Description
Investment Summary
What does the market love? SAAS companies from Silicon Valley with high growth rates and large addressable markets. So, naturally we look for the opposite. How about a small-cap, cyclical, Korean company that is shrinking its invested capital base? With no further ado, I present rebar manufacturer KISCO Holdings Corp (001940). Feel free to rate this a one and move on. It is a profitable Korean steel rebar business that trades at a 57% discount to proportional net cash, a 66% discount to NCAV, and a 73% discount to a SOTP when valuing the rebar business at 6x average EBITDA-Capex.
Overview
KISCO Holdings Corp was founded in 1957 as Korea Iron & Steel Co. It is now a holding company which owns two main subsidiaries: KISCO Corp (104700) and Hwanyoung Steel Industry (not listed). KISCO Holdings owns 40.8% of KISCO Corp and 83.5% of Hwanyoung Steel Industry. KISCO Holdings acquired its stake in Hwanyoung in 2002. KISCO Corp is the original steel rebar business and was partially spun off as a separate public company in 2008. The two subsidiaries are the 5th and 6th largest steel rebar producers in Korea.
Both subsidiaries have economics that are representative of typical steel companies. Until 2008, KISCO was investing in its businesses and earned strong returns on capital when steel prices were high. Post 2008, steel prices have stayed low and KISCO has been harvesting cash flows and spending minimal capex. D&A exceeds capex so cash earnings > accounting earnings.
The very strong profitability of steel companies in 2005-2008 followed by a 10-year period of no growth investment, decent cash flows, and a minimal dividend has led KISCO Holdings to grow its consolidated net cash from 124bn in 2004 to 663bn in Q2-19.
Valuation
KISCO Holdings, KISCO Corp and Hwanyoung all file public quarterly reports. As of Q2-19, KISCO Holding had 98.4bn KRW of net cash at the holding company level. KISCO Corp had net cash of 300bn KRW and Hwanyoung had net cash of 264bn KRW. KISCO Holdings Corp’s proportional share of this is 442bn KRW compared to its market value of 188bn (57% discount). Additionally, Hwanyoung’s average EBITDA – Capex has been 34.7bn and KISCO Corp’s has been 40.8bn. With a modest 6x EBITDA – Capex multiple, the fair value is 698bn (73% discount).
Activist/Path Forward
KISCO is family controlled (own 54.9% of shares). A local Korean activist fund has been pushing for better corporate governance (http://www.fnnews.com/news/201808311105386144).
If the KISCO Holdings improves its corporate governance and returns to reasonable balance sheet the stock should appreciate markedly.
Should the company continue the same status quo, based on average earnings and 2% interest rate, we expect proportional cash will grow ~11% a year over the next 5 years. If KISCO Holdings remains at its current market value it will trade at a 74% discount to cash. KISCO did not start trading at a discount to proportional net cash until 2010. We calculate the average discount to proportional net cash from 2013 to 2018 was 37%. If KISCO Holdings trades at a 37% discount in 5 years. The IRR will 19%.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Better corporate governance from activist campaign
Continued cash accrual on balance sheet