very stable with a very high probability of being renewed at a slightly higher rate. The carriers were financed mostly with debt and equity is building quickly because excess cash flow goes toward amortization. The car carrier investment is consolidated and probably worth book.

Four Seasons Capital: Siem owns 64% of Fours Seasons (50% voting interest), a small venture capital firm based in Sweden, which is carried at $14.8 million. The value of this holding is reviewed annually. I doubt it is worth substantially more or less than carrying value.

Portfolio Investments: Siem owns 1.4 million shares of Transocean Inc. worth approximately $41.66 million. Siem also owns a portfolio of distressed debt, a 100% interest in a German pot-ash producer, and some miscellaneous real estate. The Transocean shares and other marketable securities are carried at market, and the real estate and other investments are relatively insignificant.

DSND Inc.: Siem owns 72.2% of DSND, a leading offshore sub-sea contractor for the international oil and gas industry. DSND is traded on the Oslo exchange (recent price was in the range of NOK 15-16). There are two key points to DSND. First, the company was the target of hostile overtures from Cal Dive in Q4 2002 at NOK 20 per share. Siem did not want to sell at that price and took his ownership from 33% to 72.2% in order to get rid of Cal Dive. Here we have a knowledgeable arms length buyer willing to pay above the current market price, and an insider saying that price was too low, which should say something about the ultimate value of DSND. Second, DSND’s major asset is a 50% interest in a JV that owns Subsea 7, the sub-sea operating company. Subsea 7 came into existence in 2002 when Halliburton and DSND each contributed their assets to the JV. This industry suffered from silly competition in the past few years, as industry participants (Stolt, Coflexip) priced large and lengthy projects below cost only to eventually book losses. The wisdom (or hope) is that participants have found religion and are pricing their bids more rationally now which should allow Subsea 7 to achieve acceptable profitability. An indication that interest in the area may be increasing is the sale of Subsea 7’s ROV fleet to Oceaneering for $108 million, which should result in a decent gain for Subsea 7. The key point about Subsea 7 is that the JV agreement with Halliburton contains an exit mechanism that can be triggered after two years, whereby each party can buy out the other’s interest at market plus 10%. The two years is almost up. Alternatively, they can sell 100% of the JV to a third party. I view the 50/50 ownership structure of Subsea 7 as inherently unstable, and would expect Halliburton or DSND or a third party to wind up with 100% of Subsea 7 in the next few years. Given that the ownership of Subsea 7 will likely be restructured, and since Subsea 7 is DSND’s major asset, the future of DSND is somewhat in flux. If DSND were to become a cash shell, for example, it might make sense to merge it into Siem Industries. There are a number of possibilities for DSND’s endgame, but since DSND is a relatively major deal for Siem Industries, it is possible that the final play-out of the Subsea 7 arrangement could prompt Siem Industries to address its own shareholder structure. DSND is currently consolidated into Siem Industries’ financials.

To sum up, Siem Industries is trading at 48% of book value, and book value is fairly representative of intrinsic value in my opinion. The shares trade at a discount for good reasons as discussed above. However, Siem Industries has proven to be an effective and disciplined builder of wealth over the years, and management is clearly honest and competent. Kristian Siem is aware that his interests will be best served when the shares reflect their proper value, but he has always focused exclusively on the company’s underlying investments – too exclusively no doubt. Yet, if he were going to freeze out minority holders, he could have done so long ago. In addition, his management style and compensation arrangement suggest that he is a good deal more honest than the managers of many more typical public companies. In spite of the enormous discount and illiquidity, long term shareholders have enjoyed a decent rate of return over the years. It is possible that the resolution of Subsea 7’s ownership, and the corresponding impact on DSND, could provide an impetus to address the holding company’s ownership structure. Any improvement in Siem Industries’ liquidity or broadening of the shareholder base would have to be a positive considering where the stock is quoted today. If shareholder’s equity continues to build over time and a narrowing of the discount should occur….www.siemindustries.com.

Catalyst

Exit mechanism for DSND’s Subsea 7 investment, which would potentially trigger a reorganization of DSND and Siem Industries (perhaps a merger), broadening Siem Industries’ shareholder base and liquidity.

Recognition of deep undervaluation.

Continuation of Siem Industries’ long term record of growth in per share equity.