Description
WHX Corp. (“Company”) is a unique post bankruptcy opportunity. The Company is a diversified industrial player with some great brands and a 140 year history of operations. Not only are there some obvious profit levers in the form of losing business lines within WHX that are masking some great and profitable businesses, but the Company is >50% owned by the admired, veteran activist hedge fund, Steel Partners. Based on several ways I looked at the valuation, I think the stock is significantly undervalued and is worth north of $20/share within 12-24 months.
Capital Structure
Shares: 10M, Price $7.45 – market cap $74.5M
Warrants: 800K, exercisable @ $11.20
Debt: $115M (year-end 2006, according to WHX’s Reorganization Plan forecast)
Pensions: $51.6M (year-end 2006, according to WHX’s Reorganization Plan forecast)
Preferred Stock: $5.1M – WHX is required to repay all of it by Oct 2006.
Background
WHX was officially created in 1994 as a new entity to control WPC, which in turn, was the parent of Wheeling-Pittsburgh. In 1998, WHX (headed by Chairman Ronald LaBow) acquired a company called Handy & Harman (“H&H”) for $646M in order to gain access to the Company’s pension surplus. In November 2000, WHX’s subsidiary, WPC, filed for Chapter 11 (for the second time in its history). WPC later emerged from bankruptcy in August 2003 as an independent company, separate from the WHX umbrella.
Ironically, WHX filed for Chapter 11 in March 2005 as it couldn’t pay the principal and accumulated interest on its 10.5% Senior Notes of ~$96.6M due in April 2005. The restructuring plan to emerge from bankruptcy involved the conversion of the 10.5% Senior Notes into 9.2M Shares (current total basic share count is about 10M). Steel Partners, an activist hedge fund, started buying up the 10.5% senior notes back in 2002 at less than 60 cents on the dollar. After accumulating a large position in the notes, Steel Partners headed the unsecured notes committee for WHX. As WHX emerged from bankruptcy, Steel owned a little less than 50% of the company’s equity. Steel then quickly increased its position with a controlling share of a 50.3% holding as of Aug 2005. Given their level ownership, Steel Partners is now running WHX (see Steel employees involved in WHX listed below) and currently owns most of the debt as well (they bought the Tranche B Term Loan in September 2005). A few other funds quickly amassed WHX shares as it emerged – among them a famous longtime H&H investor – Mario Gabelli (whose office is located at the same address as H&H). The company still hasn’t issued its financial reports for almost two years now (last reported period was Q3/2004), but I suspect that it’s about to do so soon (see the last debt terms amendment which required the filing of 2004 and 2005 reports).
Employees of Steel Partners involved with WHX:
Glen M. Kassan (Director and CEO of WHX)
John Quicke (Director and Vice President of WHX)
Jack L. Howard and Josh Schector (Directors of WHX)
Business Description
WHX Corp. is now essentially a holding company for H&H. H&H was founded in 1867 as a precious metals company which traded bullion and specie (gold/silver bars and coins). In fact, in 1892 the company first issued a daily silver price quote for North America, which is still used today as a guide for silver valuation around the world. (Later, in 1917, the Company issued the”Review of the Silver Market” publication, which is also widely used today). H&H started selling soldering/brazing products (today through its Lucas Millhaupt subsidiary) as early as 1905. Since that time, the company has vastly diversified itself and so today, H&H includes a number of different business units under its umbrella. In its last reporting periods, H&H reported three business segments: (1) Precious Metals, (2) Engineered Materials and (3) Wire & Tubing. The company stated in its last financial statements that it was likely to shutdown/sell the money-losing businesses within its Wire & Tube segment (likely to be the wire and steel cable businesses). Please see my adjusted segment breakdown table below.
Precious Metals
- Lucas Milhoupt Company – This subsidiary manufactures brazing and soldering materials. Most of the unit’s sales are brazing material and therefore it takes little commodity risk with precious metals. Target customers include private subcontractors, construction businesses & repair shops. The largest end market is the heating, ventilation & air-conditioning (HVAC) industry, which accounts for 30-40% of the business (according to competitors). Major competitors are: Wolverine Joining Technologies, Umicore, and J.W. Harris (a subsidiary of Lincoln Electric). This business should have some barriers to entry as there are quality, integration and consistency issues with the OEMs. This is part of the reason that we don’t see cheap Chinese brazing material vendors dominating the U.S. (In fact, I know of only one major HVAC OEM that is using a vendor from China).
- H&H Electronic Material – This unit is the largest volume producing, non-captive, reel-to-reel electroplater in North America. It produces reel-to-reel and loose piece metal stampings from a wide variety of base materials. Typical end markets are automotive, computer, connector, semiconductor, sensor and telecommunication industries (for products such as: starter boards for autos, control boards for autos, and circuit boards).
Engineered Materials
- This segment includes a unit that produces plastic package molding. End markets for these products are electronics, sensors, and medical devices. This particular business has not been doing too well given its dependence on the struggling automotive market. Probably losing business.
- OMG Company – This subsidiary is a supplier of fasteners and accessories for the commercial flat roofing industry. Customers are the major building and roofing distributors nationwide as well as the country’s largest roofing systems manufacturers. This is a moderately growing business. Growth is driven by specialty products (drainage-related, etc.). This is a highly regarded producer – partners/customers expressed impressive admiration for the service quality, enthusiasm and professionalism of this division. I regard this unit as a reasonably good business.
- OMG Company – This unit also manufacture specialty fasteners for the building products industry for fastening applications in log homes, landscaping, masonry, post home structures and wood decks. This is a consumer-oriented business, selling to retailers like Home Depot and Lowe’s (as well as resellers). The end use of the product is for renovation, additions of decks and new housing construction (only ~10-15% of the deck market is driven by new housing). End users are subcontractors and DIY. OMG has had a few innovations and great marketing, so their business took over the market and they have been able to raise prices (perceived as value-added through better, more clean-finished screws). This is the best business unit within WHX - growing fast with good margins (most of the competitors are small mom and pop manufacturers).
- Continental Industries – This subsidiary produces unique steel and plastic fittings that connect gas and water from the main in the street to the residence or business. This business has probably been mildly profitable.
- Canfield Metal Coating Corporation – This unit makes light gauge, narrow width custom coatings. Principal markets are the appliance, automotive, construction, container, and door industries. One application for their product is to manufacture and coat the steel/metal doors between the garage and the house (which is a mandatory process). Probably making few millions in EBITDA per year.
Wire, Cable & Tubing
In general, this business manufactures and sells wire, cable and tubing products which are fabricated from stainless steel, carbon steel and specialty alloys. As stated before in WHX’s financial documents, I assume that the company will shut down its money-losing sub-segments within this Wire, Cable & Tubing division while retaining the other profitable units. I believe that Steel Partners, as a savvy financial player, does not have an allegiance to any legacy operations within WHX. Consequently, they are financially motivated to act as prudently as possible in reallocating unproductive capital within WHX. In fact, in May of this year, WHX announced its decision to close its Norristown, Pennsylvania facility, which is part of its H&H Tube Company business.
Other Businesses
- Holdings in Cosine Communications – In November 2005, the Company bought ~1.9M shares of Cosine (ticker COSN), which accounted for 18.8% of COSN shares. Steel directly holds another 25% of COSN. I won’t get into much detail about this holding because there is a VIC write-up on COSN, so you are welcome to take a look at that note. In short, COSN has no real business other than ~$22M in cash and more than $330M in NOL’s. The VIC write-up assumed the COSN’s stock was worth twice its price (WHX bought the shares for $2.65, today the price is ~$2.70, and at the time of the VIC write-up the price was $2.45).
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Segments Breakdown |
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Sales (Million $) |
1999 |
2000 |
2001 |
2002 |
2003 |
2004E |
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Precious Metals |
233.7 |
237.4 |
168.3 |
142.3 |
84.6 |
110.0 |
|
Wire & Tube |
158.9 |
158.0 |
133.6 |
132.2 |
121.9 |
145.2 |
|
Engineered Materials |
75.7 |
73.4 |
86.2 |
111.9 |
119.8 |
165.5 |
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Total |
|
468.3 |
468.8 |
388.1 |
386.4 |
326.3 |
420.7 |
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Sales Growth |
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Precious Metals |
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2% |
-29% |
-15% |
-41% |
30% |
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Wire & Tube |
|
-1% |
-15% |
-1% |
-8% |
19% |
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Engineered Materials |
|
-3% |
17% |
30% |
7% |
38% |
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Total |
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0% |
-17% |
0% |
-16% |
29% |
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% of WHX sales |
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Precious Metals |
50% |
51% |
43% |
37% |
26% |
26% |
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Wire & Tube |
34% |
34% |
34% |
34% |
37% |
35% |
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Engineered Materials |
16% |
16% |
22% |
29% |
37% |
39% |
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Op Profit (Million $) |
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Precious Metals |
22.9 |
26.2 |
10.3 |
8.5 |
2.8 |
5.0 |
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Wire & Tube |
16.8 |
16.2 |
3.4 |
(3.2) |
(1.4) |
(1.5) |
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Engineered Materials |
9.4 |
7.7 |
7.9 |
10.6 |
9.7 |
19.8 |
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Total |
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49.2 |
50.1 |
21.6 |
15.9 |
11.1 |
23.2 |
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Op Margin |
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Precious Metals |
9.8% |
11.0% |
6.1% |
5.9% |
3.3% |
4.5% |
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Wire & Tube |
10.6% |
10.2% |
2.5% |
-2.4% |
-1.1% |
-1.0% |
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Engineered Materials |
12.4% |
10.5% |
9.2% |
9.5% |
8.1% |
11.9% |
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Total |
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10.5% |
10.7% |
5.6% |
4.1% |
3.4% |
5.5% |
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- Some Corporate expenses aren’t allocated in the table above
- I made several adjustments to the figures above to count for onetime or not future-reflective benefits/expenses
The Story
If one compares the projected earnings submitted in the disclosure statement to the performance in 2004, it would look, at first blush, as if the Company is somewhat aggressive in its outlook (see projection table below). However, using reasonable assumptions and information pieced together through lots of digging, it appears that the Company has many levers to pull in order to achieve its operating plan and beyond:
– Within the Wire, Cable & Tubing segment there is a money-losing business and a profitable business (see this segment breakdown below). The Company will probably shut the losing business to stem losses.
– It seems that there are a few other losing lines of business totaling $4-7M of negative EBITDA which, again, the Company will shutter or sell.
– Due to the higher growth rate of the more profitable segments, the company should experience a mix-shift to higher margins.
– Given a lower debt load following the emergence from bankruptcy), WHX will better execute its market strategy and be able to act opportunistically in the marketplace (for instance, I learned that WHX has recently made an acquisition in France to augment its precious metals business).
WHX, as a whole, had adjusted operating margins (adjusted for one-time items) for the last 12 months as of September 2004 (the last audited & reported period) of 2.9%. Looking at the disclosure statement projections, the company forecasts seemingly high adjusted operating margins of 5.8% in 2005 and 7.5% in 2008. However, excluding the losing portion of the Wire & Tube segment, margins reach >5% level. Conservatively forecasting Q4/2004 to get 2004 in full, results in close to the plan’s 5.8% operating margin (if not higher).
Additionally, from media publications, conversations with competitors/industry participants (some with familiarity with the H&H businesses), and visits to tradeshows, it seems that WHX overall had a decent-to-good 2005. OMG Group in particular, appears to have had a great year in 2005 and a strong YTD in 2006 (see valuation below for more details).
Finally, the unusual situation of WHX being owned and run by a savvy, long-term value-oriented money manager is somewhat reassuring. In the case of WHX, we have reason to believe that Steel Partners has the interest, skill, and commitment to match expectations of shareholder value creation. Also, after the emergence from bankruptcy, Steel bought most of the Company’s debt — presumably so it could better re-organize WHX and optimize business decisions without some of the highly restrictive debt covenants standing in its way.
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WHX Disclosure Statement - Financial Projections |
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Income Statement |
12/03 |
LTM Sep-04 |
12/05 |
12/06 |
12/07 |
12/08 |
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Net Sales |
326.3 |
395.3 |
427.2 |
461.1 |
490.2 |
519.2 |
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Gross Profit |
61.3 |
72.0 |
85.7 |
94.5 |
102.1 |
110.0 |
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SG&A |
68.8 |
60.6 |
60.9 |
63.1 |
67.4 |
71.0 |
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Op Inc |
(7.5) |
11.4 |
24.8 |
31.4 |
34.7 |
39.0 |
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Interest exp |
19.2 |
22.4 |
14.5 |
13.5 |
11.7 |
10.7 |
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Nonoperating Income |
(6.5) |
(5.8) |
(0.3) |
(0.4) |
(0.4) |
(0.4) |
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Other |
(134.9) |
0.0 |
(11.3) |
0.0 |
0.0 |
0.0 |
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Pretax Income |
(168.0) |
(16.8) |
(1.3) |
17.5 |
22.6 |
27.9 |
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Tax |
1.2 |
1.9 |
1.5 |
1.5 |
1.5 |
1.5 |
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Pfd dividends |
19.4 |
19.4 |
0.0 |
0.0 |
0.0 |
0.0 |
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Net income |
(153.6) |
(38.2) |
(2.9) |
16.0 |
21.1 |
26.4 |
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Discontinued |
0.0 |
0.0 |
(0.5) |
0.0 |
0.0 |
0.0 |
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Net Income after Extra |
(153.6) |
(38.2) |
(3.4) |
16.0 |
21.1 |
26.4 |
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EPS excl Extraordinaries |
($35.08) |
($7.03) |
($0.29) |
$1.60 |
$2.11 |
$2.64 |
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EPS fully Taxed |
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|
($0.08) |
$1.08 |
$1.40 |
$1.73 |
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Revenue Growth |
-15.6% |
21.2% |
8.1% |
7.9% |
6.3% |
5.9% |
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Gross Margin |
18.8% |
18.2% |
20.1% |
20.5% |
20.8% |
21.2% |
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SG&A/Sales |
21.1% |
15.3% |
14.3% |
13.7% |
13.7% |
13.7% |
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Operating Margin |
-2.3% |
2.9% |
5.8% |
6.8% |
7.1% |
7.5% |
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Implied Tax rate |
-0.7% |
-11.3% |
-115.4% |
8.6% |
6.6% |
5.4% |
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Full Tax rate |
|
|
38.0% |
38.0% |
38.0% |
38.0% |
· The plan only specify years 2005-2008, historic figures are taken from the 10K’s with few adjustments
· The interest is adjusted for 10M higher debt level that was originally planned
· I assume 10M shares and 38% tax rate
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Wire & Tube Segment Breakdown |
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Wire & Cable |
2004E |
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9M 03 |
9M 04 |
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Sales |
|
38.9 |
|
28.1 |
29 |
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Op Profit |
(7.6) |
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(3.0) |
(5.1) |
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Analysis |
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Sales growth |
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3.2% |
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OM |
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-19.5% |
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-10.7% |
-17.6% |
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Tubing |
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Sales |
|
106.3 |
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64.2 |
78.7 |
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Op Profit |
6.1 |
|
2.8 |
4.4 |
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Analysis |
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Sales growth |
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22.6% |
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OM |
|
5.7% |
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4.4% |
5.6% |
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- Full year 2004 figures based on assumed Q4.
Valuation
Using the Company’s forecasts issued in March 2005 (Disclosure Statement in the Re-organization plan) as a base for valuation seems reasonable. Sanity checks performed in the form of bottom-up projections at the segment level suggests even higher EPS figures than what WHX forecasted (creating the plan early in 2005 – the company may have underestimated the strong 2005-2006 environment for many of its businesses). So, using the plan’s projected 2008 fully-taxed EPS of $1.73 implies a P/E of 4.3x 2008’s earnings (or 5.3x next year’s). WHX deserves a multiple of 11-13x on current year EPS (seems a reasonable P/E given mid-single digit growth and ROIC in low-to-mid teens, at or close to cycle peak in several markets. Keep in mind this is quite a diversified company with exposure to many different markets and end users). Adding the $0.50/share in NOL value (assuming that after 2008 the total value of the NOL would be $5M) and valuing the upside from COSN at $0.40 (net of the preferred shares that were used to finance it), I get a $20-$23 stock in 12-24 months.
Another way to look at the valuation is to value the Company’s best segment, the Engineering Materials business. The entire Engineering segment had >12% operating margins in the first 9 months of 2004. This segment’s major growth driver is the OMG Company. As the “star business” in the portfolio, OMG’s margins were probably at least as high as those of the entire segment. Based on several sources of information it seems that OMG’s business really picked up in 2005 & 2006 (top line growth of 23% and 14% respectively to get to ~$160M by year end, with strong margins according to media reports and industry professionals). Assuming slight operating leverage in its business (OMG manufactures ~75% of its products and outsource the rest), we can apply reasonable margin expansion from 12% in 2004 to 14% in 2006. Based on the above, I get EBIT of >$22M for 2006. With EBIT growth of 8-10% in the next two years (driven by strong commercial construction, a reasonable decking business, and market share gains with new products), we get 2008 EBIT of ~$27M. As the star business within WHX, it’s reasonable to assume returns of at least mid teens (total WHX ROIC implied by the discloser statement forecast is ~13%) with earning growth of >5% (beyond 2008). Giving OMG a 7-8x EBIT multiple implies EV of ~$200M in 2008. By assuming OMG margins of 12% in 2004 we imply that the rest of the Engineering segment had ~12% margins as well. Backing out revenue for the rest of the segment results in $51M in 2004 and $64M in 2008 (4.5% CAGR). Keeping margins flat through 2008, with +10% ROIC and 3-5% growth, and giving it a 6x EBIT multiple gets us to ~$46M in EV. Adjusted unallocated overhead should be ~ $3M for the total segment in 2008, or about negative $20M applied to the EV. Adding the NOL would get us to EV of ~$230M for the Engineered Materials segment alone in 2008. By then, EV (excluding pension liabilities, and assuming current share price) would be ~$170M (with pension liabilities it’s ~220M). Essentially, we’re getting paid $10-60M ($1-$6 per share) to own the other, profitable two segments of WHX (and the COSN shares)!
Major company-specific risks are clearly the lack of information of the last two years (which I think has created this outstanding opportunity), and the volatility of a low liquidity stock.
Catalyst
filing financial reports, selling off of business units, and using free cash flow to enhance shareholder value.