Compound Mispricings in Moated Businesses: Buzzi Unicem, Nexen, KT

Keith Smith of Bonhoeffer Fund presented his in-depth investment theses on Buzzi Unicem (Italy: BZUR), Nexen Corporation (Korea: 005720), and KT Corporation (Korea: 030200) at Wide-Moat Investing Summit 2018.

Thesis summaries:

Buzzi Unicem (savings shares), together with its subsidiaries, manufactures, distributes, and sells cement, ready-mix concrete, and aggregates. The company has operations in Italy, the U.S., Germany, Luxembourg, the Netherlands, Poland, the Czech Republic, Slovakia, Ukraine, Russia, and Mexico. Buzzi is run and majority-owned by the Buzzi family. Buzzi has increased BV and dividend per share by 5% per year, EBITDA by 5% per year, and FCF by 15% per year over the past five years.

The savings shares recently traded at a P/BV ratio of 46%, look-through free cash multiple of 7.7x, and look-through EV/EBITDA of 3.0x. The savings shares (non-voting common shares) trade at a 45% discount to the common voting shares. Reasons for the discount include concerns about governance (but management is modestly compensated and owns 50+% of the stock), concerns about where we are in building cycle and competitive position in Italy.

Future catalysts for Buzzi shares include U.S. and Mexican infrastructure programs, a recovering European economy, consolidating Italian industry, pent-up demand for housing in the U.S., and reduced savings/common discounts in conversion transactions. If the shares traded at 9x EBITDA, lower than the industry average of 11x EBITDA, the stock would be more than a double, not including gains from dividends or a recovery in the Italian cement market.

Nexen Corporation (preferred shares) manufactures and sells rubber products in South Korea. It offers tubes and flaps, solid tires, carbon masterbatch pellets and sheets, golf balls, and bladders for tires. The company also exports and distributes products to ~140 countries. Nexen also owns 42% of Nexen Tire (~75% of Nexen’s value), a multinational tire company. Nexen Tire has increased BV and dividends per share by 17% per year and sales by 9% per year over the past five years.

The shares recently traded at a “look through” earnings multiple of 2.5x, and EV/EBITDA of 3.7x. The preferred shares (non-voting common shares) trade at a 28% discount to the common voting shares. Reasons for the discount include concerns about governance (but management is modestly compensated and owns 50+% of the stock), concerns about where we are in automobile sales cycle, and the competitive position of auto suppliers with electric cars.

Future catalysts for Nexen shares include continued use and increased demand for tires in electric cars, large aftermarket (not dependent upon the automobile sales cycle) contribution to profits, and decline in preferred/common discounts in Korea securities. If the shares traded at 7x EBITDA, the stock would be more than a triple, not including gains from dividends or increase in cash flows.

KT Corporation is a holding company that provides telecom services in Korea and internationally. The company offers local, domestic long-distance, and international long-distance fixed-line and voice-over-Internet-protocol fixed-line telephone services, as well as interconnection services; broadband Internet access service and other Internet-related services, including IPTV services; and data communication services, such as leased line and broadband Internet connection services to institutional customers. KT also develops real estate, provides FSS satellite and satellite TV service, credit card processing services, digital media agency services and video content and music production and distribution.

KT Corporation has been transformed over the past three years from a declining legacy telecom conglomerate to growing and more profitable and competitive telecom provider. Over the past three years, KT Telecom has generated three-year average ROE (adjusted for excess real estate) of 10% and BV-plus-dividend growth of 11% per year.

The shares recently traded at a “look-through” FCF multiple of 5.8x, and look-through EV/EBITDA of 1.5x. Reasons for the discount include a perception of a poor corporate governance (due to past CEOs) and a declining telecom business. KT is actually more of a quad telecom service provider that uses legacy telecom infrastructure as opposed to being a legacy telecom provider.

Catalysts include using IT legacy infrastructure to provide quad telecom services, further development of FT’s real estate, and development of video and music content. If the shares traded at 6x EBITDA with a holding company discount, the stock would be more than a triple, not including dividends, buybacks or cash flow gains from a growing telecom business.

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About the instructor:

Keith Smith, the fund manager, brings over 20 years of valuation experience to the Bonhoeffer Fund. He is a CFA charterholder and received his MBA from UCLA. Keith currently serves as a Managing Director of a valuation firm and his expertise includes corporate transactions, distressed loans, derivatives, and intangible assets. Warren Buffett and Benjamin Graham’s value-oriented approach of pursuing the “fifty-cents on the dollar” opportunities, underpins Keith’s investment strategy. The combination of his experience and track record led Keith to commit most of his investable net worth to the Bonhoeffer Fund model.