Comparison of two holding companies trading significantly below net asset value: RHJ International, Sonae Capital

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Dec 26, 2008
The companies to be discussed are RHJ International (RHJIF.PK, Financial) and Sonae Capital. Both companies are quite small holding companies with the following similarities:


1.Management owns a significant amount of outstanding shares, hence eats its own cooking.

2.Both companies are young and therefore without long history, however both are run by experienced management with a good record of capital allocation in the past.

3.The holding structure is quite complex making the range of possible outcomes very wide.

4.The single businesses of the holdings are surrounded by high uncertainty and in the case of RHJI some might very well go bankrupt.


I will not present a detailed analysis of the subsidiaries of RHJI and Sonae. Rather I will try to provide some thought provoking analysis of the possible outcomes for both companies.



1.RHJ International

The company was founded 2005 by Timothy Collins with assets brought in that have been former private equity holdings. The centre is the Japanese automotive industry with the holdings being highly leveraged. The intention of RHJI is to turn these businesses around and eventually sell them above cost. Originally the holding started 2005 with assets valued around 1.5 bn€; current market cap is 300 million€. Collins owns more than 15% of outstanding share capital and receives a symbolic fixed salary of 100.000€. However the rest of the executive team is paid handsomely, also in form of stock options.

Two prominent participants of the equity offering in 2005 have been Chris Davis and Third Avenue, along with BofA and Blackrock. In the past 3 years management has not made significant progress, the only business sold has been Denon/Marantz (those of you who like good music will probably know these audio-equipment behemoth), however at a 100+% profit to original cost. Especially the development of the automotive subs, namely Asahi Tec and Honsel is unexciting with both businesses losing money currently.

For evaluation purposes I kept things very simple: I first guessed intrinsic value (IV) by taking net cash on holding level adding the companies at 8*EBITDA-Net Debt. I then arrived at IV equaling 890 M€.


Then, since some of RHJI’s subs are traded on the stock market I took the lower option (either (8*EBITDA-Debt or market cap) and came to 720 M€ IV. With current market cap of 300 M€ for the holding company this seems very attractive! So what is the worst case one might ask: as the shares right now trade on the Belgium stock exchange for 3.5€ per share and RHJI has net cash per share of more than 5€, permanent capital loss is very unlikely. Indeed even if some of the Japanese businesses turn out to be a failure one might still expect to earn money on this investment as a holding company will ultimately tend to trade at least above net cash value.


2.Sonae Capital

Sonae has been spun off its parent company in the end of 2007. Interestingly the founder of the parent Belmiro Mendez de Azevedo has decided to step down from the parent and become the new CEO of Sonae Capital. The core of Sonae Capital (SC) is

A)Land development and tourism (hotels, golf, fitness etc.)

B)Venture Capital and business joint ventures (e.g. new energy projects)

The structure is currently still very complex, but on the upside Sonae owns plenty of Land which ultimately has some value. Additionally many of their partnerships generate cash which helps to to develop the vast amount of idle lying land the company owns.


The biggest shareholder is CEO Azevedo whose controlling interest surpasses 52% of total capital outstanding. Mohnish Pabrai is said to hold around 7% of total capital through various vehicles like the Dakshana Foundation (Source: Forbes). Evaluation is very difficult as the land development is still in the early stage, hence the cashflows do not reflect the value of the properties. There exist different sum of the part calculations that vary quite wide from each other. A good idea might be to start from current book value of 330 M€ and compare that to market cap of 125 M€. Mr. Pabrai thinks IV is closer to 1 bn€ (VIC) whereas my own estimate is in the range of 400 to 600 M€ net of debt. Irrespective of the differences in the valuation method it is amazing how much businesses the investor can own for the modest outlay of 125 M€. Maybe this is the reason why Mr. Azevedo did step down from the parent. One can be sure however, that it is in the best interest of Azevedo (the 2nd richest Portuguese) to run SC for the long run – as he already did successfully with the parent company!


3.Conclusion

Both presented companies are hard to evaluate as of their complex structure. However when management is aligned with the average shareholder and the latter can ensure to get plenty of assets for the capital invested, this can be a very rewarding proposition. I urge you to take this article as a starting point for your own research in case you are interested in this type of investments. Additionally here are the links to further sources:


VIC write-ups: http://www.valueinvestorsclub.com/Value2/Idea/ViewThread.aspx?id=3426

Company websites: http://www.sonaecapital.pt/PresentationLayer/homepage.aspx http://www.rhji.com/