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TRE - Treasure ASA


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This is a spinoff from Wilh Wilhelmsen ASA which got listed on the Oslo stock exchange last week. The company essientally consists of a 12.04% stake in Hyundai Glovis and some cash. Hyundai Glovis is the logistics arm of Hyundai Motors so the company's fortunes is closely tied to that of the future volumes of the car maker. 

 

I think this is pretty compelling as Treasure has traded mostly at a discount of above 40%. Basically, this is like a Korean preferred share at a big discount, only it's listed in a more shareholder friendly country and has an additional lever to pull: they can sell the holding. They have sold some shares in recent years so further sales would be no great surprise.

 

Also, buybacks have not been ruled out by management and they have hinted they might pass on dividends to shareholders. I see no conflict of interest between management and shareholders; the only reason why they spun it in the first place was to highlight the values so there is no reason I can see why they wouldn't continue down that route. 

 

You could argue for maybe a ~10% discount but at almost half off I think the market is silly and this could be a case of an artificially depressed price due to non-economic selling pressure. Something which I think is borne out by what I have seen in the order book, where selling - at least for the first few days - was mainly from local brokers and buy side was Goldman Sachs, Credit Suisse, Deutsche Bank etc. If this thesis is correct, which I'm far from sure of, that pressure should abate pretty quickly since free float is at a maximum 27% of shares outstanding. The remaining is held by WWI, the Wilhelmsen holding company.

 

If the deep discount is not temporary, I hope and think management will be opportunistic and boost shareholder returns when they can.

 

_______________________________

 

You can get some more information on Wilh. Wilhelmsen and Treasure on these two blogs:

 

https://hammerinvesting.wordpress.com/

http://otcadventures.com/

 

There is also a short thread on the former parent and holding co here: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/oslo-exchange-wwi-wwasa-wilh-wilhelmsen-companies/

 

I have attached some relevant documents for your convenience

 

Disclaimer: I own shares in both TRE and WWI/B.

9542470_2_WWASA_-_Proposed_demerger_detailed_stock_exchange_announcement_1.pdf

HYUNDAI_GLOVIS_2016_1Q.pdf

glovis_2015_v6_ENG_Final_3.pdf

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Any idea what the tax liability might be?

 

Essentially there's next to no basis ($48mm or so). I'm not sure whether WW is going to engage in repurchases given float is already so low, but maybe.

 

That's correct, they did buy 25% of Glovis for $100m back in 2004. However, from note 5 of the prospectus:

 

The ordinary rate of corporation tax in Norway is 27% for 2015. Norwegian limited liability companies are encompassed by the participation

exemption method for share income. Thus, share dividends and gains are tax free for the receiving company. Corresponding losses on shares are

not deductible. The participation exemption method does not apply to share income from companies considered low taxed and that are located

outside the European Economic Area (EEA), and on share income from companies owned by less than 10% resident outside the EEA. The ownership of Hyundai Glovis is 12.04% and the share income is thus considered tax free

 

http://www.treasureasa.com/treasure-asas-listing-prospectus/

 

That is, they have no tax liability.

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I have a small position. It's trading at a huge discount. Not much too add.

 

Are you hedging out HG or KRW?

 

Yes, or is HG itself valued fairly?

 

Analysts seem to like it.  I really haven't done enough work.  At a very high level, I'm not super enthused about auto demand from here in certain regions, though I don't know HG well enough to know how the business is likely to perform.

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I'd recommend reading this: http://www.ft.com/intl/cms/s/0/a1a9df4c-d6c0-11e5-829b-8564e7528e54.html

 

At Hyundai, the saga began in 2001 with Hankook Logitech: a logistics company set up with Won5bn ($4m) in paid-in capital, of which 60 per cent was furnished by Chung Eui-sun and the remainder by his father.

The new company quickly secured lucrative contracts to transport products for Hyundai Motor and other group businesses. It booked sales of Won198bn in its first year, rising to Won906bn in 2004 — with the proportion of income from sister companies always well over 80 per cent.

“Hyundai always says that the company was set up so the group could better handle logistical activities,” says Chung Sun-sup, head of a research group focused on the chaebol. “But if that’s the case, then the controlling shareholder should have been Hyundai Motor — not the Chungs.”

The soaring revenue drove heavy investor appetite when the Chungs’ enterprise — now renamed Hyundai Glovis — was listed in December 2005. Two weeks after its flotation, its market capitalisation had nearly quadrupled to more than Won3tn.

That valued Chung Eui-sun’s stake — now diluted to 32 per cent by the public listing and a prior Won85bn sale to Norwegian group Wilh Wilhelmsen — at roughly Won1tn. In all, he had made a 35,200 per cent return on his original investment in less than five years.

“Investors were positive, because they knew that Glovis could not fail,” says Kim Woo-chan, a professor at Korea University. “It’s such an easy business, because there’s no competition. You don’t even need to have a sales force.”

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An interesting idea but I think the discount is not as a large as it appears, namely due to lack of marketability of such a large block of a Korean stock, the lack of control of minority shareholders and cost at the hold co level.  Given the block size of Hyundai Globus and the average trading volume it would take about 168 trading days to liquidate the stock using 1/3 of the trading volume.  If you were to buy an at the money put assuming a vol of 50%, it would imply a 17% discount on the block.  The cost of the hold co need to be capitalized in addition to not having control.  Typically, hold co discounts are in the 10 to 20% range.  Adding these together gets you a fair discount to NAV of 25% to 33%.  While 40% is higher the discount is not huge when compared to other pref or real estate hold co NAV discounts.  If you look at some of the Korean prefs you are looking at 50 to 70% with higher dividend amounts & HK RE hold co discounts of 70 to 90%.  I am not sure if Treasure will distribute dividends from Hyundai Glovis, if so then the discount will be less.  As another note when I have seen NAV build-ups by Korean analysts the typical discount for marketable securities is 30% and that does not include the additional hold co discount.

 

Packer

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An interesting idea but I think the discount is not as a large as it appears, namely due to lack of marketability of such a large block of a Korean stock, the lack of control of minority shareholders and cost at the hold co level.  Given the block size of Hyundai Globus and the average trading volume it would take about 168 trading days to liquidate the stock using 1/3 of the trading volume.  If you were to buy an at the money put assuming a vol of 50%, it would imply a 17% discount on the block.  The cost of the hold co need to be capitalized in addition to not having control.  Typically, hold co discounts are in the 10 to 20% range.  Adding these together gets you a fair discount to NAV of 25% to 33%.  While 40% is higher the discount is not huge when compared to other pref or real estate hold co NAV discounts.  If you look at some of the Korean prefs you are looking at 50 to 70% with higher dividend amounts & HK RE hold co discounts of 70 to 90%.  I am not sure if Treasure will distribute dividends from Hyundai Glovis, if so then the discount will be less.  As another note when I have seen NAV build-ups by Korean analysts the typical discount for marketable securities is 30% and that does not include the additional hold co discount.

 

Packer

 

Great remarks!

 

They won't likely go below 10% holding without completely selling off as that would jeopardize their tax exempt status. I don't know if a complete sale is on the table. They have made statements about their long-term commitment to the stake in the not too distant past, but who knows what could happen. Most block sales I have seen in Korea have been at 3-5% discount to market price, but I don't think I have ever seen a stake bigger than a few percent go.

 

Also, dividends from Glovis are subject to a 15% SK withholding tax for TRE (which means double dividend taxation for most potential investors, I guess), which is another strike against. They have indicated that they probably will pass on dividends, but I think they want to keep their options open. However, this will most likely continue to run with minimal costs, if somewhat more than the 0.3m NOK of last year due to now being listed and in need of some independent functions.

 

As long as SK doesn't open up its stock market for foreigners more and in general become more shareholder friendly, I think Treasure should all else equal trade at a lower discount than most SK preferred shares. Management of TRE is in my view much more likely to take measures against a large discount. That's not to say there aren't better bargains in preferred shares on the KRX, there probably are.

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Also, I could not tell if Wilh Wilhelmsen ASA had a "strategic" relationship with Hyundai Glovis and thus at some point may be able to achieve a premium valuation of their shares vs. just a passive holder of shares.  If they do then this will lower the discount.  These "strategic" transactions can really work out the disadvantage of minority holders in some cases like the purchase of CJ Helloworld shares by CJO Shopping from CJ Holding Corp.

 

Packer

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I read about this whole situation before TRE, WWASA, WWI/WWIB on http://otcadventures.com/ (see http://otcadventures.com/?p=1749 for a description of the holding structure) and https://hammerinvesting.wordpress.com/ (top post is a recent video).

 

I took an initial position in the holding company (WWIB) yesterday as a longer term investment because it is considerably more discounted then TRE (I might also take a position in TRE).

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I am not saying this will not be a good investment just that thinking that this will sell at a 10% discount is pretty optomistic IMO given:

 

1.  It is rare for holding companies with one security to sell anywhere near a 10% discount, from what I have seen the typical discount is 20 to 30%, typical position concentrated closed-end fund discount.  Rule 144 sale discounts in the US also support a mid teens discount for marketability alone.  In addition the discount models used in estimating these types of discounts for tax purposes (these are common structures used in estate planning in the US) would imply a 20% to 25% with some sort of dividend without a dividend it would be higher.

2.  I am not sure how many buyers there are out there for a minority position in a Korea sub of a cheabol with no control on exit time or terms that is the reason for the discounts on the prefs and Korean hold cos in the first place.  The discount in comparison to other Korean securities is not unusual.

3.  A bigger issue is Hyundai Glovis' valuation.  It is selling a premium (8.5x 16 EBITDA, 2x BV) compared to comps median (25% premium on EBITDA and 4x premium on BV) (see comps page on hammerinveting excel).  If Hyundai Glovis sells at the comp median multiple upon sale then most if not all of the discount disappears.   

4.  When I set target prices for these types of structures (which are common in Asia), I typically use discount hold cos by 20% for both securities and modestly priced RE. 

 

Bottom line today this is a bet on Hyundai Glovis, which I have not seen discussed above.  If you like Hyundai Glovis and think it is cheap today then buying Treasure is a cheap way to this.  If you think Glovis is overvalued then this does not make sense IMO.

 

Packer

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Thanks for posting the idea and for the discussion.

 

I think Packer's pretty much on point (no surprise there). It seems to me that the most important thing here is to look through the hold co discount to what you're fundamentally buying and consider the price relative to that.  Without having spent a huge amount of time on this, my impression is that Glovis is fairly to generously valued by the market, and the discount at TRE only brings it back to fairly to moderately undervalued, so based on fundamentals it's interesting but not quite compelling enough for me.  Maybe this is wrong and Glovis has a lot more easy growth ahead of it to justify its valuation (it certainly seems to have grown nicely in the past), but it's not jumping out at me as cheap.

 

Said another way, I don't see any convincing near term reason for the TRE to Glovis market value gap to close in the direction of TRE -> Glovis, and could just as easily see it closing in the Glovis -> TRE direction (i.e., Glovis could fall in price).  This wouldn't be important if TRE was going to liquidate the shares and distribute the proceedings at Glovis' current price, but it seems like we are all in agreement that that doesn't seem like anyone in charge's plan.

 

That said, both WWASA and WWI/WWIB look pretty interesting and I am planning on looking into them more this weekend.  Thanks for bringing them more to my attention.

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There's a critical wrinkle in this situation. That is the succession at the Hyundai group. The heir apparent, ES Chung, is the largest shareholder of Hyundai Glovis, and it is his largest asset as well. Glovis is therefore expected to play an important role in his ascension and a popular scenario sees Glovis as his vehicle to controlling the entire Hyundai group. Payout ratio at Glovis has risen to 30% in 2015 from 14% in 2014, and may rise further as he seeks to garner cash to pursue control. The current CEO of Glovis was the chief secretary of the Hyundai Chairman. That tells you the importance of Glovis in the overall scheme of things. 

 

This ML report has a good discussion on this succession issue.

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

Yes, this is why a comps valuation of Glovis misses the mark, as I think the FT article that I posted clearly illustrates. 

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Interesting points but do you have some insight into how the succession issue will play out?  Elliot tried to play this game with Samsung and was on the losing end of this game.  My concern is not Wilhelmsen, as I think they have good governance, it is Hyundai.  Hyundai overpaid for a HQ location in Seoul and the minorities could do nothing.  It is nice that Wilhelmsen has boards seats but wouldn't this fact make Glovis a less likely firm to be the hold co & more likely to be sub as Hyundai would not have to share the hold co board?   

 

As to valuation, just because it is down 45% doesn't mean it is cheap.  IMO it looks like it went from overvalued to modestly overvalued.  The BoA analyst has some really optomistic assumptions like a WACC of 5.8% & made comparison to larger more diversified firms for valuation.  Do you think 8.5x EBITDA is cheap when you can buy Wilhelmsen at 5.4x EBITDA without exposure to bulk shipping?

 

Another is risk is customer concentration, Hyundai group companies comprise 62% of revenue.  Typically firms with this type of concentration sell at a discount other more diversified comps.  In this case, it is at a premium. 

 

What do you think about the growth into bulk shipping?  It will be 80% of revenue in 2020 versus 35% today.  My understanding is this a pretty competitive business and there is a large amount or overcapacity.

 

Packer

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Another is risk is customer concentration, Hyundai group companies comprise 62% of revenue.  Typically firms with this type of concentration sell at a discount other more diversified comps.  In this case, it is at a premium. 

 

It's at a premium because in this case it means the source of that revenue is safe. The usual discount because of big customer dependency is mainly because of cancellation risks and/or risks to the customers' survival. Credit troubles at Motor does not seem very likely... Of course there are cycles which could hit the Hyundai companies but the same goes for all comps.

 

Hyundai overpaid for a HQ location in Seoul and the minorities could do nothing.  It is nice that Wilhelmsen has boards seats but wouldn't this fact make Glovis a less likely firm to be the hold co & more likely to be sub as Hyundai would not have to share the hold co board?
   

 

I think I can only go by history here. Glovis has quite obviously been favored by insiders over other companies in the Hyundai chaebol. There doesn't seem to be a good reason for that to have changed recently.

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I would however add that I don't find it likely that WW will sell the stake to the family because the family went to great lengths to sell Glovis shares last year: http://www.wsj.com/articles/hyundai-motors-chairman-and-son-unload-stakes-in-hyundai-glovis-1423125888

 

This doesn't of course preclude stake sales to other Hyundai companies, but the government is trying to minimize cross-holdings so that would also seem a bit unlikely.

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I am not sure a premium makes sense as the power in the relationship is with Kia and Hyundai Motor not Hyundai Glovis.  They do have common ownership & incentives now but if the firm were ever sold, the most common way to receive at or above market multiples for the company as a whole, this would be a factored in the sale price. 

 

If this is not going to be sold for a long time that could explain the discount as there is a long expected time to close the discount.  Also, the value of Hyundai Glovis could go down as it is selling at a premium to the comps and its future growth (bulk shipping) appears to be more commodisized versus it core auto transport business.  The valuation factor determines the attractiveness of Korean preferreds also, as there are some large discounts on relatively expensive firms.

 

Packer

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I am not sure a premium makes sense as the power in the relationship is with Kia and Hyundai Motor not Hyundai Glovis.  They do have common ownership & incentives now but if the firm were ever sold, the most common way to receive at or above market multiples for the company as a whole, this would be a factored in the sale price. 

 

If this is not going to be sold for a long time that could explain the discount as there is a long expected time to close the discount.  Also, the value of Hyundai Glovis could go down as it is selling at a premium to the comps and its future growth (bulk shipping) appears to be more commodisized versus it core auto transport business.  The valuation factor determines the attractiveness of Korean preferreds also, as there are some large discounts on relatively expensive firms.

Packer

 

That's true and that's also why the shares took a big hit early last years when news of the family's impending stake sale came out. We will see if they intend to sell more shares early next year as the lock-up period ends. The power in the relationship lies with Glovis as long as the family has a greater interest in Glovis than in Motor etc. That is probably true no matter what formal laws the government makes, at least in the forseeable future. No matter what their stated intent is in making moves towards more free capitalism they seem to be hopelessly toothless against breaking up chaebol power, as seen in among other things in the Elliott case.

 

FWIW, I think WWI is a better deal long-term than TRE. Which is why I own more of that.

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Korea is moving slowly towards more of a Western model but the slowness is what is creating the bargains today which can move towards full value as the change happens.  I do like the leverage you get from WWI and the debt appears to have adequate coverage (4.9 x EBITDA/interest) so the upside to lets say 7x EBITDA  is 125% marking Treasure to today's market price.  This IMO, as you have stated, WWI is the more interesting firm.  The closest comp I know of is a Brazilian firm called Tegma, they provide automotive logistics services in Brazil, and sell for 7.9x EBITDA.

 

The reason I like to us EV multiples is because this is how business are purchased including net debt so I like to find cheap EV and equity multiple businesses.  You are correct that the "look through" value of Hyundai Glovis is good from US standards and alternatives.  However, if you compare it to other Korean alternatives is average to below average, it is a matter of perspective.  The 80% of vessels is from the BoA's analysts report on Glovis' 2020 plan.  In addition most of the growth post EUKOR contract assumption is in the bulk carrier.  If this is true, then for me the big question is what are incremental returns on the new investment.  The core business is a nice business as seen from both Glovis and WWI's financials, however, the bulk business, unless they are running it different from other bulk carriers is not.

 

Packer

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Thanks to all in this topic for an interesting discussion. I've spent some time today on reading up on the Wilhemsen complex. Basically all companies in the chain look attractive: TRE, WWASA & WWI(B). I like the simplicity of the Treasure ASA thesis (and own a couple of shares) but Packer has done a good job advocating that it's not as spectacular as it looks like at first glance. WWI holding at this point is priced at a level where you get Wilhemsen Maritime Services basically for free when you buy the WWASA / TRE package (ignoring a holding company discount). Not sure what to think about the Wallenius + WWASA merger though it's probably a net positive.

 

All Wilhemsen companies look cheap on most metrics but are somewhat hard to understand for a simple retail guy such as me. I'm thinking about buying some more TRE / WWI shares but it will never be a large position for me.

 

Alwaysinvert: are you going to the capital markets day?

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Alwaysinvert: are you going to the capital markets day?

Don't think I will, no. It's a bit far away so I couldn't do it just over the day. Doesn't seem like there will be a webcast either which is a bummer. Hopefully someone who lives closer by will go there and report back if there's something especially interesting said.

 

I don't think anyone has argued that TRE is spectacular and there is obviously a cap on the possibly discount narrowing gains. It's just that it's very hard to see how it can be a big loss too, so it's a nice little bet which has elements to it that makes it less market-correlated too. If I could trade the discount narrowing and widening, I would, but it would be too expensive for me.

 

Packer is broadly correct on the reasons for the discount, but I think he may be underestimating the strategic value of Glovis and hence the long-term effects of further favoritism towards this vehicle in the Hyundai chaebol. Of course, this is what makes a market, so I guess we will have to wait for the outcome.

 

It also seems likely to me in light of the recent merger news that this spinoff was mostly a way to make the shareholdings more equal between the families in WWL. That is, the merger could probably not have happened without the spinoff.

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