Description

In an environment with few bargains available (is this the perfect intro to a lousy write-up?), why not write about a low correlation diversification into a Korean toll collection business with captive blue-chip client? Only by owning it indirectly through a recent Oslo spinoff is where the situation becomes skewed in our advantage and we gain an event-driven exposure up to 55% excess return relative to direct ownership.

Treasure ASA “TRE” is a simple Norwegian one-asset holding company, holding a 12% stake in publicly-traded Hyundai Glovis, and trades at a 35% NAV discount*. Glovis is a toll collecting company with stable fundamentals. Driven by political reform that takes a tougher stance against current chaebol practices, there is potential for a liquidity event for either all Glovis shareholders, or TRE alone. By holding TRE we expose ourselves not only to a possible takeover premium, as we side with most of Hyundai heir’s worth in Glovis stock, but interestingly a windfall if TRE would liquidate after it converts into a 100% cash vehicle.

While the Glovis price (086280 KS) might be discounting a HM restructuring probability, the Norwegian spinoff’s discount has not moved on recent news of potential restructuring.

*This post was written when the NAV discount was at 35%. Currently NAV stands at 36%.

Thesis

Background on TRE

TRE was spun off in June from the roll-on/roll-off shipping company Wilh Wilhelmsen ASA “WWASA” to “highlight the value of both”. It holds a remaining 12% stake in public company Glovis as its only asset. Last month, a merger between WWASA and peer Wallenius lines was announced. This sheds new light on the spin off, i.e. it could have been a necessary precursor for the merger of the opco’s.

Parent holding Wilh. Wilhelmsen Holding “WWI” holds 73% of TRE post-spinoff. There has been selling pressure in the first months as seen in the historical chart I compiled (see links for doc with pictures). The Glovis stake made up roughly one third of WWASA’s value pre spinoff.

WWI has been a strategic investor in Glovis since 2004: Glovis’ only competitor for HM cars, EUKOR, has the inverted balance of ownership Scandinavians/Koreans:

• WWASA and Wallenius together hold 80% of Glovis’ peer EUKOR. The Scandinavians bought this stake from Hyundai  Merchant Marine in the Asian crisis aftermath

• HM owns a remaining 20% of EUKOR

• WWASA later bought a 25% stake in Glovis in ‘04, which got diluted to 20% after its IPO

• WWASA sold down 5% in 2008 and 3% in 2012. Both buying and selling by WWASA looks well-timed in retrospect

End of 2016, the SHA between Chung and TRE is to be renegotiated (see page 57 of TRE’s prospectus) This SHA contains a two-way first right of refusal and gives TRE two seats on the Glovis board (out of 9).

Glovis background

Glovis primarily ships Hyundai and KIA cars worldwide through roll-on/roll-off “roro” carriers. This is a small shipping niche and relatively stable as compared with other shipping segments, earning decent normalized returns.

Glovis was founded in ‘01 with most equity funding from the HM heir (Chung Eui-sun). Glovis secured lucrative contracts with HM (in which the heir retains control through a complex web of cross-shareholdings). Inflated related party transactions with Glovis were a means for the Chung family to bypass the high 50% inheritance  tax in Korea, and conveniently steal from minority shareholders, as the heir holds 23% of Glovis, but only 2.3% of HM. Glovis shares are the heir’s single biggest asset.

The Korean government has taken a tougher stance towards Chaebol and passed a large legislation package called the one-shot rule (see links for images) to facilitate restructuring Chaebol (e.g. limit cross holdings and affiliated party dealings). One example from this package is a tax on inflated related-party contracts in which legacy shareholders hold more than 30% of the company. The Chung family was quick to sell down its stake in Glovis to just below this level.

Glovis valuation

Glovis holds long-term cost-plus contracts to ship Hyundai/Kia cars. Contract includes fuel cost pass-through and operating margins are stable. There is absolute volume risk as the contract only guarantees the percentage of total cars exported. Cars are cyclical, affordability mitigates this a little. HM comprises 60% of Glovis revenue. In 2015, Glovis acquired an inland distribution player in Europe as part of its strategy to become a more integrated supply-chain partner.

Debt is cheap in shipping, and given that D/E is reasonable at 1.4 it makes sense to look at P/E & ROE’s.

TRE relative to Glovis

Last month Glovis gained 10% on media reports that Korea may amend the Fair trade law (which regulates Chaebol cross holding structures) to force the unwinding of cross holdings within three years. As this unwinding would entail much less family control over HM, it adds to incentives to

1. do anti-dilutive transactions:

• merging with Glovis (main asset of Chung junior, holding 30% together with Chung senior)

• injecting the heir’s stake of Glovis into HM’ capital. This would be more accretive for Chung, but also less lucrative (i.e. more difficult to defend an acquisition premium for only his personal stake)

2. buying out other major shareholders

There’s a wide range of possibilities and intricacies however. We recommend reading the Merrill Lynch report (see links) which lay out probable scenarios. The likely new holding company for the restructured HM Group is either Mobis or Glovis. If cross holdings need to disappear, the HM heir will need to defend existing control and merging with Glovis is only one option. Buying out major shareholders is another and we think TRE is a main suspect, especially if Glovis became the new holdco of HM (note that dividend payout at Glovis has doubled last 2 years).

We will now lay out scenarios and calculate a probability weighted IRR for TRE in excess of holding Glovis. The probability of the bull case will be parameterized later, and we assume the remaining probability resides 50/50 in baseline and bear case.

Bull case: cash offer

Although the probability that HM will do a transaction with Glovis in the upcoming year or two is high (my guestimate is a probability weighted waiting time of 2 years), it’s important to note that the probability of a TRE cash offer is anything but sure. We allow another 6 months for TRE to liquidate in that case.

Assumptions on a cash offer:

1. p-weighted waiting time Hyundai + Glovis restructuring = 2 years

2. probability of cash offer, conditional on HM  - Glovis restructuring event = 30 %

3. conditional on cash offer, extra waiting time for TRE to liquidate = 0.5 years

Bull excess IRR of 18.8% (54% total excess return in 2.5 years).

Baseline: no cash offer, fair discount

In the case a Hyundai restructuring never materializes in cash, multiple scenarios can play out.

To start, Glovis shareholders could end up in the capital of a large Hyundai holding company. I suspect TRE’s plan in that case would be to sell off those shares, as the transport arm is a strategic holding for the Wilhelmsen family as opposed to the Hyundai Motors Group.

Another interesting catalyst is the potential scrapping of the Norwegian wealth tax. Currently, the Wilhelmsen’s have tax incentives to keep WWI’s and its subsidiaries’ share prices low. This tax is at 0.85% of assets and the ruling majority has stated they want to scrap this tax.  Additionally, the spin off and merger at WWASA level might indicate starting efforts to maximize value. Therefore, even without M&A activity at Glovis’ side, the endgame for TRE might be liquidation, share buybacks or a special dividend. We are an investor in the parent WWI as well, which trades at around 30 – 40% of (long duration) asset value.

In short, there is certainly potential outside of the bull scenario. We argue that the NAV discount should narrow to 20%. We believe 20% is a fair trade-off between low liquidity and potential for other liquidation/value enhancing scenarios. Friction costs (see prospectus) play a minor role at a capitalized 0.5% warranted discount.

• Upside in case of a 20% NAV discount should therefore be 23% (0.8/0.65 – 1).

• assume this is reached in 2.5 years as well

Baseline excess IRR of 8.6%.

Bear case

Status quo of current discount: no excess return other than positive dividend carry discussed below.

Positive carry from dividend (all scenarios)

Assuming TRE returns only half of the 1.64% Glovis div. yield to shareholders via buybacks/dividends while we wait, we are getting 0.44% excess returns per annum. However, there has been a Korean ruling that TRE needs to pay div. taxes in Korea (i.e. double dividend taxation for TRE holders), we therefore subtract the Korean div tax of 15% * 1.64% = 0.24%.

We add the net amount of positive carry 0.2% to the IRR of all scenarios.

Note that the dividend payout amount has doubled from ’14 to ‘16. This payout could rise even further as the HM heir is perhaps raising cash for an upcoming event. Glovis growth potential is also limited as EUKOR keeps on serving a small but stable part of HM cars.

Probability weighted excess IRR over holding Glovis

Conclusion

Merits:

• excess IRR is quite high in many scenarios, especially relative to the risk of holding a low volatility & low correlation Korean cost-plus company

• in a scenario of 30% cash offer probability and 2.5 year waiting time for liquidation, one gets a P-weighted excess IRR of 9% over holding Glovis

• alignment with Hyundai’s heir potentially engineering a takeout premium for Glovis

Risks

1. volume risk in the number of Hyundai/Kia cars exported

2. low liquidity of TRE

Trading recommendation: if Glovis should move up fast (potentially because of takeover speculation), Treasure should rise faster (and vice versa)

https://en.wikipedia.org/wiki/Wealth_tax (see Norway)

EUKOR deal: http://www.joc.com/after-eukor-deal_20030209.html

https://www.ft.com/content/a1a9df4c-d6c0-11e5-829b-8564e7528e54 (highly recommended)

http://ir.glovis.net/Common/FileDownload.aspx?mc=122&dr=&fn=17June2015_Glovis%20Initiation%20BUY%20W300k.pdf&gb=E  (highly recommended)

http://ir.glovis.net/Eng/IR/AnalystReports.aspx?page=1&sw=

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/tre-treasure-asa/

http://blogs.barrons.com/asiastocks/2016/08/25/hyundai-glovis-a-chaebol-restructuring-play/

Catalyst

Liquidity event for Glovis shareholders in general

Liquidity event for TRE in particular

Scrapping of Norwegian wealth tax

Restructuring at other Chaebol