ALEXANDER & BALDWIN INC ALEX
July 07, 2011 - 3:43pm EST by
deerwood
2011 2012
Price: 51.04 EPS $0.00 $0.00
Shares Out. (in M): 42 P/E 0.0x 0.0x
Market Cap (in $M): 2,118 P/FCF 0.0x 0.0x
Net Debt (in $M): 537 EBIT 0 0
TEV ($): 2,655 TEV/EBIT 0.0x 0.0x

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Description

Investment Thesis                                                                                                                                                                        

I propose a long position in the common stock of Alex & Baldwin ("ALEX" or the "Company") due to the underappreciated quality of its niche transportation business and presence of significant hidden real estate assets. At current levels you are paying for ALEX's real estate holdings while getting the transportation and Ag business for free. Limited sell-side coverage focuses on the transport segment with only cursory detail. All investor presentations have been at logistics conferences. Conservative management seems to play down the SOTP value while investors overlook +$1.5B of value on the real estate side, representing +70% from the current stock price.

Catalysts

Near-term catalysts to value realization include: 1) improved fundamental in the Hawaiian RE market combined with the planned sale of completed projects in 2H'11 - will help expose the market to its underlying real estate holdings and 2) volume growth, rate increases and the recapturing of fuel surcharges in its transport segment. A potential medium-term catalyst is the splitting of the real estate segment into a REIT and the transport operating company into a C-corp. In April Pershing Square filed a 13D likely with such a plan in mind. Though it is hard to handicap how this activism will play out, limited discussion in the media by activists so far is potentially a sign that management has been receptive. The fact that yesterday (7/6) the Company announced it is appointing a veteran GS banker and former external advisor as CFO may also be a positive signal. 

Structure

ALEX operates in three primary segments: transportation (Matson), commercial real estate and property development (A&B) and to a lesser extent agriculture (primarily HS&TC).      

Investment Merits

  • Attractive shipping business: Matson ships containers within the LA>Hawaii >Guam>China and LA>China lanes with 17 vessels (ave. life of 23 years), 42k containers and several warehouses. Matson is the largest Jones Act West Coast container and auto carrier and has historically been referred to as 'Hawaii's lifeline.' Prohibitive entry cost for Jones Act shipping lanes ($250M per ship) and ALEX's domination of this small market create huge barriers to entry (+65% share). The Company also derives significant competitive advantages due to its land holdings at the port (105 acre Sand Island terminal in Honolulu) and ship type (smaller vessels that can provide expedited trans-Pacific service, 10 days). This position is substantiated by its pricing power whereby it maintained its rates through the recession. The other pair in the HI string duopoly is HRZ (30% share). Pricing in the market is published (vs. privately negotiated) and has historically been rational. On 3/29, HRZ breached a senior debt covenant due to weakness across its mainland and Puerto Rico operations. HRZ also recently plead guilty in a DOJ anti-trust case in Puerto Rico, potentially resulting in the forfeiture of government contracts in HI and Guam. The natural beneficiary will be ALEX. Regardless of this outcome, HRZ's perilous financial position renders it incapable of adding capacity or pursuing aggressive pricing. As a side note, an anti-trust class action suit brought against the two in HI was recently dismissed.
  • Volumes to HI are more consistent than those of other trade lanes given the lack of alternatives (ie. limited warehousing space on the island and the perpetual need to restock). Growth in 2011 will come from 1) expansion into China with existing customer-base (underway with all ships chartered, Company says customer interest has exceeded expectations, should increase EBIT +20-25% in 2011); 2) Guam port build-out with an increased military presence; and 3) further recovery of the local HI market. Fundamentals have been improving: HI lane experienced an 8% Y/Y increase in container vols in 1Q'11 and West Coast container traffic was up 5% Y/Y in April. Public shipping data indicates that June 2011 base rate per container from LA>HI was $3700 vs. $3200 in June 2010 while fuel surcharges increased +100% from 1Q to 2Q as Matson recoups fees it lost in 1Q.
  • Real Estate Holdings: On the commercial side under A&B, ALEX owns 44 properties, 7.8M sq ft (65% industrial, 19% office, 16% retail) all of which are in urban centers. Outside of HI the segment is focused on secondary metro areas. On a stand-alone basis A&B recorded NOI of $56M in 2010 (almost all of which was attributable to commercial leasing and is only reported annually in a supplemental package that also seems to be overlooked) that equates to an EV of $780M if a peer multiple of 14x is applied (implying a 7.1% cap rate). Recently fundamentals have been improving in this segment with occupancy and rent-rolls anticipated to increase through 2011.
  • A&B is also involved in property development with 19 late-stage residential and commercial projects that in aggregate are worth over $1B based on recent sale prices. Monetization of these real estate development holdings will begin to accelerate toward the end of 2Q'11, which should lead to more market recognition of these assets in 2H'11. A long history in Hawaii (+100 years), 29k acres of conservation land and 58k acres of agriculture holdings enable it to more effectively negotiate for land entitlement (other developers choose to JV with them for this reason). In 1Q'11, A&B sold a land-locked Ag property on Maui with no road access for $40k/ acre. If this valuation were applied to the Company's entire 88k acres, the rural land holdings are worth $3.5B (note: below I assumed almost no value for this land, most of which is much more desirable than the plot recently sold).

Valuation

There are three components to the Company's value. The first are the real estate holdings, the details of which are disclosed on the Company website and in the annual supplemental RE file below (the property level valuations performed is at the end of the write-up).

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDE4Nzg4fENoaWxkSUQ9NDMxODg1fFR5cGU9MQ==&t=1

Based on recent transactions this equates to an NAV of $2.5B-$2.9B ($900M for the commercial RE portfolio + $1B for the development projects + $500M for the rural land). Meanwhile all public peers trade at 110-120% of NAV. The second component is the Matson transportation segment valued at $1.6B-$1.7B based on peer multiples and FCF yield. This does not directly include the port assets in HI (5), Guam, LA, Oakland, Portland and Seattle. The last is the Ag business: given the evolving state of this segment no value was assumed. In aggregate this yields an NAV of $3.6B-$4.1M or $87-$98 per share, a +70% premium from the current stock price.

Sum-of-the-Parts Analysis    
(US$ in Millions)*      
  Base Case Low Case Notes
Real Estate Assets      
Commercial RE Properties  980.6   892.7  Low end of comps, recent purchases at cost ($840M based on NOI)
Development Projects  1,050.1   1,050.1  Low end of recent sales, unfinished at land cost
Rural & Ag land  878.3   585.5  $15k/ acre in Base, $10k/ acre in Low for rural land; no value to conservation land in either
Total RE Value  2,909.0   2,528.3   
       
Matson Navigation      
EV (Comp Analysis Ave.)  1,703.9   1,610.0  See detail below
       
Agriculture      
EV   -    -  Breakeven business, no value ascribed 
       
Total Asset Value  4,612.9   4,138.3   
Less: Debt  522.0   522.0   
Plus: Cash  14.0   14.0   
Total Net Asset Value  4,104.9   3,630.3   
       
Shares Outstanding  41.5   41.5   
Net Asset Value per Share  $98.91   $87.48   
Premium to Current  93.8%  71.4%  
       
*Except per share data      

ALEX's current stock price relative to its asset value provides substantial downside protection in and of itself. There are, however, a number of potential additional sources of upside. The most significant are increased cash flow from development sales and continued improved fundamentals on the shipping side, in particular the retroactive recouping of fuel surcharges that will take place over the balance of 2011(increased to 47.5% in June vs. 21.75% in Feb). 

Investment Considerations & Risks 

  • Agriculture: Hawaiian Sugar & Transportation Cooperative ("HS&TC"): 35,000-acre Maui sugar plantation and Kauai Coffee: 3,000-acre plantation are the largest Ag producers in HI. This segment lost money in 2009, made $6.1M in 2010 and is basically break-even to marginally profitable given the rebound in sugar prices. No value is ascribed to this operation other than the land. The Company is likely transitioning this area to a federally subsidized bio-energy farm ($12M grant received). ALEX can continue to use land as bargaining position for entitlement on the commercial side (ie. we'll keep it green if you approve development plan on commercial side).
  • Management: Management (6% owner) has shown discipline by purchasing and developing properties through the downturn. They are now more focused on harvesting real estate investments in 2011 now that the market has improved. Compensation (+55% LT incentive) tied to ROIC (10% for transport, 8% for RE) and EBT.
  • Risks:
  • Shipping business could roll over with potential for high current shipping rates leading to influx of capacity. This would not apply to its existing Jones Act lanes (95% of container vols) and is less likely given lead-time for expansion.
  • New CLX2 line introduces risk (but also a growth opportunity) given that it is outside of ALEX's core market and area of competitive advantage. Was an $10-15M EBIT drag in 2010 due to start-up expenses.
  • Real estate price deterioration in HI would challenge leasing and sales. The region is currently coming off of a multi-decade low. Real estate asset prices in NAV based on historically depressed prices, so any meaningful recovery would provide additional upside.
  • If sugar prices decline to 2009 levels, Ag will start losing money again causing a drag on earnings. The Company is scaling back in this area so risk gets muted.

Segment Financials & Valuation

Matson Segment Financial Summary & Valuation        
(US$ in Millions)                
  2005A 2006A 2007A 2008A 2009A 2010A 2011E Normalized
Ocean Transport                
Revenue  878.3   945.8   1,006.9   1,023.7   888.6   1,045.0   1,139.1   1,085.0 
EBIT  128.0   105.6   126.5   105.8   58.3   99.4   125.3   135.0 
EBIT Margin  14.6%  11.2%  12.6%  10.3%  6.6%  9.5%  11.0%  12.4%
                 
Unit Volume                
Hawaii containers         152,700   136,100   136,700     140,000 
Hawaii automobiles         86,300   83,400   81,800     84,000 
China containers         47,800   46,600   72,700     60,000 
Guam containers        13,900   14,100   15,200     15,000 
Rev./ unit ($s)        293.7   315.3   293.2     275.6 
                 
Logistics Services                
Revenue  431.6   444.2   433.5   436.0   320.9   355.6   373.4   440.0 
EBIT  14.4   20.8   21.8   18.5   6.7   7.2   8.2   10.0 
EBIT Margin  3.3%  4.7%  5.0%  4.2%  2.1%  2.0%  2.2%  2.3%
                 
Segment Total                
Revenue  1,309.9   1,390.0   1,440.4   1,459.7   1,209.5   1,400.6   1,512.4   1,525.0 
Y/Y Growth  6.8%  6.1%  3.6%  1.3% (17.1%)  15.8%  8.0%  
EBIT  142.4   126.4   148.3   124.3   65.0   106.6   133.5   145.0 
EBIT Margin  10.9%  9.1%  10.3%  8.5%  5.4%  7.6%  8.8%  9.5%
                 
EBITDA*  193.3   176.0   203.0   182.7   125.6   168.8   194.6   205.6 
EBITDA Margin  14.8%  12.7%  14.1%  12.5%  10.4%  12.1%  12.9%  13.5%
EBITDA-Capex  18.1   (42.8)  135.2   144.8   112.3   96.6   89.6   130.6 
                 
Cash ROA  1.5% (3.4%)  10.6%  11.8%  9.6%      
                 
        Segment Valuation        
        Peer EV/ EBITDA Multiple    9.5x    9.0x    9.0x  
        Implied Matson EV    1,603.6   1,751.5   1,850.4 
                 
        Peer FCF Yield    6.0%    
        Implied Matson EV  1,610.0     
        Mean EV    1,703.9     
                 
*Includes $10M in annual corp expense            
Note: Peers consist of domestic marine operator/ intermodal KEX, HUBG, JBHT (similar business mix and return profiles)      


A&B Segment Financial Summary & Valuation      
(US$ in Millions)              
  2005A 2006A 2007A 2008A 2009A 2010A 2011E
Leasing              
Revenue  89.7   100.6   108.5   107.8   103.2   94.4   97.2 
EBIT  43.7   50.3   51.6   47.8   43.2   35.3   39.4 
EBIT Margin  48.7%  50.0%  47.6%  44.3%  41.9%  37.4%  40.5%
               
Sq. Ft.   4.8   5.2   6.4   7.5   7.2   7.8   7.8 
Rate (Rev/ Sq Ft)  18.7   19.3   17.0   14.4   14.3   12.1   12.4 
               
Development & Sales             
Revenue  148.9   97.3   117.8   350.2   125.6   136.1   156.5 
EBIT  44.1   49.7   74.4   95.6   39.1   50.1   70.4 
EBIT Margin  29.6%  51.1%  63.2%  27.3%  31.1%  36.8%  45.0%
               
Segment Total              
Revenue  238.6   197.9   226.3   458.0   228.8   230.5   253.7 
Y/Y Growth   (17.1%)  14.4%  102.4% (50.0%)  0.7%  10.1%
EBIT  87.8   100.0   126.0   143.4   82.3   85.4   109.8 
EBIT Margin  36.8%  50.5%  55.7%  31.3%  36.0%  37.0%  43.3%
               
NOI    65.8   69.3   67.0   65.9   55.7   71.6 
FFO (NOI-SG&A)    61.9   64.7   63.5   63.4   52.8   69.1 
               
      Segment Valuation        
      Peer EV/ NOI Multiple      14.0x    12.0x  
      Implied A&B EV      779.8   859.5 
               
      Peer Cap Rate      7.5%  
      Implied A&B EV    742.7   
      Mean EV      840.1   
               
Note: Peers consist of AMB, DCT, DLR, EGP, OFC, FSP, CLI and EQY; CAD cannot be estimated due to lack of capex detail    

Detailed Real Estate Valuation
 
Real Estate-Operating                  
          Valuation  
Property  Location Type Comm. Space  (Sq. ft) Acreage Low Case PSF Base Case PSF Low Case Value Base Case Value Notes
                   
Commercial Portfolio - Oahu                  
Judd Building Downtown Honolulu - Merchant St and Fort St Mall Office 20,200 0.1 300.0 400.0 6.1 8.1  
Kaneohe Bay Shopping Center Kam Highway Retail 127,500 9.8 113.0 125.0 14.4 15.9 Recent comp @ 113/sq ft
Komohana Industrial Park Kapolei, West Oahu Industrial 238,300 35.0 140.0 159.4 33.4 38.0 Acq. 6/10 for $38M
Kunia Shopping Center Waipahu Retail 60,600 4.4 150.0 200.0 9.1 12.1  
Stangenwald Building Downtown Honolulu - Merchant St  Office 27,100 0.1 300.0 400.0 8.1 10.8  
Waipio Industrial Waipahu Industrial 158,400 6.7 155.0 176.8 24.6 28.0 Acq. 2/09 for $28M
Waipio Shopping Center Waipahu - Waipio community  Retail 113,800 14.0 250.0 269.0 28.5 30.6 Acq.8/09 for $31M
                   
Commercial Portfolio - Maui                  
Apex Building Kahului - Dairy Road and Hana Highway Retail 28,100 2.3 172.0 180.0 4.8 5.1 Being sold
Kahului Building Central Kahului Office 57,700 1.6 250.0 350.0 14.4 20.2  
Kahului Office Center Central Kahului Office 32,900 1.9 200.0 250.0 6.6 8.2 HI mean
Kahului Shopping Center Central Kahului  Retail 18,600 16.8 125.0 131.0 2.3 2.4  
Lono Center Central Kahului  Office 13,100 0.6 200.0 250.0 2.6 3.3 HI mean
Maui Clinic Building Central Kahului  Office 16,600 1.3 300.0 350.0 5.0 5.8  
Maui Mall Central Kahului  Retail 186,300 25.4 175.0 190.0 32.6 35.4  
P&L Building Kahului industrial area Industrial 104,100 4.0 130.0 140.0 13.5 14.6 HI mean
Wakea Business Center II Kahului industrial park - near airport Industrial 61,500 4.4 130.0 140.0 8.0 8.6 HI mean
                   
Commercial Portfolio - Kauai                  
Port Allen Center I Port Allen Industrial 28,000 1.3 130.0 140.0 3.6 3.9  
Port Allen Center II Port Allen Industrial 13,300 1.3 130.0 140.0 1.7 1.9  
Port Allen Marina Center Port Allen Retail 23,600 1.7 200.0 225.0 4.7 5.3  
Steel Warehouse Port Allen Industrial 22,700 3.6 130.0 140.0 3.0 3.2  
                   
Commercial Portfolio - Big Island                  
Lanihau Marketplace Kailua-Kona center  Retail 88,300 9.7 250.0 256.0 22.1 22.6 Acq. 4/10 for $22.5M
                   
Commercial Portfolio - Mainland                  
Concorde Commerce Center Northwest submarket of Phoenix, Arizona Office 140,700 9.4 200.0 220.0 28.1 31.0  
Deer Valley Financial Center Northwest submarket of Phoenix, Arizona Office 126,600 9.7 200.0 220.0 25.3 27.9  
Activity Distribution Center Industrial submarket of San Diego Industrial 252,300 15.1 60.0 65.0 15.1 16.4 National average
Firestone Boulevard Building La Mirada, CA, a submarket of Los Angeles Office 28,100 0.4 200.0 220.0 5.6 6.2  
Gateway Oaks Outside Sacramento Office 58,700 1.0 200.0 220.0 11.7 12.9  
Midstate 99 Distribution Center Logistics park - Visalia, CA Industrial 790,400 43.3 60.0 65.0 47.4 51.4  
Northpoint Industrial Industrial park in North Orange County Industrial 119,400 7.4 60.0 65.0 7.2 7.8  
Prospect Park Center Rancho Cordova near Sacramento Office 162,900 9.1 200.0 220.0 32.6 35.8  
Rancho Temecula Town Center Temecula, CA - SW Riverside County Retail 165,500 20.0 295.0 295.0 48.8 48.8 Acq. 10/10 for $48M
Broadlands Marketplace Broomfield, a northern suburb of Denver Retail 103,900 12.4 150.0 165.0 15.6 17.1  
Meadows on the Parkway Boulder, CO Office/ Retail 216,400 18.6 200.0 220.0 43.3 47.6  
Wilshire Center Greeley, CO Retail 46,500 4.6 150.0 165.0 7.0 7.7  
Savannah Logistics Park Georgia Ports, Savannah Logistics Park, GA Industrial 1,035,700 62.9 60.0 65.0 62.1 67.3  
Sparks Business Center Sparks, Nevada, near Reno Industrial 396,100 20.7 60.0 65.0 23.8 25.7  
Arbor Park Shopping Center San Antonio, TX Retail 139,500 14.3 150.0 165.0 20.9 23.0  
Heritage Business Park Five miles from the Dallas/Fort Worth Airport Industrial 1,316,400 107.7 60.0 65.0 79.0 85.6  
Preston Park Plano, TX Office 198,600 12.1 200.0 220.0 39.7 43.7  
Republic Distribution Center I Port of Houston Industrial 312,500 17.9 60.0 65.0 18.8 20.3  
Royal MacArthur Center Las Collinas, Dallas Retail 44,000 8.4 150.0 165.0 6.6 7.3  
San Pedro Plaza San Antonio, TX Office 163,800 2.8 200.0 220.0 32.8 36.0  
Centennial Plaza Five min. from Salt Lake City Airport Industrial 244,000 14.6 60.0 65.0 14.6 15.9  
Little Cottonwood Center Salt Lake City suburbs Retail 141,600 20.5 145.0 145.0 20.5 20.5 Acq. 9/10 for $20.4M
Ninigret Office Park Five min. from Salt Lake City Airport Office 185,200 20.2 200.0 220.0 37.0 40.7  
                   
  TOTAL: Operating RE Assets   7,829,500 599.1     892.7 980.6  
                   
Real Estate-Development                   
            Valuation    
Property  Location Type Comm. Space  (Sq. ft) Acreage Units PSF/Per Acre* Value Status  
Development - Hawaii                  
Honolulu Condominium Ala Moana Center and downtown Honolulu Residential   1.7 330   19.0 Planning (TBD), land at cost
Keola La'i Near downtown Honolulu Residential   2.7 352   0.0 Complete, sold units
'Aina O Kane Central Kahului, Maui Resi/ Comm. 19,800 3.9 103 175 3.5 Incomplete, selling units
Bluffs at Wailea Wailea coast, Wailea Resort area, Maui  Residential   8.0 12   10.0 Complete, selling units
Grove Ranch Maui Haiku less than 10 miles from Kahului, Maui Residential   5.5 9   0.0 Selling lots  
Haliimaile Slopes of Haleakala in Upcountry Maui Residential   63.0 170   0.0 Permitting  
Kahului Town Center Central Maui Resi/ Comm. 300,000 20.0 442 175 52.5 Incomplete, selling units
Kai Malu at Wailea (50% interest) Wailea's Blue Golf Course, Maui Residential   25.0 150   0.0 Complete, sold units
Maui Business Park II Central Kahului, Maui Industrial   179.0   750 134.3 Planning, selling in 2H'11
The Ridge at Wailea Wailea, Maui Residential   6.7 9 200 27.0 Under construction
Wailea Wailea Resort, Maui Resi/ Comm.   200 1,200 500 100.0 Planning, selling lots-see 2009 sales sheet
Kukui'ula (50% interest) Southern coast of Kauai, adjacent to Poipu resort Residential   1,000 1,000   630.0 Largely complete, selling units
Ka Milo at Mauna Lani Mauna Lani Resort, Kohala Coast, Big Island Residential   30.5 137   50.0 Incomplete, selling units
Waiawa (50% interest) Waiawa, Oahu Residential   1,000     0.0 Planning  
                   
Development - Mainland                  
Bridgeport Marketplace (50%) Valencia, CA Retail 127,000 15.4   165 10.5 Operating  
Crossroads Plaza (50%) Valencia, CA Retail 105,700 13.0   166 8.8 Operating  
Centre Pointe Marketplace (50%) Valencia, CA Retail 56,000 6.5   167 4.7 Operating  
Palmdale Trade Ctr. Palmdale, CA Office/ Ind. 315,000 18.2     0.0 Planning  
Panama Grove  Bakersfield, California Retail 575,000 57.3     0.0 Planning  
                   
  TOTAL: Development RE Assets   1,498,500 2,656.4     1,050.1    
                   
*PSF ($s), PSA ($000s)                  
                   
Real Estate-Entitlement Activity                  
Property  Location Type Comm. Space  (Sq. ft) Acreage Units Price/ Acre ($000s) Value Status  
Kihei Residential Kihei, Maui Residential   95 600   0.0 Plan filed in 2010
Waiale Community Central Maui Residential   765 3,000   0.0 Env. study filed in 2010
Eleele Community Eleele, Kauai Residential   800 NA   0.0 Planning phase
                   
Rural Land                  
HC&S: Maui sugar plantation Central Maui Agriculture   51,480   15,000 772.2    
Kauai Coffee: plantation Southern Kauai Agriculture   7,070   15,000 106.1    
Maui conservation land Northern Maui Conservation   15,880     0.0    
Kauai conservation land Central Kauai Conservation   13,320     0.0    
                   
  TOTAL: Entitlement & Rural RE Assets     89,410.0     878.3    

Catalyst

Near-term catalysts:
- Improved fundamental in the Hawaiian RE market
- Sale of completed projects in 2H'11 - will help expose the market to its underlying real estate holdings
- Volume growth, rate increases and the recapturing of fuel surcharges in its transport segment
 
Medium-term catalyst:
- Splitting up the Company
    sort by    

    Description

    Investment Thesis                                                                                                                                                                        

    I propose a long position in the common stock of Alex & Baldwin ("ALEX" or the "Company") due to the underappreciated quality of its niche transportation business and presence of significant hidden real estate assets. At current levels you are paying for ALEX's real estate holdings while getting the transportation and Ag business for free. Limited sell-side coverage focuses on the transport segment with only cursory detail. All investor presentations have been at logistics conferences. Conservative management seems to play down the SOTP value while investors overlook +$1.5B of value on the real estate side, representing +70% from the current stock price.

    Catalysts

    Near-term catalysts to value realization include: 1) improved fundamental in the Hawaiian RE market combined with the planned sale of completed projects in 2H'11 - will help expose the market to its underlying real estate holdings and 2) volume growth, rate increases and the recapturing of fuel surcharges in its transport segment. A potential medium-term catalyst is the splitting of the real estate segment into a REIT and the transport operating company into a C-corp. In April Pershing Square filed a 13D likely with such a plan in mind. Though it is hard to handicap how this activism will play out, limited discussion in the media by activists so far is potentially a sign that management has been receptive. The fact that yesterday (7/6) the Company announced it is appointing a veteran GS banker and former external advisor as CFO may also be a positive signal. 

    Structure

    ALEX operates in three primary segments: transportation (Matson), commercial real estate and property development (A&B) and to a lesser extent agriculture (primarily HS&TC).      

    Investment Merits

    • Attractive shipping business: Matson ships containers within the LA>Hawaii >Guam>China and LA>China lanes with 17 vessels (ave. life of 23 years), 42k containers and several warehouses. Matson is the largest Jones Act West Coast container and auto carrier and has historically been referred to as 'Hawaii's lifeline.' Prohibitive entry cost for Jones Act shipping lanes ($250M per ship) and ALEX's domination of this small market create huge barriers to entry (+65% share). The Company also derives significant competitive advantages due to its land holdings at the port (105 acre Sand Island terminal in Honolulu) and ship type (smaller vessels that can provide expedited trans-Pacific service, 10 days). This position is substantiated by its pricing power whereby it maintained its rates through the recession. The other pair in the HI string duopoly is HRZ (30% share). Pricing in the market is published (vs. privately negotiated) and has historically been rational. On 3/29, HRZ breached a senior debt covenant due to weakness across its mainland and Puerto Rico operations. HRZ also recently plead guilty in a DOJ anti-trust case in Puerto Rico, potentially resulting in the forfeiture of government contracts in HI and Guam. The natural beneficiary will be ALEX. Regardless of this outcome, HRZ's perilous financial position renders it incapable of adding capacity or pursuing aggressive pricing. As a side note, an anti-trust class action suit brought against the two in HI was recently dismissed.
    • Volumes to HI are more consistent than those of other trade lanes given the lack of alternatives (ie. limited warehousing space on the island and the perpetual need to restock). Growth in 2011 will come from 1) expansion into China with existing customer-base (underway with all ships chartered, Company says customer interest has exceeded expectations, should increase EBIT +20-25% in 2011); 2) Guam port build-out with an increased military presence; and 3) further recovery of the local HI market. Fundamentals have been improving: HI lane experienced an 8% Y/Y increase in container vols in 1Q'11 and West Coast container traffic was up 5% Y/Y in April. Public shipping data indicates that June 2011 base rate per container from LA>HI was $3700 vs. $3200 in June 2010 while fuel surcharges increased +100% from 1Q to 2Q as Matson recoups fees it lost in 1Q.
    • Real Estate Holdings: On the commercial side under A&B, ALEX owns 44 properties, 7.8M sq ft (65% industrial, 19% office, 16% retail) all of which are in urban centers. Outside of HI the segment is focused on secondary metro areas. On a stand-alone basis A&B recorded NOI of $56M in 2010 (almost all of which was attributable to commercial leasing and is only reported annually in a supplemental package that also seems to be overlooked) that equates to an EV of $780M if a peer multiple of 14x is applied (implying a 7.1% cap rate). Recently fundamentals have been improving in this segment with occupancy and rent-rolls anticipated to increase through 2011.
    • A&B is also involved in property development with 19 late-stage residential and commercial projects that in aggregate are worth over $1B based on recent sale prices. Monetization of these real estate development holdings will begin to accelerate toward the end of 2Q'11, which should lead to more market recognition of these assets in 2H'11. A long history in Hawaii (+100 years), 29k acres of conservation land and 58k acres of agriculture holdings enable it to more effectively negotiate for land entitlement (other developers choose to JV with them for this reason). In 1Q'11, A&B sold a land-locked Ag property on Maui with no road access for $40k/ acre. If this valuation were applied to the Company's entire 88k acres, the rural land holdings are worth $3.5B (note: below I assumed almost no value for this land, most of which is much more desirable than the plot recently sold).

    Valuation

    There are three components to the Company's value. The first are the real estate holdings, the details of which are disclosed on the Company website and in the annual supplemental RE file below (the property level valuations performed is at the end of the write-up).

    http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDE4Nzg4fENoaWxkSUQ9NDMxODg1fFR5cGU9MQ==&t=1

    Based on recent transactions this equates to an NAV of $2.5B-$2.9B ($900M for the commercial RE portfolio + $1B for the development projects + $500M for the rural land). Meanwhile all public peers trade at 110-120% of NAV. The second component is the Matson transportation segment valued at $1.6B-$1.7B based on peer multiples and FCF yield. This does not directly include the port assets in HI (5), Guam, LA, Oakland, Portland and Seattle. The last is the Ag business: given the evolving state of this segment no value was assumed. In aggregate this yields an NAV of $3.6B-$4.1M or $87-$98 per share, a +70% premium from the current stock price.

    Sum-of-the-Parts Analysis    
    (US$ in Millions)*      
      Base Case Low Case Notes
    Real Estate Assets      
    Commercial RE Properties  980.6   892.7  Low end of comps, recent purchases at cost ($840M based on NOI)
    Development Projects  1,050.1   1,050.1  Low end of recent sales, unfinished at land cost
    Rural & Ag land  878.3   585.5  $15k/ acre in Base, $10k/ acre in Low for rural land; no value to conservation land in either
    Total RE Value  2,909.0   2,528.3   
           
    Matson Navigation      
    EV (Comp Analysis Ave.)  1,703.9   1,610.0  See detail below
           
    Agriculture      
    EV   -    -  Breakeven business, no value ascribed 
           
    Total Asset Value  4,612.9   4,138.3   
    Less: Debt  522.0   522.0   
    Plus: Cash  14.0   14.0   
    Total Net Asset Value  4,104.9   3,630.3   
           
    Shares Outstanding  41.5   41.5   
    Net Asset Value per Share  $98.91   $87.48   
    Premium to Current  93.8%  71.4%  
           
    *Except per share data      

    ALEX's current stock price relative to its asset value provides substantial downside protection in and of itself. There are, however, a number of potential additional sources of upside. The most significant are increased cash flow from development sales and continued improved fundamentals on the shipping side, in particular the retroactive recouping of fuel surcharges that will take place over the balance of 2011(increased to 47.5% in June vs. 21.75% in Feb). 

    Investment Considerations & Risks 

    • Agriculture: Hawaiian Sugar & Transportation Cooperative ("HS&TC"): 35,000-acre Maui sugar plantation and Kauai Coffee: 3,000-acre plantation are the largest Ag producers in HI. This segment lost money in 2009, made $6.1M in 2010 and is basically break-even to marginally profitable given the rebound in sugar prices. No value is ascribed to this operation other than the land. The Company is likely transitioning this area to a federally subsidized bio-energy farm ($12M grant received). ALEX can continue to use land as bargaining position for entitlement on the commercial side (ie. we'll keep it green if you approve development plan on commercial side).
    • Management: Management (6% owner) has shown discipline by purchasing and developing properties through the downturn. They are now more focused on harvesting real estate investments in 2011 now that the market has improved. Compensation (+55% LT incentive) tied to ROIC (10% for transport, 8% for RE) and EBT.
    • Risks:
    • Shipping business could roll over with potential for high current shipping rates leading to influx of capacity. This would not apply to its existing Jones Act lanes (95% of container vols) and is less likely given lead-time for expansion.
    • New CLX2 line introduces risk (but also a growth opportunity) given that it is outside of ALEX's core market and area of competitive advantage. Was an $10-15M EBIT drag in 2010 due to start-up expenses.
    • Real estate price deterioration in HI would challenge leasing and sales. The region is currently coming off of a multi-decade low. Real estate asset prices in NAV based on historically depressed prices, so any meaningful recovery would provide additional upside.
    • If sugar prices decline to 2009 levels, Ag will start losing money again causing a drag on earnings. The Company is scaling back in this area so risk gets muted.

    Segment Financials & Valuation

    Matson Segment Financial Summary & Valuation        
    (US$ in Millions)                
      2005A 2006A 2007A 2008A 2009A 2010A 2011E Normalized
    Ocean Transport                
    Revenue  878.3   945.8   1,006.9   1,023.7   888.6   1,045.0   1,139.1   1,085.0 
    EBIT  128.0   105.6   126.5   105.8   58.3   99.4   125.3   135.0 
    EBIT Margin  14.6%  11.2%  12.6%  10.3%  6.6%  9.5%  11.0%  12.4%
                     
    Unit Volume                
    Hawaii containers         152,700   136,100   136,700     140,000 
    Hawaii automobiles         86,300   83,400   81,800     84,000 
    China containers         47,800   46,600   72,700     60,000 
    Guam containers        13,900   14,100   15,200     15,000 
    Rev./ unit ($s)        293.7   315.3   293.2     275.6 
                     
    Logistics Services                
    Revenue  431.6   444.2   433.5   436.0   320.9   355.6   373.4   440.0 
    EBIT  14.4   20.8   21.8   18.5   6.7   7.2   8.2   10.0 
    EBIT Margin  3.3%  4.7%  5.0%  4.2%  2.1%  2.0%  2.2%  2.3%
                     
    Segment Total                
    Revenue  1,309.9   1,390.0   1,440.4   1,459.7   1,209.5   1,400.6   1,512.4   1,525.0 
    Y/Y Growth  6.8%  6.1%  3.6%  1.3% (17.1%)  15.8%  8.0%  
    EBIT  142.4   126.4   148.3   124.3   65.0   106.6   133.5   145.0 
    EBIT Margin  10.9%  9.1%  10.3%  8.5%  5.4%  7.6%  8.8%  9.5%
                     
    EBITDA*  193.3   176.0   203.0   182.7   125.6   168.8   194.6   205.6 
    EBITDA Margin  14.8%  12.7%  14.1%  12.5%  10.4%  12.1%  12.9%  13.5%
    EBITDA-Capex  18.1   (42.8)  135.2   144.8   112.3   96.6   89.6   130.6 
                     
    Cash ROA  1.5% (3.4%)  10.6%  11.8%  9.6%      
                     
            Segment Valuation        
            Peer EV/ EBITDA Multiple    9.5x    9.0x    9.0x  
            Implied Matson EV    1,603.6   1,751.5   1,850.4 
                     
            Peer FCF Yield    6.0%    
            Implied Matson EV  1,610.0     
            Mean EV    1,703.9     
                     
    *Includes $10M in annual corp expense            
    Note: Peers consist of domestic marine operator/ intermodal KEX, HUBG, JBHT (similar business mix and return profiles)      


    A&B Segment Financial Summary & Valuation      
    (US$ in Millions)              
      2005A 2006A 2007A 2008A 2009A 2010A 2011E
    Leasing              
    Revenue  89.7   100.6   108.5   107.8   103.2   94.4   97.2 
    EBIT  43.7   50.3   51.6   47.8   43.2   35.3   39.4 
    EBIT Margin  48.7%  50.0%  47.6%  44.3%  41.9%  37.4%  40.5%
                   
    Sq. Ft.   4.8   5.2   6.4   7.5   7.2   7.8   7.8 
    Rate (Rev/ Sq Ft)  18.7   19.3   17.0   14.4   14.3   12.1   12.4 
                   
    Development & Sales             
    Revenue  148.9   97.3   117.8   350.2   125.6   136.1   156.5 
    EBIT  44.1   49.7   74.4   95.6   39.1   50.1   70.4 
    EBIT Margin  29.6%  51.1%  63.2%  27.3%  31.1%  36.8%  45.0%
                   
    Segment Total              
    Revenue  238.6   197.9   226.3   458.0   228.8   230.5   253.7 
    Y/Y Growth   (17.1%)  14.4%  102.4% (50.0%)  0.7%  10.1%
    EBIT  87.8   100.0   126.0   143.4   82.3   85.4   109.8 
    EBIT Margin  36.8%  50.5%  55.7%  31.3%  36.0%  37.0%  43.3%
                   
    NOI    65.8   69.3   67.0   65.9   55.7   71.6 
    FFO (NOI-SG&A)    61.9   64.7   63.5   63.4   52.8   69.1 
                   
          Segment Valuation        
          Peer EV/ NOI Multiple      14.0x    12.0x  
          Implied A&B EV      779.8   859.5 
                   
          Peer Cap Rate      7.5%  
          Implied A&B EV    742.7   
          Mean EV      840.1   
                   
    Note: Peers consist of AMB, DCT, DLR, EGP, OFC, FSP, CLI and EQY; CAD cannot be estimated due to lack of capex detail    

    Detailed Real Estate Valuation
     
    Real Estate-Operating                  
              Valuation  
    Property  Location Type Comm. Space  (Sq. ft) Acreage Low Case PSF Base Case PSF Low Case Value Base Case Value Notes
                       
    Commercial Portfolio - Oahu                  
    Judd Building Downtown Honolulu - Merchant St and Fort St Mall Office 20,200 0.1 300.0 400.0 6.1 8.1  
    Kaneohe Bay Shopping Center Kam Highway Retail 127,500 9.8 113.0 125.0 14.4 15.9 Recent comp @ 113/sq ft
    Komohana Industrial Park Kapolei, West Oahu Industrial 238,300 35.0 140.0 159.4 33.4 38.0 Acq. 6/10 for $38M
    Kunia Shopping Center Waipahu Retail 60,600 4.4 150.0 200.0 9.1 12.1  
    Stangenwald Building Downtown Honolulu - Merchant St  Office 27,100 0.1 300.0 400.0 8.1 10.8  
    Waipio Industrial Waipahu Industrial 158,400 6.7 155.0 176.8 24.6 28.0 Acq. 2/09 for $28M
    Waipio Shopping Center Waipahu - Waipio community  Retail 113,800 14.0 250.0 269.0 28.5 30.6 Acq.8/09 for $31M
                       
    Commercial Portfolio - Maui                  
    Apex Building Kahului - Dairy Road and Hana Highway Retail 28,100 2.3 172.0 180.0 4.8 5.1 Being sold
    Kahului Building Central Kahului Office 57,700 1.6 250.0 350.0 14.4 20.2  
    Kahului Office Center Central Kahului Office 32,900 1.9 200.0 250.0 6.6 8.2 HI mean
    Kahului Shopping Center Central Kahului  Retail 18,600 16.8 125.0 131.0 2.3 2.4  
    Lono Center Central Kahului  Office 13,100 0.6 200.0 250.0 2.6 3.3 HI mean
    Maui Clinic Building Central Kahului  Office 16,600 1.3 300.0 350.0 5.0 5.8  
    Maui Mall Central Kahului  Retail 186,300 25.4 175.0 190.0 32.6 35.4  
    P&L Building Kahului industrial area Industrial 104,100 4.0 130.0 140.0 13.5 14.6 HI mean
    Wakea Business Center II Kahului industrial park - near airport Industrial 61,500 4.4 130.0 140.0 8.0 8.6 HI mean
                       
    Commercial Portfolio - Kauai                  
    Port Allen Center I Port Allen Industrial 28,000 1.3 130.0 140.0 3.6 3.9  
    Port Allen Center II Port Allen Industrial 13,300 1.3 130.0 140.0 1.7 1.9  
    Port Allen Marina Center Port Allen Retail 23,600 1.7 200.0 225.0 4.7 5.3  
    Steel Warehouse Port Allen Industrial 22,700 3.6 130.0 140.0 3.0 3.2  
                       
    Commercial Portfolio - Big Island                  
    Lanihau Marketplace Kailua-Kona center  Retail 88,300 9.7 250.0 256.0 22.1 22.6 Acq. 4/10 for $22.5M
                       
    Commercial Portfolio - Mainland                  
    Concorde Commerce Center Northwest submarket of Phoenix, Arizona Office 140,700 9.4 200.0 220.0 28.1 31.0  
    Deer Valley Financial Center Northwest submarket of Phoenix, Arizona Office 126,600 9.7 200.0 220.0 25.3 27.9  
    Activity Distribution Center Industrial submarket of San Diego Industrial 252,300 15.1 60.0 65.0 15.1 16.4 National average
    Firestone Boulevard Building La Mirada, CA, a submarket of Los Angeles Office 28,100 0.4 200.0 220.0 5.6 6.2  
    Gateway Oaks Outside Sacramento Office 58,700 1.0 200.0 220.0 11.7 12.9  
    Midstate 99 Distribution Center Logistics park - Visalia, CA Industrial 790,400 43.3 60.0 65.0 47.4 51.4  
    Northpoint Industrial Industrial park in North Orange County Industrial 119,400 7.4 60.0 65.0 7.2 7.8  
    Prospect Park Center Rancho Cordova near Sacramento Office 162,900 9.1 200.0 220.0 32.6 35.8  
    Rancho Temecula Town Center Temecula, CA - SW Riverside County Retail 165,500 20.0 295.0 295.0 48.8 48.8 Acq. 10/10 for $48M
    Broadlands Marketplace Broomfield, a northern suburb of Denver Retail 103,900 12.4 150.0 165.0 15.6 17.1  
    Meadows on the Parkway Boulder, CO Office/ Retail 216,400 18.6 200.0 220.0 43.3 47.6  
    Wilshire Center Greeley, CO Retail 46,500 4.6 150.0 165.0 7.0 7.7  
    Savannah Logistics Park Georgia Ports, Savannah Logistics Park, GA Industrial 1,035,700 62.9 60.0 65.0 62.1 67.3  
    Sparks Business Center Sparks, Nevada, near Reno Industrial 396,100 20.7 60.0 65.0 23.8 25.7  
    Arbor Park Shopping Center San Antonio, TX Retail 139,500 14.3 150.0 165.0 20.9 23.0  
    Heritage Business Park Five miles from the Dallas/Fort Worth Airport Industrial 1,316,400 107.7 60.0 65.0 79.0 85.6  
    Preston Park Plano, TX Office 198,600 12.1 200.0 220.0 39.7 43.7  
    Republic Distribution Center I Port of Houston Industrial 312,500 17.9 60.0 65.0 18.8 20.3  
    Royal MacArthur Center Las Collinas, Dallas Retail 44,000 8.4 150.0 165.0 6.6 7.3  
    San Pedro Plaza San Antonio, TX Office 163,800 2.8 200.0 220.0 32.8 36.0  
    Centennial Plaza Five min. from Salt Lake City Airport Industrial 244,000 14.6 60.0 65.0 14.6 15.9  
    Little Cottonwood Center Salt Lake City suburbs Retail 141,600 20.5 145.0 145.0 20.5 20.5 Acq. 9/10 for $20.4M
    Ninigret Office Park Five min. from Salt Lake City Airport Office 185,200 20.2 200.0 220.0 37.0 40.7  
                       
      TOTAL: Operating RE Assets   7,829,500 599.1     892.7 980.6  
                       
    Real Estate-Development                   
                Valuation    
    Property  Location Type Comm. Space  (Sq. ft) Acreage Units PSF/Per Acre* Value Status  
    Development - Hawaii                  
    Honolulu Condominium Ala Moana Center and downtown Honolulu Residential   1.7 330   19.0 Planning (TBD), land at cost
    Keola La'i Near downtown Honolulu Residential   2.7 352   0.0 Complete, sold units
    'Aina O Kane Central Kahului, Maui Resi/ Comm. 19,800 3.9 103 175 3.5 Incomplete, selling units
    Bluffs at Wailea Wailea coast, Wailea Resort area, Maui  Residential   8.0 12   10.0 Complete, selling units
    Grove Ranch Maui Haiku less than 10 miles from Kahului, Maui Residential   5.5 9   0.0 Selling lots  
    Haliimaile Slopes of Haleakala in Upcountry Maui Residential   63.0 170   0.0 Permitting  
    Kahului Town Center Central Maui Resi/ Comm. 300,000 20.0 442 175 52.5 Incomplete, selling units
    Kai Malu at Wailea (50% interest) Wailea's Blue Golf Course, Maui Residential   25.0 150   0.0 Complete, sold units
    Maui Business Park II Central Kahului, Maui Industrial   179.0   750 134.3 Planning, selling in 2H'11
    The Ridge at Wailea Wailea, Maui Residential   6.7 9 200 27.0 Under construction
    Wailea Wailea Resort, Maui Resi/ Comm.   200 1,200 500 100.0 Planning, selling lots-see 2009 sales sheet
    Kukui'ula (50% interest) Southern coast of Kauai, adjacent to Poipu resort Residential   1,000 1,000   630.0 Largely complete, selling units
    Ka Milo at Mauna Lani Mauna Lani Resort, Kohala Coast, Big Island Residential   30.5 137   50.0 Incomplete, selling units
    Waiawa (50% interest) Waiawa, Oahu Residential   1,000     0.0 Planning  
                       
    Development - Mainland                  
    Bridgeport Marketplace (50%) Valencia, CA Retail 127,000 15.4   165 10.5 Operating  
    Crossroads Plaza (50%) Valencia, CA Retail 105,700 13.0   166 8.8 Operating  
    Centre Pointe Marketplace (50%) Valencia, CA Retail 56,000 6.5   167 4.7 Operating  
    Palmdale Trade Ctr. Palmdale, CA Office/ Ind. 315,000 18.2     0.0 Planning  
    Panama Grove  Bakersfield, California Retail 575,000 57.3     0.0 Planning  
                       
      TOTAL: Development RE Assets   1,498,500 2,656.4     1,050.1    
                       
    *PSF ($s), PSA ($000s)                  
                       
    Real Estate-Entitlement Activity                  
    Property  Location Type Comm. Space  (Sq. ft) Acreage Units Price/ Acre ($000s) Value Status  
    Kihei Residential Kihei, Maui Residential   95 600   0.0 Plan filed in 2010
    Waiale Community Central Maui Residential   765 3,000   0.0 Env. study filed in 2010
    Eleele Community Eleele, Kauai Residential   800 NA   0.0 Planning phase
                       
    Rural Land                  
    HC&S: Maui sugar plantation Central Maui Agriculture   51,480   15,000 772.2    
    Kauai Coffee: plantation Southern Kauai Agriculture   7,070   15,000 106.1    
    Maui conservation land Northern Maui Conservation   15,880     0.0    
    Kauai conservation land Central Kauai Conservation   13,320     0.0    
                       
      TOTAL: Entitlement & Rural RE Assets     89,410.0     878.3    

    Catalyst

    Near-term catalysts:
    - Improved fundamental in the Hawaiian RE market
    - Sale of completed projects in 2H'11 - will help expose the market to its underlying real estate holdings
    - Volume growth, rate increases and the recapturing of fuel surcharges in its transport segment
     
    Medium-term catalyst:
    - Splitting up the Company
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