Wednesday, April 23, 2014

A New Zealand oddball; Tenon Ltd

New Zealand is a bit of a hidden stock market far off the radar of most investors, let alone most travelers.  The tiny island nation's domestic market is limited forcing them to focus on export manufacturing.  What the country lacks in domestic industry they make up for in natural beauty.  The islands are renowned for their mountains and picturesque settings.  The country is sparsely populated with the majority of their population residing on the north island in Auckland.  This leaves much of the country sparsely populated, if populated at all, which is what Tenon Ltd needs to grow their product, trees.

Tenon Ltd (TEN.New Zealand) is a New Zealand listed specialty wood manufacturer.  The company runs a sawmill, a moulding plant, and a board plant in Northern New Zealand.  The company manufacturers a variety of wood products from locally sourced pine.  They claim their wood is appearance-grade timber, which is the finest quality.  The company packages their products into shipping cubes and sends them off to the US.  The US accounts for 90% of their sales, the company is heavily reliant on the US housing market.

I found this idea on a New Zealand investing blog I read and the author's summary intrigued me.  The thesis behind this company is that when housing recovers they will have the ability to generate up to $45m in EBITDA; significant considering their $84m market cap.  In the first six months of this year their EBITDA equaled what they generated for the entire fiscal 2013, an encouraging sign.  Other relevant points are that Third Avenue value owns 18%, and that the company intends to return capital to shareholders as soon as possible.  An insider's wife also purchased a large stake recently.

For a moment I want to venture down a short rabbit trail.  I've noticed that in non-US companies paying dividends and returning capital to shareholders is of the utmost importance.  Management at companies that cannot return capital lament as if they are failing shareholders by not paying a dividend or retiring shares.  I wish we had a similar culture in the US.  Instead we have managements who feel the need to horde cash for the possibility of future re-investment opportunity.  I don't know why American companies are so stingy about returning capital to its rightful owners.

The company's financial statements reveal the starkness of the company's situation.  They broke even the first half of this year, and lost money in 2013 and the prior year period.  They hold no cash on their balance sheet, and trade at 70% of book value.  Their book value is a soft number including $67m in goodwill, some inventory and receivables.  I wouldn't count on getting book value back in a distressed scenario.  While light on assets the company is well financed, they recently closed on a $70m financing deal with PNC bank.

The entire investment thesis rests on their leveraged exposure to the US housing market.  The way the company frames the situation once the housing market picks up they will be generating cash like it was 2005.  Except that's the problem, if this is a company that rode the housing wave why did they struggle to earn money during the epic housing boom in the early 2000s?

At the present moment the stock isn't cheap, they're selling for about 20x 2013 EBITDA, but should be selling for 10x EBITDA if results are inline this year.  If they are able to benefit from a housing recovery, and shipping costs remain low, and the exchange rate is favorable I think they can probably earn their target of $45m in EBITDA a few years out.  If they can hit their target an investor buying today is getting this company at 2x forward-EBITDA.

Unfortunately for myself this isn't my type of investment.  I have a terrible time predicting the future, and I hate leverage.  That said I know that a year or two from now I will be receiving a trickle of emails thanking me for posting about this as investors double or triple their money.  Leveraged investments work out fantastically when they work out.  Without any downside protection, and with a lot of leverage I'm going to leave this one to the experts.  That isn't to say that I didn't find it interesting enough to spend a few hours with their financials.

Disclosure: No position

6 comments:

  1. As a UK investor I too have noticed differences between the US and our companies in terms of capital allocation. Share buybacks here are very rare and dividends are much more popular, which I think may have something to do with more lenient taxes on dividends here, but still I wish more companies here would do share buybacks.

    One thing most other countries lack though is the kind of activist investor base you have in the US which I think we'd benefit from. Too many CEO's here are essentially accountable to no one, the fund managers with big stakes don't really exercise their muscle.

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  2. I have been following Tenon since at least 2008, and have invested a couple of times. The story has been the same for years - massive growth in EBITDA when the US housing market rebounds... always just over the horizon. The company has been putting out presentations for years showing what earnings will look like when things return to their pre-crisis levels, but it never materialises.

    Not to say that it won't, but the track record is not great!

    Jonathan

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  3. In Australia, there is a lot of pressure to pay dividends as the shareholders receive a tax credit of approx 30 % on the tax the company paid. This can increase the yield quite considerably. On the flip side, companies seeking extra cash from shareholders is also common.

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  4. Pine boards and moldings seem quite commoditized, not "specialty".

    I have noticed the same thing about dividends outside the US. It can be convenient, since a foreign company which doesn't pay a dividend can raise a useful red flag.

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  5. Hi Nate,

    Check out another NZ company, Steel and Tube (STU). Very strong balance sheet, decent earnings and very large growth potential due to the Christchurch earthquake. Would be very interested in what you think. Currently trading at 16 times earnings so no cigar butt, the growth and strong balance sheet would be where the value comes from in my opinion.

    Cheers

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  6. It is right till a limit that people do not take much interest in investing in New Zealand stock dividends due to less profit. However, there are several companies that has good turnover and offers higher values to their stock holders. To know about highly recommended New Zealand dividend stock you can visit New Zealand Dividend Investor.

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