change the name of the company from CMI Limited to Excelsior Capital Limited. The name
change may not yet be reflected depending on where investors get their quotes.
Excelsior Capital has been written up twice on VIC (under the former name – CMI Limited).
Once by MPK391 back in December 2008 and again by VI4Life in March 2013. Both reports are
well done and provide additional background.
Over the past year and a half I have spent a significant amount of time studying the business
and getting to know the management team. I also traveled to Sydney, Australia in the fall of
2018 to attend the annual meeting and spend a day at headquarters meeting with the
Excelsior Capital is an industrial business based in Meadowbank, Australia that manufactures
and supplies equipment for the underground coal mining industry primarily in Australia.
Excelsior Capital’s electrical business has two divisions. 1) Minto Industrial Products which
manufactures and supplies couplers and connecters to the underground coal mining sector in
Australia. 2) A cable distribution and installation business that sells products under the XLPE,
AFLEX and Hartland brand names.
Although Excelsior Capital does not break out separate financials between Minto and the cable
division, my research suggests that Minto contributes 85% of operating profits. Minto is a high
quality business that exhibits a number of mental models that I look for in businesses:
High switching costs and a sticky customer base: Once a new mine selects Minto
products they are unlikely to switch suppliers for the remainder of the life of the mine.
Mines typically do not dual source and once they source with one brand of couplers and
connecters, they stick with that brand because the switching costs are significant. There
are substantial costs associated with retraining employees to use a different brand.
Given the small cost of this equipment relative to overall operations, a mine would never
risk miners safety and incur the cost to retrain workers to save an insignificant amount of
Mission critical product: Coal mines contain gases (methane being the most dangerous)
and one spark could ignite and cause an explosion. Couplers and connecters are
mission critical safety equipment with very strict government regulations. From people I
have spoken to in the industry, mines prefer Minto because of their reputation for quality
and Minto has grown their market share in low voltage underground couplers to 85%. If
this $3,000 piece of equipment breaks, a billion dollar mine would grind to a halt costing
the owner a considerable amount in lost productivity. As a result of both the mission
critical nature of the equipment and strict government regulation, buyers are price
inelastic allowing Minto to earn high margins on these products.
Recurring and counter cyclical revenue stream from replacement parts: Every 5 years
couplers are required to undergo an extensive safety check and this typically requires
replacement parts or a new coupler. This revenue is counter cyclical and creates a
steady base of recurring revenue regardless of whether new mines are opening or
expanding. As a result, Minto is very resilient through the cycle. Today, over 50% of
Minto’s revenue is either replacement couplers or parts. The replacement parts garner
much higher margins than the original coupler sale.
Strong barriers to entry: There are four companies (including Minto) that control the
market for couplers in Australia. Foreign competition is nonexistent. Minto dominates the
market for low voltage underground couplers with 85% market share in this area. Minto
currently does not compete in high voltage or open pit mines.
To protect workers safety, the Australian government has ratcheted up regulations and it
is very hard for a new entrant to get approval. A new entrant would then need to spend
significant sums to open a facility in Australia to avoid long lead times associated with
importing. As described earlier, mines stick with one supplier and thus, a new entrant
would only have the opportunity to gain share when new mines open and that is very
infrequent. All of these hurdles would have to be overcome just to enter a market that is
only $32 million in total sales. The business case simply is not there. As a result, there
have been no new competitors in the past few decades. The barriers to entry in this
business are quite high and that will remain the case. In the past few years a new
entrant attempted to enter the market and gave up after spending $13 million and getting
only 4 products approved by the Australian government (Minto has over 100 approved
Minto is a good business and has a strong brand image in the industry. My research indicates
Minto customers are willing to pay 20% more on average for Minto products because of their
safety reputation and strong customer service.
The cable division supplies imported cable to the construction, building and mining
industry under the XPLE brand name. Hartland and Aflex perform custom cable
installation jobs. Unlike Minto, the cable business is a mediocre business with low
margins and no barriers to entry. However, this business does have a positive outlook
and is likely to continue to grow. Additionally, mines prefer to buy cable and couplers
together which gives Minto an additional edge to differentiate themselves from
competitors. Although Excelsior Capital doesn’t break out separate financials between
the cable and Minto division, my research suggests that the cable business contributes
only 15% of profits.
New Management Team
Excelsior’s management team are the largest shareholders and they have consistently acted in
shareholders best interests. Long time board member Leanne Catalan owns 48% of the
company. Additionally, over the past year the Chairman has purchased a meaningful amount of
shares in the open market. I have closely studied management’s decisions over time and they
have a consistent history of doing what is right for shareholders. Over time they have returned
the majority of free cash flow to shareholders either through dividends or opportunistic share
buybacks. Over the past 4 years, Excelsior Capital has returned $16.15 million back to
shareholders through dividends and share buybacks. With management’s large ownership, their