Hamburger, anyone?

I'm shamelessly stealing an investment idea from an insightful Canadian investor, Randy McDuff. He has 2 portfolios registered on Marketocracy.com that perform in the top ten--- and he has VERY high powered competition. He regularly contributes to an investment newsletter that I subscribe to.

I read his bull pitch about the company "Hamburger Hafen und Logistik" HHULF.PK a few weeks again in Investor's Digest. You can read the highlights as he presented it (for free) here. A very informative presentation about the company, its corporate structure and its financial performance metrics is available in english here.

HHLA is a company that operates through four segments: Container, Intermodal, Logistics, and Real Estate. The Container segment operates container terminals that handle containers, 56% of which come from Asia. The Intermodal segment offers rail, road, and sea transport network linking German seaports to the hinterlands as well as north and central Europe. It also organizes feeder services with Finland and Russia from Lubeck. The Logistics segment combines various special services in the consultancy, special cargo handling, and storage logistics fields. The Real Estate segment develops projects for logistics premises and office properties.

Note: the real estate segment has spun off from the other 3 Jan 08 and is owned solely by the city of Hamburg, so it should be ignored by potential investors when analyzing the financials.

The company was founded in 1885 as Hamburger Freihafen-Lagerhaus-Gesellschaft and changed its name to Hamburger Hafen-und Lagerhaus-Aktiengesellschaft in 1939. Later, it changed its name to Hamburger Hafen und Logistik Aktiengesellschaft in 2005. The initial public offering was in November 2007 at 53 Euros. The company is based in Hamburg, Germany.

This isn't a conventional investment and I like that. I'll explore the upside and downside of owning a part of this business.

Here's what attracted me to this company:

• hard asset and infrastructure play--- chance of bankruptcy virtually nil.
• leveraged to emerging markets growth without actually be located in those countries (I think that the people in India and China are fantastic, I just don't trust their governments and I don't think the financial reports coming out of those places are worth the paper they are printed on.)
• virtual monopoly. The only real competition for access of goods to central/north Europe is the Port of Rotterdam. This allows the company to pass along capital cost increases to the customers i.e. if oil keeps spiking like it has been.
• excellent free cash flow (increasing 100% from 2006 to 2007) allowing Capex/infrastructure improvements to be self-financed
• German corporate tax reform (i.e. a significant DECREASE in corp tax rates) to the company's short and long term advantage
• improving cost controls (German efficiency!)
• cheapest large publically traded port in the world. Trades at 12 x EV/EBIDTA.
• carefully designed growth and expansion plan in place (see presentation above for details)
• impressive profitability that has improved year over year. Return on Capital 23% ROE 29% increasing yoy. EBIDTA margins increasing yoy to 32.4% as the higher margin container business makes up a larger component of revenue.
• largely undiscovered by the investment community in North America. Do a google search and search all the usual investment websites-- see how much you can find out about it! Not much internet chatter and no analyst interest yet.
• is a boring, predictable, slowly changing business with easily projected cash flows and is easy to understand. Benjamin Graham and W. Buffett would approve, I think.
• excellent liquidity Current ratio just under 2 Quick ratio 1.7
  
• My discounted cash flow calculation yields an intrinsic value of 6B euros v.s. a current market value of 4 B euros. I think that it easily deserves an enterprise multiple of 15-18 x versus 12 today. This approx 50% discount to fair market value provides an excellent margin of safety for this investment. I suspect that the current "oil shock" situation may provide an impetus for the share price to drop below current levels and make it even more of a bargain.
• Dividend yield is currently 1.6% and management commitment is to increase this on a regular basis by paying out 50% of profits annually in dividends.

Now, the down side:

• trades "over the counter" OTC or pink sheets in North America, very significantly impairing liquidity of this investment. This may or may not change in the future if management decides to list the company on a major North American stock exchange. Most investors are justifiably scared of investing in pink sheet/OTC companies and for good reason: they are usually tiny companies or enterprises with horrible credit records. Obviously HHLA doesn't fit in this group, but beware-- this investment should be designated for the very long term i.e. in a RRSP.
• Vunerable to a global recession. As with all recessions, this should be temporary but would adversely affect the share price.
• Currency risk i.e. most experts feel that the Euro is currently overvalued and the USD may be undervalued. A correction could impair future profits.
• Capex intensive-- labour costs, maintenance of the port, equipment etc.
• management's ability and integrity is difficult to judge from a North American vantage point. Executive scandals cloud several German companies lately, diminishing investor confidence. German securities rules and shareholder protection legislation is unfamiliar to most investors.

I think that HHULF.PK is definitely worth further study. As I've said above, I suspect it will get slightly cheaper over the course of the summer. I plan to put in a bid for a relatively small amount of shares at 50 euros and hopefully add to the position over time. I strongly suspect that Mr. McDuff is correct in his prediction that revenues in the expanded physical plant of the Port of Hamburg will double in the next 4 years, with the share price likely to follow. I also suspect that the more mainstream investment community will discover the stock before long and this may be a catalyst for share price appreciation.