Holding Company at a discount?? Steel Partners Holdings LP (NYSE: SPLP)

     Steel Partners Holdings LP (NYSE: SPLP) 

 Steel Partners Holdings L.P. ("SPLP" or the "Company") is a global diversified holding company that engages in multiple businesses, including diversified industrial products, energy, defense, supply chain management and logistics, banking, food products and services, sports, training, education, and the entertainment and lifestyle industries. Table below indicates the value of each businesses (Except WebBank) based on the publicly traded companies without taking NOL assets into account.

The company(SPLP) trades in the market for $527M, while the net assets of the company is approximately $757M. We have an opportunity to purchase the net assets at 70 cents on the dollar. The table below indicates the ownership and their worth in the public market today. Majority of the holdings are undervalued in the market which is another layer of margin of safety.

Holdings	Ownership Percentage	Worth ($M)
Handy & Harman Ltd	66.20%	298.562
GenCorp Inc	7.5%	106.575
DGT Holdings Corp	82.70%	39.696
CoSine Communications, Inc	48.30%	12.558
API Group PLC	32.30%	16.473
JPS Industries, Inc	38.70%	35.991
ModusLink Global Solutions Inc	27.70%	56.785
Nathan’s Famous, Inc	9.9%	32.67
SL Industries, Inc	24.10%	40.97
Steel Excel Inc	57.90%	145.329
WebBank	100%	110
Aderans Co. Ltd	27.70%	106.091
Mudanjiang Heng Feng Paper Co., Ltd	12.37%	51.8303
		1053.5303
Debt		296
Net worth		757.53

Holdings information:

API Group PLC (API.LN):

API Group PLC (“API”) is a leading manufacturer of specialized materials for packaging, headquartered in the United Kingdom. SPLP owned approximately 32.3% of API, with a market value of $30.8 million. For the trailing twelve months, API had revenue of about £110 million. The balance sheet is strong, with net debt of only £5 million pounds and an underfunded pension plan of about £13 million. The company began to pay a dividend in late 2013.

CoSine Communications, Inc. (OTC: COSN.PK):

CoSine Communications, Inc is seeking to invest its cash in one or more operating businesses with the potential for generating taxable income and/or capital gains. This strategy may enable CoSine to realize future cash benefits from its NOLs. SPLP ownership interest of approximately 48.3% in CoSine. It has approximately $357.1 million of NOLs.

DGT Holdings Corp. (OTC: DGTC.OB):

DGT Holdings Corp. (“DGT”), formerly Del Global Technologies Corp., is now a company with cash, marketable securities and real estate. SPH owns approximately 82.7% of the company

GenCorp Inc. (NYSE: GY):

GenCorp Inc. is a manufacturer of aerospace and defense systems, and also has a real estate business. SPLP owns approximately 7.5% of GenCorp

Handy & Harman Ltd. (NASDAQ: HNH):

Handy & Harman Ltd. (“HNH”) is a diversified manufacturer of engineered niche industrial products with leading market positions in many of the markets it serves. Through its operating subsidiaries, HNH focuses on high margin products and innovative technology and serves customers across a wide range of end markets. HNH manages its group of businesses on a decentralized basis, with operations principally in North America. SPH owned approximately 66.2% of HNH, has NOLs of approximately $107 million.

JPS Industries, Inc. (OTC: JPST.PK):

JPS Industries, Inc. (“JPS”) is a major U.S. manufacturer of extruded urethanes, polypropylenes and mechanically formed glass substrates for specialty industrial applications. SPLP owns approximately 39.3% of JPS, with a market value of $27.3 million. JPS has NOLs of approximately $55.5 million.

ModusLink Global Solutions Inc. (NASDAQ: MLNK):

ModusLink Global Solutions Inc. (“MLNK”) is a comprehensive supply chain and logistics services company. MLNK is a trusted and integrated provider to the world’s leading companies in consumer electronics, communications, computing, medical devices, software, luxury goods and retail. Their operating infrastructure is supported by more than 25 sites across North America, Europe and the Asia/Pacific region. SPLP had an ownership interest of approximately 27.1% in MLNK, with a market value of approximately $59.1 million. MLNK has a market capitalization of $218.5 million and has federal NOLs of approximately $2.0 billion as of July 31, 2013

Nathan’s Famous, Inc. (NASDAQ: NATH):

Nathan’s Famous, Inc. (“Nathan’s”) products, which include beef hot dogs, fries and other products, are currently distributed throughout the world. Additionally, Nathan's restaurant system currently consists of 313 units, comprised of 308 franchised units and five company-owned units. Nathan’s continues to grow its store count and cash flow, and continues to be debt free with substantial cash reserves. SPLP owns 9.9% of Nathan’s, with a market value of approximately $24.5 million.

SL Industries, Inc. (AMEX: SLI): 

SL Industries, Inc. (“SLI”) designs, manufactures and markets power electronics, motion control, power protection, power quality and specialized communication equipment that is used in a variety of industries. SPLP had an ownership interest of approximately 24.1% in SLI, which has a market value of $24.4 million.

Steel Excel Inc. (OTC: SXCL.PK):

Steel Excel Inc. (“SXCL”) has two operating subsidiaries; Steel Energy Ltd. (“Steel Energy”) and Steel Sports Inc. (“Steel Sports”). SPLP owns approximately 57.9% of SXCL, with a market value of $211.6 million and had NOLs of approximately $146 million. The company has been repurchasing shares every year as the shares continued to be undervalued.

WebBank (100% Ownership); 

SPLP owns 100% of WebBank, an FDIC insured, Utah-chartered industrial bank located in Salt Lake City. The bank is engaged in a full range of banking activities, including making loans, issuing credit cards and taking federally insured deposits. It is also a leading provider of national revolving and closed end consumer and small business financing programs. Revenue is largely derived from strategic partnerships that provide fee income and interest income on loans held. The bank had pretax income of $13.1 million in 2012. The bank reported net income of $11.3 million for 2013 and a return on average equity of 34.8%. The bank made a $7.5 million dividend payment to its parent in 2013, and paid an additional dividend of $2.5 million in January of 2014. The bank’s December 31, 2013 total assets and equity capital were $171.0 million and $32.1 million, respectively. It could be worth 10 times after tax earnings conservatively, that is $110M.

SPH Services, Inc. (SPLP’s corporate services subsidiary) 

SPH Services, Inc. (“SPH Services”) owns 100% of SP Corporate Services LLC (“SP Corporate”), a subsidiary that was created to consolidate the executive and corporate functions of SPH and certain affiliates, as well as provide services, including legal, tax, accounting, treasury, consulting, auditing, administration, compliance, environmental, health and safety, human resources, marketing, public and investor relations and other similar services, to other affiliate companies. Through the consolidation of corporate overhead and back office functions, we continue to realize cost savings for our affiliated companies, while at the same time, we are able to deliver more efficient and effective services. SPH Services operates through its wholly owned subsidiaries, SP Corporate and Steel Partners LLC. SP Corporate currently has management services agreements with certain affiliates including SXCL, SPH, DGT, WebBank, CoSine, SLI, iGo and Steel Partners, Ltd.

Steel Partners Japan Strategic Fund L.P. Steel Partners Japan Strategic Fund (“SPJ”) owns 27.7% of the outstanding shares of Aderans, and is Aderans’ largest shareholder. Josh Schechter and Katsuyoshi Tanaka serve on the board of directors of Aderans and oversee initiatives that are aimed at improving corporate and shareholder value. The value of Aderans co ownership today is $105M

Aderans Co. Ltd. (8170: Tokyo):

Aderans Co., Ltd. (“Aderans”) is a leading manufacturer, distributor and retailer of wigs, hair systems and extensions throughout the world. SPJ owns 27.7% of the outstanding shares of Aderans and is the company’s largest shareholder. SPJ has been invested in Aderans since 2004. Aderans has a strong portfolio of hair loss related brands including Aderans and Fontaine in Japan, and Hair Club and Bosley in the US. Aderans also holds the license for Revlon wigs. In April 2013, Aderans acquired Hair Club for $163.5 million. Hair Club is the only provider of “all proven solutions” for hair loss in the US. Hair Club and Bosley are the two premier brands for surgical and nonsurgical hair restoration in the US. They have been working diligently to integrate Bosley and Hair Club. They have already integrated a number of corporate functions including marketing, call center, legal and HR. Hair Club offices are now offering hair transplantation and Bosley is now offering key non-surgical services such as hair therapy and Biomatrix hair systems. Both companies are working together to address the expanding women’s market. Sales and profitability have continued to improve at Aderans. For the fiscal year ended February 28, 2014 sales were ¥67.8 billion and net income was ¥4.3 billion, up 32.6% and 29.7% over fiscal 2013, respectively. 

Steel Partners China Access I L.P 

Steel Partners China Access I L.P. currently holds a 12.37% interest of Mudanjiang Heng Feng Paper Co., Ltd. (“MHFP”) stock code 600356, down from 13.47%. During May and June 2013, Mudanjiang Hengfeng Paper Industry Group Co. Ltd., a subsidiary of the Mudianjiang State-owned Assets Investment Holdings Co., Ltd. converted a majority of its convertible bond holdings of MHFP. This conversion caused a dilution of our interest from 13.47% to 12.37%. MHFP released 2013 results on April 29, revenues increased 4.7% to 1,518 million RMB and net profit decreased 18.8% to 74.3 million RMB. The decrease in net profit was mainly due to higher interest expense and finance charges related to the convertible bonds. The paper industry is in a low growth environment with high competitive pressures and demands for sustainable product development. Cigarette paper specifically is under continued pressure, as brands of the world tobacco market are highly concentrated and controlled by a few large groups. Domestic demand may face some pressure, as regulations on smoking in public places are contemplated and overall general health concerns from tobacco smoking has increased. MHFP continues to be the largest domestic cigarette paper supplier with a 32% market share. In response to these market dynamics, MHFP is increasing its focus on cost controls, operating efficiencies, new product development and a greater international sales effort of its specialty paper products. Product development includes hand-rolled paper, low ignition paper, Bible paper and coated paper products. SPLP’s 12.37% interest of Mudanjiang Heng Feng Paper Co., Ltd is worth $52M in the market today.

Management:

Warren G. Lichtenstein is Chairman and CEO of Steel Partners LP. He has served as the Chairman of the Board and CEO of the general partner of Steel Partners Holdings L.P. since 2009.

Conclusion:

The company (SPLP) trades in the market for $527M, while the net assets of the company is approximately $757M. We have an opportunity to purchase the net assets at 70 cents on the dollar with a good margin of safety. Management has proven that they can create value over long term. When they do so in the coming years, the discount will narrow or we have an option to purchase this security at even more cheaper.

Disclosure: 

I / partnerships that I manage own shares of this company.

Investment Criteria/Checklist

This is the general criteria/checklist that I go through each time when I examine an investment opportunity.  This is neither an exhaustive enough list to cover all the possibilities nor specific enough to cover each aspects of individual companies. Not all the points are applicable in all cases.

• Honest, competent and minority shareholders friendly management who owns portion of the company

• Decentralized corporate culture geared to keeping employees focused on customers and management focused on shareholder value over the long run

• Industry with little risk of being disrupted by new technology or changes in consumer preferences in future

• Product or service that is unique for customers it seeks to serve and from competitors

• Reasonable ability to increase the price of the products

• Large addressable market size and dominant market share

• Low financial leverage

• Little required capital investment

• Return on invested capital greater than 15% over long period of time and likely to continue in the future

• Selling for a price which is less than 7 times pretax income 

• Reporting in a country with regulatory protection for minority shareholders
• Other respected value-oriented investors as shareholders

2014 Portfolio Performance

Happy New Year everyone!

My portfolio value increased by 14.2% as of 31st Dec 2014 since the beginning of Jan 2014. Overall, 2014 was a good year for my portfolio both absolutely and also relative to the S&P performance (13.4%). There were few costly mistakes(at least it appears so) in the oil and gas sector and CTC Media made the investment returns for 2014 not so great.

Major contributors for the performance were,

Direct TV (+48.97%)
PNC & COF bank Warrants (+32%)

Fairfax Financial (31%)
Fiat-Chrysler Automobiles (+29.6%)

First Service Corp (+18.8%)
Infinite Computer Solutions (+17.5%)

Major detractors were,

Exco Resources (-59%)

Biglari Holdings (-22.87%)
CTC Media (-18%)
Transocean Ltd (-11%)

Here are the top 10 holdings in my portfolio for 2015. You may have noticed some of the investment write ups and my reasons for the below holdings in this blog. The portfolio companies for 2015 are both qualitatively better, cheap and diversified compared to my 2014 portfolio. I expect the return for 2015 should be better than 2014 although one year performance is too short to measure any success/failure.

The holdings below are all have a durable businesses, have large opportunity to grow both revenues and profits, run by competent managers and priced cheaply relative to their assets and earnings.

Biglari Holdings (13%)
Infinite Computer Solutions (6.7%)
South Indian Bank (6.4%)
Fairfax Financial (6.1%)
Jammu and Kashmir Bank (5.1%)
CTC Media (4.9%)
COF, PNC & WFC bank warrants (4.7%)
Leucadia National (4.2%)
FirstService Corp (3.75%)
Liberty Boradband (3.5%)

As always, feel free to contact me if you have any questions.

Monopoly Bank in India?? Jammu and Kashmir Bank

Jammu and Kashmir Bank (NSE:J&KBANK)

Business Overview:

Incorporated in 1938, J&K bank is promoted by the government of Jammu and Kashmir State which holds 53.17% stake in the bank. J&K bank functions as a universal bank in Jammu and Kashmir and as a specialist bank in rest of the country. It carries out all the banking business of the central government besides collecting taxes for Central Board of Direct Taxes in J&K.

J&K bank follows a 2-legged business model whereby it seeks to increase lending in its home state, which results in higher margin despite lower volume and seeks to capture niche lending opportunities in other states to build volume and margins.

It operates in four segments: treasury, corporate/whole sale banking, retail banking and other banking business.  The Bank’s investments are classified into held-to-maturity, available-for-sale and held-for-trading categories. The Bank established 92 new branches in 2014, thereby taking the number of branches to 777. The bank also added 187 new automated teller machines (ATMs) both onsite and offsite. The J&K Grameen Bank is the regional rural bank sponsored by the J&K Bank. J&K bank is listed on both NSE and BSE and has a track record of uninterrupted profits and dividends over 4 decades. It is rated as A1+, FAA+ including the highest degree of safety rating by CRISIL.

Bank's Mission:

"Our mission is two-fold, "To provide the people of Jammu and Kashmir international quality financial services and solutions and to be super specialist bank in rest of the country". This strategy is intended to make us one of the best banks in the country." – Annual Report 2014

Dominance:

J&K bank holds 65% of total bank deposits in the state which talks about dominance vs the competition. The bank also has a market share of 67.5% of housing loans and 75.9% of agriculture loans in the region. Dominance comes with responsibility and brings the possibility to earn good return on invested capital. Imagine competing with such a dominating player in a highly regulated industry like banking.  Getting a new banking license in India is very difficult as there are only 2 new licenses are given in last 10 years.

Quality of the bank:

By the below metrics, the bank displays all the elements of excellent banking starting from attracting low cost deposits, high return on assets, high net interest margin and high Return on Equity. Book value per share is not adjusted for the stock split (10 for 1).

Management capability:

This bank is a government controlled bank with a profitability metrics of a private bank. Return on Assets have been over 1.5% (very few banks in US achieve this), Return on Equity is over 20% (almost no bank in US achieve this), book value per share increased over 20% historically, conservative dividend payout of 20% and reinvesting the remaining 80% of earnings back into the business. Net Interest margin is highest (4.1%) in the industry and Capital Adequacy Ratio under Basel III stood at 12.69% as of March, 2014 well above Reserve Bank of India stipulated norm of 9%. Mr. Mushtaq Ahmad is a chairman and CEO of the bank, has more than 41 years of experience in finance and in corporate/retail banking.

Historical Financial Overview:

Valuation:

This excellent bank is selling in the stock market today for 6500 Cr (Rs. 135/share), which is less than 6 times after tax earnings (~1200 Cr) and about 1 times book value (liquidation value). The best days of banking and India’s growth are still ahead. To interpret the numbers per branch, Average branch has approximately Rs.88 Cr ($14M) in Deposits and the market price of the bank is Rs.8 Crs ($1.3M). We don’t have to be geniuses to figure that the deposits at these branches are going to grow at reasonable rates, and so is the lending since the economic activities in India have more room to grow. We don’t need to be precise about the growth rate as we are not paying anything for the growth. Based on the market price today, the shareholder gets paid about 15% in earnings yield and 3.75% in Dividend yield. This is a very attractive valuation for a dominant bank. Let’s play with some numbers with various assumptions:

Rate of growth in Earnings (%)	Earnings in 5 years (Crs)	P/E multiplier	Market Cap potential (Crs)	Stock Price (Rs)
10	1932.612	10	19326.12	399.3
15	2413.628625	15	36204.42938	748.0254
20	2985.984	20	59719.68	1233.8777

Various stock price potentials in next 5 years measure well against the current price of Rs.135.

Major Owners of this company (other than the state):

Name of the Shareholder	Total Shares held	Shares as % of Total No. of Shares
Aberdeen Global Indian Equity Fund Mauritius Ltd	17180000	3.54
The Pabrai Investment Fund LP	12432560	2.56
Route One Investment Company L.P A/c Route One Fund I L P	8757700	1.81

Conclusion:

This investment opportunity measures well against my criteria’s,

Strong/dominant business with great economics and huge growth opportunities ahead P

Run by proven management with strong capability P

Selling at a price which is cheap relative to the current earnings and future potential P

Disclosure:

I/partnerships managed by me own shares in this company.

Best run private bank in India?? South Indian Bank Limited (NSE: SOUTHBANK)

 Banking:

Banks accept various forms of deposits from their customers for X% of interest, and lends it back to the customers at Y% interest. The difference between Y and X is the spread, which is used for all the expenses like employee costs, branch leases etc. After all the expenses, an average bank makes about 1% of total assets per year which can be distributed to shareholders or invested in more branches and loans.

South Indian bank has 801 branches and 1020 ATMs across India. It is the second largest private bank in Kerala. The bank has 86 years of operational history. It is also a pioneer in technological development in terms of serving customers needs. South Indian Bank Limited (the Bank) provides retail and corporate banking, as well as other banking activities, such as debit card, third party products distribution like insurance and brokerage operations.

Number of branches per state:

Andhra Pradesh 48	Gujarat 18
Maharashtra 30	Rajasthan 2
Assam 2	Haryana 4
Meghalaya 1	Tamil Nadu 137
Bihar 1	Himachal Pradesh 1
Mizoram 1	Tripura 1
Chandigarh 1	Jammu & Kashmir 1
Nagaland 1	Uttar Pradesh 9
Chattisgarh 3	Jharkhand 2
Orissa 2	Uttaranchal 1
Delhi 24	Karnataka 43
Pondicherry 2	West Bengal 16
Goa 5	Kerala 439
Punjab 4	Madhya Pradesh 2

Qualitative aspects of the bank:

Growth & Profitability:

Total deposits have grown 3 times over the last 6 years,  24.45% per year; Profit after tax growth of 26.45%; improving asset yield as bank builds fee income streams in addition to interest income. Profitability of any bank can be identified by return on total assets; South Indian Bank makes more than 1% of the total assets consistently.

Low cost funding growth:

Low cost funding (interest rates on deposit base) is the recipe to have better profit margins and return on total assets, bank identifies them clearly & they have implemented specific strategies to achieve low cost deposits.

Asset Quality:

Higher asset quality; Gross Non Performing Assets at 1.57%, Net Non Performing Assets 1.12%

Employees:

Young workforce (avg. age of 34 years) with continuity of management and only 2 CEOs in the last decade

Private bank advantage:

Private banks in general don’t have legacy issues and poor quality loans as in many of the Public/government controlled banks.

Shareholders:

Strong shareholders with a long term perspective can be a huge advantage; here are the biggest shareholders with a long time horizon for investments:

1 First Carlyle Ventures Mauritius 4.94%

2 India Capital Fund Ltd 4.65%

3 LIC ltd 4.44%

4 Multiples Private Equity FII I 4.03%

5 GKFF Ventures 3.85%

Successful investor Mohnish Pabrai recently bought about 2% of the company at Rs.32.5/share.

Valuations:

The current market capitalization of South Indian bank is 3700 Crs (Rs.28/share). It makes income about 1000 Crs before tax and provision. Net of tax, the company makes about 500Crs. This means, you are effectively buying this bank at 7 times after tax earnings this year. The dividend is 108 Crs, payout ratio of 20%.

Taking number of branches into account, it means every branch is valued at about 4.7 Cr in the market today. It means, based on the latest quarter’s profit, each bank makes about 60 lacs/year after tax.

Here are some of the financial metrics:

P/E – 7; Earnings yield – 14.3%

Market cap/Total assets – 0.071

Market cap to Total equity (M.cap/Book value) – 1.1

Long term debt/Equity - 0.80

Risks:

Banks are leveraged institutions; Loan losses could potentially be a life threatening risk for any bank. But, South Indian bank makes Rs. 1000 Crs of pretax and pre-provision income every year; they can handle almost 3% of their assets loss, which is 3 times the current loss provision.

Banks are also very much influenced by government policies and interest rate settings by RBI in India. To have a good economic development in any country, banks should be in the forefront of prosperity. As we all know economic development in India is still a long road, South Indian Bank should be a net beneficiary of this development.

Conclusion:

Banking in India is very well developed (safe), poised to grow revenues/profits in coming years. Imagine how many people in India don’t have bank accounts and salary is not deposited directly to the bank compared to other parts of the world. Banking is a sticky business; I don’t know a lot of people who moved from one bank to another many times in their lives. The opportunities for South Indian bank are huge and many of them are yet to develop,

1. Customers growth as the banking is only moderately penetrated in many parts of the country.

2. Growth in deposits per customer as they make and save more money.

3. Debt/capita is very low for Indian consumers, discretionary income increases should lead to loans/investments.

4. Shift from local lending (pawn shops, local finance companies) to bank lending due to the cheaper lending rates, better technology implementation. Obtaining a loan from banks is getting much easier now.

5. More service based revenues such as in insurance, brokerage, bill payments and wealth management etc.

Here we have a conservatively managed bank poised to grow their net income in coming years and selling in the market for 7 times of after tax earnings. So, the initial yield on our investment is more than 14%.

Disclosure: I/partnerships managed by me own shares of this company.