Check-up on KHD Humbold Wedag AG

Last year I already did a quick check on KHD (here, German), a cologne-based company engaged in building cement plants around the globe.

Now the cement industry is a highly cyclical one, this is most likely reflected on the share price.

I put together a quick overview of the major financial data:

In Mio EUR	2011	2010	2009
Revenue	234,58	286,89	360,30
Amortization/Depreciation	1,68	1,25	1,09
EBIT	17,62	24,95	49,71
Net profit	13,51	15,80	37,17
Goodwill	5,16	2,13	2,13
Total Equity	233,53	148,56	169,73
Non-current Liab	53,07	49,16	46,22
Current Liab	145,32	215,62	213,94
Cash and equiv, unrestr.	287,68	293,06	225,84
Cash restricted	12,64	13,73	661,00
Debt/Equity ratio	22,7%	33,1%	27,2%
Cash to assets	67%	71%	53%

Here I want to highlight a few points:

-De facto debt-free, non-current liabilities are mainly provisions, pensions (with 20M quite high, however old and discontinued program) and deferred tax

-Hugh pile of cash 67% of all assets consisted of pure cash

-Low goodwill, which is good in my opinion, since chance of failure (-impairment-) is often significant

-Steady declining revenue/EBIT/profit, see following performance ratios:

in Mio EUR		2011		2010		2009
EBIT Margin	7,5%		8,7%		13,8%
Profit Margin	5,8%		5,5%		10,3%
Effec. Group tax rate	34,7%		39,3%		30,7%
ROCE by EBIT	6,1%		12,6%		23,0%
ROCE by NOPAT	4,7%		8,0%		17,2%
Capital turnover	81,8%		145,1%		166,8%
CapEmp	286,599		197,714		215,951
CapEx	2,70		2,37		0,73
Net CapEx	1,03		1,13		-0,36
Asset turnover	54,3%		69,4%		83,8%
ROA	3,1%		3,8%		8,6%
ROE	5,8%		10,6%		21,9%

As we can see, all performance indicators decline. It’s doubtful that even cost of capital could have been earned in 2011.

2009 figues in general seem very strong, considering the industry KHD is operating in. However, until March 2010 KHD was part of a Canadian holding, which also operated in the mining business (now: Terra Nova Royalty Corporation). Cost structure before early 2010 might not be that accurate, esp. in overhead.

Let’s have a look at the cash flows:

in Mio EUR		2011		2010		2009
CF from op	-65,79		50,48		-4,46
CF from inv	-4,25		66,32		21,29
FCF	-70,04		116,79		16,83
CF from fin	81,36		-63,16		5,39
Change in cash	11,32		53,63		22,21

-Fin CF 2011: In 2011 there was a equity offering, during which a Chinese government-owned company acquired a 20% stake

-Neg. FCF 2011:

-Structure of receivables: +4 Mio to total of 7 Mio Allowances on trade receivables (mainly for “North Africa, Middle East, India”)

-Actually utilized allowances was 0,5 Mio in 2011 and 0,2 Mio in 2010, so might be very prudent approach and the political turmoil.

-Non impaired, more than 60 days overdue: +3,7 Mio to total of 10 M, thereof 4 Mio more than 120 days.

-High outflows for Income tax paid (-33Mio) and this is something I can’t quite understand. The income statement showed a 7,2 Mio income tax expense, the balance sheet a reduction of -17 Mio income tax liabilities related to a tax audit for the period of 2005-2007, so maybe cash outflow was for this. Other that would only make up for 24,2 Mio.

Now let’s have a look at the market valuation (current price: 5,3 EUR, 11/05/2012)

P/B	1,13
P/E	19,5
MarCap	263,4
Enterprise Value	28,8
EV/EBIT	1,6
EV/EBITDA	1,5

As expected Enterprise value multiples are extremely low, due to high cash assets (which get deducted [EV=MaCap + Debt - Cash]). I used only unrestricted cash for the multiples.

Positive: 

-Cash, market capitalization is lower than unrestricted cash, at 5,8 EUR/stock there is breaking-                     even.

             -If economic conditions pick up, margins might improve

             -World-wide operations, diversified

Negative:

-Cash:   Might be wasted in stupid acquisitions. There is an article talking about a major acquisition of 75 Mio (here). However, he wants to used the cash “slowly”

Also pressure on management for effective use of assets is low (comfortable cash buffer, no debt investors, no big activist investor, however 2 smaller ones [5,7% IAT Reinsurance Group; 5% Sterling Strategic Value]).

                -Weak and declining performance in earnings/return indicators

                -Income tax expanses I outlined above (maybe I just don’t understand or miss something)

                -Strongly cyclical industry.

All in all a difficult decision, soon the Q1 2012 results will be published, this might help in decision making.




UPDATE1:  As I just saw on KHD's Invester Relation Page they postponed on the 27/04/2012 the annual general meeting to an undisclosed date due to "an agenda item which has not been decided upon yet".
This sounds very interesting, might be an opportunity (buyout offer?), but as well bad news.
I wonder...