Conrad Industries Reports Q1 2013 Results ($CNRD)

Conrad Industries has posted its first quarter 2013 results [pdf]. Highlights:

• Revenue was up 18.5% year over year, gross profit was up 58% (15.9% margin vs 11.9%), and SG&A increased only 10 bps. 
• CFO in the quarter was $4 million and capex was $3.6 million. The "construction in progress" account increased by $3 million so that was obviously where most of the money went. Separately, the company breaks out capex by segment and says that repair and conversion capex was $2.7 million.
• Vessel construction revenue as up 16% year over year and repair was up 22%. Vessel margins were up 410 bps to 14% and repair margins were up 620 bps to 23%. We were predicting that there would be both increased revenue and higher margins, and so far this seems to be the case.
• In the quarter, 27.6% of revenues came from the offshore oil and gas industry.
• Backlog was up 77% year over year, and backlog man-hours were up 98% year over year.
• EBITDA for the quarter was $9.9 million, up 70%.

Conclusion: the expansion is repair focused, and repair margins and revenue are currently growing the fastest. We had said that this expansion is either incredibly smart or incredibly stupid, because a rational management would only spend money on expansion if the IRR exceeded that of share buybacks. Based on what is happening in the repair business, it looks more like the expansion is smart.

Here is an estimate of the current enterprise valuation:

So the EV is now ~$120 million, roughly where it was at the end of 2012, because the share price has gone up but it banked earnings during the first quarter of this year.

The company trades at 1.55x book value. Conrad peaked during the last cycle at $17.59 in September 2007. At that point, the diluted share count was approximately ~7.3 million for a market capitalization of $128.4 million, and book value was $43.5 million for a P/B of 2.95x.

Review of The Shipping Man by Matthew McCleery

I highly recommend The Shipping Man, a gripping, hilarious novel about a hedge fund manager who buys a decrepit dry bulk carrier at what he thought was 1x EBITDA. It is also a crash course on the shipping business:

"[H]e who is the most bullish on the market, or has the lowest cost of capital, or has some other personal motivation for doing a deal, or ideally all three, wins the ship. Everyone else does nothing but talk about the very good and rational reasons they have for not doing deals. The simple fact is that you must take a view on the market."

True of other assets as well. 5/5.

When to Fold 'em

This week's Hussman,

"[E]ven a run-of-the-mill bear market decline wipes out more than half of the preceding bull market advance. I doubt that the present instance will be different. Indeed, cyclical bear market declines that occur in the context of secular bear markets average a market loss of about 39%, wiping out about 80% of the prior bull market advance. We presently estimate a nominal total return for the S&P 500 of just 3.2% annually over the coming decade. It is not pessimism, but optimism – and optimism born of a century of evidence – that we expect stocks to provide more favorable opportunities for investment over the completion of this cycle."

I was noticing how Longleaf Partners gave back all of their gains from 2000-2007 - and then some! - in a period of about a year. I use them as an example because they are relatively smart - one of the largest holders of Chesapeake, for example.

But doesn't matter how good your security selection is if you refuse to go to cash at opportune times (and are managing billions). The small investor (AUM<$100MM) has the ability to make more market agnostic investments, and to hold large amounts of cash for extended periods of time.

Shenzhen

The advantage of being at an activity hub:

"It’s naive to think of labor costs as China’s chief advantage in hardware manufacturing. The main advantage of being at the center of the supply chain is the iteration speed it permits. Need to find a particular part to fit a particular housing? Just blew a board and need a replacement part? Looking for a variation of a certain component? Then literally walk across the street and go get it. Even if you’re in the heart of the Silicon Valley sitting inside a TechShop that’s not possible. Looking for a segmented LED display? How about browsing through a case full of 75 different ones on the spot. Not sure about using the part in production? Talk to the factory rep and maybe jump in a car to see the factory line."

"We're selling everything that's not nailed down"

Barron's,

That is, the private-equity giant is a net seller because things simply can't get much better. "We think it's a fabulous environment to be selling," he says, noting Apollo has sold about $13 billion in assets in the past 15 months. "We're selling everything that's not nailed down. And if we're not selling, we're refinancing."

WSJ: "The Man at the Center of Solar-Panel Maker Suntech's Fall" ($STP)

An excellent article in today's WSJ, "The Man at the Center of Solar-Panel Maker Suntech's Fall",

Through what analysts and regulators describe as a complicated set of transactions, Mr. Shi helped finance an investment vehicle known as Global Solar Fund that created demand for his solar panels. The venture, he and other Suntech officials later said in a lawsuit over suspected fraud in the fund, was deliberately structured to keep hefty debts off Suntech's books.

"Suntech didn't want to have control over management of the proposed fund," Mr. Shi said in an affidavit filed last year in a Singapore court. "If Suntech had control, it would have been obliged to consolidate the financial statements of the proposed fund with its own."

But last year the venture began to unravel, preventing Wuxi, China-based Suntech from selling the vehicle just as a $541 million bond payment was coming due. Suntech is now in Chinese bankruptcy court, and Mr. Shi isn't allowed to leave China without court approval, as is customary with non-Chinese executives involved in bankruptcy proceedings, according to people familiar with the matter.

Suntech's collapse was widely attributed by analysts and the company itself to a world-wide plunge in solar-panel prices. But interviews, court documents and company filings suggest China's flagship champion for renewable energy was also hit by what analysts say were poor management decisions and questionable corporate governance practices. At the center of the transactions was Mr. Shi, whose decisions they said raised eyebrows among investors and analysts.

Read the whole thing.

Suntech Power - the holding company - owns stakes in a handful of subsidiaries e.g. the Wuxi manufacturing sub and the Global Solar Fund. Knowing what we know about the current fate of these subsidiaries, why does anyone think that the holding company securities have any value?

There's over a billion dollars in subsidiary bank loans, and these bank loans are guaranteed by the holding company, meaning that even if the holding company had equity in one subsidiary it would need to make the bank lenders to other subsidiaries whole before it could keep any proceeds. Thus, the math is not, "is any subsidiary solvent?", but really more, "are all the subsidiaries solvent?".

So we have this holding company where it is hard to see where any value could come from. Yet, the bonds are now trading at about 27, a market value of $146 million and implying a loss of $395 million for bondholders, while the company market capitalization is $110 million!

In other words, the bondholders think that the holding company is worth $146 million and the equity investors think it is worth $651 million. A difference of half a billion dollars!

Sooner or later, that difference will be reconciled.

Suntech Power Delays Filing Annual Report, Announces Updates

From yesterday's news release.

"The Company continues its discussions with major holders of the Notes with a view to achieving a consensual restructuring. Suntech previously received a notice of default and acceleration relating to Suntech’s non-payment of the principal amount of US$541 million that was due to holders of the Notes on March 15, 2013. Suntech has entered into a forbearance agreement with holders of over 60% of the Notes under which the signing bondholders agree not to exercise their rights under the Notes and the related indenture until May 15, 2013, subject to certain market-standard early termination events."

Totally amazing. The bonds are now trading at about 27, a market value of $146 million and implying a loss of $395 million for bondholders. Meanwhile, the company market capitalization is $120 million!