Kian Ghazi's Presentation on Layne Christensen: Value Investing Congress ~ market folly

Monday, October 1, 2012

Kian Ghazi's Presentation on Layne Christensen: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Kian Ghazi of Hawkshaw Capital.  His talk was entitled 'Quenching the Thirst For Value.'

Ghazi noted that he's decided to wind down his hedge fund after nine years after his "worst year in 2011" where they were down 11%.  Their only other loss was in 2008, down only 3%.  Prior to that, 7 year net return of 58% versus 30%.  They were focused on underfollowed, unloved, misunderstood small-midcap companies.

Layne Christensen (LAYN)

Ghazi argues there's limited downside here given that the company rarely trades below tangible book value.

$20.16 stock, $399M market cap, $36M cash, $120M debt, $483M EV.  LTM sales $1.1B.  Trades at 18x 2012 eps. #1 in water-well drilling in US.  #2 in sewer construction, repair, #2 in trenchless pipeline rehabilitation.

Two segments: Mineral Exploration. 24% of revenue.  Margins up to 18%, from 1.7% in 2009.  There are signs of weakness; major mining companies are cutting CAPEX. Two comps have guided down already.  Could hedge this segment by shorting Boart Longyear (BLY), or Major Drilling (MDI). 

Water infrastructure 76% of revenue, but only 25% of profit due to margin pressures. Only problem is 62% of revenue is from government.  Margins crushed down to 1.4%, last management team bid too aggressively, just to keep backlog up, so some mispriced projects that are causing losses.  CEO has replaced management in the region that had them.

Bull case is they get back to 4% margins; peers are at 6-8%.

Bears say mineral exploration business currently producing unsustainably high margins, miners already cutting back.  Margins in water segment are also getting worse, only 1% from 4-6% range.  Heavy exposure to municipalities; fiscal cliffs, budget pressures.

Variant view:  Can hedge mineral division with a pure play. Water segment problems are isolated to just 1 of 4 units.  There is a powerful margin recovery drivers in water segment; new CEO.  Spending on wastewater and drinking water are protected at the municipal level.

Downside support with attractive upside.  Trades at 1x tangible book, a good support level. Mineral division alone could be valued at $19/share.  Water could bet $10-15 share if they can turn it around.  Overall upside 60-90% if the story works.  Underfollowed.  CEO and insiders buying stock.

Price target:  basic bull scenario $32.  In best case, if everything works, and if margins return to 4% in troubled portion of water business, so can even get to $59 stock.

Embedded below is Ghazi's presentation from the Value Investing Congress:


Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

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